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Misuse of corporate assets turns 30
21/07/2022

30  years ago, with the law of 21 July 1992, Luxembourg criminal law was enhanced with a new offence targeting company directors: misuse of corporate assets (abus de biens sociaux).

30 years ago, with the law of 21 July 1992, Luxembourg criminal law was enhanced with a new offence targeting company directors: misuse of corporate assets (abus de biens sociaux). Until that time, the abuse of powers by company directors had been dealt with only inadequately, by means of the offence of breach of trust (abus de confiance) under Article 491 of the Criminal Code.

When, three decades ago, the Justice Ministry resolved to intervene on this issue, it was both to “clean up” corporate practice and to strengthen international judicial cooperation – two subjects that are now more topical than ever. The practical importance of the offence of misuse of corporate assets is further demonstrated by a number of recent cases reported in the press. The rate of such prosecutions is generally increasing, part of a broad-based rising trend in economic criminal cases reflecting heightened public awareness of financial crime.

This anniversary is an opportunity to recall the principles governing this offence, which has not said its last word.

The offence of misuse of corporate assets encapsulates the fundamental idea that directors do not own their company’s assets, and that if they accept a management or direction mandate – remunerated or not – they undertake to exercise it in good faith, in the company’s interests. They must set their personal interests aside and focus on those of the company, which has a separate legal personality, and thus assets of its own. This strict separation of assets must be respected even when a director holds all of the company’s shares. Indeed, they must not be permitted to mix the different assets and yet continue to enjoy the limitation on their liability. In particular, outflows of company funds must go through official channels, such as dividends and salaries.

1. The status of the perpetrator

Enshrined in Article 1500-11 of the law of 1915 on commercial companies, misuse of corporate assets is a crime of office (délit de fonction), meaning an offence that can only come about if the perpetrator is in a particular capacity. In this case, the person must be a company “director” (dirigeant).

First and foremost, this is meant to encompass formal directors and those named in the articles of association; for example, the managing members of a limited liability company or the directors of a public limited company. It does not cover persons without a formal corporate mandate, such as employee directors responsible for the company’s day-to-day management.

However, the offence also extends to de facto directors. These are those who, although not officially mandated, are nonetheless in charge of the company. Judges will evaluate the functions actually performed at the company on a case-by-case basis: Who takes strategic decisions? Who negotiates and contracts with customers and suppliers? Who recruits staff? Who is the “boss” in the eyes of employees?

Persons who are not de jure or de facto managers cannot be perpetrators or co-perpetrators of a misuse of corporate assets. However, they can still be prosecuted for complicity. This could happen, for example, to an employee who provided assistance, a banker who knowingly agreed to execute transfers, or an accountant who advised an arrangement that they knew to be contrary to the company’s interests.

2. The status of the victim

The primary purpose of the offence of misuse of corporate assets is to protect companies against the actions of their directors. But a secondary purpose is to protect the company’s members or shareholders, whose shareholdings will decrease in value if the company’s assets are embezzled. The company (and the shareholders, at least according to some case law) could then bring a civil action against the director to demand compensation for their losses. Third parties may also be affected, such as the company’s creditors or the tax authorities, but the case law views the damage suffered by such parties as too indirect to be indemnifiable by the criminal court.

Misuse of corporate assets only pertains to commercial companies, meaning those governed by the law of 1915. There is some uncertainty about its applicability to foreign companies. In any case, it does not cover other types of organisation, such as associations or foundations.

3. The use of assets or credit (biens or crédit)

“Assets” (biens) are understood very broadly, covering any asset held by the company, tangible or intangible. Some examples include movable property, production equipment, money in cash or in bank accounts, and intellectual property rights. The director does not need to have appropriated the property for the offence to arise; merely using it is sufficient. For example, borrowing a company car to go on holiday or throwing a private party on company premises would constitute such use. The director could not be exonerated by claiming that they intended to return the property.

In principle, it will not be in a company’s interests to grant loans to a director, especially if they do not bear interest at the market rate. According to several court rulings, the mere existence of an advance to the company member on current account is enough to justify a conviction.

In particular, the company’s “credit” is engaged when it incurs debts or commitments under its director’s signature. More broadly, credit is used whenever the solvency, reputation or credibility of the company is at stake. The Court of Appeal recently convicted a director of misuse of corporate assets within a fraudulent investment scheme. Although the money never passed through the company’s hands, the defendant had put forward the company’s name in order to make the investment project look serious, thereby using the company’s “credit”.

Article 1500-11 also covers cases involving abuses of power or voting rights. However, these convictions are rarer in practice.

4. Action contrary to the company’s interests

The use made of the assets must also be contrary to the company’s interests. Commercial companies are classically considered to have the objective of maximising profits. Today however, in the wake of ESG (environmental, social and governance factors) and with the advent of the social and solidarity economy, it is legitimate for profit maximisation to be counterbalanced by considerations of environmental and social impact.

