Liability for insufficient assets: protect your personal assets

Business life is rarely a smooth ride. When difficulties accumulate and judicial liquidation becomes inevitable, a major fear emerges for managers: that of being personally liable for the company's debts out of their own assets. This very real threat has a name: the action for liability for insufficient assets. A dreaded mechanism, it is one of the main swords of Damocles hanging over company directors and sole traders whose business falters. It is therefore essential to understand how it works, the conditions under which it can be implemented and how to protect yourself against it. This article aims to shed some light on this complex system.

What is a liability action for insufficient assets?

Formerly known as the "action en comblement de passif" (action to make good liabilities), the action for liability for insufficient assets is a procedure specific to the law governing companies in difficulty. Its objective is clear: to obtain an order from the court for one or more directors to bear, out of their personal assets, all or part of the company's debts that cannot be repaid through the sale of the company's assets during liquidation. This is a financial sanction, distinct from professional sanctions such as personal bankruptcy or criminal sanctions such as bankruptcy.

It is important to note a significant change: since a 2008 reform, this action can only be taken in the strict context of a judicial liquidation procedure. Previously, it could be considered even in the event of receivership, particularly if a plan had been resolved. Today, as long as the company is not in liquidation, this specific action is not applicable.

The underlying idea is to punish misconduct by the director who has contributed to worsening the company's financial situation to the point of leaving creditors unpaid after all the assets have been realised. It is a form of civil liability adapted to the specific context of business difficulties, but with its own rules.

Who can benefit from this action?

The personal scope of this action is defined by article L. 651-1 of the French Commercial Code. The following may be sued:

• The de jure or de facto directors of a legal person : This includes managers of SARLs, chairmen and managing directors of SASs, directors and managing directors of SAs, etc. The concept of "legal person" is broad and covers commercial companies as well as associations, provided that they are subject to collective proceedings. It makes no difference whether the executive is paid or unpaid.
• De facto rulers : This refers to any person who, although not holding an official corporate office, has in fact exercised a management activity with complete independence. Proof of de facto management is essential and is assessed by the courts. In some cases, this may concern a parent company that interferes in a significant way in the management of its subsidiary, even though this is often difficult to establish. A credit institution may also, exceptionally, be classified as a de facto director if it goes beyond its role as lender to interfere in the management.
• Permanent representatives : Where a company (legal entity) is itself the director of another company, the natural person who represents it on a permanent basis may be affected.
• Sole traders : Initially designed for company directors, the action has been extended. It applies to sole proprietors with limited liability (EIRL) and, since the law of 14 February 2022, to sole proprietors under the new single status (with separation of professional and personal assets).

An important point concerns executives who have ceased their functions before the judicial liquidation is opened. They may still be sued if the alleged misconduct was committed during their term of office and if the shortfall in assets, even if it is only established at a later date, originated or potentially already existed at the time of their departure.. The fact that the resignation has not been published in the commercial register does not mean that the director cannot be considered to have effectively ceased his duties if he can prove this.. Conversely, failure to publicise the appointment does not exonerate a director who has actually performed his duties.. It's the reality of exercising power that counts.  

What are the conditions for liability?

For a director to be ordered to bear the shortfall in assets, three cumulative conditions must be met and proven by the person bringing the action (usually the liquidator). This is a major departure from previous systems where fault was sometimes presumed. The model is that of civil liability: a fault, a loss and a causal link..  

The need for mismanagement

This is the heart of the system. If there is no proven mismanagement, there can be no conviction on this basis. But what is meant by "mismanagement"? The Commercial Code does not provide a precise definition. Jurisprudence takes a broad view of it: it can involve any action, but also any omission, committed in the administration of the company.. This can cover :  

• From manifest errors of assessment or strategy For example, the continuation of a structurally loss-making business without a serious attempt at recovery, even though the cessation of payments was foreseeable. Such continuation is often considered to be an abuse.  
• From breaches of the law or the Articles of Association These include failing to convene a shareholders' meeting when shareholders' equity falls below half the share capital, failing to keep proper accounts, and failing to declare the cessation of payments within the statutory 45-day period.  
• A faulty passivity A general lack of diligence and inaction in the face of known difficulties. Failure to use the tools available to prevent difficulties (ad hoc mandate, conciliation) when the situation required it may have been considered a fault by some courts.  
• From acts prejudicial to society These include: granting excessive remuneration, using company assets for personal purposes (possible overlap with misuse of company assets), and engaging in abnormal acts (unbalanced loans within a group, excessive dividend payments, etc.).  

It is essential to understand that simple management error, commercial failure or "bad luck" are not enough. Fault is not automatically deduced from the size of liabilities.. The judge has full discretion to assess the situation in concreto.  

Since the Sapin 2 Act of 2016, an important limit has been introduced: the "simple negligence of the director no longer gives rise to liability for insufficiency of assets. The aim of this provision is to avoid imposing excessive penalties on directors who have only committed minor or unintentional faults.. The interpretation of this "simple negligence" is still being worked out by the courts. A failure to declare cessation of payments for several months, even though the difficulties were known, was not considered to be simple negligence.. The repetition of faults or the manager's awareness of the seriousness of his actions tend to exclude the qualification of simple negligence.. On the other hand, a simple error of assessment, even if conscious, could be qualified as simple negligence if it does not reveal a serious fault..  

