Director liability: mismanagement, asset deficiency and protection

A director who mismanages their business faces three orders of liability: civil (towards the business or third parties), tax (joint liability with the authorities) and criminal (fraudulent bankruptcy, misuse of company assets). Many believe the limited liability that protects the business also shields them personally: that is a mistake. In our practice, we have supported directors facing an asset deficiency action or a personal claim after a liquidation. These situations show that insufficient protection from the start, for want of clear articles, documented governance and suitable insurance, can prove costly.

Quick answer. A director can be held personally liable for asset deficiency on liquidation (Commercial Code Article L651-2), for mismanagement towards the business or members (Articles L223-22 for SARL, L225-251 for SA), for a fault detachable from their duties towards third parties, and for criminal offences (fraudulent bankruptcy, misuse of company assets). The exclusion of mere negligence, introduced by the Sapin 2 Act in 2016, limits the risk without removing it. Directors and officers (D&O) insurance and documented governance remain the best protection.

Director liability is not monolithic. It draws on three domains, each with its own rules and conditions.

Civil liability#

It targets harm caused to the business, the members or third parties. It requires a fault, damage and a causal link.

Tax liability#

When a director has committed fraud or serious and repeated breach of their tax duties, the public accountant can ask the court to declare them jointly and severally liable for the tax debt (Tax Procedure Code Article L267).

Criminal liability#

It targets offences: fraudulent bankruptcy (Commercial Code Article L654-2), misuse of company assets (Articles L241-3 for SARL, L242-6 for SA), and other criminal breaches.

The director must manage the business with the care of a prudent, reasonable person. This duty binds the SARL manager (Article L223-22), the SA administrators and CEO (Article L225-251), and the SAS president.

What is mismanagement?#

It is conduct contrary to law, the articles or sound management. Some examples:

1. Breach of articles or law: acting beyond granted powers, contracts entered without required authority, excessive pay not approved by the members.
2. Fiscally imprudent choices: unsuitable regimes without reason, failure to track filing duties.
3. Lack of care: no cash monitoring, signing unbalanced contracts, heavy reliance on one or two customers.
4. Failing accounting follow-up: records not kept up to date, missing vouchers, annual accounts not filed.

The action is brought by the business (derivative action), by injured members (individual action) or, exceptionally, by creditors. The limitation period is three years.

Liability to third parties#

A director only incurs liability to a third party (customer, supplier, employee) if their fault is detachable from their duties. This is the settled case law of the Court of Cassation: a fault separable from office, of particular gravity and incompatible with the normal exercise of the mandate, engages the director personally; a fault linked to the exercise of duties remains that of the business.

It is one of the most-feared provisions of French insolvency law. Commercial Code Article L651-2 sets its regime.

Where a judicial liquidation reveals an asset deficiency, the court may, in the event of mismanagement that contributed to that deficiency, charge all or part of the asset deficiency to the directors, de jure or de facto, who contributed to it (Commercial Code Article L651-2).

Conditions#

Three cumulative requirements apply:

1. A judicial liquidation is open (not mere restructuring);
2. An asset deficiency is established (assets do not cover liabilities);
3. Mismanagement by the director contributed to that deficiency.

The exclusion of mere negligence (Sapin 2, 2016)#

This is the major safeguard: Article 146 of Law no. 2016-1691 of 9 December 2016 (Sapin 2) laid down a now-critical rule. Where a director, de jure or de facto, is merely negligent in managing the entity, they cannot be held liable for the asset deficiency.

In other words, a fault graver than ordinary negligence must be shown: deliberate conduct, serious breach of a legal or articles duty, marked lack of foresight. Merely poor management does not suffice. The court assesses case by case whether the fault exceeds mere negligence.

Limitation#

The action prescribes three years from the order opening the judicial liquidation. Beyond that relatively short period, it is no longer admissible. To understand the sequence, see our article on insolvency proceedings and on how to tell whether a business is in court-supervised recovery.

The authorities have a complementary weapon: Tax Procedure Code Article L267 lets the public accountant ask the court to declare the director jointly and severally liable for the tax debt where:

• fraud is established (knowingly false filings, sham invoicing); or
• serious and repeated breach of tax duties (non-filing, systematic non-payment) makes recovery from the business impossible.

The director then becomes personally liable for the debt, including interest and penalties.

Fraudulent bankruptcy (Commercial Code Article L654-2)#

The flagship criminal offence in insolvency. It targets a director who, in bad faith and while the business is in cessation of payments, has notably:

• kept false accounts or made accounting documents disappear;
• misappropriated or concealed all or part of the assets;
• used ruinous means to raise funds;
• kept manifestly incomplete or irregular accounts.

