Banqueroute (Fraudulent Bankruptcy) and Management Bans: The Creditor's Criminal Lever Against a Director Who Engineers Insolvency

An institutional creditor who discovers, on the opening of compulsory liquidation (liquidation judiciaire), that the business (fonds de commerce) was sold six months earlier to a company owned by the director's spouse, that the accounts have not been kept for two financial years and that the annual accounts were never filed, is faced with a derisory residual estate and a proof of debt with no economic value. The action for liability for insufficiency of assets under Article L. 651-2 of the French Commercial Code, which belongs to the liquidator, requires lengthy proceedings and a director whose assets can still be attached. The criminal side, the offence of fraudulent bankruptcy (banqueroute) and the management ban (interdiction de gérer), follows a different logic: it strikes the person, not only the assets, and it gives the creditor means of investigation that civil litigation does not provide. One must still know the facts that characterise the offence, know that an individual creditor does not control the public prosecution, and document the file before limitation begins to run. This analysis sets out the cases of banqueroute under Article L. 654-2, the conditions for joining the proceedings as a civil party (constitution de partie civile), the evidence to be assembled upstream and the interaction with the action for insufficiency of assets.

Banqueroute requires opened collective proceedings and an identified director

Banqueroute is not a free-standing offence of ordinary criminal law. Article L. 654-2 of the French Commercial Code expressly makes the characterisation conditional on the opening of court-supervised reorganisation (redressement judiciaire) or compulsory liquidation proceedings. This precondition has two practical consequences.

First, safeguard proceedings (sauvegarde) opened under Article L. 620-1 do not allow a prosecution for banqueroute, since by definition they presuppose the absence of cash-flow insolvency (cessation des paiements). A creditor who suspects a diversion of assets during a conciliation or safeguard period will have to turn to the ordinary-law offences (breach of trust, fraud, forgery) or wait for the proceedings to be converted.

Second, as long as no opening judgment has been given, a complaint for banqueroute is bound to be inadmissible. For an institutional creditor faced with a debtor that is liquidating its assets without filing for insolvency, the first decision is therefore not criminal but civil: to apply for the opening of reorganisation or liquidation proceedings under Article L. 631-5 or Article L. 640-5 of the French Commercial Code, in order to create the precondition of the offence and, at the same time, to have a date of cash-flow insolvency fixed. Demonstrating cash-flow insolvency and conducting that application are set out in our article on the creditor's application to place the debtor in court-supervised reorganisation.

The persons liable to prosecution are exhaustively listed in Article L. 654-1: traders, farmers, individuals carrying on an independent professional activity, including a liberal profession subject to a legislative or regulatory status, and de jure or de facto directors of private-law legal entities carrying on an economic activity. The reference to the de facto director is decisive. It makes it possible to reach the majority shareholder who gives the instructions, the founder who resigned while installing a nominee manager, or the parent company that interferes in day-to-day management. Proof of de facto management rests on positive acts of management carried out in complete independence: bank signing authority, negotiation of contracts, cash decisions, and representation vis-à-vis third parties.

Finally, banqueroute is an intentional offence. A management error, even a gross one, is not enough. A creditor building its file must therefore look not only for the material fact but for the director's awareness, which requires dated evidence: warning letters from the statutory auditor, formal notices, recovery proceedings under way, rejected direct debits, a formal notice from the URSSAF (French social security collection body), and refusal to renew bank facilities.

The constituent facts: what Article L. 654-2 actually covers

The text identifies five cases. Mastering them conditions the drafting of the complaint: a general denunciation of "fraudulent management" cannot be used by an investigating service.

Diversion or concealment of assets

This is the case most frequently relied on and the most operational for a creditor. Diversion of assets covers any removal of an element of the debtor's estate from the common pledge of the creditors. The typical configurations are identifiable: sale of the business or operating equipment to a newly formed company set up by a relative at a price unrelated to market value; transfer of the customer base and framework contracts to a sister entity while the indebted entity keeps the liabilities; withdrawals from the shareholder's current account for the director's benefit in the months before filing; disappearance of stock between the inventory and the opening of liquidation; collection of customer receivables in a bank account opened in the name of another company. On the civil route allowing such impoverishing acts to be declared unenforceable against creditors, see our analysis of the Pauline action (action paulienne) in collective proceedings.

