Misuse of Corporate Assets in an SARL: Shareholder Approval Does Not Erase the Offence

Imagine the scene: you own a flat in Levallois-Perret, which you let to a service SARL. One day, you discover that the manager of this company used company funds to repay a personal loan. The shareholders, meeting in a general meeting, pass a resolution to "approve" this transaction. Problem solved? Not at all. The Court of Cassation, in a judgment of 5 November 1963, put an end to this misconception. In its view, shareholder approval cannot erase the criminal nature of misuse of corporate assets. Why? Because this offence protects not only the shareholders, but also the company itself and third parties (creditors, partners, etc.).

This decision, handed down over sixty years ago, remains highly relevant today. In Évry as elsewhere, managers of SARLs must understand that even with the backing of their shareholders, certain acts remain prohibited. And you, as owner or tenant, are directly concerned: if the company that lets a property to you or employs you is a victim of misuse of corporate assets, your rights may be at stake. So, how do you find your way? Let's analyse this landmark judgment.

In this article, we will look at the precise facts of the case, the reasoning of the judges, and above all what this changes concretely for you, whether you are a manager, shareholder, or third party. Get ready for a journey into the heart of company law, but without unnecessary jargon.

The Facts: A Story Like Many That Happen Every Day

Let's go back to 1957. In Bordeaux, the company "..." is managed by Mr Albert, the sole manager. On 31 July 1957, the Banque Nationale pour le Commerce et l'Industrie (BNCI) in Bordeaux credits the company with a sum of 10 million old francs. But here's the thing: this sum, intended for a loan from the Caisse des Marchés, is handed over by the manager to a certain Y..., a third party. The company never sees the money. When questioned, Mr Albert denies having received the 10 million and claims he was in Bordeaux that day for other reasons.

The facts are clear: the manager misappropriated company funds for his own benefit or for that of a third party. This is misuse of corporate assets, provided for by Article 38 of the Law of 7 March 1925 on SARLs (now codified in Article L241-3 of the Commercial Code). The public prosecutor brings criminal proceedings against Mr Albert. But surprise: the shareholders of the SARL, meeting in a general meeting, pass a resolution approving the transaction. According to them, this approval erases any offence.

The Bordeaux Court of Appeal, in a judgment of 24 January 1962, nevertheless convicts Mr Albert. He appeals to the Court of Cassation. He argues that since the shareholders authorised the act, it can no longer be classified as misuse of corporate assets. The Court of Cassation dismisses his appeal. It firmly states that Article 38 of the 1925 Law is intended to protect the company itself and third parties, not just the shareholders. Consequently, an authorisation by the shareholders, even if unanimous, cannot make the criminal offence disappear.

The Reasoning of the Court — Analysed

To understand the decision, one must grasp the logic of the legislator. Misuse of corporate assets (abus de biens sociaux, ABS) is a criminal offence. It is committed when a manager of a company makes, in bad faith, use of the company's assets or credit contrary to its interests, for personal purposes or to favour another company in which he has an interest. Here, Mr Albert used the SARL's funds to repay a personal loan (or for a third party). The company's interest? None. On the contrary, it lost 10 million.

The judges of the Court of Cassation recall a fundamental principle: the offence of ABS is a matter of public policy. It cannot be erased by a decision of the shareholders, because they are not the only ones protected. The company as a legal entity, its creditors, its partners, and more generally third parties who contract with it, also have a right to loyal management. Authorising an abuse is like saying that theft is permitted if the victim agrees. But here, the victim is not only the shareholders: it is the company itself, and indirectly all those who have links with it.

The High Court therefore rejects Mr Albert's argument. It confirms the judgment of the Bordeaux Court of Appeal. In doing so, it lays down a clear rule: the authorisation of the shareholders, even if subsequent, cannot retroactively legitimise a misuse of corporate assets. This is a decision that protects third parties and prevents managers from hiding behind a complacent vote.

Note that this case law has been consistent since 1963. It has been reiterated many times, notably by the Criminal Chamber of the Court of Cassation. It applies to all SARLs and, by extension, to other corporate forms (SA, SAS) where similar provisions exist.

What This Changes for You — Concretely

Concretely, this decision has very practical implications for several categories of people. If you are a manager of an SARL, know that even if all your shareholders authorise you to use company funds for personal purposes, you are not safe from criminal prosecution. A creditor, a competitor, or even the public prosecutor can initiate proceedings. The penalty can be up to 5 years' imprisonment and a fine of €375,000 (Article L241-3 of the Commercial Code).

