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Facing insurmountable financial difficulties is a dreaded ordeal for any company director. When recovery solutions seem out of reach, judicial liquidation becomes a concrete prospect. This procedure, although difficult, is governed by precise rules designed to organise the end of the business and pay off creditors in an orderly fashion. Understanding the broad outlines of this process is essential for the company directors and sole traders concerned.
This article gives you an overview of compulsory liquidation: when does it occur, who can trigger it, what are the key stages and the major consequences? We also look at a possible alternative for certain small businesses. For in-depth analyses of specific points, links will take you to our detailed articles.
When does compulsory liquidation become inevitable?
Judicial liquidation is generally only considered when the company's situation is deemed to be irretrievably compromised. Two conditions must be met for a court to order liquidation:
- Suspension of payments : Alarm bells ringing for companies in difficultyIt occurs when a company is no longer able to pay its current debts (those that have fallen due) with its immediately available assets (mainly cash).
- Manifestly impossible recovery : It must be clear that no solution (reorganisation, continuation plan) would save the company and make it viable again.
If these two criteria are met, liquidation is often the only legal way out. Details of how these conditions are assessed are given in our article on the opening of a judicial liquidation and its conditions.
Who can file for compulsory liquidation?
It is not just the executive who can initiate proceedings. There are several parties who can refer a case to the court:
- The debtor himself : It is legally obliged to declare the cessation of payments within 45 days.
- A creditor : A supplier, a bank or any other unpaid creditor can take the company into liquidation.
- The Public Prosecutor : It can act if it is aware of the company's critical situation.
The court can no longer initiate liquidation proceedings on its own initiative, but the president can alert the public prosecutor's office.
What are the immediate consequences for managers?
The decision to open a compulsory liquidation procedure has immediate and significant effects for the director and the company:
- Divestment : This is the most striking effect. The manager loses the power to administer and dispose of the company's assets. It is the liquidator, appointed by the court, who takes control to manage the proceedings. However, the director retains certain "rights of his own" (relating to his person). The subtleties of divestiture, as well as the opening of the procedure and its initial effects, are essential points to understand.
- Stopping business : In principle, the company ceases trading immediately. The aim is no longer to operate the business but to sell its assets. A temporary continuation may be authorised in very limited cases, particularly if a sale of the business is envisaged.
What happens to the company's debts?
The aim of liquidation is to pay creditors by selling the company's assets. This process involves :
- Stopping individual lawsuits : Creditors whose debt arose before the judgment can no longer take individual action to obtain payment. They must declare their claim to the liquidator.
- Realization of assets : The liquidator sells the company's assets (buildings, equipment, stocks, business goodwill, etc.) according to specific procedures (auction, private sale).
- Allocation of funds : The sums obtained are distributed among the creditors according to a very strict order of priority defined by law (Art. L. 643-8 C. com.). Employees benefit from a super-privilege, followed by legal costs, then creditors benefiting from guarantees (conciliation privilege, property security interests, etc.) and subsequent preferential creditors. Unsecured creditors are paid last, if there are any funds left. The details of this process are covered in our article on consequences for creditors and the realisation of assets.
How does the procedure end?
The judicial liquidation ends with a closing judgement. There are two possible outcomes:
- Closure to extinguish liabilities : All creditors have been paid. This is a rare occurrence.
- Closure for lack of assets : The assets sold were not sufficient to pay off all the debts. This is the most common case.
Closure due to insufficient assets has a major effect on the individual debtor: in principle, unpaid creditors can no longer sue the debtor after closure (Art. L. 643-11 C. com.). This is known as the "purge of debts" and is intended to enable the debtor to "bounce back". There are important exceptions to this principle (fraud, personal bankruptcy, maintenance debts, recourse by guarantors, etc.). For a full analysis of debt closure and its effects, see our article on end of liquidation and professional recovery.
Are there alternatives for smaller structures?
There is a simplified procedure for sole traders whose situation is irremediably compromised but who have very few assets (less than €15,000, excluding their main residence) and no recent employees: professional recovery (Art. L. 645-1 C. com.).
This rapid procedure (4 months) makes it possible, if the conditions are met and with the agreement of the debtor, to obtain a write-off of eligible debts without going into formal liquidation. However, it also has its limits: not all debts are written off, and the procedure can be converted into a judicial liquidation if there are problems (bad faith, conditions not met). More information is available on the end of liquidation and professional recovery.
Judicial liquidation is a complex procedure with a lot at stake. Each situation is unique.
For a personalised analysis of your case and a tailored legal supportOur team is at your disposal.
Frequently asked questions
What is suspension of payments?
This is the condition of a company that can no longer pay its debts due (when they fall due) with its immediately available cash.
Who can file for compulsory liquidation?
The debtor himself (this is an obligation), an unpaid creditor, or the Public Prosecutor may refer the matter to the court.
What are the main consequences for managers in the event of compulsory liquidation?
He is "divested": he loses the power to manage and dispose of the company's assets, this role being entrusted to the liquidator.
Can my company continue to operate during a compulsory liquidation?
In principle, no, the business will cease trading. A very limited temporary continuation (a few months) may be authorised by the court if this is conducive to the sale of the business or its assets.
What happens to the company's debts once the liquidation is terminated due to insufficient assets?
In principle, unpaid creditors can no longer take legal action against the individual debtor after closure, except in exceptional circumstances (fraud, specific debts, etc.).
As a company director, am I liable for the debts of my company in liquidation?
Normally not, except in exceptional cases such as a management error that has contributed to the shortfall in assets (action en comblement de passif) or if you have provided a personal guarantee.
How long do receivership proceedings last?
The duration varies, and is often several years for a traditional liquidation. Simplified procedures exist for small businesses, with shorter timeframes (6 to 15 months).
What is professional recovery?
This is a simplified alternative procedure for sole traders with no recent employees and very few assets, aimed at wiping out their debts without formal liquidation.
Are my personal assets protected in the event of compulsory liquidation?
For sole traders (new status), personal assets are in principle separate and protected. Their principal residence is also exempt from seizure. For company directors, their personal assets are separate, unless they have provided a guarantee.
Can I contest a court-ordered liquidation?
Yes, the debtor (as well as other parties such as the public prosecutor or employee representatives) can appeal against the opening judgment within a short period of time (generally 10 days).
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