Droit des affaires

 

Company law – Acts before incorporation

 

On 29 November 2023, the French commercial, financial, and economic chamber of the Cour de cassation (FS-B+R) ruled the practical question of acts performed by founders before incorporation of their company. This case is considered as a reverse of the common understanding of the French Supreme Court’s case law.

 

According to article L210-6 alinea 2 of the French commercial Code (applicable to commercial companies), “Persons who have acted in the name of a company in the process of being incorporated before such company being granted the legal personality are jointly and indefinitely bound by acts therein entered into, unless the company, after being duly constituted and incorporated, takes over such acts entered into. Such acts are thus being deemed as having been entered into in the first instance by the company”. This article is a replica of the common rule applicable to companies i.e. 1843 of the French civil Code which shows the importance given by French law to this possibility for the company to take over pre-incorporation acts.

 

In the same perspective, EU derivative regulation (article 8 of directive 2009/101/EC of 16 September 2009) states that “If, before a company being formed has acquired legal personality, action has been carried out in its name and the company does not assume the obligations arising from such action, the persons who acted shall, without limit, be jointly and severally liable therefor, unless otherwise agreed.”). It is thus only by way of exception that the company can assume such pre-incorporation acts by the willingness of their founders (and only with the mention of specific wordings in the relevant acts).

 

These articles are one of the keystones of the French regulation of companies aiming at preserving freedom of commerce and legal safety. The period pending before incorporation can be considered as a grey zone, as future business partners need to start their business facing at the same time the obligation to accomplish legal formalities to formally incorporate their company. French law provides for a balance between the necessity, for the future business partners, to swiftly take any opportunities of business and being at the same time protected by the corporate veil before incorporation (due to a retroactive affect by law).

 

The particularity of French law, in this respect, as mentioned by the Cour de cassation itself, is the existence of a sliding of the interpretation of the law. Pre-incorporation acts are void if the act does not contain a specific wording: acts entered into “on behalf” or “in the name” of the company. On the contrary, if such wording is mentioned and the company assumes such pre-incorporation acts, the company will be liable of such acts.

 

As to the present case, a commercial lease was granted on 21 January 2019 to two persons representing founding partners of a company in the process of being incorporated. Following a disagreement between such founding partners, one of such partners sued the lessor on 11 March 2020 in the view of cancelling the commercial lease. On the basis of the existence of specific wordings inserted in the commercial lease, the Court of appeal of Dijon (in Burgundy) ruled the cancellation of the lease and the personal commitment of the founding partners for illegal occupation. In this perspective, the Court considered that future partners did not act on behalf of the company, but personally.

 

In this context, the founding partners seized the French Cour de cassation in the view of the cancellation of the Dijon’s Court of appeal decision. The main mean of cancellation invoked by the founding partners was precisely the existence of specific wordings: the commercial lease (entered into before notary) indeed stated that “the persons named herein are the sole founding partners of the company” and “the present operation is made in the name and on behalf of the company in the process of being incorporated”, referring to articles L210-6 et seq. of the commercial Code, specifically, and stating also that “the registration of the company in the commercial and company registry will, as of right, with retroactive effect be taken over by the company by the hereby, such acts being deemed to have been entered into by the company as from the start”. 

 

The answer of the Cour de cassation is to refer to the position of its case law, stating that acts that may be taken over after the incorporation are only those expressly entered into “in the name” or “on behalf” of the company in the process of being incorporated and that are void acts entered into by such company without such wording, albeit the acts or the circumstances revealing that the willingness of the parties was that the act was entered into in its name or on its behalf.

 

Having stated that, the Cour de cassation follows its reasoning by observing that the “in the name” or “on behalf” requirement does not explicitly arise from French regulation. This position is considered to be enough to leave the door open to a reverse of case law. By this decision dated 29 November 2023, the position of the Cour de cassation moves towards a global appreciation of the common intention of the parties to determine whether the said pre-incorporation acts were entered into in the name and on behalf of the company (with an intrinsic and extrinsic appreciation) and whether, furthermore, after incorporation and acquisition of the legal personality the company may decide to assume the pre-incorporation acts.

