The concept of “misusing a company’s assets” was introduced into French criminal law by two laws passed as long ago as 1935 in response to a notorious French banking scandal which followed the Great Depression of 1929.
The offence is different from a mere breach of trust, which under French law requires the existence of a contract. It consists of the use of assets, goods, or the goodwill of a legal entity in a way which is inconsistent with the interests of the company. Both laws are now codified in a new Code of Commerce, introduced on 18 September 2000.
Whilst the offence has two elements – namely act and intention – the French Courts are not particularly demanding on the requirement for intention and, in particular, do not excuse ignorance of the law.
Inconsistent with the company’s interests
The requirement that the misuse of company’s assets is, in fact, inconsistent with the interests of the company is far more complicated. It is unclear whether “interests” means:
the interests of the partners;
the viability of the company;
the interests of all actual or potential creditors; or
simply anything that is not related to the business of the company.
It is also unclear whether the offence requires an “abuse” or a “misuse”. It is difficult to find a precise criterion as the relevant case law has constantly extended the scope of the offence, which has now become extremely wide.
As a starting point, the use of a company’s assets for an unlawful purpose is considered inconsistent with the interests of the company. Case law also considers the offence to be committed when the use of assets, goods or goodwill of the company is made in such a way that criminal or fiscal penalties may be imposed on the company or its managers (even though such penalties may not actually be imposed). For example, a French Court found that, where a manager lent money to a family member, he committed the offence even though the money was paid back without any loss being suffered by the company. This is because it had put the company at a potential risk of criminal sanctions.
A misappropriation of company’s assets by managers or excessive gifts to friends or members of the manager’s family are also considered an offence. Furthermore, the courts have always held that, though the manager may not personally benefit from the misuse of the company’s assets, this does not protect him or the company from being prosecuted.
How are these principles applied in relation to a misuse which is inconsistent with the interests of a group of companies? A company may, for example, transfer virtually all of a subsidiary company’s assets to another company within the group in the ultimate interests of the group as a whole. French Courts have ruled that the offence would not be committed when the sacrifice of one subsidiary is made so as to ensure the viability of the whole group, provided there was:
i.no illicit purpose; and
ii no alternative way of achieving the ultimate objective.
The issue of the relevant limitation period for prosecuting claims has led to an abundance of case law. As for all misdemeanours in France, the law imposes a three year limitation period which usually starts on the date of commission of the offence. However, as the perpetrators generally try to keep misuses of company’s assets secret, the Courts tend to delay the starting point of the limitation period.
The initial position was that the period ran from the point at which the misuse of the assets became known. However, it has subsequently been extended to the date when the misuse is made known to the parties who are in a position to prosecute. As only a few people are entitled to lodge a complaint for the offence of misusing company assets, the period of three years only starts when they have actual knowledge of the offence. This ruling has, of course, been much criticised as it more or less paves the way to the possibility of prosecution without any limitation as to when the charges may be brought.
Commission of the offence by legal entities
The final amendments to the offence were incorporated in March 2004. These changes meant that all legal entities could now be prosecuted for all the relevant offences.
The possibility of prosecuting legal entities stems from the adoption of a new Criminal Code in 1994. Previously, the offences were limited to specific misdemeanours and the offence of misusing a company’s assets was not incorporated into the Code until 2004. From this point it has become easy for companies to commit the offence. Indeed, for a company to be criminally liable, it must only be evidenced that the offence was committed on behalf of the company by a manager or a representative. Hence, the liability incurred by legal entities does not require a specific offence committed by the company. It is an automatic liability so long as the individual did not act on his own behalf.
The excessive extension of the offence - both materially and in relation to the limitation period for prosecuting the offence - has prompted judges and lawyers alike to request wholesale reform of the offence. However, no such amendments are currently proposed and the offence of misusing company’s assets continues to put French legal entities and their managers at risk of prosecution.