Consequences of a declaration of bankruptcy

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Over-indebtedness of private individuals (in French on the Portail Citoyens)

The declaration of bankruptcy takes effect on the day judgement is delivered, with retroactive effect until 00.00 hours, regardless of any appeals entered (appeal or opposition).

With this judgement, the trader or commercial company is officially declared bankrupt.

The judgement also appoints the trustee in charge of the bankruptcy (usually chosen among the lawyers registered in the roll of lawyers), the examing magistrate (bankruptcy judge) and it determines when the cessation of payments occurred.

Following the judgement:

  • the trader loses all administrative powers over his assets and the right to take legal action in his own patrimonial matters, with these powers being transferred to the trustee in bankruptcy;
  • the period between the cessation of payments and the declaration of bankruptcy (known as the période suspecte or hardening period) is deemed 'suspect' and certain acts performed by the bankrupt party during this period may be deemed null and void;
  • the bankrupt party can be held liable for any offence committed.

Who is concerned

In this case, the bankrupt party refers to any trader or commercial company that has been declared bankrupt.

Regarding the liability of the bankrupt party in the case of commercial companies, it is the natural person responsible for managing the company that is exposed to penalties, i.e. the de jure or de facto managers, whether or not they are partners (sleeping or otherwise) and whether or not they receive remuneration.

How to proceed

Transfer of the bankrupt party's powers to the trustee in bankruptcy

On the day the bankruptcy is declared, the trader or commercial company loses:

  • the right to administer their assets (movable and immovable assets, including assets that may come into their possession while bankrupt);
  • the right to take legal action as a defendant or plaintiff in their patrimonial matters. Only the trustee in bankruptcy is authorised to do this and to pursue any proceedings in progress.

All payments, operations or acts performed by the bankrupt party after the declaration of bankruptcy are automatically null and void.

The trustee in bankruptcy must manage the bankruptcy in a responsible manner: he is not only responsible for representing and administering the assets of the bankrupt party, but also for representing the general body of creditors.

The bankruptcy trustee's actions are monitored by the examining magistrate appointed in the declaration of bankruptcy.

Regime for outstanding contracts: the declaration of bankruptcy does not automatically terminate outstanding contracts. The bankruptcy trustee must assess whether it is best to terminate or to continue a contract.
Only employment contracts are terminated with immediate effect.

Nullity of certain acts performed during the hardening period (période suspecte)

The judgement declaring bankruptcy can fix the period of cessation of payments by the bankrupt party on a date prior to the declaration of bankruptcy. However, this date cannot precede the date of the declaration by more than 6 months.

In order to safeguard the interests of creditors, the period between the cessation of payments and the declaration of bankruptcy is deemed a 'hardening period' (période suspecte).

Certain acts performed during this period that could be detrimental to the rights of the creditors are deemed null and void. These include:

  • any act relating to movable or immovable assets that the bankrupt party may have disposed of either free of charge or in return for payment where the sale price is clearly too low in relation to the value of the asset in question;
  • all payments made, either in cash or by assignment, sale, offsetting or otherwise, in respect of debts that have not yet become due;
  • all payments made in a form other than cash or commercial paper for debts due;
  • any mortgage or any other rights in rem granted by the debtor for debts contracted before the cessation of payments.

Other acts, however, are not automatically deemed null and void.

Therefore, certain payments made by the bankrupt party in respect of debts due and all other acts subject to payment during the hardening period may be declared null and void if it transpires that the third parties having received payments or having dealt with the bankrupt party were aware that the latter had ceased payments.

When a creditor is aware that his debtor is unable to meet his commitments, he must not seek preferential treatment to the detriment of the general body of creditors.

Validly-acquired rights of lien may be registered until the date of the declaration of bankruptcy. However, rights registered during the 10 days preceding the period of cessation of payments or subsequently may be declared null and void if more than 15 days have passed between the date of the deed constituting the lien and its registration.

Lastly, all acts or payments made fraudulently to creditors, i.e. carried out by the debtor in full knowledge of their prejudicial impact on other creditors (e.g. by decreasing the estate, by not respecting the preferential ranking of debts, etc.) are deemed null and void, regardless of the date on which they take place.

The notion of a hardening period does not apply to financial collateral arrangements or to future debts assigned to a securitisation entity.

Liability of the bankrupt party in the case of an offence

The bankruptcy itself does not establish the liability of the entrepreneur. For a trader or commercial company, the fact of being declared bankrupt is not a punishable act in itself.

