Closing down a business can be voluntary or imposed on the business in the case of bankruptcy. Both cases will be addressed on this page, taking into consideration rules applying to companies and to sole traders.
Voluntary Closing Down of any type of Business
Two different processes apply depending on whether the company is exclusively held by another company or not.
- Company exclusively held by another company: dissolution without liquidation
- Other cases: dissolution with liquidation
Company exclusively held by another company: dissolution without liquidation
In the case of a company exclusively held by another company, the only way to wind up is to proceed through a dissolution without liquidation, often referred to by the acronym TUP (transfert universel de patrimoine).
The TUP decision is quite straightforward and must be made by the sole shareholder.
The constraints are light and relate mainly to protecting creditors’ interest, as the major consequence of the TUP is the transfer of all assets and liabilities of the dissolved company into the hands of the sole shareholder.
Once the TUP decision is signed it must be published in a journal of legal notices and will become effective:
- within 30 days after publication of the legal notice if no creditor petition the Commercial Court during that time, or
- in case a creditor petitions the Court for payment or for obtaining a payment guarantee, either (i) at the end of the one month period after the petition is rejected by the Court (ii) on the date the petitioning creditor is paid or guarantees are made by the sole shareholder
Once the dissolution of the company becomes effective, specific filings with the relevant Registry of Commerce and Companies must be completed within the following month in order to de-register the dissolved company.
Transfer of contracts
The TUP triggers the automatic transfer to the sole shareholder of the contracts entered into by the dissolved company, except those which are “intuitu personae” (a personal services contract) or those concluded with public entities. It is therefore necessary to conduct a prior audit of the contracts in order to detect contracts that may not be transferable.
The TUP produces exactly the same effects as a merger although it is much easier to implement, especially when the parent company is not a French entity.
Note: the existence of debts is not an obstacle to the TUP. However, from a practical standpoint it could significantly delay the dissolution process. It may also be costly for the sole shareholder who will not be able to benefit from the limitation of liability offered by the limited liability structure of the company. Therefore, should anyone want to restrain the effects of the company’s dissolution and avoid, among others, the automatic transfer of the existing liabilities, it would be necessary to obtain the termination of all the agreements entered into by the company and the liquidation of all the assets before the sole shareholder makes the decision to dissolve.
The whole TUP process will reasonably take 45 to 60 days if no creditor petitions the Court.
Other cases: dissolution with liquidation
In all other cases, (i.e. where the company has several shareholders or where there is a sole shareholder who is a physical person) closing down the company may take place only via dissolution with liquidation. This is a less straightforward procedure since a liquidator has to be appointed for the purpose of realising all assets and paying off all liabilities.
The shareholders shall be called to an extraordinary shareholders’ meeting to decide on the dissolution of the company and the appointment of an amicable liquidator. The dissolution is effective immediately. The decision must be published in a legal gazette and at the Trade and Companies Registry.
Management personnel (Board of Director, President, Manager, etc) will be replaced by the liquidator, whose duties are to terminate any pending business, realise all assets and pay off all liabilities.The statutory auditor, if any, will remain in office.
All corporate and commercial documents shall mention that the company is in liquidation. The company will continue to exist for the purpose of the liquidation and must continue to issue annual accounts.
End of the dissolution
Once the liquidation process is complete, the liquidator shall call an ordinary shareholders' meeting, the agenda of which will be to acknowledge that there are no longer any assets or liabilities and to state the closure of the liquidation. The decision will then be published in a legal gazette, and the company may be struck off the Trade and Companies Registry.
The duration of a dissolution without liquidation may vary according to the existence of outstanding debts to be paid off but by law it cannot exceed three years.
Bankruptcy of a Company
In a certain number of cases, the most common being payment default (cessation des paiements), the company’s management is required to make a statement of default of payments before the Commercial Court within 15 days of its occurrence.
Default of payment is the situation in which the debtor cannot meet its debt obligation (debts which are due and payable) with its available capital (assets which can be liquidated within a few days).
Third parties (creditors, Public Prosecutor or the Court itself) may also file suit in bankruptcy cases against the debtor.
The statement of default may end up with either a direct liquidation order if the Court rules that the company’s situation is critical, or with a restructuring order (redressement judiciaire) if the Court believes that there is a hope for a reassessment (with a caveat that if the restructuring fails it will be converted into a liquidation), or a judiciary sale of the assets of the company if third parties make offers.
The entities involved in the liquidation procedure
When ordering liquidation the Court must designate an insolvency judge (juge commissaire) who will be responsible for the efficient treatment of the matter and the protection of the interests of all parties. The Court will also appoint a liquidator who is responsible for overseeing the sale of the debtor’s assets in order to cover the company’s debts. Other professionals may be appointed as needed. The employee will be invited to designate a delegate to attend the hearing and make comments on behalf of the staff.
