The danger of commingling of assets in insolvency proceedings

🏘 The danger of the commingling of assets in insolvency proceedings: the need for regular dealings between the company owning the premises and the operating company

⚖️ The Commercial Chamber of the Court of Cassation, in a judgment dated 20 October 2021 (no. 20-17.124), confirmed the requirement of rigour relating to the separation of the assets of companies.

The commingling of assets in the context of a judicial liquidation is a mechanism established by law and characterised by case law.

⬇️📜 Article L. 621-2 of the Commercial Code sets out its principle, providing that “the proceedings opened may be extended to one or more other persons in the event of commingling of their assets with those of the debtor (…)”.

📍 Case law establishes that the commingling of assets rests on two alternative criteria: the commingling of accounts or the existence of abnormal financial dealings.

📍 The waiver by the company owning the premises of its right to collect the rent — even though that rent constituted its main source of income — for the sole purpose of delaying the declaration of cessation of payments by the operating company, was held by the Court of Cassation to characterise the existence of abnormal financial dealings constituting commingling of assets (Court of Cassation, Commercial Chamber, 5 March 2002, 99-13.302).

➡️ In the judgment of 20 October 2021, the Court of Cassation held that the Court of Appeal, in order to justify a commingling of assets of two companies — one owning the premises and the other operating the business — had rightly relied “on a body of evidence, all consistent” characterising “the existence of financial dealings incompatible with normal reciprocal contractual obligations”.

The indicators identified by the Court of Appeal were the scale of the debt and its spread over time, in the absence of any recovery action (formal notice or order to pay invoking the termination clause) in the context of a considerably deteriorated financial situation offering no hope of a resumption of rent payments, thereby marking an intention to create an abnormal situation facilitated by the commingled management of the two companies.

🔎 A ruling which, all in all, is in no way innovative, but which provides a more precise view of the conduct that may give rise to an extension of insolvency proceedings for commingling of assets, offering essential indications as to the potential abuses of an otherwise classic financial structure involving a company owning the premises and an operating company.