Headquarters fictivity and fraud

November 17, 2016

The French case law regarding company private international law is “overcome by doubt“. The judgments Artifax Trading (Commercial Chamber, 21 October 2014) and Protesic (Criminal Chamber, 25 June 2014), commented here, show a gap between criminal case law and civil case law.

Criminal case law, which remains connected with the theory of actual headquarters, “offsets” gradual conversion of French case law to the country of incorporation theory.

The dispute opposed two companies about the acquisition of a third company. The transferred company being insolvent, the buyer initiated proceedings by claiming payment of the compensation under the asset and liability guarantee and the seller, a Cypriot company, filed a counterclaim for the payment of the price. Firstly, the buyer claimed inadmissibility of appeal findings of the buyer due to irregularity of mentioned headquarters. Indeed, according to him, the latter was fictitious because composed of a domiciliation in a local law firm without actual local activity.

The Court of Cassation decided that the law of the incorporation country was applicable to the determination of headquarters. This solution is classic.

Secondly, on the basis of an index series, the buyer opposed the lack of quality and interest to initiate proceedings of the company, apparently Cypriot, which did not have any “concrete reality” and was “devoid of any legal existence”. The Court of Cassation dismisses, estimating that it is necessary to consult the law governing the company, in order to determine if the company is fictitious.

This solution is an innovation, a clear turnaround: fictivity shall from now on be estimated pursuant to the foreign law governing the company. The previous case law (92-18.946 – 85-18.504 – 86-12.032) and especially the Baltic Shipping, Navire Kovrov judgement of 1999 (98-13.611) defined fictivity without taking into account the law of the incorporation country and applied the French law regime of fictivity.

The new solution should therefore be applicable unless conflict of the foreign law with the French public order or application of a French overriding mandatory provision.

What about appreciation of fictivity of headquarters in French law ?

In the Protesic case, a road transport company established in France, where it achieved 99% of its turnover without being registrated in the registry of transporters and without declaring its staff there, was condemned for undeclared work on account of fraudulent use of corporate property. The Court of Cassation applied French criminal law to this company due to its economic establishment in France not correlated with its organization.

Previous case law first refused to apply fraudulent use of corporate property to a foreign company on the grounds that this incrimination may not be extended to a foreign company. Then, it applied this incrimination to a Gabonese company (sub-subsidiary of a French company), considered by the judges as being French because its actual head office was located in France (02-85.089).

Then, in a judgment of 10 March 2010, the Court of Cassation approved the location of headquarters depending on the dominant activity of companies in France and the deduction of their submission to French criminal law.

The Protesic judgment confirms this case law. Thus, according to the Criminal Chamber, provisions concerning company law infractions applying to companies validly incorporated in France shall also apply to the offshore company without actual establishment abroad which should have been established in France according to the letter and the spirit of the text.

This case law could receive two objections. A violation of the principle of criminal legality or of economic freedoms, especially freedom of establishment of European Union law, may indeed be opposed. Freedom of establishment, a principle of law of the European Union, requires Member States to recognize legal personality established pursuant to a lex societatis of another State Member. However, recognizing this legal personality does not exclude application of criminal law to this company. Moreover, according to case law of the CJEU, local law of actual headquarters may be occasionally applied when it is justified by public interest and after a necessity and proportionality control.

Finally, the combination of aforementioned case laws results in recognizing jurisdiction of the foreign law of the State of establishment in order to determine if the company is fictitious, while authorizing intervention of French law if France is the place of actual headquarters and if it is about punishing attempts of hurting interests of third parties or of the public.