Manager/Director Liability: limits and RCMS insurance

The separation between a company's assets and those of its director is not an absolute protection. It gives way in precise, well-known circumstances that recur with striking regularity in litigation: mismanagement in the event of a shortfall in assets, personal guarantees, and serious tax or social security breaches. Understanding these three breaches is more useful than relying on the general principle.

The three liability regimes

Civil liability towards the company and its shareholders. The director is answerable for breaches of legal provisions, violations of the articles of association, and mismanagement. The action may be brought by the company itself or, failing that, by one or more shareholders acting on its behalf.

Civil liability towards third parties. This is governed by a rule that protects the director: they only incur personal liability towards a third party if they have committed a fault separable from their duties, that is, an intentional fault of particular seriousness, incompatible with the normal exercise of the corporate mandate. Outside this case, it is the company that is liable.

Criminal liability. This is personal and cannot be covered by any insurance. Misuse of company assets, bankruptcy offences, undeclared work, breaches of safety obligations: the director is answerable in their own name, even where they derived no personal benefit from the offence.

Mismanagement in the event of liquidation

This is the widest breach, and the one that produces the heaviest penalties.

Where compulsory liquidation reveals an asset shortfall, the court may order all or part of that shortfall to be borne by directors whose mismanagement contributed to it. An exception has been introduced: mere negligence is not taken into account. More than mediocre management is therefore required, but considerably less than an intention to cause harm.

The faults most often found are identifiable in advance:

• The wrongful continuation of a loss-making activity that could only lead to insolvency.
• The failure or delay in filing a declaration of insolvency beyond the statutory deadline.
• The failure to keep proper accounts, which prevents an accurate assessment of the real situation — a topic covered in our article on bookkeeping.
• personal expenses charged to the company.

The deadline for filing a declaration of insolvency is short, and exceeding it is the most frequently sanctioned breach. It starts running as soon as the company is unable to meet its due liabilities with its available assets, not when the director becomes aware of it.

Personal commitments: the real exposure

In the practice of small businesses, a director's exposure almost never comes from a liability action, but from the guarantees they have themselves given.

A personal guarantee is required by almost all banks for a business loan, and frequently by commercial landlords. It puts personal assets on the front line, regardless of any fault. Its scope must be checked before signing: whether the amount is capped, its duration, whether it is joint and several, and whether it extends to interest and ancillary costs.

The protective formalities surrounding guarantees have evolved, but the requirement for a handwritten statement or its electronic equivalent remains for guarantees given by individuals. A guarantee that is formally defective can be annulled — this is often the only available defence.

Tax and social security debts. The authorities may seek to hold the director jointly liable where non-payment results from fraudulent manoeuvres or a serious and repeated failure to comply with obligations. This mechanism is independent of insolvency proceedings and survives the company's liquidation.

Directors' civil liability insurance

It covers the financial consequences of mismanagement attributed to the director, as well as defence costs — an item that is often higher than the award itself in cases settled favourably.

Four points deserve checking before taking out cover:

• Defence costs: are they covered from the moment proceedings are brought, or only in the event of a conviction?
• The level of cover: is it sufficient in view of the company's potential liabilities?
• Run-off cover: does it cover claims made after the director has left office? This is the decisive point, since claims are often brought after the director's departure.
• Exclusions: fines and criminal penalties are always excluded, as are intentional fault and personal commitments such as guarantees.

This last exclusion is essential: no insurance covers a personal guarantee. Protection against this risk depends solely on negotiating the guarantee itself — capping the amount, limiting its duration, and restricting it to identified commitments.

Usage scenarios

Taking up office. Check the existing cover and its run-off provision, as well as any personal commitments given by the predecessor that might remain attached. Documenting the situation as at the date of taking office protects against being blamed for earlier faults.

Cash-flow difficulties. The useful reflex is the timeline: precisely date the moment when due liabilities exceed available assets, and file the declaration within the deadline. This is the approach that rules out the most frequently upheld complaint.

Leaving office. Check that personal guarantees have actually been released, as they do not automatically lapse with the end of the mandate, and check the duration of the insurance's run-off cover.

Frequently asked questions

Is the director liable for the company's debts? Not in principle: it is the company that is liable for its debts. The director is liable in the event of mismanagement that contributed to an asset shortfall, a personal guarantee, or serious tax or social security breaches.

What is a fault separable from one's duties? An intentional fault of particular seriousness, incompatible with the normal exercise of the corporate mandate. This is the condition for a third party to be able to take action against the director personally.

Is mere negligence enough in liquidation? No. The law excludes mere negligence from the scope of liability for an asset shortfall. A clearly established fault is required, although an intention to cause harm is not.

Does insurance cover fines? Never. Criminal and administrative penalties are inherently uninsurable, as is intentional fault.

Can a personal guarantee be covered? No. It is excluded from all policies. Only negotiating the guarantee itself — cap, duration, scope — limits this risk.

What is at risk from filing a late declaration of insolvency? This is one of the complaints most frequently upheld as mismanagement. The deadline runs from the point at which it becomes objectively impossible to meet due liabilities, not from when the director becomes aware of it.

Key takeaways

The principle of separation of assets protects effectively, but it gives way on three fronts that must be dealt with separately. Mismanagement in the event of an asset shortfall, the most common complaint being late filing of the declaration of insolvency — thus a matter of timing before it is a matter of management. Personal commitments, guarantees foremost among them, which expose personal assets without any fault being necessary and which no insurance covers. And serious tax and social security breaches, which survive liquidation.

Directors' insurance addresses the first front, provided its run-off cover is checked: claims often arise after departure. It does nothing against the other two, where only contractual vigilance and rigorous documentation offer protection — the same logic as set out for tax audits and corporate taxation.