Concealment differs from diversion in that it leaves the asset in the estate but removes it from the knowledge of the bodies of the proceedings: a vehicle or stock stored with a third party, an undeclared intangible asset, bank accounts omitted from the declaration of cash-flow insolvency.

Fraudulent increase of liabilities

The second axis consists in artificially inflating the liabilities in order to dilute the real creditors and, where applicable, to allow a relative to vote in the classes of affected parties or to receive a share of distributions. In practice: invoicing of fictitious services by a related company, accommodation acknowledgements of debt, shareholder current accounts fictitiously funded, equipment rental contracts without real consideration. Article L. 654-9 of the French Commercial Code completes the system by punishing, with the penalties for banqueroute, fraudulently declaring fictitious claims in the proceedings and, for a third party, having removed, concealed or hidden the debtor's assets in the debtor's interest. This is the text that makes it possible to reach the accommodating purchaser, the spouse or the accountant who lent assistance.

Fictitious, missing or manifestly incomplete accounts

Points 4° and 5° of Article L. 654-2 cover respectively fictitious accounts, the disappearance of accounting documents, the total absence of accounts where the rules require them, and manifestly incomplete or irregular accounts. The last case is the easiest to prove: it does not require demonstration of a scheme, but only the finding of an objective default.

For a creditor, this fact has a considerable advantage. It can be documented from the outside, before any judicial investigation: failure to file annual accounts with the registry over several consecutive financial years, a statement in the creditors' representative's report that the accounting position cannot be established, refusal to certify or a warning from the statutory auditor, and absence of a journal and general ledger. The absence of accounts is also a ground for personal bankruptcy (faillite personnelle) and a management ban, which allows a two-pronged strategy.

Ruinous means and purchases for resale below market price

Point 1° of Article L. 654-2 covers the director who, intending to avoid or delay the opening of proceedings, made purchases with a view to resale below market price or used ruinous means to obtain funds. The indicators are financial: recourse to factoring or cash advances at off-market rates, cascading assignments of receivables, very short-term cash loans taken from non-bank operators, systematic discounting of accommodation bills, and resale of new stock below purchase price to generate immediate cash. It is here, and not in a specific case of late filing, that the director's culpable delay finds its criminal expression.

Late filing for cash-flow insolvency: a ground for a management ban, not for banqueroute

The distinction deserves to be drawn clearly, because it is frequently confused. Exceeding the forty-five-day period provided for in Articles L. 631-4 and L. 640-4 of the French Commercial Code is not, as such, among the five cases of banqueroute. It is, however, a separate ground for a management ban under the third paragraph of Article L. 653-8, which covers a person who has knowingly failed to apply for the opening of court-supervised reorganisation or compulsory liquidation proceedings within forty-five days of cash-flow insolvency, without having otherwise applied for the opening of conciliation proceedings. Since Law No 2015-990 of 6 August 2015, the adverb knowingly requires proof of knowledge of the state of cash-flow insolvency, which excludes the earlier, almost automatic sanction.

Late filing is criminally exploitable only if it is accompanied by the conduct referred to in point 1° of Article L. 654-2: the delay was used to obtain funds by ruinous means or to sell off assets cheaply. The chronology then becomes the central element of the demonstration.

This is why postponement of the date of cash-flow insolvency is, for the creditor, the pivotal procedural step. Article L. 631-8 allows the court to postpone that date one or more times, without being able to fix it at a date more than eighteen months before the opening judgment. The postponement has a threefold effect: it opens the hardening period (période suspecte) and thus the nullities under Articles L. 632-1 and L. 632-2, it measures the length of the delay in filing for the purposes of Article L. 653-8, and it dates the starting point of conduct that may fall within point 1° of Article L. 654-2. An institutional creditor therefore has an interest in supporting the creditors' representative's request for postponement, or even in prompting its examination.

Management ban and personal bankruptcy: the sanction that reaches the director personally

The sanction of the director is not limited to a financial penalty. The management ban, provided for in Article L. 653-8, prohibits directing, managing, administering or controlling, directly or indirectly, either any commercial or craft enterprise, any agricultural holding and any legal entity, or one or more of them. Personal bankruptcy, pronounced in the cases of Articles L. 653-3 to L. 653-6, carries the same prohibition for every enterprise and every legal entity (Article L. 653-2); the court pronouncing it may also pronounce incapacity to hold elected public office, for a period equal to that of the personal bankruptcy within a limit of five years (Article L. 653-10). In both cases, Article L. 653-11 caps the duration of the measure at fifteen years.

