Piercing the Corporate Veil in France

Piercing the corporate veil may apply in cases of abuse of company’s legal personality, which means that the company is used to be just a front for the shareholders or owners in order for them to avoid legal responsibilities, or in corporate groups where a parent company exercises abusive control over its subsidiary(ies).

Under corporate French law, the main principle is the separation of legal identity between the company and its shareholders/owners. However, even though such separation has been created to protect the company and the shareholders/owners, that does not shield shareholders/owners from the consequences of their own misconduct. The corporate veil can be pierced if a shareholder commits fraud or abuses their rights, as supported by French case law (Court of Appeal of Paris, October 16, 2018) and by specific provisions of the French Commercial Code (articles L.651-2, L.621-2, L.241-3 and L.242-6).

Under French law, the responsibility of a shareholder/owner in a commercial company depends closely on the legal form:

• In limited-risk companies (limited liability companies “SARL”, limited joint-stock companies “SAS”, corporations “SA”, partnerships limited by shares “SCA”), the responsibility is in principle limited to the contribution made by the shareholders, but it can be incurred in the event of fraud, fictitiousness, confusion of assets or separate personal fault, in particular in the event of abusive exercise of shareholders rights,
• In unlimited risk companies (partnerships “SNC”, de facto companies, companies with conspicuous participation), liability is indefinite and joint for companies’ social debts, including debts prior to the entry into the company,
• In all cases, the partner may be sought personally for a damage caused to the company, or to another partner of the company if the damage is distinct from the one suffered by the company itself.

What are the consequences of failing to comply with legal requirements?

A.   Absolute Nullity of Deeds Executed “by” a Non-Registered Company

Deeds executed “by” a non-registered company (that is, where the company itself is designated as a contracting party, without any express indication that the act is performed “on behalf of” a company in formation) are absolutely null and void. This nullity sanctions the legal non-existence of the company at the time the deed was executed.

The nullity has the following characteristics:

• It may be invoked by any interested party, including the parties to the deed;
• The null and void deed cannot be validated, whether by confirmation, ratification, performance, or subsequent regularization, even after the company’s registration. Once void, such a deed remains incapable of producing legal effects.

B.   Exception: Deeds Executed “on Behalf of” a Company in Formation

Only deeds executed “on behalf of” or “in the name of” a company in formation, by its founders or persons duly authorized for that purpose, may be validly adopted by the company following its registration, subject to certain formal requirements.

To avoid nullity, the deed must not be concluded “by” the company itself but rather “on behalf of” or “in the name of” the company, expressly indicating that the company is still in the process of incorporation.

The conditions for adoption are strict:

• The deed must expressly state that it is entered into “in the name of” or “on behalf of” a company in formation; or
• In the absence of such express wording, it must be established by evidence that the common intention of the parties was to contract on behalf of the company. The assessment of such evidence lies within the sovereign discretion of the courts.

Recent case law reaffirms the above principles, confirming that absolute nullity may be avoided only where it is clearly established that the parties intended to contract on behalf of a company in formation — even where the contract’s wording is not perfectly consistent with the required terminology

The company may adopt deeds executed on its behalf:

• By annexing a schedule of such deeds to its articles of association prior to signature (in which case adoption occurs automatically upon registration);
• By a pre-registration mandate granted by the future shareholders to one or more persons for the performance of specific deeds; or
• Failing the above, by an express resolution adopted by a majority of the shareholders after registration.

C.   Consequences for Founders and Third Parties

Where a deed is not adopted by the company in accordance with the conditions above, the person who executed the deed on its behalf remains personally liable for all obligations arising therefrom.

Such liability is personal, joint and unlimited where the future company is a commercial entity, and personal but not joint where the future company is a civil entity.

If the company is never registered, the founders or individuals who entered into commitments on its behalf remain personally liable to third parties.

Under French law, the notion of “abuse of legal personality” does not exist as an autonomous legal concept. A company that has been duly incorporated and registered possesses a distinct legal personality, separate from that of its shareholders and directors. This principle of autonomy — the company as a “moral person” (personne morale) — is firmly protected by law.

Nevertheless, French case law and legal doctrine have developed certain corrective mechanisms which, in exceptional circumstances, permit the courts to disregard or neutralize a company’s separate legal personality when it is used abusively, fraudulently, or in a manner that infringes upon the rights of third parties.

