Partner in an SNC and collective insolvency proceedings: unlimited and joint and several liability

Buying shares in a general partnership (société en nom collectif, SNC) often appeals because of its flexibility and tax transparency. But an investor who enters an SNC does not become a mere holder of shares: he takes on personal liability for all of the partnership's debts, including those that arose before his arrival. When the partnership runs into difficulty and moves into collective insolvency proceedings (procédure collective), the question becomes stark: can the partner's personal assets be attacked, and can the partner himself be drawn into the debtor's proceedings? This analysis sets out the liability regime of an SNC partner faced with collective insolvency proceedings, then the contractual precautions that a well-advised investor should require before signing.

The unlimited and joint and several liability of the SNC partner: a derogatory regime

The SNC is the most exposed corporate form in French law. Unlike the partner in a SARL (French limited liability company) or the shareholder in a SAS (French simplified joint-stock company), whose commitment is in principle limited to his contributions, a general partner commits all of his personal assets.

Article L. 221-1 of the French Commercial Code lays down the rule unambiguously:

General partners all have the status of traders and are liable without limit and jointly and severally for the partnership's debts.

What "unlimited and joint and several" means

These two adjectives concentrate all the risk. The liability is unlimited: it is capped neither at the amount of the contribution nor at the value of the shares held. A partner who contributed a few thousand euros may be pursued for the whole of the partnership's liabilities, against his own assets (home, bank accounts, other investments).

The liability is joint and several: a creditor of the partnership may claim payment of the entire debt from a single partner, without having to divide its proceedings among the partners. The partner who has paid then has a right of recourse against the others for their share, but he bears the risk of his co-partners' insolvency. In practical terms, if three partners each hold a third of the capital and two of them are insolvent, the third may find himself paying the whole amount alone.

This obligation does not, however, operate immediately. Article L. 221-1, paragraph 2, imposes a preliminary step on the creditor: it may pursue a partner only after having served a fruitless formal notice (mise en demeure) on the partnership by extrajudicial instrument, that is, by an instrument of a commissaire de justice (bailiff, formerly huissier). The partner's liability is therefore subsidiary in its triggering, but unlimited in its extent.

The partner's status as a trader and its consequences

Article L. 221-1 gives each general partner the status of trader. This point is decisive for what follows: because he is a trader, the partner may, in his own name, be made the subject of collective insolvency proceedings if he is personally in a state of cessation of payments (cessation des paiements). A minor, even one emancipated under certain conditions, or a person subject to an incompatibility (civil servant, certain regulated professions) therefore cannot be a partner in an SNC.

This trader status also explains why the regime of the SNC partner is historically linked to that of collective insolvency proceedings, as we shall see.

Is the partner automatically drawn into the SNC's collective insolvency proceedings?

This is the central question for any investor: does the opening of court-supervised reorganisation (redressement) or compulsory liquidation (liquidation judiciaire) against the SNC mechanically trigger proceedings against each partner?

The end of automatic extension since the 2005 safeguard law

Under Law No. 85-98 of 25 January 1985, the answer was yes: the opening judgment pronounced against the partnership took effect in respect of the partners who were liable without limit and jointly and severally, who were subject as of right to the same procedure. An SNC partner could thus find himself in compulsory liquidation without being personally in cessation of payments, by the sole effect of his status.

Business Safeguard Act No. 2005-845 of 26 July 2005 abolished this automatic extension. Since then, the opening of collective insolvency proceedings against the SNC no longer, of itself, entails the opening of proceedings against the partners. The partnership and its partners are treated as separate debtors. This is a major protective development: the partner is no longer "sucked in" to the partnership's proceedings solely because of the judgment.

Care must nonetheless be taken not to over-interpret this reform. The abolition of automatic extension does not make the unlimited and joint and several liability of ordinary law disappear. It changes only the mechanism: the partner is no longer subject automatically to the partnership's proceedings, but he remains liable for the partnership's debts and may be pursued individually, or even be made the subject of his own collective insolvency proceedings if he becomes personally insolvent.

Residual cases of extension: commingling of assets and sham companies

There remain cases in which the proceedings opened against the partnership may be extended to a partner, but they no longer turn on his status as an SNC partner. Article L. 621-2, paragraph 2, of the French Commercial Code allows the proceedings to be extended to any person in the event of commingling of assets (confusion des patrimoines) or sham status (fictivité) of the legal entity.

Commingling of assets presupposes abnormal financial relations, an intermingling of accounts or unjustified flows between the partnership and the partner. Sham status concerns a company with no real existence, a mere front concealing the partner's personal activity. A passive investor, who merely holds shares without mixing his affairs with those of the partnership, is in principle not exposed to this extension. But a partner who uses the SNC's account as his personal cash box takes a considerable risk. The criteria applied by the courts are detailed in our article on extension of collective insolvency proceedings for commingling of assets or sham company.

The routes by which the partner may be pursued

If the proceedings no longer extend automatically, by what routes can the partner's assets nonetheless be reached during the SNC's default?

Prior formal notice to the partnership

In the normal course, the creditor of the partnership must comply with Article L. 221-1, paragraph 2: formal notice to the partnership by instrument of a commissaire de justice, which has proved fruitless. Only then may it turn against the partner.

Where the partnership is in compulsory liquidation, this formality loses part of its meaning: serving formal notice on a partnership whose insolvency has been judicially established would be a purely formal act. The courts accordingly accept that the opening of collective insolvency proceedings against the partnership may dispense the creditor from prior formal notice, proceedings against the partnership being by definition bound to fail. This point is a matter for the judges' assessment and deserves a case-by-case analysis.

Creditors' action during the collective insolvency proceedings

Two logics combine. On one hand, the creditor must declare its claim in the SNC's liabilities within the statutory time limits, failing which its claim is unenforceable against the proceedings. On the other, it retains, by virtue of the unlimited and joint and several liability, the ability to act against the partner to obtain payment of the partnership's debt.

It is accepted that the declaration of a claim in the partnership's liabilities interrupts limitation as regards the jointly and severally liable partner and that it amounts, to a certain extent, to an act of pursuit. In practice, a prudent creditor declares its claim in the partnership's proceedings and brings an action for payment against the solvent partner or partners. The partner then finds himself on the front line, not as a party to the partnership's proceedings, but as a personal debtor of the partnership's debt.

Take an illustration. Imagine an SNC operating a restaurant business (fonds de commerce), placed in compulsory liquidation, leaving substantial supplier and tax liabilities. The landlord, the bank and the tax authority may, once their claims have been declared, pursue each partner against his personal assets to recover the whole of their sums. A partner who performed no operational function, having entered the partnership as a mere investor, is exposed in the same way as the manager.

The risk of personal collective insolvency proceedings

The last tier of risk: because he is a trader, the SNC partner may himself find himself in cessation of payments under the weight of the partnership debts that he must pay. He may then be made the subject of court-supervised reorganisation or compulsory liquidation in a personal capacity, distinct from that of the partnership. The SNC partner is thus one of the few "partners" in French law liable to be personally declared bankrupt because of the debts of their company.

The particular position of the incoming investor

This angle is essential for anyone considering joining an existing SNC: what exactly is one committing to by buying shares or subscribing to a capital increase?

Taking on the liabilities that predate entry

This is the most formidable surprise. It is accepted in French law that a partner who enters an SNC is liable for the partnership's debts, including those that arose before his entry. The liability for debts is not limited to liabilities incurred during his time in the partnership: it encompasses the pre-existing liabilities.

In other words, an investor who buys the shares of a departing partner inherits the risk attached to commitments that he neither negotiated nor signed: loans in progress, supplier debts, latent tax reassessments, unprovisioned disputes, off-balance-sheet commitments. If the SNC moves into collective insolvency proceedings a year after his entry for causes that largely predate it, the incoming partner may be pursued for the whole.

This rule radically transforms the analysis to be done before investing: entering an SNC is not only valuing a future activity, it is taking on a history of debts that may be unknown.

The position of the departing partner

Symmetrically, a partner who transfers his shares or withdraws does not immediately clear his past. He remains liable for debts that arose before the proper publication of his exit. The enforceability of the transfer against third parties requires completion of the publicity formalities provided for by Article L. 221-14 of the French Commercial Code (filing with the Trade and Companies Register, registre du commerce et des sociétés). As long as those formalities have not been properly completed, the departing partner remains liable towards creditors acting in good faith.

For the incoming investor as for the departing one, the exact date of the publicity formalities and the content of the notices therefore determine the dividing line of liability. This technical point must be handled rigorously in the deed of transfer.

Prevention and protective clauses for the incoming investor

Unlimited and joint and several liability is mandatory (d'ordre public) in its effects as regards third parties: no clause in the articles of association can neutralise it vis-à-vis creditors. But the investor has tools to know, allocate and limit his exposure. These measures operate upstream (audit), at the time of the deed (warranties), and in the internal organisation (allocation among partners).

Prior audit of the partnership's liabilities

Since the incoming partner takes on the pre-existing liabilities, the first protection is information. An acquisition audit (due diligence) must reconstruct all of the SNC's commitments: bank debts and repayment schedules, supplier debts, tax position (taxes, VAT, audits under way or risk of audit), social security debts and contributions, leases and rental commitments, guarantees given by the partnership, pending disputes and provisions. The conduct of due diligence and the contractual tools for securing a purchase of shares are presented in our guide to taking over a business.

Attention must be paid first and foremost to off-balance-sheet commitments and to latent tax and social security risks, which do not always appear in the accounts. An investor who joins an SNC without auditing the liabilities signs a blank cheque on unlimited personal assets.

The asset and liability warranty

The central contractual tool of a share transfer is the asset and liability warranty agreement (garantie d'actif et de passif). It obliges the seller to indemnify the buyer if a liability not disclosed at the time of the transfer, or a shortfall in assets, comes to light afterwards but originates in a period before the transfer.

Several parameters must be negotiated with care:

• the scope of the warranty (which liabilities are covered, in particular tax and social security)
• the duration, which must at a minimum cover the reassessment periods of the tax authority and of the URSSAF (social security contributions collection body)
• the trigger thresholds and any cap on the warranty
• the procedures for enforcement (notification period, challenge procedure)
• a guarantee of the warranty (escrow of part of the price, first-demand bank guarantee, surety) to protect against the seller's insolvency

This warranty does not protect the partner against creditors, who disregard it, but it gives him a right of recourse against the seller where he has had to pay a debt that predates his entry.

Allocation clauses among partners (and their limits)

The articles of association or a partners' agreement may organise the internal allocation of contribution to debts, for example by providing that a given partner will bear a capped share or that a partner will be called on first. These clauses are valid between partners, but they cannot be enforced against creditors.

This distinction is crucial and often misunderstood. A creditor may pursue the investor for the whole of the debt, ignoring the cap clause. The investor will pay first, then turn against his co-partners on the basis of the agreed allocation, bearing the risk of their insolvency. The internal clause therefore organises recourse a posteriori, never immunity a priori.

The choice of corporate form and the alternatives

The most strategic question is sometimes whether one should really enter an SNC at all. The SNC's tax transparency (taxation of profits in the hands of the partners) and its flexibility of operation come with maximum exposure of personal assets. For an investor who refuses this exposure, several avenues exist: negotiate a prior conversion of the SNC into a SARL or a SAS, enter through an interposed limited-liability holding company that will hold the shares, or opt for funding through a shareholder current account rather than capital.

Interposing a holding company does not remove the risk entirely (a holding company that is a partner in an SNC is liable for the partnership's debts), but it confines the exposure to the holding company's assets and protects the investor's personal assets, subject to there being no commingling of assets and no personal guarantees given elsewhere.

Finally, entry into an SNC must remain consistent with the investor's family and asset situation: marital property regime, coordination with any protection of the main residence, taking out suitable insurance. These choices are prepared upstream, never in the urgency of a signing.

Conclusion

Since the Safeguard Act of 26 July 2005, the SNC partner is no longer automatically drawn into the partnership's collective insolvency proceedings: the opening judgment no longer subjects him as of right to the same procedure. But this development should not be a cause for excessive reassurance. The unlimited and joint and several liability of Article L. 221-1 of the French Commercial Code remains intact, the partner may be pursued personally against all of his assets, he takes on the liabilities predating his entry, and he may, as a trader, be made the subject of personal collective insolvency proceedings under the weight of the partnership's debts.

The position is clear: entering an SNC is a decision that commits personal assets well beyond the contribution, and calls for a degree of vigilance out of all proportion to the acquisition of shares in a SARL or a SAS. No clause will make this liability unenforceable against creditors; only rigorous preparation limits the risk. Before any entry into an SNC, have a complete audit of the partnership's liabilities carried out and negotiate an asset and liability warranty secured by an escrow or a bank guarantee, and have the choices, including corporate form and the interposition of a holding company, determined by an adviser experienced in the field.

Frequently asked questions

Is an SNC partner automatically put into liquidation when the partnership is liquidated? No, not since Business Safeguard Act No. 2005-845 of 26 July 2005. That Act abolished the automatic extension of the partnership's proceedings to partners liable without limit and jointly and severally. The partner nonetheless retains his unlimited and joint and several liability under Article L. 221-1 of the French Commercial Code and may be pursued individually, or even be made the subject of personal collective insolvency proceedings if he himself falls into cessation of payments.

Is the incoming partner liable for debts that arose before his arrival in the SNC? Yes. It is accepted in French law that a partner who enters a general partnership is liable for the partnership's debts, including those predating his entry. The liability for debts is not limited to the period of the partner's presence. It is precisely for this reason that an audit of the liabilities and an asset and liability warranty are indispensable before any acquisition of shares.

Can a clause in the articles of association limit the SNC partner's liability? A cap or allocation clause has effect only between partners and cannot be enforced against creditors, who may pursue any partner for the whole of the partnership's debt. The liability under Article L. 221-1 of the French Commercial Code therefore cannot be neutralised as regards third parties. The clause merely organises the recourse of the partner who has paid against his co-partners.

Can a creditor pursue the partner directly without going through the partnership? Not immediately. Article L. 221-1, paragraph 2, requires prior formal notice to the partnership by instrument of a commissaire de justice, which has proved fruitless. However, where the partnership is in compulsory liquidation, the courts accept that this formal notice may be regarded as unnecessary, the partnership's insolvency having been judicially established. The creditor must in addition have declared its claim in the liabilities of the proceedings.

What becomes of the liability of a partner who transfers his SNC shares? The departing partner remains liable for debts that arose before completion of the publicity formalities for his exit, provided for in particular by Article L. 221-14 of the French Commercial Code. As long as the transfer has not been properly published in the Trade and Companies Register, he remains liable towards creditors. The exact date of publication determines the dividing line between the departing partner and the incoming partner.

How can an investor enter an SNC without exposing all of his assets? The best protection combines a prior audit of the liabilities, a soundly secured asset and liability warranty, and consideration of the entry structure. Interposing a limited-liability holding company makes it possible to confine the exposure to that holding company's assets, subject to avoiding any commingling of assets. Negotiating upstream a conversion of the SNC into a SARL or a SAS also remains an option where tax transparency is not essential.

Does the transfer of SNC shares require the consent of the other partners? Yes. Article L. 221-13 of the French Commercial Code requires that the transfer of shares in an SNC be consented to unanimously by the partners, unless the articles of association provide otherwise for certain transfers. This rule protects the intuitu personae specific to this corporate form, in which each partner is jointly and severally bound by the others. An investor therefore can neither enter nor leave without the agreement of all the partners.