Directors’ Liability in France

The notion “directors” covers several positions. Directors are either persons designated as directors by the law (“de jure” directors) or actually acting as such without being legally appointed in this capacity (“de facto” directors).

In France, the “de jure” directors are the persons who are granted powers of legal representation within a company, i.e. :

• Directors (“administrateurs”) per se, i.e. members of the Board of Directors in joint-stock companies (“sociétés anonymes”)
• President (or Chairman) of the Board of Directors (if also CEO)
• President (or Chairman) of the Directorate (in companies with Directorate and Supervisory Board)
• General Manager (“gérant”) in companies under the form of “SARL” (limited liability company) or “SNC” (partnerhip), or “société commandite par actions” (partnership limited by shares) and also in “SCI” (Real estate companies) which are civil companies
• Chief Executive officer (“Directeur General”)

All the above positions are referred to hereunder as “directors”.

Members of Supervisory Board do not have executive powers and their liability is more limited.

The main sources of civil liability are to be found in the Code of Commerce, under the sections relating to corporations. There are different articles of the Code applying to different corporate forms.

The sources are also to be found in French Tax Code, Civil Code, Labor Code, Criminal Code (see question 3 below), Environment Code, Monetary and Financial Code, and Code of Commerce again, in the articles relating to bankruptcy.

Directors incur civil liability for their actions when the following cumulative conditions are met:

• they have committed a fault, which can consist in (i) a breach of the law; (ii) a breach of the by-laws, or (iii) a management fault defined very broadly and which goes from mere carelessness, to willful misconduct or fraud;
• such fault result in damage or harm either to the company or to third parties;
• there is a causal link between the fault the damage suffered.

The liability may be individual or joint and several.

If there are several directors in a company, they will all be jointly and severally liable for a harmful act produced by one of them, except those who prove that they did not intervene in the adoption and execution of the harmful act/s or omission/s, since they were unaware of their existence or that, being aware of them, they did everything possible to avoid the damage or, at least, they expressly opposed them.

The liability of the Board of Directors is usually joint and several, the Board being a collegial body; except if one director may prove that he/she voted against an action that is considered as a fault or was unaware such action, or tried to prevent it.

Directors may be jointly and severally liable for payment of tax penalties of fines if they have rendered such payment by the company impossible through fraudulent actions of material and repeated breach of their tax obligations.

They may also be held liable, in case of bankruptcy of the company, and be sanctioned in the following manners:

• repayment or all or part of the insufficiency of asset in case of management faults other than mere negligence
• personal bankruptcy for specific material faults.
  

The civil liability of the directors sought through actions from:

• most of the time, the company where a director operates. However, such an action may prove difficult when there is only one director representing the company. This is why the action of the company may be conducted by one or several shareholder(s) acting in the name of the company. The action is called “ut singuli” when it is conducted by one shareholder or “ut plures” when it is conducted by several shareholders. Such actions are conducted to the sole benefit of the company. Any damage awarded is paid to the company itself. When the action is conducted by another director acting on behalf of the Company, the action is called “ut universi”;
• one specific shareholder, when he/she/it can prove the existence of an individual and special damage;
• third parties, such as creditors, only when the fault is personal to the director and may be detached from his/her duties;
• tax authorities who may rule that the directors are jointly liable for tax penalties.
  

Directors may be liable under criminal law for their own actions and those, specifically committed as directors even indirectly by someone under his/her responsibility.

Liability cases cover mainly financial, accounting, tax and stock market issues (misuse of corporate assets, distribution of fictitious dividends, failure to establish corporate accounts, tax evasion, money laundering, insider trading…), fraudulent bankruptcy, corruption actions, actions in the fields of labor law, where the director may be held liable, in his/her capacity as legal representative, for violations (even indirect) of rules applying to health and security of employees, moral harassment, employees representation, work discrimination, etc.; or environmental laws. It is possible to limit that sort of liability through clear delegation of powers and responsibility to employees in charge of a given site (a plant) or a specific area (human resources) and having competence and authority to make these rules complied with.

Public action may be initiated by the Public Prosecutor, upon a claim from a victim or an interested party (association of defense of general interest, public administration), such claim being either “simple” or with constitution as civil Party in order to seize an Examining Magistrate or sometimes by a self-referral procedure, initiated on the knowledge of criminal behaviors of the director in the context of an ongoing criminal investigation or reports from public administrations (for example, in case of lack of filing of a company annual account to the RCS, the Public Prosecutor is informed by the Commercial court).

As a general rule, Civil liability actions against directors are subject to the statute of limitations of three years from the date of the action or, when such action has been dissimulated, from the date of its discovery.

For actions against “de facto” directors or directors of special companies, such as civil companies, General or Limited Partnerships, the statute of limitation is 5 years.

For criminal cases, actions against companies and/or their directors, the statute of limitations depends on the penalty for each offense, i.e.

• one year for minor offenses sanctioned by a fine only,
• 6 years from the offense or the discovery of the offense (capped to a maximum of 12 years from the date of the offense) for more serious offenses, sanctioned by fines and/or imprisonment of 2 months to 10 years
• 20 years from the offense or the discovery of the offense (capped to a maximum of 30 years from the date of the offense) for crimes, sanctioned by imprisonment above 10 years.
  

Directors & Officers (D&O) liability policies are commonly used in France to cover consequences of directors’ actions.

D&O liability policies may cover almost all consequences of actions of directors, to the exception of intentional, willful or fraudulent acts.

The terms & conditions of the policy must be carefully reviewed and/or drafted to clearly define the scope of the cover.

There is no difference between independent directors and non-independent directors, as long as they are executive directors, i.e with powers of representation.

This is not the case of non-executive directors, who are usually employees. Therefore, the liability is weaker. Non-executive directors do not have liability based on their mere title. They may be held liable when they actually committed an illegal action or were aware of an illegal action and agreed with it or did nothing to prevent it.

Holding company may be liable for actions of a subsidiary or directors thereof, when it is considered as “de facto” director, i.e. as actually managing the subsidiary. In such a case, the liability is a direct liability based on the qualification as director of the subsidiary.

It may be liable, in the event of bankruptcy of the subsidiary, if it can be proven that certain actions or behavior of the holding company have led to the bankruptcy (huge management fees for example). Bankruptcy is the most frequent area of liability of a mother company.

The mere fact that the holding company has the power to appoint directors, who committed a fault triggering their liability, is insufficient.

The holding company may be liable as accomplice if the Public Prosecutor may prove that the decisions taken to the holding level contributed to the commission of the criminally reprehensible acts in the Company.