Prohibited Agreements in a French SARL

In a French société à responsabilité limitée (SARL), the law imposes strict and mandatory safeguards against the misuse of corporate assets. These rules, enshrined in Article L.223-21 of the Commercial Code, are not limited to the approval of certain contracts through the regulated agreements procedure. Some transactions are not simply subject to control — they are outright prohibited. This public policy regime aims to prevent any diversion of company funds or credit for the personal benefit of the company’s managers, shareholders, or their close relatives.

The consequences of breaching these prohibitions are serious: the sanction is not relative nullity, which could be waived or regularized, but absolute nullity. This means that the agreement is considered void from the outset, and its invalidity may be invoked by a wide range of stakeholders, including the company, its shareholders, and even its creditors.

1. The Nature of Prohibited Agreements

The law draws a strict line: managers and natural person shareholders of an SARL are forbidden from using the company as a personal source of credit or financial support. Article L.223-21 of the Commercial Code sets out three categories of forbidden transactions:

1. The conclusion of a loan agreement with the company, in whatever form;

2. The granting of an overdraft facility or any advance on a current account;

3. The company acting as guarantor, endorser, or aval provider for the personal debts of the manager or shareholder.

This prohibition is very broad. It applies regardless of the mechanism used. Whether the arrangement takes the form of a direct loan, a cash facility, a temporary advance, or even a more complex financial scheme, it falls within the scope of the prohibition if its effect is to provide a manager or individual partner with credit from the company. Similarly, the prohibition extends to all types of guarantees, whether personal or real, conventional or otherwise, when they are granted by the company to secure a personal debt of the persons concerned.

Persons Covered

The prohibition does not apply only to the managers and natural person shareholders themselves. It also covers their close relatives and intermediaries, reflecting the legislator’s determination to prevent circumvention through interposed persons. The following categories are therefore included within the scope of the prohibition:

• The legal representatives of corporate shareholders;

• The spouses, ascendants (parents, grandparents) and descendants (children, grandchildren) of managers, shareholders, or the representatives of corporate shareholders;

• Any interposed person acting on behalf of one of the above.

This extensive scope ensures that the prohibition cannot be easily bypassed by transferring the operation to a family member or by using a legal representative as a front.

2. Exceptions to the Prohibition

While the prohibition is strict, the law and case law recognize several exceptions where such agreements may be validly concluded.

a. Corporate Shareholders

The most significant exception concerns corporate shareholders. The prohibitions only target natural persons. As a result, when a shareholder is a legal entity (for example, another SARL or a société anonyme), it may borrow from the company, benefit from an overdraft, or receive a guarantee. In practice, this means that a parent company may lawfully obtain financing from its subsidiary, or a subsidiary may guarantee the obligations of its parent company.

However, such operations must comply with the strict framework of regulated agreements and be approved accordingly. The legislator thus distinguishes between the risks associated with lending to natural persons (where there is a risk of personal enrichment) and the legitimate financing of a corporate group.

b. Case Law and Doctrinal Clarifications

French courts have refined the scope of the prohibition by recognizing situations where certain transactions do not fall within Article L.223-21. The key principle is that the prohibition applies only when the company’s financial support is directed to cover the personal commitments of managers or shareholders.

Examples include:

• A loan contract concluded before a person becomes a manager is not affected by the prohibition, since the rule is assessed at the time the contract is formed (CNCC, June 2003).

• A guarantee granted by the company to secure a loan taken out by the purchaser of its business is valid, as the buyer is not an associate of the company (Cass. com., 6 March 2007).

• Within a corporate group, an SARL may guarantee the obligations of its parent company, provided the operation is not routine and is carried out under normal conditions, subject to the regulated agreements procedure.

By contrast, the courts have consistently held that all guarantees, whether real or personal, are caught by the prohibition when they cover the manager’s or shareholder’s personal commitments (CA Montpellier, 7 January 1980; Cass. com., 25 April 2006).

c. Exceptions for Financial or Commercial Activity

The law also recognizes two explicit exceptions:

• Where the company itself carries on a financial activity, the prohibition does not apply to ordinary operations carried out in the normal course of business and under standard market conditions (Commercial Code, art. L.223-21, al. 3). Thus, a financial SARL may grant loans or overdrafts as part of its professional activity.

