Manager/director liability: RCMS limits and insurance

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

The three liability regimes

Civil liability towards the company and its shareholders. The director is liable 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 protective of 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 severity, 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 their own name, even where they derived no personal benefit from the offence.

Mismanagement in the event of liquidation

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

When a court-ordered liquidation reveals insufficient assets, the court may order directors whose mismanagement contributed to this shortfall to bear all or part of it personally. An exception has been introduced: mere negligence is not taken into account. More than poor management is therefore required, but considerably less than an intent to cause harm.

The faults most often found are identifiable in advance:

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

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

Personal commitments: the real exposure

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

The 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: capped or uncapped amount, duration, joint and several nature, extension to interest and ancillary costs.

The protective formal requirements for guarantees have evolved, but the requirement for a handwritten mention or its electronic equivalent remains for guarantees given by individuals. A guarantee that is formally irregular can be voided — this is often the only defence available.

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

Director's liability insurance

It covers the financial consequences of mismanagement claims against the director, as well as defence costs — often a larger item than the award itself in cases that settle favourably.

Four points deserve checking before taking out a policy:

• Defence costs — are they covered as soon as proceedings are brought, or only in the event of a conviction?
• The coverage amount — is it sufficient given the company's potential liabilities?
• Extended reporting period 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 wrongdoing and personal commitments such as guarantees.

This last exclusion is essential: no insurance covers a personal guarantee. Protection against this risk comes only through negotiating the guarantee itself — capping, duration, limiting it to identified commitments.

Usage scenarios

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

Cash flow difficulties. The useful reflex is the timeline: pinpoint precisely when due liabilities exceed available assets, and file 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 insurance's extended reporting period.

Frequently asked questions

Is the director liable for the company's debts? Not in principle: the company is liable for its own debts. The director is liable in the event of mismanagement contributing to insufficient 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 severity, 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 insufficient assets. A clearly established fault is required, though intent to cause harm is not.

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

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 filing late for insolvency? This is one of the most frequently upheld complaints regarding mismanagement. 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. Mismanagement in the event of insufficient assets, the most common complaint being delay in filing for 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 liquidation.

Director's insurance addresses the first front, provided its extended reporting period is checked: claims often arise after the director's departure. It does nothing against the other two, where only contractual vigilance and rigorous documentation provide protection — the same logic set out for tax audits and corporate taxation.