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Directors’ Liability in France

27-10-2014
 
 
Directors Liability In Corporate Law: Cross Jurisdictional Comparative Discussion
Article by Olivier Sanviti
 

Questions:
 
1) Are directors liable for management decisions?
 
The responsibility of directors in France is laid down in the Commercial Code.
 
According to articles L223-22 and L225-25 of the Commercial Code directors may be held liable for the following categories of breaches towards the company and third parties:
  • breaches of laws and regulations applicable to companies;
  • breaches of the articles of association of the company; and
  • mismanagement.
Concerning the damage caused by the directors to third parties, the directors will only be found personally responsible if they have intentionally breached their duties towards those parties and if such breaches were committed outside the course of their duties.
 
The shareholders that have suffered personal damage as a result of the fault of the directors may bring an individual action against them but they will have to prove that the injury they suffered was independent from the damage suffered by the company. This “personal” injury does not include for instance the loss of value of his shares which it is considered just an effect of the damage suffered by the society (Cass. 3 civil, 16 Nov. 2011, nº 10-19.538). Unlike the case of third parties, if the action is brought by the shareholders, the tribunals don’t require that the directors’ breach has been committed outside the course of their duties (Cass. Com., 9 March 2010, nº 08-21.547).
 
As for the damages caused by the directors to the society, the shareholders have the possibility to bring a social action against them (action sociale ut singuli). However, the Commercial Code (arts. R223-31 and R225-251) provides that this action may only be exercised by a minimum number of shareholders. For example, in the case of limited liability companies, the shareholders have to represent at least 10% of the social capital. The damages eventually obtained as a result of the exercise of this action will be reintegrated to the capital of the company.
 
Directors are liable individually or jointly, depending on whether a director individually or several directors collectively have breached their duties. Should more than one director have cooperated in the same circumstances, the court shall determine the contributory share of each one in the reparations.
 
Besides, directors may also be criminally liable for offences committed during the exercise of their duties. Directors may be liable for certain speci?c offences such as misuse of company property, misuse of power and distribution of ?ctitious dividends.
 
In the event of bankruptcy, a speci?c action may be brought against directors, who may be ordered to pay off all or part of the company’s debts.
 
Liability suits brought against directors lapse after three years as from the commission of the harmful act.
 
French law prohibits any limitation of directors’ liability in the articles of association. Any provision of within these requiring the consent of a shareholders’ meeting for bringing an action against a director, or providing an anticipated waiver of this action, will be ineffective.
 
2) What is the general criterion for being liable? Ex. To cause a damage, to act with minor or soft guilt, imprudence, negligence, bad faith, fraud, malice…)
 
The French law doesn’t provide a definition of mismanagement so the appreciation of the liability of the directors in these cases depends on the criteria of the courts. The courts usually check if the directors have acted with due diligence (“en bon père de famille”).
 
The claimants are required to prove the commission of a fault of management by the director as well as the existence of damage and a causal link between the fault and the damage.
 
The damage must be current, direct, certain and personal. The damage alleged is usually the economic loss or the loss of profit suffered by the society, but it may also be a moral damage such as the harm caused to the image of the company.
 
It is possible to point out three types of faults that may engage the liability of a director: negligence, imprudence and acts against the interest of the company.
  • Negligence: All the directors have to act with due diligence. Sometimes, a director may fail to comply with his duty of supervision and tolerate some tortuous acts committed by the general manager or the other directors. This failure may engage his responsibility except if he proves that the tortuous act was hidden to him or that he was opposed to that act but his opinion was not followed by the other directors or that the information he received was not accurate.
  • Imprudence: The directors act recklessly when they engage the responsibility of the society without making sure that they will be able to cope with these expenses. For example, substantially increasing the staff of the company without previously having performed an analysis of profitability.
  • Acts performed against the interest of the company: The directors have the obligation to act in the interest of the society. The acts performed by a director regarding exclusively his personal interests are considered faults of management. For example, if he substantially increases his remuneration while the society tries to overcome financial issues.
 
