The director's personal guarantee and insolvency proceedings

When a company director gives a personal guarantee (caution) to secure the debts of his or her company, he or she is exposed to considerable financial risks. The situation becomes particularly critical when collective insolvency proceedings (procédure collective) are opened against the company. Between the rules on guarantees and those on insolvency proceedings, the director often finds himself or herself without resources in the face of creditors seeking to recover their claims by every available means.

The legal foundations of the director's personal guarantee

Nature and scope of the guarantee

The director's personal guarantee is an undertaking by which the director personally guarantees performance of the company's obligations to a creditor. This undertaking, often required by banks or suppliers, creates a personal obligation distinct from that of the company.

The French Civil Code governs these undertakings in Articles 2288 et seq., in the version resulting from Order No. 2021-1192 of 15 September 2021, in force since 1 January 2022. On pain of nullity, a guarantor who is a natural person must write by hand the statement by which he or she undertakes to pay the creditor what the debtor owes it if the debtor defaults, up to an amount expressed in words and in figures; if the guarantor is deprived of the benefits of discussion or division, the statement must say so, failing which the guarantor retains those benefits (Article 2297 of the French Civil Code).

The different types of guarantee in business

The director may be led to give several forms of guarantee:

• The simple guarantee, where the director can be pursued only after the principal debtor has been pursued first (discussion)
• The joint and several guarantee, which allows the creditor to pursue the director directly
• The guarantee with waiver of the benefit of discussion, which is in practice equivalent to a joint and several guarantee

These distinctions take on crucial importance when insolvency proceedings are opened, because they determine the respective rights and obligations of the parties.

The impact of insolvency proceedings on personal guarantees

The effects of the opening of proceedings

The opening of insolvency proceedings against the debtor company does not release the guarantor, but his or her position depends on the proceedings opened. In safeguard proceedings (sauvegarde) and in judicial reorganisation (redressement judiciaire), the opening judgment suspends, until the judgment adopting the plan or ordering liquidation, any action against natural persons who are co-obligors or who have given a personal security; the court may then grant them time or a deferral of payment of up to two years, and creditors may take protective measures (Articles L. 622-28 and L. 631-14 of the French Commercial Code). In judicial liquidation (liquidation judiciaire), this suspension does not apply: only the halting of interest, on which a guarantor who is a natural person may rely, is carried over (Article L. 641-3 of the French Commercial Code). The position of guarantors, whether natural or legal persons, after the opening judgment is examined in our article on the halt to individual proceedings.

This rule derives from Article 2298 of the French Civil Code: the guarantor may not rely on the statutory or judicial measures from which the debtor benefits as a result of its default, unless a special provision provides otherwise. Articles L. 622-28 and L. 641-3 of the French Commercial Code are such special provisions in favour of guarantors who are natural persons. Apart from these provisions, the company's financial difficulties affect neither the validity nor the enforceability of the guarantee.

Creditors' proceedings against guarantors

Proceedings against the guarantor therefore follow the timetable of the insolvency proceedings:

• In safeguard proceedings and judicial reorganisation, no action against a guarantor who is a natural person until the judgment adopting the plan or ordering liquidation, subject to protective measures; the court may then grant the guarantor time or a deferral of payment of up to two years
• In judicial liquidation, proceedings are possible from the opening judgment, a simple guarantor retaining the benefit of discussion, on which a joint and several guarantor cannot rely (Article 2305 of the French Civil Code)
• In all cases, proceedings are conducted in parallel with the insolvency proceedings, without waiting for their closure, the creditor also having to file its claim in the debtor company's liabilities

This situation often places the director in a precarious financial position, all the more so as he or she may lose professional income at the same time and face substantial demands for repayment.

The mechanisms protecting the director as guarantor

The principle of proportionality

Article 2300 of the French Civil Code, resulting from the Order of 15 September 2021 and applicable to guarantees entered into since 1 January 2022, penalises a guarantee given by a natural person to a professional creditor which was, when entered into, manifestly disproportionate to the guarantor's income and assets. The director as guarantor may rely on it.