Although this phenomenon is sometimes described in academic writing as an “abuse of legal personality”, it does not constitute a formally recognized legal category under either statutory law or case law in France.

Three principal corrective mechanisms have emerged in judicial practice:

1. The fictitious nature of the company or commingling of assets;
2. Fraud or misuse of legal personality; and
3. The personal liability of shareholders or directors.

A.   Fictitious Company or Commingling of Assets

Where a company’s separate legal personality is used as a mere façade to defraud the law or to prejudice the rights of third parties, the courts may pierce the corporate veil and extend certain legal proceedings (notably insolvency proceedings) to the shareholders or controlling persons.

In such cases, the company and its members may be treated as a single economic entity, in order to restore the rights of creditors that have been compromised by either the commingling of assets or the fictitious nature of the company itself.

B.   Fraud or Misuse of Legal Personality

In situations involving fraud, misuse of legal personality, or deliberate confusion of assets, French courts recognize the possibility of disregarding the company’s separate legal existence. This allows creditors or other injured parties to take action directly against the individuals or entities that have improperly exploited the corporate structure for unlawful or fraudulent purposes.

The judicial intervention here is exceptional and aims to prevent the corporate form from being used as an instrument of fraud or abuse.

C.   Personal Liability of Shareholders or Directors

Even in the absence of direct action against the company itself, shareholders or directors may incur personal liability where their conduct constitutes a fault separable from their corporate functions (“faute séparable de leurs fonctions”), or where there is a manifest abuse of the corporate form.

This personal liability does not arise from the mere exercise of management duties but from wrongful acts committed intentionally or with gross negligence, distinct from the normal operation of the company.

In substance, the concept may find functional parallels in French law, though it operates through distinct doctrines and terminology. Indeed, the notion of an “abuse of legal personality” does not correspond precisely to any recognized legal category within the French legal system. Accordingly, it is necessary to consider its functional equivalents, such as the commingling of assets, the fictitious nature of a company, or the misuse of legal personality.

Within this framework, the doctrine of piercing the corporate veil delineates the boundary between the legitimate protection conferred by corporate personality and the improper use of that protection for unlawful or fraudulent purposes. It embodies a careful balance between the legal autonomy accorded to companies—and, by extension, to their shareholders and directors—and the duty to exercise that autonomy in good faith and within the limits of the law.

No, the legal personality of a company does not constitute an absolute and impenetrable barrier between third parties and its members.

A.    General principle: The company’s separate legal personality and asset autonomy

The creation of a company vested with legal personality generally results in a strict separation between the company’s assets and those of its shareholders or partners. As a rule, creditors may enforce their claims only against the assets of the company, and not against the personal assets of its members. This principle is a cornerstone of corporate law, intended to shield shareholders from the company’s debts, except if contrary stipulation provided by the law and certain legal forms.

B.     Exceptions: Circumstances in which the corporate veil may be lifted

1.     Legal forms involving unlimited liability (partnerhips “SNC”, civil companies (“sociétés civiles”, joint ventures)

Certain legal entities are so closely linked to the personal activities of their members or managers – who are often indistinguishable from the founders or their individual successors—that a strict separation between personal and corporate assets would be inappropriate. This applied notably to associations, economic interest groupings (GIE), and partnerships—whether civil or commercial in nature. In such cases, the law allows creditors, after unsuccessful attempts to recover from the company’s assets, to pursue the members of partners personally for debts incurred by the legal entity. Frequently, such liability is joint: all members may be required to cover the entirety of the company’s debts.

2.     Confusion of assets and fictitious companies

Where a company is found to be fictitious, or where there is confusion of assets between the company and its members, courts may disregard the legal personality and allow creditors to proceed directly against the individuals involved.

3.     Fraud or abuse of legal personality

Courts may set aside the corporate veil where legal personality is used fraudulently – particularly to evade the payment of debts. In such cases, the protection of legal personality may be lifted in a favour or wronged third parties.

4.     Personal liability of shareholders or directors for wrongful acts

Where a shareholder or director commits a wrongful act separable from its corporate duties (“faute detachable des fonctions”), it may incur personal liability toward third parties.

