Manager/Director Liability: limits and RCMS insurance

Introduction

Managing a company exposes you to considerable legal risks. Whether as a SARL manager, SAS president or SA chief executive, a company officer's personal liability can be engaged on civil, criminal, and even tax grounds. Contrary to popular belief, the corporate veil does not systematically protect the manager: his management breaches, statutory failures or breaches of laws and regulations can result in direct claims against his personal assets. Understanding the limits of this liability and taking out appropriate insurance is therefore a major strategic issue for any company officer.

The three levels of director liability

Civil liability is governed by Article L. 223-22 of the Commercial Code for SARL managers and Article L. 225-251 for SA directors. Three grounds can trigger it: breach of legal or regulatory provisions, breach of articles of association, and management breach. The derivative action (action ut singuli), brought by a shareholder on behalf of the company, allows recovery of the loss suffered.

Criminal liability targets specific offences: misappropriation of company assets (Article L. 241-3 of the Commercial Code, punishable by 5 years' imprisonment and €375,000 fine), presentation of false accounts, bankruptcy, or breaches of employment law and safety regulations. Since the Fauchon Act of 2000, unintentional criminal liability requires a characterised breach.

Tax liability can be engaged under Article L. 267 of the Tax Procedure Code, which allows the tax authority to claim payment of taxes evaded by the company from the director in the event of fraudulent manipulation or serious and repeated non-compliance.

Limits on liability

Case law has established safeguards. The Seusse decision of the Court of Cassation (20 May 2003) requires that the director's breach towards third parties be separable from his functions, i.e. intentional, of particular gravity and incompatible with the normal exercise of the corporate mandate. Failing this, only the company is liable. The limitation period for civil liability actions is 3 years from the date of loss (5 years in case of concealment). Moreover, discharge of liability voted at general meeting does not preclude legal action.

Company Officers Liability Insurance (RCMS)

RCMS insurance covers the financial consequences of professional breaches committed by the manager in the course of his duties. It covers legal defence costs (lawyers, experts), damages awarded, and sometimes civil penalties where the law permits. Generally excluded are: intentional breaches, criminal penalties, and damage caused before the subscription date. Annual cost ranges from €1,500 for an SME to several tens of thousands of euros for large groups, depending on turnover, sector and cover chosen.

Practical examples

Case No. 1 – Management breach in a SARL: A manager decides to invest heavily in a project without prior market research. The company goes into receivership. The liquidator brings a breach of duty action (Article L. 651-2 of the Commercial Code); the manager is ordered to pay €200,000 from his personal funds. His RCMS insurance covers the indemnity and legal costs.

Case No. 2 – Irregular dismissal: A SAS president dismisses an employee without following proper procedure. The employee directly sues the officer for detachable breach. RCMS covers the defence and any civil awards.

Case No. 3 – Environmental breach: A director of an industrial SME is prosecuted for illegal waste discharge (Article L. 541-46 of the Environmental Code). RCMS funds the criminal defence, but the fine remains his responsibility.

Conclusion

A manager or director's liability is not limited to the boundaries of the corporate entity. Faced with multiplying litigation – shareholder disputes, employment matters, environmental issues, tax disputes – taking out appropriate RCMS insurance is no longer an option but an essential wealth management measure. Before any subscription, it is advisable to carefully analyse the risks specific to your sector and negotiate bespoke cover with a specialist broker.