Civil and criminal liability of managing directors at a SAS.
To start with, the managing director’s liability must be distinguished from a company’s liability which is limited to the company’s share capital. By comparison, no such restriction applies to the managing director.
The managing director of an SAS may be held accountable in his or her capacity as executive leader both on the basis of his or her own actions or omissions and on the basis of the actions of the company or its employees. These regulations also apply to the so-called “dirigeants de faits”, i.e. managing directors who were not officially appointed by shareholder resolution but outwardly perform the same duties.
Managing directors are subject to a wide net of liability regulations by virtue of the free hand they enjoy as top executives of an SAS. In principle, a managing director may perform all actions that are in the interest of the company without prior shareholder approval. The only exceptions to this are individual actions (e.g. actions that are mentioned in the final section of the articles of association, actions that only shareholders can carry out such as capital reduction, M&A, dissolution resolutions, and wrongful acts of self-dealing, of course.
Outwardly, i.e. vis-à-vis third parties and business partners, managing directors have unlimited authority to act. This holds true even if managing directors intentionally or negligently exceed the powers bestowed on them by their company (e.g. set forth in the articles of association). The company must be accountable for such actions unless the third party had positive knowledge of the transgression.
The liability of managing directors is substantially determined by the legal distinction between cases of civil and criminal law. Of course, misconduct can give rise to both civil and criminal liability.
1. Civil (and criminal) personal liability:
For a managing director to be liable under civil law, there must be the elements of wrongful action, harm and a causal connection between the wrongful action and any harm inflicted.
To what extent actions are wrongful is largely determined by the articles of association or the law.
Prerequisites of liability under civil law govern claims of the company against managing directors (action sociale) as well as claims asserted by partners and third parties (action individuelle – though it must be noted that in the event of third party claims, the company is liable with its assets and managing directors are only responsible for intentional misconduct, e.g. providing employees with uninsured vehicles or the refusal to sign a “décennale insurance”).
Managing directors bear personal liability for their own intentional actions that violate legal and statutory regulations including, under certain circumstances, misconduct on the part of their own employees.
The term “faute de gestion”, i.e. management errors (e.g. high company debt due to poor decision-making, high costs due to supervisory failures etc..) carries enormous significance in practice. Since December 9, 2016, errors in the ordinary negligence range that were made in the capacity of managing director have been excluded from liability.
If a managing director is personally liable under civil law, he or she will usually have to pay for the damage from private assets.
In the worst case, a managing director may become liable to pay the insolvency administrator (and all insolvency creditors) within the scope of insolvency proceedings in accordance with Art. 651 – 2 Code de Commerce, and be forced to shoulder part or even all of the insolvent company’s debts (so-called “comblement du passif social”).
On that score, disproportionate compensation that has contributed to a company’s insolvency (Cour de Cass. 28 juin 2017 n° 14 29936) is sufficient to trigger liability for managing directors.
2. Criminal liability by action or omission:
However, the greatest risk of exposure to liability clearly stems from criminal law. Intent is not always required for criminal liability that extends to several types of violations in more than one legal area.
One does not have to look further than Art. L. 244-1 to 244-4 of the Code de Commerce to find a listing of offenses that would incur criminal liability for a managing director of an SAS (e.g. fictitious dividend payments, publishing false balance sheets, embezzlement, breach of trust, abuse of power and in some cases as little as failure to comply with articles of association, failure to appoint an auditor despite factual preconditions necessitating such action etc..).
Other acts or acts of omissions that trigger criminal liability are a managing director’s failure to comply with mandatory labor law regulations (e.g. prohibition of discrimination, failure to comply with hygiene and safety regulations, moonlighting, etc.) and prohibitions under tax law.
It should be noted that in France both the corporate entity and its managing director can be prosecuted by invoking the ‘solidarity principle’ under Art. 121-2, Code Penal.
If a managing director is guilty of a criminal offense, he or she will typically receive a jail term and/or a fine. Furthermore, the court may prohibit the managing director from continuing to act as managing director in the future.
3. Other corporate bodies:
Of course, the liability regulations above also apply to all other corporate bodies that are filled by shareholder resolution (e.g. Directeur Général or DGD). It is quite possible to set forth directly in the statutes that the director is entitled to exercise the same powers (and bear the same liability risks) as the president. In order for the director to effectively represent the company externally, his or her name should also be entered into the commercial register.
4. Limiting liability:
Due to the wide range of liability regulations in France, individual responsibilities (and associated obligations) are usually transferred to third parties (e.g. to a director or other company employees such as project managers) as part of a so-called “délégation de pouvoir”.
Such a “délégation de pouvoir”, which must be accepted by both parties, should be worked out in a transparent and precise manner.
Beyond that, there are of course insurance policies available to insure against management liability claims. In Germany, this is known as D&O insurance.
This article has been prepared for informational purposes only. It is not a substitute for legal advice addressed to particular circumstances. You should not take or refrain from taking any legal action based upon the information contained herein without first seeking professional, individualized counsel based upon your own circumstances. The hiring of a lawyer is an important decision that should not be based solely upon advertisements.
Information by ALARIS AVOCATS