The grounds for personal bankruptcy largely overlap with those of banqueroute: diversion or concealment of all or part of the assets, fraudulent increase of liabilities, fictitious, missing or manifestly incomplete accounts, and abusive continuation of a loss-making business that can only lead to cash-flow insolvency. Article L. 653-4 adds, for directors of legal entities, use of the company's assets or credit contrary to the company's interest, for personal ends or to favour another business in which the director had an interest.

Two routes coexist. The civil route falls to the court handling the collective proceedings, seised under Article L. 653-7 by the creditors' representative, the liquidator, the public prosecutor or, where the court-appointed officer has not acted, by the majority of the creditors appointed as controllers. The criminal route is through the additional penalties of Article L. 654-5: the criminal court that finds the director guilty of banqueroute may pronounce a ban on directing, administering, managing or controlling a commercial or industrial enterprise or a commercial company. Article L. 654-6, which allowed it to pronounce personal bankruptcy or the ban of Article L. 653-8, was declared unconstitutional and repealed by Decision No 2016-573 QPC of 29 September 2016.

The effectiveness of the measure lies in its enforceability. Decisions are entered in the national register of persons banned from management, provided for in Article L. 128-1 of the French Commercial Code and kept by the National Council of Commercial Court Registrars. Breach of the ban is itself criminally punished under Article L. 654-15. For an institutional creditor, this policing effect is sometimes more dissuasive than a civil judgment that cannot be enforced: it closes the possibility of immediately reconstituting an identical operating structure.

As to the penalty, persons guilty of banqueroute face, under Article L. 654-3, five years' imprisonment and a fine of €75,000, increased to seven years and €100,000 by Article L. 654-4 where the offender is a director of an investment services provider. Article L. 654-5 provides for additional penalties, including a ban on practising the professional activity in the course of which the offence was committed.

How the creditor enters the criminal arena

The relative monopoly of Article L. 654-17

Article L. 654-17 of the French Commercial Code strictly regulates referral to the criminal court: prosecution by the public prosecutor, or joining as a civil party by the administrator, the creditors' representative, the employees' representative, the plan commissioner (commissaire à l'exécution du plan), the liquidator or the majority of the creditors appointed as controllers acting in the collective interest of the creditors where the court-appointed officer has not acted. The individual creditor is not included.

Distinct personal harm, a condition of admissibility

Joining as a civil party is moreover governed by Article 2 of the French Code of Criminal Procedure, which requires personal harm directly caused by the offence. In matters of banqueroute, the harm resulting from the reduction of the common pledge is collective harm, the redress for which belongs to the creditors' representative or the liquidator. It is accepted that a creditor is admissible as a civil party only if it shows personal harm distinct from that suffered by the creditors as a body. The complaint must therefore individualise the damage: a guarantee given in reliance on falsified accounts, deliveries accepted after false assurances about solvency, and security rendered ineffective by the removal of the charged asset.

Becoming a controller: the underused procedural lever

A creditor that wants to carry weight without depending on the inertia of the creditors' representative has an interest in applying to be appointed as a controller before the supervisory judge (juge-commissaire), under Article L. 621-10 of the French Commercial Code. The status gives access to the documents of the proceedings, involves the controller in the information given to the creditors' representative and, by a majority of the controllers and after an unsuccessful formal notice, opens the possibility of bringing the actions reserved to the bodies of the proceedings, both as regards sanctions and insufficiency of assets. For a bank, an institutional landlord or a strategic supplier, the application for appointment is a decision to be taken in the first weeks, not at the end of the proceedings.

Related offences that reopen the door

Where admissibility under banqueroute is uncertain, the ordinary-law offences offer a direct route. Fraud under Article 313-1 of the French Criminal Code covers the director who obtains deliveries or bank support by deceptive manoeuvres, for example by producing doctored financial statements. Forgery and use of forgeries under Articles 441-1 et seq. cover the falsification of accounts given to the lender. Breach of trust under Article 314-1 applies to the diversion of funds handed over for a specific use.

Fraudulent organisation of insolvency under Article 314-7 of the French Criminal Code, by contrast, calls for a rigorous reading. It protects only the enforcement of a pecuniary conviction pronounced by a criminal court or, in matters of tort, quasi-tort or maintenance, by a civil court. A purely contractual creditor, a bank, landlord or supplier, cannot rely on it for a claim for a loan, rent or invoices. This limit, often ignored, explains the inadmissibility of many complaints.

