Personal bankruptcy and prohibition on management: the professional risks for the manager

In addition to the direct financial consequences for the company and potentially for the executive's personal assets, difficulties can lead to sanctions of another kind, just as formidable: professional sanctions. These are not aimed directly at the company's portfolio, but at the executive's ability to practise his profession, to manage, administer or control a company. The impact on a career can be devastating. The two main measures are personal bankruptcy and a management ban. Although distinct from financial and criminal sanctions, they are a severe response to serious breaches by a company director. Their aim is clear: to remove from the business world those whose conduct is deemed to be prejudicial or dangerous. Understanding these sanctions, and knowing who can be targeted and on what grounds, is essential for any manager wishing to assess the risks associated with his or her duties.

What is personal bankruptcy and a management ban?

Under articles L. 653-1 et seq. of the French Commercial Code, personal bankruptcy and disqualification from managing a business are civil penalties imposed by the court in charge of collective proceedings (receivership or compulsory liquidation). They therefore do not apply in the context of safeguard proceedings, which are designed as a preventive and incentive measure.

Although they are civil penalties, the French Constitutional Council has described them as "sanctions having the nature of punishment", recognising their repressive nature. They are designed to protect public economic order by preventing those deemed to be at fault from causing further harm. They are never imposed automatically; the court has discretionary powers to decide on the appropriateness of the penalty and its scope, depending on the seriousness of the acts and the personal situation of the executive.

La personal bankruptcy is the most severe penalty. It entails a general ban on exercising any function of direction, administration, management or control of a commercial, craft or agricultural business or of any legal entity.

L'management banis a more flexible sanction. The court may order it "in place of personal bankruptcy" (article L. 653-8). This makes it possible to target the ban on certain specific activities or certain types of business. For example, the court could prohibit an executive from managing a commercial company, while allowing him or her to run a farm.

Who can be penalised?

These penalties only apply to private persons. A company cannot be sentenced to personal bankruptcy or prohibited from managing its affairs. The list of persons referred to in article L. 653-1 of the Commercial Code is broad and covers most economic players:

• The individuals carrying on a commercial or craft activitythe farmers.
• The self-employed individualsincluding a liberal profession (with the exceptions below). This includes the individual entrepreneur with limited liability (EIRL) and the individual entrepreneur covered by the new single status since 2022.
• The de jure or de facto directors of legal entities (commercial companies, non-trading companies, associations, economic interest groupings, etc.). It is immaterial whether the executive is remunerated or not, and whether he or she is acting in law (as a corporate officer) or in fact (without a corporate officer but with real and independent power). Case law is consistent in including de facto directors.  
• The permanent representatives (natural persons) appointed by a legal entity when the latter is itself the director of another entity.  

It is crucial to note that even a manager who has ceased to hold office before the commencement of the proceedings may be prosecuted, if the acts of which he is accused were committed during his term of office and contributed to the situation leading to the collective proceedings.  

A major exception However, these penalties do not apply to individuals (or directors of legal entities) engaged in self-employed professional activities who are, as such, subject to specific disciplinary rules (for example, under the supervision of a professional association). This generally excludes lawyers, notaries, doctors, chartered accountants, etc., for whom sanctions are the responsibility of their professional bodies.. This exception, sometimes criticisedHowever, it does not apply to all regulated professions; pharmacists, for example, although subject to professional discipline, are considered to be traders and may therefore be subject to these sanctions..  

When can personal bankruptcy be declared?

The court can only declare personal bankruptcy for specific acts, listed exhaustively by law. These texts are to be interpreted strictly. The main cases are as follows :  

General facts applicable to all persons concerned (Article L. 653-5)

This article lists seven categories of behaviour:

1. Have carried out an activity (commercial, craft, agricultural, management, etc.) contrary to a legal ban. It is a question of having breached an incompatibility (e.g. a notary running a commercial company) or a ban already imposed by the courts.  
2. Buying and selling below the market price, or using ruinous means to obtain fundsThe "ruinous means" typically include excessive borrowing generating unsustainable financial costs, the systematic discounting of convenience bills, or the repeated issuing of bad cheques. Ruinous means" typically include excessive borrowing generating unsustainable financial costs, the systematic discounting of convenience bills, or the repeated issuing of bounced cheques.  
3. Having entered into commitments on behalf of others, without consideration, that are deemed too large at the time they were concluded, having regard to the company's situation. The classic example is the acceptance of contracts of convenience, but this can also apply to unjustified employment contracts.  
4. Having paid or caused to be paid, after the date of cessation of payments and with full knowledge of the fact, a creditor to the prejudice of the others. This is the penalty for violating the principle of equality of creditors once the difficulties have been established. Knowledge of the cessation of payments must be proven.  
5. Having, by voluntarily abstaining from cooperating with the organs of the procedure (trustee, liquidator, administrator), hinders its smooth running. This applies to a director who refuses to disclose essential information or documents. Abstention must be voluntary, but it is not necessary to prove a specific intention to hinder the proceedings.  
6. Concealing accounting documents, failing to keep accounts when required by law, or keeping fictitious, manifestly incomplete or irregular accounts.. This is a frequent occurrence. Fictitious accounting involves the concealment of economic reality (e.g. double accounting, recording of grossly overvalued receivables). Disappearance may involve destruction, concealment or prolonged refusal to hand over the accounts. The total absence of accounts is also covered. Simple irregularities or incompleteness must be "obvious" to fall within the scope of this text.  
7. Knowingly declaring a supposed claim on behalf of a creditor (non-existent or hypothetical). Introduced in 2014 to counter abuses linked to the possibility for debtors to declare claims on behalf of their creditors.  

Facts specific to sole traders (Article L. 653-3)

For shopkeepers, craftsmen, farmers and self-employed professionals (including EIRLs and the new status of sole trader), there are two specific offences in addition to those set out in article L. 653-5 :

1. Abusively pursuing a loss-making operation which could only lead to suspension of payments. Abuse is the key here; a distinction must be made between unreasonable obstinacy and optimism or a legitimate attempt at recovery. Excessive personal deductions may constitute abuse.  
2. Embezzling or concealing all or part of its assets or fraudulently increasing its liabilities. These acts are very similar to certain cases of bankruptcy.  

Article L. 653-3, II, adds for EIRLs and sole traders under the new status :

• Having carried out commercial acts in an interest other than that of the professional activity covered by the procedure.  
• Have used the company's assets or credit or the assigned assets as a means of use contrary to its interests for personal gain or to benefit another structure or asset.  

Facts specific to company directors (Articles L. 653-4 and L. 653-6)

In addition to the general cases referred to in Article L. 653-5, directors of legal entities may be sanctioned for :

1. To have disposed of the assets of the legal entity as if they were one's own assets. This largely covers situations of abuse of corporate assets (ABS).  
2. Trading for personal gain under cover of the legal entity.  
3. Using the assets or credit of the legal entity in a manner contrary to its interests for personal purposes or for the benefit of another legal person or company in which it has an interest.  
4. Abusive prosecution, for personal gainA loss-making business which could only lead to the cessation of payments. The difference with the case of article L. 653-3 is the requirement here of a proven personal interest on the part of the director.  
5. Embezzling or concealing all or part of the assets or fraudulently increasing the liabilities of the legal entity. These facts are very similar to those in article L. 653-3 and to acts of bankruptcy.  
6. Failure to pay the debts for which he is liable in application of article L. 651-2 (condemnation on grounds of insufficient assets).  

In what cases can a management ban be imposed (Article L. 653-8)?

As mentioned, the court may choose to impose a management ban instead of personal bankruptcy for any of the facts listed above, if he considers the personal bankruptcy to be too severe or inappropriate.  

Article L. 653-8 also provides for specific cases in which only a management ban (and not personal bankruptcy) may be imposed:

1. To have, in bad faithfailed to provide the mandataire judiciaire, the administrator or the liquidator with the following information mandatory information within one month of the opening judgment (list of creditors, inventory, etc., as provided for in art. L. 622-6).  
2. Have knowingly omitted request the opening of proceedings of reorganisation or liquidation within 45 days of the cessation of payments, without having also requested the opening of conciliation proceedings. The adverb "knowingly", added by the Macron Act of 2015, implies that the director must have been aware of the state of cessation of payments and have deliberately failed to act. Mere negligence or an error of assessment as to the exact date is no longer sufficient. Proof of this intentional element lies with the claimant. The assessment is made with regard to the date of cessation of payments set by the opening or postponement judgment.  

What are the effects and scope of these penalties?

The consequences vary from personal bankruptcy to a management ban.

Effects of personal bankruptcy (Article L. 653-2)

• General prohibition : Prohibition on directing, managing, administering or controlling, directly or indirectly, any commercial, craft or agricultural business or any legal entity. This is a very broad ban.  
• Loss of voting rights : The sanctioned director may no longer vote at the meetings of the company undergoing insolvency proceedings. An agent appointed by the court will vote in his place.  
• Sale of shares : The court may order the sale of the shares held by the executive in the company.  
• Elective incapacity (optional) : The court may also rule that the bankrupt is disqualified from holding an elected public office (mayor, member of parliament, councillor, etc.) for a period equal to that of the personal bankruptcy, up to a maximum of 5 years. Specific reasons must be given for this measure.  
• Resumption of individual proceedings : Creditors whose claims have not been paid in a judicial liquidation recover their right to take individual legal action against a debtor who has been declared personally bankrupt (art. L. 643-11, III).  

Effects of a management ban (Article L. 653-8)

• Targeted ban : The prohibition covers direction, management, administration or control, but the court may limit it to certain types of business or activities.  
• Loss of voting rights and sale of shares : These measures are possible, as in the case of personal bankruptcy.  
• No elective incapacity: This penalty does not apply to a management ban.  
• No automatic resumption of proceedings: A management ban alone does not entail the recovery of creditors' individual right of action.  

Duration and rehabilitation (Article L. 653-11)

• Limited duration : Whether it is personal bankruptcy or a management ban, the court must set the duration of the sanction, which is may not exceed 15 years. Previously, personal bankruptcy could be imposed for life.  
• End of penalty : The measure ends automatically at the end of the set period, or if the liability is paid in full.  
• Rehabilitation / Recovery : The person concerned may apply to the court that imposed the sanction to be statement of the contract (in whole or in part) before it expires. To do this, they must prove that they have provided a sufficient contribution to the payment of liabilities. It is up to the judge to determine whether the sentence is "sufficient". If the person concerned has only been sentenced to a management ban, he or she may also apply for the ban to be lifted by demonstrating his or her ability to direct or control a company (via training, for example). Full recovery is equivalent to rehabilitation. The procedure and conditions for rehabilitation are detailed elsewhere.  

It should be noted that certain acts, such as misappropriation of assets or accounting irregularities, may result in both a professional sanction (personal bankruptcy or prohibition on managing the business) and a criminal sanction for bankruptcy. These penalties are distinct from those discussed in our general guide to penalties for directors.

The complexity of the rules and the seriousness of the issues at stake underline the importance of being well advised when insolvency proceedings are contemplated or initiated. If you are faced with such a situation, our firm can help you defend your rights, limit the risk of sanctions, and provide you with the best possible advice. personalised legal assistance to defend your ability to exercise managerial or executive functions, or to assist you in a procedure to have your professional sanctions lifted and help you rebuild your career.

Sources

• Commercial Code, articles L. 653-1 to L. 653-11 (Personal bankruptcy and other prohibition measures)
• Commercial Code, articles R. 653-1 to R. 653-4 (Procedure relating to personal bankruptcy and other prohibition measures)