However, if it transpires that the bankruptcy is the result of a specific offence committed by the trader or the natural person representing a company (e.g. late submission of the bankruptcy petition, disposal of company assets as own assets, etc.), the person concerned may be held civilly or criminally liable.

Criminal penalties

In the case of bankruptcy, any manager may be held criminally liable if he is found to blame for reckless or fraudulent bankruptcy.

Reckless bankruptcy

A reckless bankruptcy has the following characteristics:

  • failure to file for bankruptcy within one month from the cessation of payments;
  • failure to keep complete and regular accounts;
  • failure to respond to summons from the bankruptcy judge or trustee in bankruptcy, with no fraudulent intent.

The penalty stipulated by the criminal code is between one month and 2 years of imprisonment.

Fraudulent bankruptcy

Fraudulent bankruptcy necessarily involves fraudulent intent, such as:

  • deliberately concealing some of the company's assets;
  • concealing the company accounts or erasing entries;
  • declaring oneself a debtor in respect of fictitious debts.

The penalty stipulated by the criminal code is between 5 and 10 years of imprisonment.

A bankrupt party may have simultaneous proceedings brought against it for reckless bankruptcy and fraudulent bankruptcy. A bankrupt party may also be prosecuted for the misuse of company property. The sentenced person may also lose civil rights for a period of 5 to 10 years as part of the sentence for both types of bankruptcy.

Civil penalties

The Commercial Code stipulates 3 categories of civil penalties applicable to bankrupt parties who have committed an offence:

  • ban on exercising the professional activity;
  • personal bankruptcy;
  • action to make good a deficiency in the company assets (action en comblement de passif).

Ban on exercising a commercial activity or holding a position as a company director or manager

The trustee in bankruptcy or public prosecutor may request a ban of 3 years following the declaration of bankruptcy in the case of:

  • blatant gross misconduct contributing to the bankruptcy on the part of the bankrupt party or its managers;
  • reckless bankruptcy;
  • fraudulent bankruptcy.

Serious misconduct is deemed to have occurred if the person in question was aware that his act/behaviour would contribute to the bankruptcy.

The court must then issue a ban on exercising any commercial activity or holding any position as a director, manager, etc. with respect to the bankrupt party or the managers (de jure or de facto, whether or not they are partners (sleeping or otherwise) and whether or not they receive remuneration) that have contributed to the bankruptcy through blatant gross misconduct or have been sentenced for reckless or fraudulent bankruptcy.

The ban will apply for a minimum of one year and a maximum of 20 years.

Personal bankruptcy

If the company goes bankrupt, each de jure or de facto manager can therefore be declared personally bankrupt for one of the following reasons:

  • the manager has carried out commercial activities for personal gain through the company in an attempt to conceal his actions;
  • the manager has disposed of the company's assets as if they were his personal assets;
  • the manager has run the business at a loss, improperly and in his personal interest, making the cessation of payments by the company inevitable.

Examples: the following situations were deemed to warrant the extension of the bankruptcy of the company to its managers:

  • cash withdrawals for private purposes;
  • irregular accounting practices;
  • improperly identified withdrawals and payments, etc.

If the manager is declared personally bankrupt, this will be binding on his personal assets. He will therefore be held jointly and severally liable for the company's liabilities and must liquidate his personal assets in order to settle the debts of the company as well as his own debts.

Action to make good a deficiency in the company assets (action en comblement de passif)

If, following the declaration of bankruptcy, it transpires that the managers are guilty of blatant serious misconduct thereby contributing to the bankruptcy and that the assets of the company are not sufficient to cover its debts, the bankruptcy trustee may initiate an action to make good a deficiency in the company assets against the managers in order to have them tried and sentenced to pay back, in person, the debts of the company declared bankrupt.

Over-indebtedness of private individuals

In the event of over-indebtedness of private individuals, a trader cannot benefit from the collective settlement procedure for debts with regard to their business debts.

However, they may benefit from the procedure for all non-business related debts if:

  • they have stopped all commercial activities for at least 6 months; or
  • where applicable, if the court has ordered the closure of the liquidation proceedings.
Persons who find themselves in a situation of over-indebtedness because they have acted as a joint guarantor of a sole trader or a company may benefit from the collective settlement procedure for debts provided they have never been a director in fact or in law of said undertaking.

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