Failure to declare cessation of payments: what are the risks for the manager?

When a company can no longer meet its debts as they fall due with its cash reserves and readily available resources, it is considered insolvent. Its management must then react quickly: unless conciliation proceedings are initiated within the legal timeframe, they have 45 days to request the commencement of receivership or liquidation proceedings.

Failure to declare insolvency within this timeframe may expose the director to a ban on holding office. When this delay constitutes mismanagement that contributed to the company's asset shortfall, it may also result in a personal conviction to bear all or part of this shortfall.

How is the date of cessation of payments determined? When does the 45-day period begin? Under what circumstances does a delay become mismanagement? What are the personal consequences incurred by the manager?

What is a cessation of payments?

ArticleL. 631-1 of the Commercial Code defines cessation of payments as the impossibility for a company to meet its liabilities as they fall due with its available assets.

This definition is therefore based on the comparison of two elements.

The liabilities due

Current liabilities correspond, in principle, to debts:

• some, that is to say, not seriously contested;
• liquids, the amount of which is determined or determinable;
• expiring dates;
• the creditor can immediately demand payment of.

This may include tax and social security debts, wages, rent, bank loan repayments or supplier invoices.

A debt subject to a moratorium accepted by the creditor is not immediately due and payable during the term of that agreement. The same applies, depending on the circumstances, to a debt that is genuinely disputed.

Available assets

Available assets do not represent the company's entire net worth. They include the funds and resources immediately available to settle debts that have fallen due:

• bank availability;
• the cash held in the till;
• some investments that can be made immediately;
• usable credit reserves;
• confirmed banking competitions;
• possibly, the immediately available contributions made by the partners.

On the other hand, a building, equipment, a business or a debt that is difficult to recover generally does not constitute an available asset, even if its book value is significant.

A company can therefore own significant assets while being insolvent because it does not have the necessary liquidity to settle its debts as they fall due.

What difficulties do not yet characterize a cessation of payments?

A cash flow problem, even a serious one, does not necessarily mean that the company is already insolvent.

The Commercial Code specifies that the debtor is not in cessation of payments if he establishes that credit reserves or moratoria granted by his creditors allow him to meet the liabilities due.

The distinction is essential:

• Before ceasing payments, the company may, in particular, request an ad hoc mandate, conciliation or, under certain conditions, a safeguard procedure;
• After the cessation of payments, it must request the opening of a receivership or a judicial liquidation within the legal period, unless a conciliation is requested within this period.

The analysis should therefore not be based solely on the annual balance sheet. It requires a concrete and up-to-date examination of cash flow, maturing debts, payment facilities, and immediately accessible resources.

What is the deadline for declaring cessation of payments?

According to ArticleL. 631-4 of the Commercial Code, the debtor must request the opening of a judicial reorganization procedure no later than 45 days after the cessation of payments, unless he has requested, within this period, the opening of a conciliation procedure.

When any recovery is clearly impossible, the request must be for the opening of judicial liquidation proceedings.

This process, commonly referred to as "filing for bankruptcy", is carried out by the company's legal representative with the competent court.

The 45-day period begins to run from the actual date of cessation of payments. However, this date can be difficult to determine in practice. It does not necessarily correspond to:

• on the date on which the manager becomes aware of the difficulties;
• at the closing date of the accounting period;
• at the first payment incident;
• on the date on which the chartered accountant alerts the manager;
• on the date of actual filing of the declaration.

The court sets the date of cessation of payments in the opening judgment. It may then postpone this date if it appears that the company was already in cessation of payments at an earlier date, within the limits provided by law.

This delay may reveal, after the proceedings have begun, that the declaration was made well beyond the 45-day deadline.

Does conciliation make it possible to avoid an immediate declaration?

A company that has been in default of payments for less than 45 days can request the opening of a conciliation procedure.

This confidential procedure allows negotiation with key creditors, including banks, landlords, tax and social security organizations, and strategic suppliers.

A request for conciliation submitted within the legal time limit constitutes an exception to the obligation to immediately request the opening of a receivership or liquidation procedure.

This possibility should not, however, be interpreted as a means of indefinitely postponing the commencement of insolvency proceedings. If conciliation fails and the company remains insolvent, its situation must be reassessed without delay.

Does a delay in filing a tax return automatically constitute mismanagement?

