Manager/Director Liability: Limits and RCMS Insurance

The separation between the company's assets and those of its director is not an absolute protection. It gives way in specific, well-known situations that recur with striking regularity in litigation: management fault in the event of insufficient assets, personal guarantees, and 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 management faults. 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: he incurs personal liability towards a third party only if he has committed a fault separable from his 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 liable in his own name, even where he derived no personal benefit from the offence.

Management fault in the event of liquidation

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

When a court-ordered liquidation reveals an insufficiency of assets, the court may order that all or part of this shortfall be borne by the directors whose management fault contributed to it. An exception has been introduced: mere negligence is not taken into account. What is required, therefore, is more than poor management, but considerably less than an intention to cause harm.

The faults most often found are identifiable in advance:

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

The deadline for declaring insolvency is short, and exceeding it is the most frequently sanctioned failure. It starts running as soon as the company is unable to meet its due liabilities with its available assets, not at the moment the director becomes aware of it.

Personal commitments: the real exposure

In practice, for small structures, the director's exposure almost never comes from a liability action, but from the guarantees he has personally given.

The personal guarantee is required by almost all banking institutions for a business loan, and frequently by commercial landlords. It places personal assets on the front line, regardless of any fault. Its scope must be checked before signing: capped or uncapped amount, duration, joint and several nature, extension to interest and ancillary costs.

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

Tax and social security debts. The authorities may pursue the director's joint and several liability where non-payment results from manoeuvres or from serious and repeated non-compliance 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 management faults attributed to the director, as well as defence costs — an item that is often higher than the award itself in cases that are settled favourably.

Four points deserve to be checked before taking out a policy:

• Defence costs — are they covered from the moment a claim is made, or only in the event of a conviction?
• The coverage amount — is it sufficient in view of the company's potential liabilities?
• Extended reporting cover — does it cover claims made after the end of the director's term? This is the decisive point, since claims are often brought after the director has left office.
• Exclusions: fines and criminal penalties are always excluded, as are intentional faults and personal commitments such as guarantees.

This last exclusion is essential: no insurance covers a personal guarantee. Protection against this risk relies solely on negotiating the guarantee itself — cap, duration, limitation to identified commitments.

Usage scenarios

Taking up office. Check existing cover and its extended reporting period, as well as any personal commitments made by the predecessor that might remain attached. Documenting the situation as of the date of taking office protects against being held responsible for prior faults.

Cash-flow difficulties. The useful reflex is the timeline: pinpoint precisely 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 been effectively released, as they do not automatically end with the mandate, and check the extended reporting period of the insurance.

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 a management fault that contributed to an insufficiency of assets, 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 a liquidation? No. The law excludes mere negligence from the scope of liability for insufficiency of assets. A clearly established fault is required, though an intention to cause harm is not.

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

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

What is the risk of declaring insolvency late? This is one of the complaints most frequently upheld as a management fault. The deadline runs from the point of objective inability to meet due liabilities, not from when the director becomes aware of it.

Key takeaways

The principle of separation of assets provides effective protection, but it gives way on three fronts that must be addressed separately. Management fault in the event of insufficiency of assets, the most common complaint being delay in declaring insolvency — thus a matter of timing before being a matter of management. Personal commitments, guarantees foremost, which expose personal assets without any fault being necessary and which no insurance covers. And serious tax and social security breaches, which survive the company's liquidation.

Directors' insurance addresses the first front, provided its extended reporting cover is checked: claims often arise after the director has left. It does nothing against the other two, where only contractual vigilance and documentary rigour provide protection — the same logic set out for tax audits and corporate taxation.