Judicial liquidation: the prohibition on sale to directors' relatives also applies to auction sales

Imagine: you own a small rental property building in Saint-Jean-de-Luz, put up for auction in the context of a judicial liquidation. You win the auction, pay the price, sign the deed. A few months later, a creditor challenges the sale, arguing that you are the cousin of the director of the liquidated company. The sale is annulled, you lose your property and your money. This is exactly what the Court of Cassation ruled on 3 February 2021 (appeal no. 19-20.616).

This decision answers a question that many buyers and real estate professionals ask: can a relative of a director purchase the assets of the bankrupt company at auction? The answer is no, even if the auction is public and open to all.

So, a mere formality or a trap for buyers? And above all, how to avoid finding yourself in this situation? Analysis of a landmark ruling.

The facts: a story like many others

A commercial company is placed in judicial liquidation (collective procedure aimed at selling all assets to pay creditors). The liquidator (agent responsible for realising the assets) decides to sell a building belonging to the company at public auction. On the day of the sale, a buyer appears and wins the auction. The problem? This buyer is the father of the director of the liquidated company.

A creditor (a person to whom the company owed money) challenges the sale. He invokes Article L. 642-3 of the Commercial Code, which prohibits the sale of the company's assets to relatives of the directors up to the second degree (parents, children, brothers and sisters, grandparents, grandchildren). The buyer retorts that this prohibition only applies to amicable transfers (private treaty sales) and not to public auctions, which are open to all and guarantee transparency.

The Commercial Court of Tarbes rules in favour of the creditor and annuls the sale. The buyer appeals, but the Court of Appeal of Pau confirms the annulment. The case goes up to the Court of Cassation, which must decide a delicate legal question: does the prohibition of Article L. 642-3 apply to auction sales?

The reasoning of the court — analysed

The Court of Cassation, in its judgment of 3 February 2021, answers in the affirmative. It relies on a combination of articles of the Commercial Code. Article L. 642-3 sets out the principle: "It is prohibited to sell, by any means whatsoever, the assets of the debtor to relatives, up to the second degree, of the directors of the debtor legal entity." The Court specifies that the expression "by any means whatsoever" includes public auctions. Indeed, auction sale is a method of sale, just like a private treaty sale.

But why refer to Article L. 642-20? Because this article specifically governs auction sales in the context of judicial liquidations. It provides that auctions are open to all, but subject to legal prohibitions. The Court of Cassation deduces that the prohibition of Article L. 642-3 therefore also applies to auctions.

The judges consider that the purpose of the law is to avoid collusion (fraudulent agreements) between directors and relatives, which could allow assets to be removed from creditors. An auction, even if public, is not immune from manoeuvres: a relative could bid up prices, or on the contrary, pose as an independent buyer while acting in concert with the director.

This decision confirms earlier case law (Cass. com., 10 February 2015, no. 13-27.890) which had already applied the prohibition to private treaty sales. It now extends it to auctions, marking a strict evolution for buyers.

What this changes for you — concretely

For landlord owners and buyers, this decision means that if you are a relative (up to the second degree) of a director of a company in liquidation, you cannot purchase its assets, even at auction. If you do, the sale can be annulled, and you will lose the property and the price paid. Example: in Tarbes, a buyer purchased a commercial premises at auction for €80,000. He was the brother of the manager. The sale was annulled, and he had to return the premises, with no guarantee of recovering his money if the liquidator had already distributed it to creditors.

For tenants of properties belonging to a company in liquidation, be vigilant: if the property is sold to a relative of the director, the sale could be annulled and you may have to leave the premises. It is better to check the identity of the buyer before signing a new lease.

For real estate professionals (agents, notaries, lawyers), you must inform your clients of this prohibition. A notary who handles an auction sale in the presence of a relative of the director could incur professional liability. In case of doubt, require a sworn declaration from the director and the buyer.

Time limits: the action for nullity (annulment of the sale) can be brought within three years from the sale (Article L. 642-20 of the Commercial Code). After this period, the sale becomes final.

Four tips to avoid this type of dispute

• Check the family relationship before bidding. If you are a relative of a director of the liquidated company, do not participate in the auction. Ask the liquidator or your lawyer to verify the list of prohibited persons.
• Require a certificate from the director. Before any sale, have the director sign a sworn declaration stating that he has no family relationship with the bidders. Keep this document.
• Ask the judicial liquidator. The liquidator is required to comply with the prohibition. Ask him in writing whether he has verified the absence of a family relationship between the buyer and the directors. His written response will protect you.
• Consult a specialised lawyer. Before becoming a buyer, consult a lawyer specialising in real estate law and collective proceedings. He can analyse the situation and advise you on the risks.

Further reading: related case law and developments

This decision is part of a jurisprudential trend (body of court decisions) favourable to the protection of creditors. Already, in a judgment of 10 February 2015 (no. 13-27.890), the Court of Cassation annulled a private treaty sale to a relative. The judgment of 3 February 2021 extends this logic to auction sales.

Another interesting decision: the Paris Court of Appeal, on 12 September 2019, had validated an auction sale to a relative, considering that the prohibition only applied to amicable transfers. The Court of Cassation quashed (annulled) this judgment, thus confirming its strict position.

In the future, courts could further extend the prohibition to other forms of sales (for example, private treaty sales after unsuccessful auctions). Buyers must therefore be doubly cautious.

Frequently asked questions

1. What is a relative up to the second degree?
These are parents, children, brothers, sisters, grandparents and grandchildren. Cousins, uncles, aunts, nephews and nieces are not concerned.

2. Can I buy if I am the spouse of the director?
Article L. 642-3 only mentions relatives by blood or marriage (up to the second degree). The spouse is not directly targeted, but a sale to a spouse could be annulled for fraud (collusion). It is better to avoid it.

3. What are the time limits to challenge a sale?
The action for nullity must be brought within three years of the sale (Article L. 642-20 of the Commercial Code). After this period, the sale becomes final.

4. What should I do if I have already bought and the sale is challenged?
Consult a lawyer immediately. You can try to negotiate a settlement with the creditors, or invoke your good faith (if you were unaware of the family relationship). But the nullity is automatic, and the judge has no discretion.

5. Can a good faith buyer be compensated?
Theoretically, you can turn against the seller (the liquidator) to obtain damages, but the liquidator acts on behalf of the liquidated company, often without assets. In practice, you risk losing your investment.

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 →