Civil, criminal and fiscal liability of the manager of SARL

The manager of an SARL (Limited Liability Company) occupies a strategic function. As such, he is bound to legal, statutory and management obligations. In case of fault, his civil liability can be engaged, whether by the partners or by third parties. In case of criminal or fiscal infraction, the manager of an SARL can also engage his criminal or fiscal liability.

1. The civil liability of the manager of SARL

a. Legal basis of the liability of the manager

Article L. 223-22 of the Commercial Code provides that the manager is responsible individually or jointly:

• towards the company,

• towards the partners,

• and, in limited cases, towards third parties.

The manager can be held liable for:

• Infractions to the legal or regulatory provisions applicable to SARL,

• Violations of the statutes,

• Faults of management, from simple negligence to characterized fraud.

b. Violation of legal or regulatory provisions

The managers are responsible in case of non-observance of the laws or regulations applicable to SARL, notably:

• Omission or irregularity in the formalities of creation or modification of the statutes,

• Illicit granting of loan to a partner natural person or to themselves,

• Refusal of communication of corporate documents to a partner,

• Non-payment of dividends within 9 months following the closing (except judicial extension),

• Irregular presentation of annual accounts,

• Distribution of fictitious dividends,

• Inaction facing critical situations, such as:

  • the loss of more than half of the capital,

  • the exceeding of the maximum number of partners (100).

c. Violations of the statutes (articles of association) of the SARL

The liability of the manager can be engaged when he goes beyond statutory clauses, for example:

• Execution of an exceptional operation without prior authorization of the assembly,

• Breach of restrictions provided in the statutes concerning certain acts (ex.: sale of assets, important borrowings).

For example, engages his liability the manager who buys a land to build a factory without authorization of the partners, in violation of a clause limiting his powers to acts of current management (CA Paris, 4 February 2000).

d. Faults of management: from simple omission to serious fault

The faults of management encompass a wide range of faulty behaviors going from simple omission up to serious fault:

• Negligence, incompetence, bad organization,

• Imprudence, bad appreciation of the financial situation,

• Delay in the declaration of cessation of payments,

• Abusive use of corporate funds,

• Unbalanced management having led to the ruin of the company.

The judges appreciate case by case the seriousness of the fault and its link with the prejudice suffered by the company or the partners.

e. Shared liability in case of plurality of managers

When several managers are in function, each can be held individually or jointly responsible according to his degree of implication in the fault.

The judge determines the contributive part of each faulty manager. But the victim can ask complete reparation from only one manager, who will then turn against the others to be indemnified of his share (art. L. 223-22, al. 2).

f. Action in liability: who can act?

In case of fault of the manager of an SARL of civil nature, two types of actions are possible:

• The individual action, which can be exercised by any partner in reparation of the personal prejudice which he has suffered, and

• The social action (also called “ut singuli”) by which a partner exercises the action of the injured company in the name and for the account of it, seeking to obtain reparation for the company.

For example, if a partner illegally excluded from a decision which causes him prejudice he will be able to try to act individually, while if he notices a misappropriation of funds affecting the corporate accounts he will exercise the social action to obtain indemnification for the company.

g. Particular case: insolvency proceedings of the SARL

In case of receivership or judicial liquidation, the manager can see his liability aggravated. Possible sanctions may include:

• Obligation to bear all or part of the corporate liabilities,

• Prohibition to manage,

• Forfeiture of certain corporate rights (voting right, transfer of shares…).
  

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2. Criminal liability of the manager of SARL

The manager of an SARL does not only incur civil liability towards shareholders and third parties, but he can also be prosecuted criminally for offenses committed in the framework of his management.

These offenses are heavily sanctioned, notably in case of fictitious dividends, fraudulent presentation of the accounts, or misuse of corporate assets. Constant vigilance during management is therefore a must.

a. Main criminally sanctioned offenses for which may be liable a manager (“gérant”) of a SARL

Articles L.241-3 to L.241-5 of the Commercial Code set out a list of offenses that may be committed in the course of managing an SARL. These offenses are punishable by imprisonment and substantial fines. Thus, a manager of a SARL incurs up to 5 years of imprisonment and €375,000 fine if he:

• Distributes fictitious dividends

  • Either in the absence of inventory,

  • Or by means of fraudulent inventory,

  • And this, before the real results of the company are established.

• Presents inaccurate accounts

  • When he knowingly presents to the partners accounts which do not reflect the financial reality of the company,

  • Even if there has not been distribution of dividends,

  • The objective is often to mask losses, mislead the partners or the creditors.

• Commits a misuse of corporate assets (ABS)

  • By using the assets or the credit of the company for personal purposes,

  • Or for the benefit of another company in which he has a direct or indirect interest,

  • And in bad faith.

• Commits an abuse of power or of vote

  • By using his prerogatives of manager or his voting rights in a manner contrary to the interest of the company,

  • For personal purposes or for the benefit of a third party.

b. Aggravated penalties for misuse of corporate assets of international character

When the misuse of corporate assets is facilitated by:

• Bank accounts or contracts opened abroad,

• Interposed persons or trusts situated abroad,

The penalty incurred is increased to 7 years of imprisonment and €500,000 fine (article L. 241-3, al. 8 of the Commercial Code).

This aggravating circumstance aims to fight against mechanisms of concealment or evasion via offshore structures.

c. Accounting obligations: sanctions at article L. 241-4 of the Commercial Code

The manager is liable to a fine of €9,000 if he:

• Does not establish, each year:

  • The inventory,

  • The annual accounts,

  • And, unless legal dispensation, the management report.

It is not necessarily a fraud, but a formal and serious breach of the obligation of transparency.

d. De facto manager of an SARL can be prosecuted just like the de jure manager

Are punishable:

• The de jure manager, appointed statutorily and registered at the RCS,

• But also the de facto manager, that is to say any person who actually exercises the power of management, even without official title.

Cass. crim., 29 February 1988 and 21 October 2009: a de facto manager can be condemned for misuse of corporate assets.

Exception: directors of foreign companies

A director of a foreign company cannot in principle be prosecuted in France for the offenses set out in article L. 241-3 of the Commercial Code, unless:

• The real seat of the company is in France,

• Or if the real activity is located on the French territory.

Cass. crim., 3 June 2004; 31 January 2007; 25 June 2014.

Summary table of criminal offenses

3. Fiscal liability of the manager of SARL

In which cases can the manager be personally condemned to pay the fiscal debts of the company?

If the SARL does not settle its fiscal debts (VAT, corporate tax, social contributions…), it is in principle the company itself which is held to payment. However, in case of fraud or of serious breaches of French law, the manager can be personally sentenced to settle the taxes and penalties due by the company.

This exceptional sanction is provided in article L. 267 of the Book of Fiscal Procedures (LPF).

a. In princple, the SARL is sole liable for the payment of its taxes, however, there are exceptions

In French tax law, the SARL is a legal person distinct from its directors, It is thus solely debtor of the tax, except in cases of fraud or of characterized fault.

However, article L. 267 LPF allows the French tax administration to transfer the fiscal burden of the company’s taxes to its manager, when the latter has prevented the collection of the taxes, by fraud or serious and repeated non-observance by the company of its fiscal obligations.

b. Conditions for involving the manager’s fiscal responsibility

For the personal fiscal liability of the manager to be engaged, three elements must be present:

1° Taxes and penalties must be due by the company

• It can be VAT, corporate tax, CFE, social contributions, etc.

• The company must have been subject to a reassessment or to an unsuccessful recovery.

2° The manager must have committed fraudulent maneuvers or a serious and repeated non-observance of the fiscal obligations

• Fraudulent maneuvers: concealment of revenues, fictitious or altered accounting, false invoices, etc.

• Serious and repeated non-observance: absence of declaration, absence of payment, chronic default of regularization despite reminders, etc.
  A simple negligence or financial difficulty is not sufficient.

3° There must be a direct link between the fault of the manager and the impossibility for the tax administration to recover the amounts due

The fiscal administration must demonstrate that the faults of the manager made impossible the recovery of the sums due. For example, the voluntary concealment of assets, the transfer of funds abroad, or else the cessation of activity without liquidation.

c. De facto managers of SARL are concerned as much as statutory managers

Are concerned:

• The de jure manager: registered at the RCS,

• But also the de facto manager: any person having effectively directed the company, even without official title.

Constant jurisprudence: a de facto director can be held fiscally responsible in the same way as a statutory manager.

d. The procedure of engaging the SARL manager’s responsibility for the SARL’s fiscal debts

If the tax authorities wish to hold a manager personally liable, they cannot do so directly. Instead, they must bring the case before the judicial court (formerly the Tribunal de Grande Instance). It is the judge who decides whether the manager’s liability should be engaged. Throughout this process, the manager has the right to contest the proceedings and to present his arguments.

Liability of the SARL’s manager for the company’s fiscal debts is never automatic. The court will examine whether the manager’s conduct was intentional or faulty, whether the breaches were serious and repeated, and whether these actions directly prevented the recovery of the company’s tax debts.

Example of involving the manager

A manager did not declare VAT during 3 years, voluntarily omitted to file the tax returns, then organized the dissolution without effective liquidation. The court condemns him to personally pay the fiscal debts, for having knowingly organized the insolvency of the company.

Summary: cases in which the manager’s responsibility for taxes of the SARL can be engaged