MANAGERS’ LIABILITY OF A LUXEMBOURG PRIVATE LIMITED LIABILITY COMPANY (SOCIÉTÉ À RESPONSABILITÉ LIMITÉE) UNDER THE LUXEMBOURG LAW OF 10 AUGUST 1915 ON COMMERCIAL COMPANIES AS AMENDED (“LAW”)
Managers of a private limited liability company (société à responsabilité limitée) must perform their duties in this capacity in the corporate best interest. In doing so they shall act as an average judicious person (bon père de famille), in accordance with the Law and the company’s articles of association (statuts). The key financial obligation of managers is to draw up the balance sheet and income statement of the company for each financial year, whereby the sole manager or the board of managers if the case may be shall convene the general annual meeting of the shareholders in order to approve the annual accounts (comptes annuels). Managers’ are liable for the publication of such accounts. Companies meeting certain thresholds must also publish consolidated annual accounts (comptes consolidés). The reserve of 5% must be set aside in the statutory reserve out of the company’s profit. Finally, managers must file for bankruptcy in a timely manner in case the company is cumulatively (i) unable to remit its debts (i.e. due and payable liabilities exceed available assets) (cessation de paiements) and (ii) unable to obtain credit (ébranlement du credit).
1. CIVIL LIABILITY
Managers can be held liable for mismanagement (faute de gestion), infringement of the law and articles of association; and according with general rules of torts.
1.1. Managers of an SARL are liable according to article Art. 710-16 (referring to Art. 441-9) of the Law which provide that:
Directors, members of the executive committee and the chief executive officer shall be liable vis à vis the company in accordance with general rules of law for performance of the duties entrusted to them and for mismanagement.
Directors and members of the executive committee shall be jointly and severally liable vis à vis the company and third parties for damages resulting from infringements of the Law or the articles of association of the company.
1.2. Furthermore, managers can also be held liable according to general rules of torts provided by Art. 1382, 383 of the Luxembourg Civil Code in all cases that are not encompassed by Art. 710-16 and Art. 441-9 of the Law.
1.3. A particular liability is provided by Art. 480-2 that practitioners call “the former article 100” which provides that:
Excepting more strict provisions of the articles of association of the company, if the net assets are reduced to an amount less than one-half of the company’s share capital, the board of managers must call a general meeting to be held within a period not exceeding two months from the time when the loss has been revealed by them or should have been, which will deliberate, if appropriate, cf. Article 450-3 on whether or not to dissolve the company and on any other points set down in the agenda.
Therefore, in case of loss of at least 50% of the company’s share capital, the board of managers shall convene a general meeting of shareholders which shall decide whether (i) the company should be liquidated or (ii) to take relevant measures in order to improve the company’s financial situation.
Special (voting) rules apply in case of loss of 75% of the share capital.
Art. 480-2 last paragraph provides that:
In the event of breach of the foregoing provisions, the managers may be held personally, jointly and severally liable vis à vis the company for all or part of any increase of the losses.
1.4. In case of bankruptcy, the sole manager or the board of managers must within one month from the moment the company has ceased to meet its payment obligations (cessation de paiements) declare the company bankrupt (declaration de créance) at the clerk’s office (greffe) of the relevant commercial court. Managers failing doing so can be held liable for negligent or fraudulent bankruptcy (Articles 573 to 578 of the Luxembourg Commercial Code).
If the manager caused the company to act in his personal interest, or he used assets for his personal purposes or he carried out an evidently ruinous business in his personal interest, the bankruptcy might be extended to such manager (Article 495 of the Luxembourg Commercial Code).
Finally, if the company’s bankruptcy was caused by serious wrongdoings of managers (e.g. not keeping regular accounts for five years; cf. Luxembourg Commercial Court, case no. 117633 of 19/12/2008) such managers can be held liable, in whole or partially, jointly and/or severally as the case may be, for all the company’s outstanding liabilities.
2. CRIMINAL LIABILITY
2.1. According to Art. 1500-1 and 1500- 2 of the Law managers can be convicted to pay a fine of EUR 500 to EUR 25,000 if they fail to:
– submit to the general meeting of shareholders within six months of the closing of the financial year the financial statements, consolidated financial statements, management report and certificate of the person charged with the audit engagement, as well as managers or directors failing to publish such documents;
– publish all modifications relating with the identity of shareholders in accordance with Article 100-13, paragraph (2), point 3);
– publish the report on payments made in favour of governments or the consolidated report on payments made in favour of governments, in breach of Article 1760-4 of the Law and article 72septies of the amended Law of 19 December 2002 on the Register of Commerce and Companies and the Accounting and Annual Accounts of Undertakings;
– if the company meets certain criteria, publish the non-financial statement or the corporate governance declaration provided for in Article 1730-1 of the Law and articles 68bis and 68ter of the amended Law of 19 December 2002 on the Register of Commerce and Companies and the Accounting and Annual Accounts of Undertakings;
– call the general meeting cf. Article 450-8, second paragraph of the Law, within three weeks from the date they have been required to do so.
Managers who have opened a public subscription to shares for an SARL incur the same fines as above mentionned.
2.2. According with Art. 1500-4, Art. 1500-5, Art. 1500-12 of the Law, jailtime from one month to two years and a fine between EUR 5,000 and EUR 125,000 shall be imposed on a manager who:
– by any fraudulent means whatsoever, procures or attempts to procure a rise or fall in the price of shares, bonds or other corporate securities;
– fraudulently made erroneous statements in the statement of bonds in circulation referred to in Article 470-12 of the Law;
– with fraudulent intention, omitted to publish the financial statements, consolidated financial statements (comptes consolidés), management report and certificate of the person charged with the audit engagement, according to articles 461-8, 813-4 and 1770-1 and according to article 79 of the Act of 19 December 2002 on the Register of Commerce and Companies and the Accounting and Annual Accounts of Undertakings
– in the absence of records, despite records or by means of fraudulent records, made dividends distributions to the shareholders which were not drawn from the true profits of the company as well as managers breaking Articles 461-3 and 710-25;
– redeems shares by reducing the share capital or legally obligatory reserve, against the provisions of Article 710-5, paragraph (2) to (7);
– orders, authorises or agrees that another company as defined in article 430-23, paragraph (1),points 1) and 2), should subscribe, acquire or hold shares under the terms set down by the provisions of points 1) and 2) of paragraph (1) of article 430-23, in breach of article 430-15; and
– effects by any means, at the company’s expenses, payments for shares or admits as effected payments not actually made in the manner and at the times as required;
– intentionally fail to keep a share register according to Art. 430-3 of the Law.
2.3. Jailtime of five to ten years and a fine between EUR 5,000 to EUR 250,000 are applicable to managers committing forgery, with fraudulent intent or the intention to cause damage, in the balance sheets or in the profit and loss accounts of a SARL that are required by law or by its articles of association.
2.4. Finally, according to Art. 1500-11 of the Law shall be subject to a jail term of one to five years and a fine of 500 to EUR 25,000 or either one of these penalties, the legally appointed or de facto directors who:
– in bad faith used property or credit of the company which they knew that was contrary to the company’s corporate interest for personal purposes or for the advantage of another company in which they have direct or indirect interest,
– used power that they had or votes they disposed of in their capacity as managers m that they knew to be against the company’s corporate interest for personal purposes or for the advantage of another company in which they have direct or indirect interest.
Should you need more information on the managers’ liability of a private limited liability company (société à responsabilité limitée) under the Luxembourg law feel free to contact us.