French court orders extension of company insolvency proceedings to shareholder's assets

Quick read

The Court of Cassation has considered whether company insolvency proceedings may be extended to a managing director and shareholder who has made payments to himself from the company's bank account.

Background

The managing director of a limited liability construction company (SARL) made large cash withdrawals and unjustified transfers to himself from the company's bank accounts. He debited these sums to his shareholder current account. The company was subsequently placed in (judicial) liquidation and the liquidator requested that the collective proceedings be extended to the managing director's assets. Company insolvency proceedings may be extended to a director or shareholder, who interferes with the management of the company, where there is confusion of their assets and liabilities due to abnormal financial transfers. The Court of Appeal held that there had been no confusion of assets and liabilities because the debit balance of the shareholder current account, constituted a claim by the company against the managing director and shareholder.

Decision

The Court of Cassation disagreed. The fact that these sums had been entered in the shareholder's current account was not such as to rule out the abnormality of the transfers and withdrawals made by the managing director.

Key takeaways

The existence of a current account with a debit balance recording the sums owed to the company by the director or shareholder does not exclude a claim for the commingling of assets.
If commingling of assets is proved, the court may order that the director or shareholder is liable for some or all the company's debts in the insolvency proceedings which may exceed the sum received from the company.
It is also forbidden for directors of a SARL, who are natural persons, to be granted loans or current account overdrafts by the company. Such loans or overdrafts are absolutely null and void. Criminal penalties may also apply if the acts constitute a ‘misuse of company assets’.