The effects of the liquidation order
As soon as the liquidation is ordered:
- The company must immediately cease its activity, unless the Court authorises it to continue for a temporary period
- The management is stripped of managerial powers
- All Court proceedings involving debts which arose prior the bankruptcy proceedings are suspended. The enforcement of any prior judgment is suspended
- The debtor is prohibited from paying any debt which arose prior the bankruptcy and interest accrued on prior debts is frozen
- All receivable held by creditors against the company become immediately payable, even if they are not yet due. Within two months off the publication of the Court order, creditors who have a claim that existed before the Court order should send a statement of claims to the liquidator
Process of liquidation
The liquidator has a key role and is charged with:
- Making the employees redundant within 15 days of the liquidation order (unpaid salaries are then advanced by the wage guarantee insurance (AGS)
- Verifying the claims: the creditors of the company are granted two months (or four months if they are located abroad) to make their claim against the company
- Proceeding with the recovery of amounts due to the Company and pursuing ongoing procedures that would convict the company's debtors
- Valuing the assets of the company as best he or she can in order to pay its creditors
- At the end of the procedure allocating the funds to the creditors of the company based on their priority ranking. Roughly, the creditors will be paid in the following order:
- reimbursement to the wage guarantee insurance, which lends the money necessary to pay employees
- fees of legal agents (liquidator, etc)
- preferred creditors (according to an order that is set forth in the law, i.e.: tax authorities, social security authorities, leaser and creditors with a preferential right or a pledge)
- all other creditors
For small cases, that is where the debtor's assets include no immovable property and where:
- the debtor has hired no more than one employee during the six months prior to the commencement of the proceedings and its sales turnover is equal or less than €300,000, or
- the debtor has hired between one and five employees and its sales turnover is between €300,000 and €750,000
a simplified liquidation procedure will apply, with the main following consequences:
- the creditors’ claims are not verified as a whole. Only wage claims and the claims that can be paid out of the company’s available assets are verified
- the liquidator has more flexibility to sell the debtor’s property
- the whole liquidation process must be completed within six months, extendible for three additional months
Closing of the liquidation
When the liquidation process has come to an end the Court will render a second order to close down the liquidation process.
The law provides for two types of liquidation closure:
- Closure as a result of payment of debts, if all creditors have been paid (this is very rarely encountered in practice)
- Closure due to insufficiency of assets, if all creditors have not been paid. In practice, after closure, the unpaid creditors will not be able to pursue the company
When the liquidation is finished the company loses its legal status and is removed from the Trade and Companies Register.
In the best case the whole liquidation process will take at least a few months, and much more if, for example, judiciary procedures are pending. However a maximum duration of three years for the process is allowed.
Liability of the company’s management
The managers of a company which was liquidated can freely undertake new commercial activities unless the Court has imposed specific restrictions on them. They may face personal liability in a certain number of cases as civil or pecuniary penalties (as well as criminal sentences) can be imposed on them.
- Pecuniary sanctions: Reimbursement of debts (action en comblement de passif). In the case of mismanagement contribuing to the insufficiency of assets of the company, its managers can be ordered to reimburse all or part of the debtor company’s debts. “Mismanagement” is not defined by the law and give rise to interpretation by the Courts. Some examples are: failing to make a statement of default within 15 days, continuing a loss-making activity, or conducting misleading accounting practices
- Civil penalties: Personal disqualification (faillite personnelle)
The Court may pronounce the personal disqualification of the liquidated company’s manager in a certain number of cases, among which:
- Selling property belonging to the company as his own
- Carrying out company transactions to further his personal interests, using the company as a cover
- Using property or credit of the company, against that company’s interests, for personal purposes or in favour of another company or business in which he had a direct or indirect interest
- Abusively pursuing, for his personal interest, an unprofitable business activity that would necessarily lead to the company’s insolvency
- Embezzling or concealing all or part of the assets of the company or fraudulently increasing its debts
The personal disqualification may be pronounced for a maximum of 15 years duration. It entails, among other sanctions, a prohibition from running, managing or controlling, directly or indirectly, any business, but the Court may also pronounce the ineligibility to occupy a public office.
- Prohibition from managing (interdiction de gérer): this sanction can be pronounced by the Court independently from a personal qualification, but in that case the penalty is less heavy as it is not general.
- Criminal penalties: fraudulent bankruptcy (banqueroute)
Fraudulent bankruptcy can be pronounced against the manager of the debtor company if he has committed the following offences:
- Purchasing goods or services for resale at below market prices or using ruinous means to procure funds, with the intention of avoiding or delaying the commencement of judicial restructuring or judicial liquidation proceedings
- Embezzling or concealing all or part of the debtor's assets
- Fraudulently increasing the debtor's liabilities
- Keeping fictitious or clearly incomplete accounts
These offences can by punished by a fine of up to € 75,000 and to prison sentence of up to 5 years. The manager can incur additional penalties such as personal disqualification, prohibition from exercising civic, civil and family rights, ineligibility for public procurement contracts, prohibition from issuing cheques.
Closing Down a Business Carried out by a Sole Trader (Entreprise Individuelle or Entreprise Individuelle à Responsabilité Limitée)
From a formal standpoint, closing down a business carried out by a sole trader is very straightforward as it consists of a simple statement to be made before the Trade and Companies Register or the Chamber of Trades and Crafts (a specific form will need to be filled in and filed, depending on which organisation should receive the statement).
The main difference is that the sole trader will be forced to hand over personal assets to business creditors, thus making it even important to pay off all outstanding debts prior to any decision to dissolve.
All concerned authorities (Tax, Health Insurance, RSI, Family Allowances, Pension) are then automatically kept informed of the dissolution but it is advisable to inform them directly too. These authorities will then liquidate all due taxes or contributions, which therefore must be anticipated.
Bankruptcy of a Sole Trader
The bankruptcy rules described above for companies apply almost similarly to sole traders (such as merchants, registered artisans and farmers). There are however a few differences that are to be explained by the fact that a sole trader risks losing personal assets to creditors.
The notion of default of payment also exists but the sole trader is required to make a statement of default within 45 days of its occurrence before the Commercial Court (and not 15 days as for companies).
Then the same liquidation procedure will apply (most often in simplified form) and the liability of the sole trader then follows the same rules as those applying to a company’s officer or director.