The corporate veil exists to protect shareholders by establishing a clear separation between their personal assets and the company’s assets, reflecting the principle that the company was created to shield them from personal liability. However, this protection cannot be used as a vehicle for fraudulent conduct. 

To address such abuses, the French legal system has developed mechanisms such as the “action en extension de la procédure collective”, codified in Article L.621-2 of the Code de commerce, which allows courts to extend insolvency proceedings to shareholders or third parties in order to prevent the commingling of assets.

Under French law, when majority shareholders act in their own personal interest to the detriment of the company’s best interest, they may be found guilty of what is known as an “abuse of majority” or “abuse of voting rights”. Several legal remedies and sanctions may apply in such cases.

A.   Voidance of shareholders’ resolutions

There is an abuse of majority when the decision adopted by the majority shareholder(s) is contrary to the company’s best interests and has been made solely for the purpose of favoring the majority shareholders to the detriment of the other shareholders.

Any aggrieved shareholder may bring an action before the courts to seek the annulment of such decision.

B.   Civil liability of majority shareholders

Majority shareholders may incur civil liability toward the company (through a derivate action or “action sociale”) or toward the minority shareholders where a distinct and personal harm can be demonstrated.

C.   Revocation or annulment of directors appointed through the abuse

If the abuse of majority results in the appointment or continued presence of a company officer who acts in the personal interest of the majority to the detriment of the company, their appointment may be void by the courts, or they may be revoked from office.

D.   Criminal liability

In more serious cases, majority shareholders may also incur criminal liability where their conduct constitutes an offence under French criminal law (such as misuse of assets, unlawful taking of interest, fraud).

E.   Legal actions and remedies for minority shareholders

Minority shareholders may bring legal proceedings to:

• Obtain the annulment of the disputed resolution,
• Seek compensation for their own personal and distinct harm,
• Or pursue the majority shareholders for damages suffered by the company

Under French law, the sanctions applicable to a shareholder or partner whose negligence causes harm to the company’s creditors depend on the legal context, the type of company, and the nature of the harm caused.

A.   General principle: separation of assets

Generally, a company endowed with legal personality is solely liable for its debts. Creditors may only seek payment from the company’s assets. Shareholders or partners are not personally liable for corporate debts, except in specific cases—such as companies with unlimited liability or where a personal and separable fault (“faute detachable”) is established.

B.   Liability in unlimited liability companies

In companies where shareholders or partners bear unlimited liability (e.g., general partnerships—SNC, civil companies), creditors may, after unsuccessful attempts to enforce against the company, pursue the partners personally for the company’s debts:

C.   Liability for fault separable and intention misconduct

Outside of unlimited liability companies, a shareholder may only be held liable toward creditors where they have committed a personal fault that is separable from the normal exercise of shareholder rights:

Simple negligence—unless it rises to the level of such serious fault—is generally insufficient to trigger liability toward the company’s creditors.

To engage personal liability, the following must be proven:

• A serious, intentional fault separable from the shareholder’s status,
• A direct causal link between the fault and the damage suffered by the creditors.

D.   Extension of insolvency proceedings

In cases of fictitious companies or confusion of assets, courts may order the extension of insolvency proceedings to a negligent shareholder, particularly where such negligence has facilitated the fraud or asset confusion:

E.   Tort liability action by creditors 

A creditor may bring a tort-based civil action (action en responsabilité délictuelle) against a shareholder if they can demonstrate:

• A personal fault attributable to the shareholders (e.g., gross negligence, fraudulent collusion)
• A distinct and direct harm suffered by the creditor (separate from the company)
• A causal linked between the fault and the harm.

In practice, courts impose strict evidentiary requirements regarding the separable nature of the fault and the personal nature of the harm suffered by the creditor.

A.   Definition and Legal Implications of the silent partner under French Law

The notion of a “silent partner” is recognised under French law, particularly in legal doctrine and case law, even though it is not explicitly defined by statutory provisions.

A silent partner is a person who, while not officially recognised as a partner in the company’s articles of association or vis-à-vis third parties, nevertheless effectively participates in the company. This participation may take the form of:

• Capital contributions,
• A concealed share in the company’s profits or losses,
• Or the exercise of de facto control over the company.

Such status may arise from:

• A concealed agreement with the disclosed partners
• Be inferred from factual circumstances such as regular involvement in profits, losses, or management decisions.

Scope and applications:

• Partnerships and Joint ventures

The notion of a silent partner is especially prevalent in partnerships and joint ventures, where a distinction is often drawn between disclosed partners and undisclosed partners, the latter not being known to third parties.

• Duties and liability

A silent partner may be held subject to the same duties as disclosed partners, particularly regarding contributions to losses or liability for the company’s debts – especially when they have acted in such capacity openly and to the knowledge of third parties:

• Proof of silent partnership

The status of a silent partner can be established by any means of evidence, notably by demonstrating a regular and active participation in management decisions, profit-sharing, or loss-bearing.

• Effect with respect to third parties

For a silent partner to be held liable toward third parties, it must generally be shown that third parties were aware of the partner’s involvement, or that the silent partner intervened in the management or led the third party to believe he was personally undertaking obligations.

B.   Liability of a silent partner or de facto director in insolvency proceedings under French law

Under French insolvency law, the liability of a silent partner or a de facto director may be incurred in the context of collective proceedings (such as judicial reorganisation or liquidation) primarily through two legal mechanisms:

• Extension of proceedings
• Liability for shortfall in assets

1.   Extension of insolvency proceedings 

Insolvency proceedings initially opened against a company and may be extended to any individual or legal entity who has acted as a silent partner or de facto director, under two principal circumstances:

• Fictitious nature of the company
• Confusion of assets

The fictitious nature of the company appears when the company is found to be a mere façade and is used to conceal the business or assets of another person. In this case, the court may declare the company fictitious and extend the proceedings to that person. This effectively treats the silent partner or de facto directors as the true debtor, with the aim of restoring the creditors’ security interests.

Where there is a confusion of assets (where the assets of the company and those of the silent partner or de facto director have been so confused that they cannot be distinguished), the court may similarly extend the proceedings to the individual concerned, deeming that only a single asset exists.

2.   Liability for shortfall in assets

In the event of mismanagement that contributed to a company’s asset shortfall, the court may hold a de facto director – and in certain circumstances, a silent partner who actually managed the company—personally liable for all or part of the company’s debts.

3.   Other forms of liability

In addition to the above, a silent partner or de facto director may incur liability on other grounds, including:

• Fraud against the law, particularly where the corporate structure was used to circumvent legal obligations;
• Complicity in fraudulent bankruptcy or other criminal offences related to the company’s management, where the individual participated in the wrongful acts.

Under French law, the notion of piercing the corporate veil can apply in the context of groups of companies, including with respect to parent companies, under certain narrowly defined conditions. While French law recognizes the legal autonomy of each company within a group, courts may disregard this separation in exceptional cases where misuse of corporate personality results in fraud or an abuse of rights.

A.   General principle: autonomy of legal persons

Under French law, each company has a distinct legal personality, even within a corporate group. Consequently, as a rule:

• A parent company is not liable for the debts of its subsidiary,
• The mere exercise of control or majority shareholding does not in itself justify holding the parent company liable for the obligations of the subsidiary.

B.  Exception: piercing the corporate veil in case of fraud or misuse

French courts may pierce the corporate veil and hold a parent company liable for the debts of its subsidiary in the presence of the following exceptional circumstances:

• A fictitious nature of the subsidiary meaning where the subsidiary is devoid of real autonomy and is merely a façade or instrument for the parent company, the court may consider it fictitious and treat the parent as the true debtor.
• A confusion of assets meaning where there is such a confusion of the parent’s and subsidiary’s assets that they are indistinguishable, the court may consider that there is only one economic entity, allowing for liability to be extended,
• Fraud or abuse of corporate personality meaning that if the legal structure of the group is used to commit fraud or to evade legal obligations, courts may set aside the corporate veil and directly engage the liability of the parent company.

C.   Specific application in insolvency proceedings

In collective proceedings, the extension of proceedings from a subsidiary to a parent company may be ordered on the ground of:

• Fictious company
• Confusion of assets

These mechanisms allow the parent company to be treated as co-debtor, despite the formal separation between entities. 

To conclude, while French law upholds the legal independence of companies within a group, the corporate veil may be pierced in the presence of fraud, fictious structure, or confusion of assets, particularly in insolvency contexts. This enable a parent company to be held jointly liable for the debts of its subsidiary, but only in exceptional and strictly defined situations, supported by a consistent body of case law.