The mere fact that a declaration was made after the expiry of the 45-day period does not necessarily produce all possible sanctions.

Two mechanisms should be distinguished:

1. the prohibition on managing, which implies a conscious omission;
2. liability for insufficient assets, which presupposes mismanagement that contributed to the aggravation of this insufficiency.

The conditions for these sanctions are not identical.

Can a manager be sentenced to a ban on holding a management position?

ArticleL. 653-8 of the Commercial Code allows the court to issue a management ban against the manager who knowingly failed to request the opening of a receivership or liquidation procedure within 45 days of the cessation of payments, without having requested the opening of a conciliation.

The term "knowingly" is crucial. A ban on managing a company should not result solely from the objective exceeding of the deadline. It is up to the judges to determine the manager's awareness of the company's situation and their omission.

This knowledge can nevertheless be deduced from objective elements, such as:

• the sustained accumulation of tax and social debts;
• repeated non-payment of wages;
• the rejection of essential withdrawals or payments;
• the lack of available cash;
• the elimination of bank loans;
• successive formal notices from creditors;
• the existence of enforcement procedures;
• alerts from the accountant, the auditor or the company's advisors;
• the continuation of a structurally loss-making activity with no serious prospect of recovery.

The manager cannot therefore necessarily escape the sanction by claiming that he had not legally identified the state of cessation of payments.

The contribution of the ruling of January 12, 2022

In a ruling dated January 12, 2022, the commercial chamber of the Court of Cassation upheld a management ban imposed on a director who had delayed requesting the opening of collective proceedings.

The company had stopped paying several particularly significant debts: employer social security contributions, VAT, and then salaries for several months.

The judges had held that, even if awareness of the state of insolvency was not established from the date finally chosen by the court, the manager could not have been unaware, at the latest several months before his declaration, that the company was no longer able to meet its liabilities as they fell due with its available assets.

By waiting until March 23, 2016 to request the opening of the collective procedure, he had therefore knowingly failed to take this step within the legal deadline.

This decision shows that judges can infer knowledge of the cessation of payments from the seriousness, repetition and duration of payment incidents.

Cass. com., January 12, 2022, No. 20-21.427

What are the consequences of a ban on managing a business?

A ban on managing a company can prevent a manager from directing, managing, administering, or controlling, directly or indirectly:

• any commercial or craft business;
• any agricultural operation;
• any legal entity;
• or only certain categories of companies or legal entities designated by the court.

Its duration can reach 15 years.

The measure can therefore have considerable professional consequences. It can prohibit not only the exercise of a corporate office, but also any indirect involvement in the management of a company.

The decision is also subject to publicity measures and is recorded in the National Register of Persons Prohibited from Managing a Business. For more information, see our article on the National Register of Persons Prohibited from Managing a Business.

Failure to comply with a ban on managing a business also exposes the person concerned to criminal penalties.

Can a company director be held personally liable for the company's debts?

The delay in declaring cessation of payments can also be invoked in the context of an action for liability for insufficient assets.

According to ArticleL. 651-2 of the Commercial Code, when the judicial liquidation of a legal entity reveals an asset shortfall, the court may order the de jure or de facto directors who have committed a management error that contributed to this shortfall to bear all or part of it.

Three conditions must therefore be met:

• an asset deficiency;
• a management error attributable to the manager;
• a contribution of this fault to the asset shortfall.

The delay must have contributed to the asset shortfall

The personal liability of the manager cannot be based solely on the fact that the declaration is late.

It must be established that the continuation of business activity during the delay period contributed to creating or exacerbating the asset shortfall. This may result, in particular, from:

• new tax and social security debts;
• of unpaid wages;
• orders taken without a reasonable capacity to execute them;
• new financial resources used without any serious prospect of recovery;
• from the consumption of the last available assets;
• preferential payments that disrupted the cash flow;
• from the accumulation of additional losses.

The fault does not necessarily have to be the sole cause of the asset shortfall. It is sufficient that it contributed to it. However, the liquidator must establish this contribution with sufficient precision.

Simple negligence is not enough

Since the law of December 9, 2016, liability for insufficient assets cannot be invoked in the event of simple negligence on the part of the manager.

This protection does not mean that any delay in filing a declaration is excusable. Judges take into account, in particular:

• the duration of the delay;
• the importance of unpaid bills;
• the information available to the manager;
• the warnings that had been sent to him;
• the steps taken to rectify the situation;
• the existence of credible cash flow forecasts;
• the skills and real involvement of the leader;
• the continuation or not of an activity that is clearly compromised.