3) Can the directors be directly liable for company debts in front of the company’s creditors without proving that directors have been guilty? In which cases?
 
For example in certain jurisdictions, directors are directly liable in front of the creditors of the company when they are obliged to promote the dissolution of the company and they do not do it in the required time, in certain cases, for example when losses accumulated imply that the net assets are less than half of the issued capital.
 
In France, the courts have a large margin of appreciation to decide about the liability of the directors.
 
For example, the Court of Appeal of Paris in a judgment delivered on 17 February 2009 has found liable a director that failed to consult the shareholders about the continuation of the activity of the company, when according to the balance sheet the losses of the company were higher than half of the issued capital.
 
Another example is the judgment delivered by the Court of Appeal on 18 February 2000 that stated that the fact of failing to declare the insolvency of a company by a director within the legal term constitutes an act of mismanagement as provided by article 225-248 of the Commercial Code. This article provides that if, as a result of losses duly recorded in the accounting documents, a company's equity capital falls below half of its share capital, the board of directors or management, as the case may be, must call a special shareholders’ meeting within four months of the approval of the accounts revealing the said loss to decide whether the company should be prematurely dissolved.
 
4) Can the directors be liable in case of insolvency of the company? Is this situation of responsibility frequent in your jurisdiction in insolvency cases?
 
In France, the Commercial Code contains arguably very harsh provisions on directors in the event of a company’s insolvency. Article L 651-2 of the Code de commerce provides that when the liquidation of a legal entity reveals a deficiency of assets to pay off liabilities, the court may, in instances where management fault has contributed to this deficiency, decide that the debts of the legal entity will be borne, in whole or in part, by all or some of the de jure or de facto managers, who have contributed to the management fault. If there are several managers, the court may, by way of a reasoned ruling, declare them jointly and severally liable.

In the situation where there are several liable managers, the court will take into account the fault of each manager in order to determine the portion of the debts of the company to be borne by each one.

The right of action shall be barred after three years from the date of issuance of the order pronouncing the liquidation proceedings. Sums paid by the managers in compliance with the first paragraph shall form part of the debtor's assets. These sums shall be distributed to all creditors on a pro rata basis.
 
In addition, articles L 653-2 and L 653-11 of the Commercial Code allow the court to disqualify the director from holding that office in any other company for a maximum term of 15 years.
Further criminal liability can be found in articles L 654-2 and L 654-3 of the Commercial Code where the director commits certain crimes during the company’s bankruptcy. These include embezzlement, concealing the company’s property or increasing the insolvency of the company. If these same acts took place before the insolvency started, they will constitute a misuse of the company assets and the director will be liable for breach of his fiduciary duties. He will risk at the most 5 years of imprisonment and a fine of 75,000 euros.
 
5) Are directors liable in the case of closing business without filing for insolvency?
 
This action will be probably deemed by the courts as a fault of management of the directors.
 
In the event that the company cannot comply on a regular basis with its obligations, the Commercial Code establishes different procedures that the company shall follow depending on a number of circumstances: procedures de sauvegarde, de redressement judiciaire et de liquidation.
 
If the directors decide to close business without taking into account those provisions, a court may afterwards rule that the debts of the company are to be borne, in whole or in part, by the directors if it considers that the failure of the directors has contributed to the deficiency of assets of the company as provided by in article L 651-2 of the Commercial code.
 
6) Do you have a specific action to sue a director when he/she produces damages not to the company but to the creditors or shareholders? Is this legal action successful for recovering the damage suffered by the claimant?
 
If a shareholder wishes to be indemnified for his personal injury, he may bring an individual action against the director for his mismanagement. In this case, he will have to prove the director’s fault, the personal damaged that he has suffered and the causal link between the fault and the damage.

The main difficulty of this action is to prove that the injury he suffered was independent from the damage suffered by the company. This “personal” injury does not include for instance the loss of value of his shares which it is considered just an effect of the damage suffered by the society (Cass. 3 civil, 16 Nov. 2011, nº 10-19.538).