The sanction is no longer complete discharge of the guarantor but reduction of the undertaking to the amount up to which the guarantor could commit himself or herself at the date it was entered into. Disproportion is assessed at that date, having regard to the guarantor's income and assets. On the conditions and the sanction of disproportion, see our analysis of the litigation between bank and guarantor on manifestly disproportionate guarantees.

Challenging the validity of the guarantee

The director may challenge the validity of the undertaking by relying on:

• Failure to give information on the extent of the obligations
• The absence of any real economic consideration
• Defects of consent
• Manifest disproportion between the undertaking and the guarantor's assets

These defences must be raised promptly and supported by probative evidence. The burden of proof generally rests on the director who relies on them.

Negotiations with creditors

Faced with insolvency proceedings, directors often have an interest in negotiating with their creditors in order to:

• Obtain staggered payments
• Negotiate a reduction in the amount due
• Propose a partial waiver of the claim
• Arrange a disposal of personal assets

These negotiations generally prove more fruitful when they take place soon after the insolvency proceedings are opened.

Judicial liquidation and its specific consequences

The worsening of the position of the director as guarantor

The judicial liquidation of the debtor company generally worsens the position of the director as guarantor. This procedure means the definitive end of the business and the dissolution of the company, permanently depriving the director of professional income. The other consequences of this procedure for the director, in particular as regards his or her liability and assets, are set out in our article on the consequences of judicial liquidation for the director.

In this context, creditors naturally turn their hopes of recovery to the personal guarantees. The director is then obliged to honour undertakings that are sometimes considerable with personal resources that are often limited.

Strategies for emerging from the crisis

Several options are open to a director facing judicial liquidation:

• Organising his or her own personal recovery
• Early sale of personal assets
• Negotiating amicable agreements with creditors
• Filing for an over-indebtedness procedure where appropriate

Each situation requires an individual analysis taking account of the director's assets, the extent of his or her undertakings and his or her prospects of future income.

Reporting and procedural obligations

Mandatory declarations

The director as guarantor must comply with certain reporting obligations when insolvency proceedings are opened. These declarations may concern:

• The company's debts secured by the personal guarantee
• Personal assets liable to be applied to repayment
• The director's other personal undertakings

Compliance with these obligations often determines the effectiveness of later defences.

Managing time limits

Rigorous management of time limits is a crucial issue for the director as guarantor. The time limits for filing claims, for challenging undertakings or for exercising rights of appeal must be scrupulously observed on pain of being barred (forclusion).

This requirement calls for constant monitoring of how the insolvency proceedings are developing and an immediate response to new developments.

Outlook and practical recommendations

Anticipating difficulties

The director's best protection lies in anticipating difficulties. This involves:

• Regular monitoring of the company's financial position
• Preventive negotiation with creditors from the first signs of difficulty
• Building up separate and protected personal assets
• Taking out suitable insurance where possible

Professional support

Given the complexity of the legal and financial issues, support from professionals often proves indispensable. Business law lawyers (avocats), chartered accountants (experts-comptables) and restructuring advisers may be involved in these situations.

Early intervention by these professionals often makes it possible to identify solutions that are no longer available once the insolvency proceedings have been opened.

Conclusion

The director's personal guarantee in insolvency proceedings raises major legal and financial issues. Although protective mechanisms exist, they remain limited and their implementation requires in-depth expertise. The dissolution of the company and judicial liquidation considerably worsen the position of the director as guarantor, who must then meet his or her personal undertakings without the resources of the professional activity.

In this context, the involvement of a lawyer in business litigation makes it possible to assess the risks, identify the defences available and develop a strategy suited to each situation. Anticipating difficulties limits the consequences of these undertakings for the director's personal assets.