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French Court Rules on Corporate Liability for Criminal Acts Committed by Executive

In Short

The Situation: A chief executive officer in France convicted of misusing corporate assets, and required to pay damages plus interest to the victim of his offense, sued to force the company to reimburse him for this amount, on the grounds that, in committing the offense, he was acting within the scope of his official duties.

The Result: The French Court of Cassation (la Cour de cassation) squarely rejected the CEO's claim for reimbursement, holding that the CEO's intentional criminal acts were separate from his official corporate duties and that the company therefore was not liable for the criminal penalties attributable to those acts.

Looking Ahead: As the law regarding corporate liability for the criminal acts of corporate personnel continues to develop in France and elsewhere, companies and their executives will need to be mindful of established and emerging legal principles in this area.

On September 18, 2019 (n° 16-26962), the commercial chamber of the French Court of Cassation (la chambre commerciale de la Cour de cassation) issued its ruling in a closely followed case in which a corporate officer convicted of a criminal scheme sought to recover from the company a sum that he had been ordered to pay the victim of the scheme. The executive maintained that he had committed the criminal offense in connection with his official corporate duties. In this case of first impression, the Court of Cassation ruled against the executive, holding, in part, that for purposes of assessing whether the executive has a legal right to such recovery, the executive's intentional criminal conduct was separate from his official responsibilities vis-à-vis the company.

Context

In the early 2000s, a real estate promotion company acquired a major player in the French real estate market. Post-acquisition, after the successor company had undergone various restructurings, it was discovered that the former CEO and majority shareholder of the acquired company had paid secret commissions in connection with the sale of a parcel of property in the early 1990s. These commissions, paid out of funds from one of the companies the former CEO was then managing, had the effect of reducing the sale price of the property, to the detriment of the seller.

After this conduct was discovered, the former CEO was charged with, and convicted of, complicity in the misuse of corporate assets. As part of his sentence, he was required to pay damages to the victim of his scheme (i.e., the seller of the property involved).

In this context, the former CEO brought an action against the successor company in the Paris Tribunal de Grand Instance, seeking to recover from the company the amount he had paid to the victim in his criminal case.

This claim for reimbursement was based on two main arguments: (i) that in executing his scheme, the former CEO was acting as an agent of, and fulfilling his duties to, the company he was managing; and (ii) that the company benefitted from the scheme insofar as the scheme enabled the completion of the real estate transaction at issue. In essence, the former CEO reasoned that, if he committed a criminal act, it was in the interest of the company for which he was acting. As such, he sought to place the responsibility for the criminal activity on the company itself (anc. art. 1382, C. civ. ; art. 1240 nv.).

Rebuffed by the Paris Tribunal de Grande Instance, the former CEO also failed on initial appeal to the Versailles Court of Appeal. He then appealed further to the Court of Cassation, the appellate court of last resort for such matters. In its September 18, 2019, judgment, the Court of Cassation rejected his arguments and affirmed the reasoning adopted by the Versailles Court of Appeal.

In the first place, the Court of Cassation dismissed all references to the mandate of the corporate officer, as set forth in the French civil code (articles 1984 and following). Under this mandate, a principal gives to another the authority to do something on behalf of the principal and in the principal's name. The court ruled, for the first time, that these provisions of the civil code "are not intended to apply in relations between a company and its corporate officers." In this regard, the court departed from a contrary view that has been defended by certain legal commentators. It is therefore now settled that the power to represent the company held by a corporate officer results from, and is governed by, the provisions of the civil and commercial codes on corporate law (in particular, see article L. 221-5 of the French commercial code).

In rejecting the former CEO's assertion of corporate liability, the Court of Cassation then pointed out that "the intentional criminal offense of the corporate officer is in essence separable from his functions, regardless of the fact that it was committed within the framework of his duties." In doing so, the court aligned itself with other jurisprudence in France that separates a corporate officer's intentional criminal conduct from his or her official functions.

Indeed, the Court of Cassation left little doubt as to this separateness. As the court concluded, once a corporate officer is found to have committed an intentional criminal offense, it is a "personal act for which he alone must assume the consequences, from which it follows that the debt arising from compensating for damage caused by the offense is a personal debt."

Four Key Takeaways

  1. The French Court of Cassation has ruled that the specific provisions of the civil code governing mandate (articles 1984 and following) do not apply to relations between the company and its corporate officers; these relations are instead governed by the provisions of the civil and commercial codes on corporate law.
  1. For purposes of determining whether a company is legally obligated to reimburse a corporate officer for funds paid to the victim of a criminal offense committed by that officer in the performance of corporate duties, the officer's intentional criminal act is separate from those duties.
  1. An intentional criminal offense committed by a corporate officer is a personal act for which he or she alone must assume the consequences; the corporate officer is not entitled to compensation or reimbursement from the company for any sums paid to the victim of the offense.
  1. As this case illustrates, for companies of all sorts, the ability of corporate personnel to expose the companies to legal liability, even if only potentially, is often a matter of significant interest. On this topic in particular, companies and their personnel are well advised to remain knowledgeable about key legal developments in all of the jurisdictions in which they are doing business. Relatedly, companies should ensure that they have in place effective compliance measures to promote ethical conduct on the part of their personnel.

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