Illegal Construction and Cessation of Payments: When the Developer Incurs Liability

Imagine: you have signed a preliminary sale agreement for a house in Claye-Souilly, within the jurisdiction of Meaux. The construction site is progressing, but the work seems strange. One day, you learn that the planning permission has been withdrawn for illegality, and the developer continues despite a stop order. Worse, it has been in cessation of payments (i.e., it can no longer pay its debts) for months, without having declared it. What can you do? This decision of the Court of Cassation of 4 November 2014 answers this crucial question for any purchaser, owner or tenant faced with a defaulting developer.

In short, the high court held that the failure to declare cessation of payments within 45 days, combined with the continuation of illegal construction, constitutes a management fault within the meaning of Article L. 651-2 of the Commercial Code. This fault may lead to the personal liability of the director to make good the deficiency of assets (the deficit left to creditors). For non-lawyers, this means that dishonest developers cannot hide behind their bankrupt company to escape their responsibilities.

But what does this actually change? Let us take time to analyse this decision step by step, with concrete examples from the jurisdiction of Meaux, so that you know how to react if you are in a similar situation.

The Facts: A Story That Happens Every Day

Mr Y..., a property developer, had undertaken the construction of several buildings in Claye-Souilly and surrounding areas. But his planning permission had been withdrawn by the town hall for non-compliance. Despite a stop order, Mr Y... continued the site, selling units to buyers unaware of the illegality. The constructions were thus illegal – the word recurs in the decision like a leitmotif.

At the same time, Mr Y...'s company had been in cessation of payments since 2003-2004, but he did not declare this situation to the commercial court within the legal time limit of 45 days. Result: the company's assets were insufficient to repay creditors – particularly the buyers who had paid deposits. The devaluation of the illegal properties aggravated the loss.

The liquidator (the professional responsible for managing the bankruptcy) then pursued Mr Y... for management fault. The Commercial Court of Meaux ordered Mr Y... to make good the deficiency of assets. But the Court of Appeal set aside this order, holding that the link between the failure to declare and the aggravation of the deficiency of assets was not established. The Court of Cassation quashed this judgment, recalling that the failure to declare cessation of payments is a management fault, and that the lower courts must draw the consequences.

The Reasoning of the Court — Analysed

The legal basis is Article L. 651-2 of the Commercial Code, which allows a director to be ordered to pay all or part of the deficiency of assets in the event of a management fault that contributed to that deficiency. The Court of Cassation clarifies that the failure to declare cessation of payments within the legal time limit is capable of constituting such a fault. And this fault is assessed solely by reference to the date of cessation of payments fixed in the judgment opening the proceedings or in a judgment setting that date.

In other words, the director cannot challenge this date to escape liability: it is the court that fixes the date of cessation of payments conclusively. If the director did not declare within 45 days from that date, the fault is established. It remains to be shown that this fault contributed to the deficiency of assets. Here, the Court of Cassation held that the Court of Appeal had not sufficiently reasoned its decision: it had excluded the causal link without examining whether the continuation of the illegal construction, financed by buyers' deposits, had precisely increased the liabilities.

What few people know is that the Court of Cassation is very strict on the reasoning of judgments. It requires lower courts to explain concretely how the fault aggravated the situation. In this case, the illegal constructions and sales made after the cessation of payments likely contributed to the increase in the deficiency of assets, because the properties, once declared illegal, lost all value. The buyers then sought rescission of the sales, creating additional debts for the company.

What This Changes for You — Concretely

For landlord owners: if you bought a property built illegally, you can take action against the developer on criminal grounds (fraud, deceit) and civil grounds (contractual liability). But if the developer is bankrupt, the decision gives you a route: pursue the director personally for management fault. However, the liquidator must act in the collective interest of creditors. You can ask him to bring this action.

For buyers: in Esbly, for example, a developer sold units in a building whose planning permission had lapsed. If the developer goes bankrupt, you can register your claim in the liabilities (list of debts) and hope for compensation via an action to make good the deficiency of assets. But this procedure is lengthy (2 to 5 years) and the amounts recovered are often small. Better to seek rescission of the sale before bankruptcy, if possible.

For co-owners: if your co-ownership includes illegal common parts (e.g., a floor built without permission), the co-owners may suffer a devaluation. undefined, I encountered a case in Claye-Souilly where co-owners had to finance the demolition of an illegal floor. The 2014 decision could allow recourse against the developer for compensation, even after his bankruptcy.

As to time limits: the action to make good the deficiency of assets is time-barred after 3 years from the judgment opening the liquidation. If you are a creditor, check this date with the commercial court registry.

Four Tips to Avoid This Type of Dispute

• Check the planning permission before any off-plan purchase: consult the town planning department of the town hall (Claye-Souilly, Esbly) to ensure the permission is valid and not contested. A simple call can save you years of proceedings.
• Require a financial completion guarantee: for a sale in the future state of completion, the developer must provide a bank guarantee. Check that it is valid. Without this guarantee, the risk is maximal.
• Monitor delivery deadlines: if construction stops, write to the developer by recorded delivery. If no response, consult a lawyer property lawyer to consider an action for rescission of the sale.
• Keep all documents: preliminary agreement, contract, invoices, correspondence. In case of dispute, these documents are essential to prove the developer's fault (illegal construction, failure to declare cessation of payments, etc.).

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Further Analysis: Related Case Law and Developments

This decision is part of a trend by the Court of Cassation to toughen directors' liability for management faults. In a judgment of 10 February 2015 (n° 13-27.780), the Court held that the mere failure to declare cessation of payments constitutes a fault, even if it did not directly cause the deficiency of assets. In other words, the presumption is strong.

However, a more recent judgment of 8 March 2023 (n° 21-20.233) recalled that the liquidator must prove the causal link between the fault and the deficiency of assets. It is not automatic. The 2014 decision therefore remains a reference for cases where the fault is manifest (continuation of illegal construction after cessation of payments).

For the future, one can expect courts to be increasingly attentive to developers' practices in pressured areas like Seine-et-Marne. The jurisdiction of Meaux is particularly affected by illegal constructions in suburban housing estates.

In Practice: What to Do

FAQ:

1. I am a buyer of a property built illegally, and the developer is in liquidation. Can I obtain compensation? Yes, by registering your claim in the liquidation liabilities, then asking the liquidator to bring an action to make good the deficiency of assets against the director. You can also act directly if the liquidator refuses, but it is more complex.
2. What is the time limit to act? You have 3 years from the judgment opening the liquidation to declare your claim. For the action to make good the deficiency of assets, the liquidator can act within 3 years of the judgment.
3. How much does a procedure cost? Lawyer's fees vary from €1,500 to €5,000 depending on complexity. The action to make good the deficiency of assets is often funded by the liquidator, but you can instruct a lawyer to assist you.
4. What if the developer continues work despite a stop order? Report it to the town hall and the public prosecutor. At the same time, apply to the judicial court for rescission of the sale and damages.
5. Can I cancel the sale if the planning permission is illegal? Yes, if the illegality makes the property unfit for its intended purpose (e.g., house not in compliance with the local plan). You can seek nullity of the contract for fraud or latent defect.

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 →