Finding of insufficient assets

This is the damage that the action seeks to repair. The asset shortfall is the negative difference between the amount of assets that can be realised (sold) during the liquidation and the total amount of the company's debts admitted as liabilities.. Only debts arising before the judgment opening the initial proceedings (even if it was a reorganisation subsequently converted into a liquidation) are taken into account to calculate this shortfall.  

This shortfall must be someeven if the exact amount has not yet been definitively determined at the time of the court's ruling.. However, the judge must be able to assess it, at least on a provisional basis, on the day of his decision.. A provisional sentence is possible if the final amount is not known.. The fact that the liquidator is not required to verify certain claims does not preclude the claimant from bringing an action against the liquidator..  

A causal link between the fault and the shortfall in assets

It is not enough to establish mismanagement and a shortfall in assets; it must also be shown that the former has caused the latter. contributed per second. This is often the most difficult point for the claimant to prove..  

The law uses the term "contributed", which is interpreted quite flexibly by the courts.. It is not necessary for mismanagement to be the sole cause, or even the main cause, of the shortfall in assets.. It is sufficient that it contributed, among other factors (economic situation, default by a major customer, etc.), to the creation or worsening of the "hole" in the accounts. For example, a late declaration of cessation of payments may be a fault that contributed to the shortfall in assets if it allowed the liabilities to increase during the period of delay..  

However, the causal link must be specifically demonstrated for each fault identified.. It cannot simply be deduced from the nature of the fault without explanation..  

What are the consequences of taking action?

If the three conditions (non-negligent mismanagement, insufficient assets, causal link) are met, the court will can convict the executive(s) at fault.

The amount of the sentence

This is an essential feature of this action: the judge has a right of appeal. sovereign discretion. It can :  

• Decide not to pronounce no convictionseven if the conditions are met.  
• Order the director to pay all or part asset shortfall.  

The amount of the order may never exceed the total amount of the shortfall in assets found.. In setting this amount, the judge takes into account the seriousness of the management errors committed, their numberbut also the personal situation of the director (financial capacity), although the director does not have to justify his decision on this last point.. The idea of proportionality is underlyingeven if the Cour de cassation reiterates the sovereignty of trial judges.  

If there is more than one director at fault, the court may order them to jointly and severally(C. com., art. L. 651-2, para. 1 in fine).. He is not obliged to share the burden of the debt between them, unless a request is made to this effect.. An action brought against a director does not interrupt the limitation period with regard to the other directors..  

Allocation of sums paid

The sums paid by the convicted manager are included in the assets of the company in liquidation. They are then divided between all creditorsbut according to a specific rule: au marc le francin proportion to the amount of each claimwithout taking into account any liens or security interests from which certain creditors may benefit (such as the super-privilege on salaries or the Treasury's lien).. This is an important exception to the usual ranking of creditors.  

Notable point: an executive who has been convicted and who is also a creditor of the company (for example via his shareholder's current account) cannot participate in this distribution to the extent of the sums he has had to pay.. He cannot therefore indirectly recover part of what he has paid..  

Exclusion of civil liability under ordinary law

An important principle, known as non-cumulativehas been established by case law. Where the action for liability for insufficiency of assets (based on Article L. 651-2) is applicable (i.e. in judicial liquidation with insufficiency of assets and mismanagement having contributed to it), it will excludes the possibility for the liquidator to take action against the director on the basis of civil liability under ordinary law (art. 1240 of the Civil Code) or on the basis of specific liability under company law (e.g. art. L. 223-22 or L. 225-251 of the Commercial Code) to obtain compensation for the collective loss suffered by all the creditors as a result of the shortfall in assets. Specific action takes precedence.  

There are, however, exceptions to this principle exceptions. It does not preclude :  

• The individual action of a specific creditor if he proves a separate personal injury of that resulting from the collective insufficiency of assets, caused by a personal misconduct of the director detachable from his duties. These conditions are difficult to meet.  
• Certain specific actions, such as that of the tax authorities (art. L. 267 LPF).  
• Civil action brought in the context of criminal proceedings (e.g. for misuse of corporate assets or bankruptcy).  

The procedure for engaging this liability follows specific stages, which are as follows in our article on procedures and appeals. In addition, failure to pay this fine may result in other penalties, such as the bankruptcy and related offences - criminal offences distinct from liability for insufficient assets. In our article on personal bankruptcy and prohibition of management similar risks. Finally, an overview of the various sanctions is available in our guide to executive sanctions.  

If you are a manager and your company is experiencing difficulties, it is essential to anticipate these risks. Prudent management and the early use of preventive tools can limit your exposure to this liability. For a personalised analysis of your situation and tailored adviceOur team is at your disposal.

Sources

• French Commercial Code, articles L. 651-1 to L. 651-4 (Liability for insufficient assets)
• Commercial Code, articles R. 651-1 to R. 651-6 (Procedure relating to liability for insufficient assets)