Sanction: five years' imprisonment and a EUR 75,000 fine. The offence requires fraudulent intent.

Misuse of company assets (Articles L241-3 SARL, L242-6 SA)#

The use, in bad faith, of company assets or credit for personal ends, contrary to the company's interest. Examples: cash used for a private expense, an asset bought by the business for the director's exclusive use.

Sanction: five years' imprisonment and a EUR 375,000 fine.

De facto director#

Liability and asset deficiency actions do not target only the de jure director (statutorily appointed). They also reach the de facto director: one who, without formal title, effectively runs the business (material decisions, signing commitments, dealings with third parties).

SAS and SARL#

Both forms fall under the Commercial Code. SARL follows Article L223-22; for SAS, Article L227-8 applies the SA administrator liability rules to its directors.

Association#

Officers of an association (president, treasurer, board members) also incur civil liability for mismanagement. The principles are close to those for commercial entities.

Personal guarantee by the director#

If a director personally guaranteed a business loan and the business does not pay, they remain liable on their personal estate. This is not director liability proper, but the separate obligation of the guarantor. A representations and warranties clause given on a sale follows a different logic, which should not be confused with it.

Directors and officers (D&O) insurance#

It covers defence costs and, where applicable, civil damages. It does not cover criminal fines or deliberate fraud. On taking it out, check:

1. the scope of cover (civil liability, defence costs);
2. the insured limit, aligned with your activity and risks;
3. the exclusions (deliberate fraud, wilful breaches);
4. the deductibles left to your charge.

It differs from professional liability insurance, which covers harm caused to third parties in the course of the activity.

Good governance practices#

This is the best protection:

1. Clear articles: powers of each organ, voting thresholds, spending limits.
2. Documented meetings: minutes of major decisions.
3. Segregation of duties: dual sign-off on spending above a certain size.
4. Current accounts: vouchers filed, regular reconciliations, cash monitoring.
5. Tax and social compliance: strict adherence to deadlines and thresholds.
6. Suitable insurance: professional liability, D&O.
7. External eye: an accountant or audit catches drift early.

• Anticipating difficulties. The later the reaction to tight cash, the greater the risk of mismanagement. Watch your indicators and raise the alarm in time.
• Tax reassessment. A significant correction can open the door to joint tax liability. Document each accounting or tax choice.
• Combined roles. A director may also be an employee within limits: the director's social regime should be clarified at incorporation.
• Binding contracts. Have major commitments approved by the right body; do not sign alone if the articles require a majority.

A manufacturing SME director consulted us after an asset deficiency action. Liquidation revealed an asset shortfall, and the liquidator attributed to him a series of errors: prolonged underestimation of costs, no cash monitoring leading to overdrafts, ill-calibrated hiring. The court found these choices amounted to mere negligence, not deliberate fault: no sum was charged to him. Yet the cost of the trial and the defence had eaten into his personal estate, which D&O insurance taken out at the start would have preserved.

Hayot Expertise advice. From incorporation, build a governance file: clear articles, minutes, major contracts on record, current accounts. Take out D&O insurance suited to your sector and size. Entrust your accounting to a professional who helps you anticipate risk. And if you plan a transfer, have liability clarified by legal counsel and, where relevant, support in director wealth management before signing.

• A director incurs civil liability to the business (mismanagement), the members and third parties (if the fault is detachable from duties).
• Asset deficiency (L651-2): the court can charge the shortfall to the director, unless mere negligence (since Sapin 2, 2016).
• Joint tax liability (Art. L267 Tax Procedure Code) for fraud or serious and repeated breach.
• Fraudulent bankruptcy (L654-2): 5 years' imprisonment and a EUR 75,000 fine.
• Misuse of company assets (L241-3 SARL, L242-6 SA): 5 years and EUR 375,000.
• D&O insurance covers defence costs and civil damages, never criminal fines.
• Rigorous governance (articles, minutes, accounts, audit) remains the best protection.

Official sources#

• Légifrance — Commercial Code, Article L651-2
• Légifrance — Commercial Code, Article L223-22 (SARL manager)
• Légifrance — Commercial Code, Article L225-251 (SA administrators)
• Légifrance — Law no. 2016-1691 of 9 December 2016 (Sapin 2)
• Légifrance — Commercial Code, Article L654-2 (fraudulent bankruptcy)
• Légifrance — Tax Procedure Code, Article L267 (joint tax liability)