Procedurally, an ordinary complaint to the public prosecutor remains the most efficient route: it requires neither a deposit nor prior demonstration of admissibility, and it places the file in the hands of a prosecutor's office that already receives the creditors' representative's reports. A complaint joining as a civil party before the senior investigating judge (doyen des juges d'instruction), governed by Article 85 of the French Code of Criminal Procedure, is envisaged only after an ordinary complaint has remained unanswered for three months, and requires that the question of admissibility has been anticipated. The procedural path of the person under investigation, up to formal investigation (mise en examen) or pre-trial detention, is presented in our FAQ on police custody and what follows.

The evidence to gather upstream: a documentary file, not a narrative

A criminal complaint for banqueroute is won or lost on the exhibits. The useful work is done before filing, from public sources and the documents of the collective proceedings.

• the annual accounts filed with the registry for the last three financial years, or a record that they were not filed, which supports the complaint of irregular accounts
• BODACC (French official gazette of civil and commercial announcements) publications and registrations of privileges and pledges, which date the deterioration of the situation
• the Kbis extract (company registration extract), the history of changes to the articles and the register of beneficial owners, to identify related entities and suspicious changes of management
• the deeds of sale of assets, leases, management lease contracts and minutes of meetings obtained by the creditors' representative
• bank statements, shareholder current accounts and intra-group flows, where their disclosure can be ordered
• the statement of claims and the proofs of debt, to identify accommodation liabilities
• the report of the creditors' representative or the liquidator, the central document, often the only one that corroborates the material facts
• the creditor's pre-litigation correspondence, formal notices, reminders, promises of payment, which establishes knowledge of the state of cash-flow insolvency

Two tools deserve to be used in parallel. Summary proceedings for an expert investigation under Article 145 of the French Code of Civil Procedure allow, before any trial and where there is a legitimate reason, an expert to be appointed to reconstruct the accounts or value an asset sold, and to preserve evidence at risk of disappearing. For the purposes of Article L. 651-2, Article L. 651-4 of the French Commercial Code allows the president of the court, of its own motion or at the request of the liquidator, the public prosecutor or the controllers, to instruct the supervisory judge to obtain, notwithstanding any legislative provision to the contrary, disclosure of any document or information on the directors' financial position from public administrations, social security bodies and credit institutions, and to order any useful protective measure over their assets. Banking secrecy is thus set aside, and the director's assets can be frozen before the director has had time to organise.

Interaction with the action for insufficiency of assets under Article L. 651-2

The two actions pursue different purposes and must not be confused, including in their sequencing.

Article L. 651-2 opens, in the event of compulsory liquidation, an action to make good the insufficiency of assets against the de jure or de facto director who committed a management fault that contributed to it. Since Law No 2016-1691 of 9 December 2016, known as "Sapin II", the director's liability cannot be engaged in the case of mere negligence in the management of the legal entity. The action belongs to the liquidator and the public prosecutor; the majority of the creditors appointed as controllers may bring it, in the collective interest of the creditors, where the liquidator has not acted after a formal notice that went unanswered (Article L. 651-3). It is time-barred after three years from the judgment ordering compulsory liquidation. The sums paid by the director enter the debtor's estate and are distributed pro rata among all the creditors.

The criminal action does not give the creditor direct payment. It reaches the person of the director and makes it possible, through the investigation, to gather facts and documents that the liquidator can use in support of the action for insufficiency of assets or of a request for personal bankruptcy or a management ban. The criminal court also rules, even in the event of acquittal, on the return to the debtor's estate of assets fraudulently removed and on the damages claimed (Article L. 654-11).

The timetables do not coincide. The limitation period for the public action runs only from the opening judgment where the facts came to light before that date (Article L. 654-16), whereas the action for insufficiency of assets is time-barred after three years from the liquidation judgment and the actions for personal bankruptcy or a management ban after three years from the opening judgment (Article L. 653-1, II). The creditor therefore cannot wait for the outcome of the criminal proceedings before asking the liquidator to bring the civil actions, or bringing them as a controller after formal notice. The useful strategy is to document the facts from the opening, to apply to be appointed as a controller, to refer a well-supported complaint to the prosecutor's office and to pursue, within those time limits, the asset-recovery actions and the personal sanctions.