However, shareholders may individually or collectively sue a director for a damage suffered by the company. But in that case, if the director is held liable the indemnity will be perceived by the company.

Third parties (i.e. creditors) may also bring an action against directors for their mismanagement. However, the third party’s action is very limited. To begin with, a third party will only receive an indemnity if his injury was caused by a director’s “fault” committed outside the course of his duties. Therefore, even if the director has violated a statutory provision or concluded a tortuous contract, if he has acted in the course of his duties and represented the company he cannot be held personally liable. In that case, the injured party will have to bring an action against the company to get compensation for the damages suffered.

It is very difficult to prove that the director has acted outside the course of his duties. Only if the director has intentionally committed a serious fault incompatible with the normal exercise of his duties will the courts consider that the director has acted outside the scope of his duties (Cass. Com., 18 Mai 2010, nº 09.066,172).
 
7) Can other persons apart from directors be liable / board members? Ex. Managers, officers  
 
Besides the members of the board of directors, there are other individuals that can be held liable for mismanagement of a company such as the founding partners, the managers and officers and the members of the supervisory board (« Conseil de Surveillance »). According to article L. 225-257 of the Commercial Code, the members of the « Conseil de Surveillance » shall be liable for negligent or tortuous acts committed by them in a personal capacity in the performance of their duties. They shall incur no liability for acts of management or the result thereof. They may be held liable in civil law for criminal offences committed by members of the management if, having been aware thereof, they did not report the said offences to the general meeting.

The liability only exists if the director/manager has committed a fault, even if he has just contributed or validated the commission of a criminal offence.

This liability remains even if mismanagement proofs are found out a long time after he left, and when he ended his functions before his former company became insolvent or before the decision of bankruptcy has been rendered by the Court.
 
8) What do you estimate would be the expected time for obtaining an enforceable judgment in a legal action before Court against the directors? For example a temporary enforcement pending of Court of Appeal decision.
     
The expected time to obtain a judgment against the director before the Commercial Tribunal may vary depending on the seat of the Tribunal and the complexity of the case. In Paris, it may take between 18 and 24 months.
 
9) Is it feasible / convenient to include in the by-laws of the company the arbitration clause for claiming to directors? What is the expected time for the arbitration award?
 
It is feasible to include an arbitration clause in the by-laws for claiming directors since article 721.3 of the Commercial Code provides that the parties may agree to submit to arbitration all the questions related to companies, commercial acts and agreements between traders. 
 
In France, it is not very common to include an arbitration clause like that in the by-laws of a company since unlike some jurisdictions like Spain, the Commercial Tribunals in France are made up of non-professional traders with experience managing companies and therefore they usually have a high level of understanding of this kind of controversies.
 
10) What are the expected fees and costs for a law suit like this?
 
As for the costs of the law suit, the price for bringing any law suit before the tribunals may range from 50 to 100 euros. Besides, there is a 35 euros tax stamp that must be paid for each stage of proceedings (instance). Before the Commercial Courts, the intervention of a party representative (mandataire) is compulsory. The cost of this service is 400 euros excluding taxes. As for the lawyers’ fees, they will usually depend on the time spent to prepare and litigate the case, but an amount of €10K could be a reasonable estimation of the cost of a classic law suit.
 
11) What is/are the usual system/s for estimating the fees? Ex. Hourly rate, cap fixed budget, success fee - quota litis.
 
The French law doesn’t allow lawyers to be remunerated exclusively according to a success fee. If a success fee is agreed upon with the client, the percentage of this fee must be reasonable so as to guarantee the quality of his service as well as his independence.
 
In law suits concerning the liability to directors, the hourly rate (average of €280 VAT excluded) remuneration is the most commonly used system by lawyers in France since the time needed to prepare a judicial case is not always easy to ascertain because it depends also on the opponent’s lawyer defence.
 
ASTON
Olivier Sanviti
35, Boulevard Malesherbes
75008 Paris
+ 33 1 44 94 00 00