• Indirect financial benefits resulting from ordinary commercial transactions (such as sales on credit) are not prohibited, provided that the manager or shareholder benefits from them under the same conditions as any other customer.

d. Strict Interpretation

Because it is a prohibition, Article L.223-21 must be interpreted strictly. The courts have therefore admitted that the company may sometimes provide guarantees where they do not directly cover the manager’s or shareholder’s personal debt. For example, the Court of Cassation held that an SARL could guarantee the commitments of a company managed by the manager’s spouse, provided the guarantee did not cover the manager’s own personal obligations (Cass. com., 25 May 1993). Similarly, a pledge of the company’s business assets in favor of the brother of a shareholder was held not to fall within the prohibition, absent a direct personal link or fraudulent arrangement.

3. Sanctions: Absolute Nullity of the Prohibited Agreement

The sanction for violating Article L.223-21 is absolute nullity. Unlike relative nullity, which can only be invoked by the protected party, absolute nullity may be invoked by any person with a legitimate interest, including the company, its shareholders, and its creditors. This reflects the public policy nature of the prohibition.

Scope of Nullity

In its landmark decision of 25 April 2006 (Cass. com., no. 05-12734), the Court of Cassation held that the guarantee granted by an SARL to secure a loan made to its managers was void as a matter of absolute nullity. Furthermore, because the loan itself had been conditioned on the company’s guarantee, the nullity extended to the loan contract itself, which was considered contrary to public policy.

Nullity and Managerial Liability

The conclusion of a prohibited agreement may also have consequences for the manager personally. The courts have ruled that entering into such an agreement may justify the judicial removal of the manager, but only where the operation has had a significant adverse impact on the company’s situation (Cass. com., 10 July 2007, no. 06-13520).

4. Limitation Periods

The question of limitation periods has given rise to debate. In the 2006 decision mentioned above, the Court of Cassation applied the thirty-year limitation period of common law, rather than the three-year limitation period specific to company law. Following the 2008 reform of French civil law, the common law limitation period is now five years (Civil Code, art. 2224).

Thus:

• An action for nullity of the agreement must be brought within five years from the day when the claimant knew or should have known of the prohibited agreement.

• An action in liability for damages against the manager, however, is subject to a three-year limitation period, as confirmed by a recent decision (Cass. com., 20 December 2023, no. 21-20019).

5. Nullity Opposable to Third Parties, Except in Good Faith

Absolute nullity may be opposed to third parties who have dealt with the company. However, Article L.235-12 of the Commercial Code provides an important safeguard: nullity cannot be invoked against third parties who acted in good faith.

The Court of Cassation has clarified that a third party cannot claim good faith if it knew the beneficiary of the transaction was a manager or shareholder, since it is deemed to know the law and the scope of the prohibition (Cass. com., 23 September 1982). By contrast, where the identity of the true debtor has been fraudulently concealed from the third party, and the latter remained in complete ignorance, good faith may be recognized, protecting the third party from the consequences of nullity.

Examples of prohibited agreements in a SARL

• A cash advance from the SARL to its manager for personal expenses.
• An overdraft facility granted by the SARL to a shareholder.

Sanctions

Entering into such prohibited agreements entails:

• Absolute nullity of the contract (may be declared by the court),
• Civil and criminal liability of the managers involved,
• Joint liability of any person who benefited from or facilitated the conclusion of the unlawful agreement.

Conclusion

The prohibition of certain agreements in SARLs is a cornerstone of French company law. By forbidding loans, overdrafts, and guarantees in favor of managers, natural person shareholders, and their close relatives, Article L.223-21 of the Commercial Code seeks to preserve the integrity of company assets and protect the interests of creditors. The regime is strict, but the courts have gradually clarified its boundaries, admitting exceptions where there is no risk of personal enrichment or where economic logic justifies the operation.

The sanction of absolute nullity, combined with potential managerial liability, makes it crucial for managers and shareholders to understand these rules. Any financial arrangement that risks falling within the prohibition must be carefully examined, and where permissible, structured within the framework of regulated agreements and approved by the partners.

Key Takeaway: In an SARL, individuals linked to the company (partners, managers, family members) are prohibited from drawing loans, overdrafts, or guarantees from it. Only corporate shareholders may legally engage in such transactions, and even then, they must follow the regulated agreements procedure. Any breach leads to absolute nullity, potential managerial revocation, and is strictly regulated by French case law on limitation periods.