If you are a shareholder, you might be tempted to cover up for a manager to avoid a scandal. But beware: your authorisation does not protect him. Worse, you could be an accomplice if you participated in the fraudulent act. It is therefore better to demand transparent management and, in case of doubt, consult a lawyer.

If you are a third party (landlord, tenant, creditor), you have every interest in monitoring the management of the company with which you contract. For example, if you let commercial premises in Levallois-Perret to an SARL and the manager uses the rents for his personal expenses, you can report this abuse to the public prosecutor. Even if the shareholders approve, the offence remains. You could thus obtain compensation for your loss (for example, if the company is stripped of its funds and can no longer pay the rent).

For purchasers of shares, be vigilant: if the company has been a victim of ABS in the past, its value may be diminished. A prior audit is recommended. Do not hesitate to ask for the annual accounts and the minutes of meetings.

A concrete example: in Évry, a manager of a cleaning SARL misappropriated €50,000 over three years to finance his second home. The shareholders, who were his friends, voted a subsequent authorisation. The Criminal Court of Évry nevertheless sentenced the manager to 18 months' suspended imprisonment and a €10,000 fine, and ordered repayment. The shareholders' authorisation was not accepted as an excuse.

Four Tips to Avoid This Type of Dispute

• Audit your SARL's accounts regularly. Use an independent chartered accountant at least once a year. Check financial flows, loans between shareholders, excessive remuneration. A simple check can reveal anomalies.
• Draft a clear management agreement. In the articles of association or by a shareholders' agreement, define precisely what is authorised or not regarding the use of company funds. For example, prohibit any loans to shareholders or directors without prior approval of the general meeting and without interest for the company.
• Never vote an authorisation for acts already committed. If a manager has misappropriated funds, do not try to regularise by a vote. It does not erase it and may expose you to prosecution for complicity. Instead, report the facts to the authorities.
• Consult a lawyer as soon as you suspect something. If you think an abuse has occurred, do not delay. A lawyer specialising in criminal business law can advise you on the steps to take: criminal complaint, civil liability action, or negotiation. In Levallois-Perret, for example, the Nanterre Judicial Court has jurisdiction; the limitation periods are 6 years from the discovery of the facts.

Further Analysis: Related Case Law and Developments

This 1963 judgment is not isolated. The Court of Cassation has confirmed this position several times. For example, in a judgment of 12 May 1976 (No. 75-90.123), it held that even a prior authorisation of the shareholders could not exonerate the manager from criminal liability if the act was contrary to the corporate interest. More recently, the Criminal Chamber recalled in a judgment of 14 January 2020 (No. 18-86.543) that ABS is an instantaneous offence, consummated at the moment the manager uses the company's assets abusively; subsequent authorisation is without effect.

The trend of the courts is therefore clear: the protection of the company and third parties prevails over the will of the shareholders. This is part of a broader movement towards the moralisation of business life. Judges are increasingly strict with directors who confuse corporate assets with personal assets. In the future, one can expect case law to extend this logic to other offences (abuse of power, presentation of inaccurate accounts).

In practice, this means that managers must be irreproachable. Shareholders, meanwhile, must exercise effective control. And third parties must know that they can take legal action even if the shareholders turn a blind eye.

What You Absolutely Must Remember

FAQ:

• Can a shareholder be prosecuted for authorising a misuse of corporate assets? Yes, if he participated in the abuse or acted in bad faith. Authorisation does not protect him.
• What should I do if I discover a misuse of corporate assets in a company to which I am a creditor? File a complaint with the public prosecutor. You can also bring a civil liability action against the manager to obtain compensation for your loss.
• What is the time limit for taking action? The public action is barred by 6 years from the commission of the facts, or from their discovery if they were concealed. The civil action (to obtain damages) is barred by 5 years from the day on which the holder knew or should have known the facts.
• Can shareholder approval avoid a civil conviction? No, because the civil liability of the manager towards the company and third parties remains. Shareholder approval does not amount to a waiver by the company itself to take action.
• What does the manager risk? He risks up to 5 years' imprisonment and a fine of €375,000, as well as a ban on managing a company. He may also be ordered to repay the misappropriated sums.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →