The Companies and Associations Code (CAC), introduced by the Law of 23 March 2019, provides for strict rules governing the distribution of profits in the form of dividends to shareholders, to which the company director must pay particular attention.
Indeed, the liability of company directors can be engaged due to an irregular distribution of the result. In addition, shareholders may be required to repay improperly received dividends.
What should be considered before distributing dividends?
Before deciding to distribute profits in the form of dividends, the following points should be considered:
1. The solvency test
For limited liability companies (SRL) and cooperative corporations (SC), the distribution cannot take place if the company's book net assets* are negative or would become negative as a result of the distribution.
* Net assets are total assets minus provisions, debts and the net book value of start-up and expansion costs, as well as R&D costs.
For public limited companies (SA), the distribution cannot be made if the net assets are, or would become, as a result of such distribution, less than the amount of the paid-up capital** or, if this amount is higher, the called-up capital***, increased by all the reserves which the law or the articles of association do not allow to be distributed.
** part of the share capital actually paid into the company's account on the day of its incorporation
*** share capital which the company has requested to be paid up from the shareholders
2. The liquidity test
The board of directors must state in a report, that following the distribution, the company will be able, depending on the developments which can reasonably be expected, to continue to discharge its debts as and when as they mature for a period of at least 12 months.
This test should be performed for SRLs and SCs but not for SAs.
Do shareholders have to pay back improperly received dividends?
For SRLs and SCs, in the event of irregular distribution, the company may claim reimbursement of the sums paid to shareholders, whether in good or bad faith.
On the other hand, for SAs, the company may only demand reimbursement in the event of bad faith on the part of the beneficiary by demonstrating that the latter was aware of the irregularity or could not have been unaware of it under the circumstances.
What about the liability in the event of irregular payment of dividends to shareholders?
By proposing to the general meeting to distribute a dividend in contravention of the solvency test, the members of the administrative body of an SA, SRL and SC are jointly and severally liable for the damage suffered by the company and third parties as a result of the violation of the CAC, all without prejudice to their criminal liability (see below).
For SRLs and SCs, if it is established that, at the time of the distribution decision, the members of the board of directors knew or, in view of the circumstances, should have known that, as a result of the distribution, the company would clearly no longer be in a position to pay its debts (liquidity test), they must be held jointly and severally liable to the company and to third parties for all resulting damages.
Thus, for example, the directors could be liable on their personal assets for the amount of social debts subsequent to the distribution that could have been paid by the company if the dividends had not been paid to shareholders.
Criminal liability of members of the administrative body
It should be noted that failure to comply with the solvency and liquidity tests is punishable by a fine of 400 to 80,000 euros (including decimals) and possible criminal penalties for the directors.
In order to avoid having to reimburse the sums received or, worse, to risk penal sanctions, we can only recommend that the directors obtain assistance in order to carry out the solvency test and, if necessary, the liquidity test, before any distribution of the result.
All the more so if a company is an SRL or an SC, corporate forms in which shareholders can be more easily compelled to reimburse unduly paid amounts than in an SA.
Source : text reprinted and translated with agreement of S-Team