 

It remains that this decision does not put into question the current true procedures available entitling the company to take over pre-incorporated acts (R210-5 et R210-6 of the commercial Code): (i) listing the said acts entered into on behalf of the company in a detailed schedule at the end of the by – laws, the signature of the by-laws evidencing the willingness of the partners to take over such acts after incorporation (ii) a specific mandate granted by founding partners to other partners (or manager not partners) to enter into pre-incorporation acts, such acts being taken over after incorporation (it being specified that the mandate, may, in certain circumstances be given after  the conclusion of the said contract – see J. Mestre, M.E Pancrazi, I. Grossi, N. Vignal, L. Merland, A.S. Mestre-Chami, Droit commercial T1, Activité commerciale, structure d’entreprise (commerçants, sociétés et autres groupements) LGDJ 31^th ed. 2021 n°457 p 386) and (iii) the general meeting of the partners, after incorporation, may decide to take over such pre-incorporated acts (even if the requested formalities are not complied with – see M. Germain, V. Magnier, Traité de droit des affaires T2, Les Sociétés Commerciales, LGDJ, 23^th ed. 2022, n°82 p.71).

 

The other side of the coin reveals that, the fact that a person enters into a contract naming himself as duly authorized to act on behalf of a company (without mentioning that the company is in the process of being incorporated) results in the contract being void due to its lack of legal personality (if the company not being in fine incorporated - e.g. C. cass. com. 9 January 2019, n°17-15.386). The company scheme also reveals that if the company is in fine incorporated, founding partners are personally bound by such pre-incorporated acts in the lack of the specific taking over procedures after incorporation (in particular in respect of a bill of exchange, C. cass. com. 3 avril 1973, n°71-13.527 and see also P. Didier, Ph. Didier, Droit commercial, T2 Les sociétés commerciales, Economica 2011, n°502 p 407).

 

As to the scope of the taking over, one should be interested in knowing that torts (e.g. unfair competition) cannot be taken over by the company (see. P. Le Cannu, B. Dondero, Droit des sociétés, LGDJ, 10^th ed. 2023, n°348, p. 262) and that the Cour de cassation shows a reluctance to admit the taking over of procedure acts, ruling majority against while at the same time admitting the taking over of auction tenders (see. P. Le Cannu, B. D0ndero, op. cit. n°348, p. 262). In addition, the legal practitioner may be interested in using the substitution process, the company stepping into the shoes of the founding partners by performing the said act (but, in this later case, without a retroactive effect) (see D. Legeais, Droit commercial et des affaires, Sirey, 29^th ed. 2023, n°407, p.210).

 

It remains that the new global appreciation of the common intention of the parties to determine whether the said pre-incorporation acts were entered into in the name or on behalf of the company (with an intrinsic and extrinsic appreciation) should be praised, as this new guidance given by the Cour de cassation gives only more latitude to lower courts to apply it and to limit the voidness of pre-incorporation acts. It is also possible to encourage lower courts to use the concept of bad faith (or fraud - as fraus omnia corrumpit) to open the possibility to make founding partners personally liable, as a sanction (and not the company).

 

Up to date 29 November 2023.

 

Declaration of claim and presumption (safeguard procedure)

 

On 8 February 2023, the French Cour de cassation (commercial chamber; F-B, n°21-19.330) had the opportunity to reiterate that the knowledge of the claim by the judicial representative (mandataire judiciaire) creates a presumption of such declaration of claim by the creditor, but only within the limit of the content of the information provided for to the judicial representative by the debtor (see previous decision of the commercial chamber dated 5 September 2018 – 17-18.516; P+B+I).

Under French law, a creditor has to declare his claim within a 2-month period otherwise his claim is barred by effluxion of time (forclusion). It has to be stressed that forclusion has not the same legal meaning as prescription and is more stringent. This is due to the fact that the commercial activity of the debtor has to be protected.

 

In the event of safeguard procedure, the receiver (administrateur) has to contemplate the possibility to restructure and to turn around the company. In this perspective, article L622-6 alinea 2 of the French commercial Code states that “The debtor gives to the receiver and to the judicial representative, for the purposes of the exercise of their mandate, the list of his creditors, of the amount of his debts and material ongoing contracts.” 

 

This gives the receiver the possibility to assess the strengths and weaknesses of the company, receiving amongst others, a list of the creditors edited by the company itself. In this perspective, the receiver is informed of the creditors of the company without the declaration of claim of the creditors. According to the French Cour de cassation, such information creates a presumption of a declaration of claim effectuated by the creditor and only within the limit of the content of the information provided for to the receiver by the debtor.

 

As a result, a difference between the information provided for by the debtor and a separate declaration of claim by the creditor may arise, especially regarding the amount of the claim, the debtor seeking to minimize such amount. In such a context, if a creditor does not declare his claim, he should nevertheless be in the position to rely on the information provided for by the debtor, at least. In addition, if the creditor also declares his claim, such later declaration shall prevail (see on this question F. Pérochon, with M. Laroche, F. Reille, T. Favario and A. Donnette, Entreprises en difficulté LGDJ, 11 ed. 2022, n°2763 et seq., p. 1113).

 

One should be puzzled to observe that from primary antagonist positions (creditor against debtor) a party (the debtor) can act on behalf of the other (the creditor) to secure a claim against himself. This is why this new legal scheme has been named a revolution (see F. Pérochon, op. cit.).

 

Up to date 8 February 2023.

 

Corporate law (SAS), coup d’accordéon (increase in share capital) and temporary measure

 

On 04 January 2023, the French Cour de cassation (financial, commercial and economic chamber (F-B)) stated that the reduction to zero of the share capital can only legally be made on the condition that a subsequent increase in share capital amounting to, at least, the minimum legal or contractual share capital.

 

Applying articles L.210-2 and L.224-2 of the French commercial Code, the French supreme Court draws the lines of what is named the coup d’accordéon (accordion effect), a metaphor referring to the two cumulative operations leading to an in fine increase in share capital after a reduction of it to zero. Initially used to save the company (see Usinor case dated 17 May 1994, 91-21.364 – B, cited in inter alia Traité de droit des affaires G. Ripert, R. Roblot by M. Germain, V. Magnier Les sociétés commerciales, LGDJ, T2, 23 ed 2022, n°1019 p.718 et seq. and in a nutshell Droit commercial et des affaires, D. Legeais, Sirey, 29 ed 2023, n°601 p.333), this cumulative operation is now more widely associated with a change in the partners allowing new partners to join the company in the event of significant loss (by law total equity (capitaux propres) valuated less than 50% of the share capital, to avoid the dissolution of the company). 

 

As to this specific case, the legal practitioner will take into account that the cancellation of the whole operation was initiated by a shareholder in référé (summary judgment) before the commercial Tribunal, with an ephemera success, such Tribunal decided with innovation to retain the decrease of the share capital to zero but to temporary suspend the increase.

 

Fortunately, the French Cour de cassation maintains the mechanism composed of the two operations, evidencing the indivisible feature of the coup d’accordéon in a positive way (the two operations cannot be separated), when, in other contexts, the cancellation of one operation cancels a subsequent operation (group of contracts).

It should however be observed that article L.224-2 states that the sanction of dissolution is not automatic as any interested party has to ask for the dissolution of the company before the commercial judge (and as a regularization is possible before the judge states on the dissolution case). This possibility of regularization may be the reason leading the initial commercial judge to have decided to temporarily suspend the subsequent increase of the share capital.

 

It remains to be seen if and how this legal corporate scheme of coup d’accordéon may be alternatively contractually replicated with the new threshold of 1 euro of the share capital applicable to selected companies only. The operation would consist in the reduction to 1 euro of the share capital and in a subsequent increase of the said share capital to refund the company (see comments of S. Sylvestre Dalloz Actualités, Le quotidien du droit dated 21 February 2023). This would apply to SARL and SAS for example, but the question remains to determine if the same indivisible feature would follow.

 

The thought may be fed by the fact that such an indivisible feature is necessary to refund the company and to therefore protect its creditors. In this perspective, it is hard to imagine how a reduction of the share capital to 1 euro would not be followed by a subsequent increase (the contrary would lead to a bankruptcy, or at least to a material weakening of the company). However, since this operation would not fall within the article L.224-2 legal scheme, a suspension of one of the two operations (the subsequent increase for example) may be contemplated as a temporary measure on a case-by-case basis, as the function of the commercial judge is to be pragmatic and as this temporary measure only aims at putting the process on hold, without cancelling the whole process. In addition, preventing a commercial judge from ruling a temporary measure in any events would lead to bind such judge without any legal exceptions, such situation leading to an illegality.

 

A temporary measure of suspension may be contemplated for example in the event of necessity of regularization or ratification of the contractual replicated scheme.

It would be for the parties to challenge such temporary measure and for the judge to decide, as decided by the supreme Court with this decision dated 04 January 2023, to bind the two operations and to follow the current case law based on the article L224-2 (or not).

 

Up to date 21 February 2023.

 

Coronavirus (Covid-19), French continuing plans and economy

 

On 13 March 2020, French Ministry of Justice issued a press release just after the announcements of the President of the French Republic. The aim, due to the emergency, is to protect citizens who are the most vulnerable and to curb the epidemic. Chancery has now prepared continuing plans to allow Justice to face core obligations of the Nation. 

 

According to a CNB (Conseil National des Barreaux) release dated 15 March 2020, the continuing plans will be triggered as from 16 March 2020 by the Ministry of Justice to avoid propagation of Covid-19. Tribunals and courts will be closed, except for cases relating to core litigations.

 

Core litigations are limited to (i) criminal tribunals and courts including (a) pre-trial custody (détention provisoire) and probation (contrôle judiciaire), (b) immediate criminal summary trials (comparution immédiate), (c) appearance before the liberty and custody judge (juge des libertés et de la détention), (d) appearance before the enforcement judge (juge de l’application des peines) including appeals, these latest in the events of emergency only, (e) permanence of public prosecutor’s office (permanence du parquet), (f) hearings relating to investigation chamber for custody (audience de la chambre d’instruction pour la détention) and (ii) civil tribunals and courts including (a) children’s courts and permanence in the events of emergency only (audiences du tribunal pour enfants et du juge pour enfants et permanence du tribunal pour enfants) - including educational assistance (assistance educative), (b) summary judgments (including relating to family matters), but based on emergency only, (c) civil liberties and custody judge hearings (juge des libertés et de la détention civil).

 

Due to the risks of contamination, instructions are, to the extent possible, to cancel criminal court sessions related to crimes (cour d’assises). It is also allowed to postpone hearings (taking into account reasonable time extension and pre-trial custody timeframe).

 

Legal public facilities (services d’accueil du public) will be closed as well as justice centers and legal access points. Even if justice civil servants will not be allowed to receive public, they will be reachable by phone to address emergency situations. 

 

As far as Paris is concerned, the first President of the court of appeal of Paris issued an ordinance dated 16 March 2020 (N°105/2020) named ordonnance de roulement modificative (amending rotation ordinance), on the basis of, inter alia, the decision of the Ministry of justice dated 15 March 2020 triggering continuing plans, article L1142-7 of the French Code de la Défense and emergency. Such article not only states that (i) the Ministry of Justice ensures in all circumstances the continuity of the legal criminal services as well as enforcement of criminal sanctions, but also (ii) he participates in fighting against elements adversely affecting fundamental interests of the Nation (this including preservation of the population in and outside France, according to article 410-1 of the French Code pénal). 

 

Aside to the public authorities, the legal profession, as a whole, may support the economy : it can be suggested that business lawyers may wish to consider advising their clients to enter into settlement agreements (within the meaning of article 2044 of the French Civil Code) to solve pending litigations and to unlock commercial situations created by the current sanitary crisis.

 

This would give the economy a possibility to maintain a flow of activity. 

 

Up to date 16 March 2020. 

 

 

 

 

Company law - Exclusion of Partners (SEL – Société d’Exercice Libéral)

 

The current situation of partners of limited liability companies carrying on a civil professional purpose (SEL – Société d’Exercice Libéral) is protected by law and the constitutive documents (statutes and internal regulation). This is due to the fact that they have to be protected as they are running the business activity. This is particularly the case in the event of exclusion of partners, when a decision is made to exclude a partner from the company. 

 

In this respect, Article R.4381-16 of the French public health Code states that a partner practicing within the company can be excluded when (i) he is prohibited from practicing or providing care to covered parties for a period equal to three months or (ii) the said partner contravenes operating rules of the company.

 

Article R.4381-16 of the French public health Code gives guarantees as to the exclusion decision: no exclusion decision can be taken if the partner was not legally convened and if he has not been in the position to plead his case on specific facts for which he was charged. 

 

However, as to the voting process, Article R.4381-16 of the French public health Code states that the decision of the partners to exclude a partner is taken on the reinforced majority calculated excluding not only the vote of (i) the partners having been sanctioned for the same facts or related facts but also (i) the concerned partner (unanimity of other partners practicing within the company and entitled to vote having as well to be obtained). 

The fact that the concerned partner does not take part to the vote is not in line with the ratio decidendi of the Cour de cassation (i.e. com. 9 July 2013) and the challenged provision is deemed not to have been written. Such a provision may as well be considered in breach of the ECHR (European Convention on Human Rights), in this particular case of Article 6 (right of a fair trial) or of Article 13 (right of an effective remedy). 

The business activity is also protected in the event of temporary prohibition from practicing or providing care to covered parties (Article R.4381-16). In this perspective, provided that the partner is not excluded, the person concerned keeps his partners’ rights and duties, to the exclusion of the remuneration linked to his professional activity (Article R.4381-17). 

 

This protection is crucial to ensure management stability, legal safety and thus, to foster business activity. 

 

Up to date 21 June 2018