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Piercing the Corporate Veil in France

Posted by Circonlex
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on Tuesday, 19 July 2011 in Law

Safe From Corporate Veil Piercing in Limited Liability Companies in France? Think again


Director and shareholder liability is largely limited by the the corporate form whether an LLC, and S-Corp or a C-Corp.

These limited liability structures are what insulate the people running and investing in them from having creditors seek out their personal assets.  Even if the entity goes bankrupt, directors and shareholders can generally rest easy that their personal lives will remain intact.  This protection is only provided, however, if the company is run according to the rules of good corporate governance and accounting.  If the rules are not respected to a degree where the corporate personality and those of the individuals running the company become blurred, the personal liability protection may be removed through "piercing the corporate veil".

Creditors may request that a court "pierce" the veil of a corporation so that they may seek damages against the shareholders directly.  In general, this is a very high bar for creditors to overcome, but it does occur.  For an example, see Sea-Land Services, Inc. v. Pepper Source, 941 F. 2d 519 - Court of Appeals, 7th Circuit 1991, available at http://scholar.google.fr/scholar_case?case=8625200149761722932&q=pierce+veil&hl=en&as_sdt=2002, last visited Dec. 22, 2010.

In France, a number of entities offer the protection of limited liability.  The most common forms are the SàRL, the SAS and the SA.  Each of these business forms offer limiting the shareholders' liability to the extent of their capital investment.  This can be as low as one euro for the SàRL and the SAS since the beginning of 2009.  As with their United States equivalents, closely held companies are often managed by their shareholders, which brings about the question as to the potential liability of these individuals.

When studying French corporate and commercial law, the question of corporate veil piercing is asked often by American jurists.  Most if not all French professors and corporate law experts will give a blank stare and then conclude that piercing is not possible.  However, when looking at the bankruptcy section of the Commerce Code it becomes brutally apparent that the personal liability of anyone involved in the management of a faltering company are subject to potentially heavy sanctions.  Moreover, these sanctions can go far beyond simply covering the debts of the company.  Even more perilous for the errant manager, is that the liquidation may be initiated by a creditor.  Article L 640-5 of the Commerce Code allows any creditor to request that the Commerce Court opens the liquidation procedure.  In order to succeed, the creditor need show that the company has ceased paying its debts and that a Chapter 11 style restructuring would not succeed in saving the company.  Normally, by law the company itself must make this request and not doing so gives way to an adverse inference of bad faith.

Once the liquidation procedure has been opened, the possibility of piercing the corporate veil piercing is opened.  Article L651-2 of the Commerce Code states that if during the liquidation it is determined that there are insufficient assets due to management negligence, certain persons may be held liable for part or all of the unpaid company debts.  The persons may be also held jointly and severally liable as well.   Who may be held liable? According to the same article managers by law and by fact may be held responsible.  Managers by law would be the gérant of an SàRL, the Président and general directors of an SAS and the president and/or general director and delegated directors of an SA.  In the case of the SA the simple fact of being on the board of directors is not the equivalent of being a manager by law.  Managers by fact can pull anyone who was involved in the direction of the company, including third parties.  Some case law examples have bank managers, lawyers, accountants and other professionals who got too involved in the management of the company in question being qualified as managers by fact.  Therefore, banks, partners and creditors should be forewarned from conditioning their involvement with a company on terms that could be interpreting as directing the company.

But wait, there's more.  The same persons targeted by L 651-2 of the Commerce Code may also be subject to further sanctions under L 653-1 et seq of the same code.  Under this section of the code, it must be shown that the person either (a) took a course that guaranteed the company would not be able to pay its creditors or (b) funneled all or part of the company assets or fraudulently increased the liabilities.  Articles L 653-4 and L 653-5 go on to list a whole host of other no-nos that could inflict the corporate "death" penalty.  Mostly things that most people know not to do such as using corporate funds for their personal needs.  What are the sanctions?  Prohibition from participating in any corporate activity of any sort including for-profit and not-for-profit companies.  Forced to hold the hot potato as the the condemned person may not be legally prohibited from selling any shares in companies that are failing or will fail.  Finally, a court may ban the person from participating in any civic activities such as running for office or even voting in public elections.  There are ways to remove these sanctions including waiting it out for 15 years or through rehabilitation.  Rehabilitation can be done primarily through righting all of the wrongs that have been done, namely paying back all of the creditors in full.

So, next time some one asks you if there is corporate veil piercing in France, feel free to say no and remember to qualify it with "but there's another sanction and it's much much worse".


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Circonlex was created in 2008 in order to address the need for higher quality legal, financial and technical translations.


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