A limited delay in a complex and actively monitored situation will not necessarily be appreciated as prolonged abstention despite obvious warning signs.

Does late filing constitute a criminal offence?

The mere failure to declare cessation of payments within the 45-day period does not, in itself, constitute the offence of bankruptcy.

However, criminal proceedings may be initiated when the manager has also committed certain acts stipulated by law, for example:

• the misappropriation or concealment of assets;
• the fraudulent increase of liabilities;
• keeping fictitious accounts;
• the disappearance of accounting documents;
• the absence of accounting when it is mandatory;
• resorting to ruinous means with the intention of avoiding or delaying the opening of collective proceedings.

It is therefore necessary to distinguish between late reporting, which is mainly likely to lead to civil or professional sanctions, and fraudulent behavior that may be subject to criminal charges.

Who can be sanctioned?

The sanctions may include:

• the de jure manager, such as the manager, the president or the chief executive;
• the permanent representative of a governing legal entity;
• the de facto manager, that is to say the person who independently carries out effective management activities without having been duly appointed.

The resignation of the manager before the opening of the collective procedure does not necessarily eliminate his responsibility for acts committed during the exercise of his duties.

In structures with multiple leaders, however, each person's responsibility must be assessed in light of their powers, their involvement, the period during which they held their position, and the information they had at their disposal.

How can a manager protect themselves in case of financial difficulties?

The best protection is to detect and document difficulties early enough.

The leader should, in particular:

1. Implement regular cash flow monitoring

An annual accounting statement is insufficient when a company is experiencing difficulties. It is helpful to establish a rolling cash flow forecast that lists tax, social security, payroll, bank, rent, and supplier payment deadlines.

2. Precisely identify the debts due

Debts must be classified according to their due date, whether they are disputed or not, and any payment extensions granted by creditors.

Moratoriums and deferral agreements must be formalized in writing.

3. Check the resources actually available

A promise of contribution, a refinancing plan or the planned sale of an asset does not necessarily constitute an immediately available resource.

It is important to distinguish between funding that has been secured and funding that is still hypothetical.

4. Keep records of decisions made

Exchanges with the accountant, banks, shareholders, main creditors and company advisors must be maintained.

Important decisions can usefully be formalized in the minutes of corporate bodies. This documentation will demonstrate that the manager was actively monitoring the situation and making decisions based on sound information.

5. Quickly consult the company's advice

Early intervention by a lawyer and an accountant allows for:

• to assess whether the cessation of payments is characterized;
• to determine the probable date;
• to identify the prevention measures that are still accessible;
• to prepare for a conciliation;
• or to organize, if necessary, the declaration of cessation of payments.

Waiting for a creditor to take legal action, for bank financing to be withdrawn, or for wages to be unpayable, significantly reduces the available solutions.

Why is it necessary to act before the 45-day deadline expires?

The 45-day period should not be viewed as a period during which the manager could continue operations without reassessing the situation.

Each additional week can lead to:

• an increase in debt;
• a loss of trust from partners;
• a reduction in the chances of recovery;
• the performance of acts that may be called into question during the suspect period;
• an increase in the leader's personal exposure.

On the contrary, an early approach allows for the preservation of more solutions: confidential negotiation, financial restructuring, organized sale, safeguarding of the business or preparation for judicial reorganization under better conditions.

Failure to declare cessation of payments: key points to remember

The manager must request the opening of a receivership or liquidation within 45 days of the cessation of payments, unless a request for conciliation is made within this period.

A late declaration can result in:

• a ban on managing if the omission is deliberate;
• a conviction to bear all or part of the asset shortfall if mismanagement contributed to its aggravation;
• additional sanctions when other faults or offences have been committed.

However, these sanctions are not automatic. The court must verify the specific conditions for each one, including knowledge of the situation, the seriousness of the conduct and, for liability actions, its contribution to the asset shortfall.

Faced with persistent cash flow difficulties, a legal and financial analysis must be conducted without delay. ARST Avocats' Restructuring and Insolvency department assists business leaders in analyzing insolvency, choosing the appropriate procedure, and preventing personal liability.

If you are facing a problem related to a state of insolvency, our business law department can assist you, contact us.

Article written by Morgan Jamet