An act is contrary to the company’s interests if it is not likely to achieve any of these objectives. Generally, the fact of being contrary can be inferred from the fact that the director derives a personal benefit. The company’s interests are affected when the company is made poorer or incurs debts. However, it is not necessary for this damage to actually occur; it is enough if the company is exposed to an abnormal risk, meaning one to which it would not have been exposed under normal management.

In some of the cases prosecuted the situation seems obvious: for example, managers withdrawing money from company accounts without being able to justify its use. A conviction was also handed down to a director who, just a fortnight after the company was created and before he even obtained the permit to operate his hairdressing salon, bought a luxury company car for 110,000 euros, although the company had only 12,500 euros in capital. Another manager had been receiving reimbursements from his company over a period of six years for private expenses like restaurants, gardening, salon treatments, clothes, shoes, household appliances, cigars, private subscriptions, shows, holidays, florists, jewellers, and so forth.

In other cases, the situation is less clear-cut. A director may see to it that their company concludes a contract with another company in which they also have a personal interest, but both companies may still benefit. If a director makes a personal purchase of a car belonging to their company, both they and the company may benefit from the transaction. At this point, the matter becomes one of assessment – in particular, of whether the contracts were concluded under arm’s length conditions, without any imbalance. Some room for entrepreneurial freedom must be allowed. For example, a director who pays themselves a high rate of salary or other remuneration does not automatically commit misuse of corporate assets. However, they do if the amount is clearly excessive and inappropriate for the work performed and the company’s financial situation.

Directors can be somewhat reassured by the well-known principle of in dubio pro reo: if there is doubt as to whether a transaction may have been well founded, then there are grounds for acquittal.

A particular problem arises within corporate groups in situations where one company will benefit from a transaction while another is impoverished, but the whole remains economically sound. The case law accepts such reasoning if a number of conditions are met: in particular there must be consideration, as well as a coherent group strategy and policy, and the transaction must not seriously jeopardise the disadvantaged company.

Another thorny issue is sponsorship (mécénat). The case law recognises this practice, but on condition that the donation is appropriate in light of the company’s resources.

5. Pursuit of a benefit

The director must also have acted either for personal gain, or to favour another company or business in which they had a direct or indirect interest. The “bad faith” required for misuse of corporate assets generally flows from this objective of obtaining a benefit.

The criminal intent of these offences is therefore understood as the will to commit, in full knowledge of the facts, an act contrary to the company’s interests in order to obtain a direct or indirect personal benefit.

Usually this is a monetary benefit or savings. That is the case, for example, where directors take remuneration they are not owed or are reimbursed for private expenses.

However, the case law accepts that it is enough for a director to have pursued a non-material interest, which substantially extends the scope of misuse of corporate assets. For example, they may also be criminally liable for causing a family member or friend to benefit: the Court of Appeal once convicted a director who had his company grant a loan to his wife, and another who had his two sons paid a salary without their having actually provided any service to the company.

6. Burden of proof

In accordance with the general principles of criminal procedure, it is the role of the public prosecutor to prove that a use of assets contrary to the company’s interests has occurred. However, judges tend to relax this rule by requiring the defendant to justify the use of any funds, especially for transactions involving cash.

For example, a director who has sold company cars and received the proceeds must prove that they then credited the money to the company – otherwise, there is a presumption that they kept it for themselves. By the same token, directors who take cash from the company’s accounts must show how it was used.

7. Penalties

Under the law on commercial companies, the misuse of corporate assets by natural persons is punishable by one to five years’ imprisonment and/or a fine of 500 to 25,000 euros.

This offence can also be committed by legal persons, i.e. where a company is the director of a business. Such managing companies are liable to fines of 500 to 50,000 euros, and their natural person directors may be investigated in turn.

* * *

Because the offence of misuse of corporate assets targets them specifically, company directors must be particularly vigilant in their decision-making, especially where they stand to draw a personal benefit or to benefit another company in which they have an interest. Prosecution for misuse of corporate assets can be initiated by the public prosecutor ex officio. Furthermore, since it is also a primary money laundering offence, banks and other regulated entities are obliged to report any suspicions to the authorities; for example, if they discover unexplained transfers between companies. Finally, when a transaction goes wrong, a claim can be filed by the company itself, by the shareholders or (in the worst case) by the receiver in bankruptcy.

For certain risky transactions, therefore, it is useful to have the director’s potential criminal liability risk assessed in advance. If prosecution is initiated, it is important to ensure a coherent defence from the outset, and to rely on a multidisciplinary team that is able both to provide this criminal defence and to analyse the underlying economic transactions.

Jean-Luc Putz, Partner

Ari Gudmannsson  Of Counsel

Michel Fischbach, Senior Associate

Related : Arendt

[+ http://www.arendt.com]


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