France: Accumulation of responsibilities

published on 19 February 2025 | reading time approx. 2 minutes

Approval of a related-party agreement (“convention réglementée”) at a general meeting does not relieve the director of liability for mismanagement (“faute de gestion”).

In a ruling of December 18th, 2024 (no. 22-21.487), the French Supreme Court (“Cour de cassation”) answered the following questions:

Can a company corporate officer be held liable for the harmful consequences of a so-called "related-party agreement" even if it has been approved by the general meeting?
Is the application of liability for mismanagement excluded when the specific regime of related-party agreements is applied?

In this case, the manager of a limited responsibility company (“SARL”) (company A) held 999/1000 shares in the share capital of company B. The two companies entered into a collaboration agreement under which company B provided SARL A with all technical, material and logistical resources for creation, hosting and management return for a fixed fee. However, the sum actually invoiced by company B did not correspond to the stipulations of the agreement, at the disadvantage of the SARL A. In addition, the SARL A had sold shares in a civil real estate company (“SCI”) to its manager on terms that were also unfavorable.

The Court of Appeal upheld the action brought by the minority shareholders against the manager for mismanagement under Article L. 223-22 of the French Commercial Code.

The manager then lodged an appeal to the French Supreme Court, arguing that the special provisions relating to related-party agreements should have taken precedence over the general provisions relating to liability for mismanagement. Court of Appeal thus infringed Article L. 223-19, paragraph 4, of the Commercial Code, which provides that the manager may be held liable for the consequences detrimental to the company of "unapproved" related-party agreements only, whereas the agreements in question had been approved at a General Meeting.

The “Cour de cassation” confirmed the solution adopted by the Court of Appeal and stated that the possibility of charging the manager with the consequences detrimental to the company of unapproved related-party agreements does not prevent him from being held liable for mismanagement, whether or not the agreements have been approved.

The manager being liable for breaching the rules governing related-party agreements does not prevent him from being held liable for mismanagement.

As the provisions relating to related-party agreements and the liability of directors for mismanagement are drafted in a similar way for simplified joint-stock companies (SAS) and public limited companies (SA), this solution could be applied to these company forms as well (related-party agreements: L 227-10 al 3 for SAS, L 225-41 for SA and L 223-19 al 4 for SARL; mismanagement: L 225-251 for SA, L 227-8 for SAS and L 223-22 for SARL).