Financing a French SARL: Shareholder Current Accounts, Bonds and Personal Guarantees

Financing a French SARL: current accounts, bonds and the guarantees that banks want

A SARL cannot raise money the way a joint-stock company can. It cannot issue shares to the public, it is barred from issuing most securities at all, and its access to bond finance is hedged with conditions. In practice, SARL is financed by shareholders' money lent through current accounts, bonds, and bank credit — which almost always arrives attached to a personal guarantee from the gérant. 

Shareholder current accounts

Why they are allowed. Generally, only credit institutions may habitually grant loans, and breaching that monopoly is a criminal matter — up to three years' imprisonment and a €375,000 fine. A company may nevertheless receive funds in current account from its shareholders or managers, and since the PACTE law this is open to every shareholder, the old requirement of holding more than 5% of the capital having been removed.

How the mechanism works. Shareholders deposit funds as the company needs them, either by paying money into the company's account or by leaving at its disposal sums they are entitled to draw — remuneration, dividends and the like. These deposits are simply loans. Unlike contributions to capital, they sit on the liability side of the balance sheet in a "current account", which receives all the financial flows between the company and the shareholder. The advantages are practical: the sums can bear interest, the shareholder can draw them down as he needs or commit to blocking them for a period, the company strengthens its financial position without raising capital from new shareholders, and the interest can be deductible for the company within certain limits. Banks frequently make their own facilities conditional on shareholders blocking their accounts for a period.

Interest is optional. Absent an express stipulation, shareholder loans are presumed to have been made free of charge. Where interest is agreed, three cautions apply:

• The rate must not be usurious — it cannot exceed by more than a third the average effective rate charged by credit institutions in the previous quarter for comparable transactions. 
• The agreement falls within the regulated-agreements procedure applicable to related-party agreements, which must be followed.
• Shareholders and managers should only take interest where the advances are genuinely necessary for the company rather than justified by the lenders' personal advantage, or they risk their own liability.

Two points of characterisation are worth knowing:

• an unblocked advance whose repayment has not been demanded counts within the assets available for assessing whether the company has stopped paying its debts, and 
• the transfer or gift of the shares of the shareholder who granted the current account to the company does not, absent a specific clause, automatically transfer the current account to the new shareholder.

The account can never go into debit

Gérants and shareholders other than legal entities are prohibited, on pain of nullity, from borrowing from the company in any form or having it grant them an overdraft, in current account or otherwise — a prohibition that extends to the legal representatives of corporate shareholders (c. com. art. L 223-21). No criminal penalty is expressly attached, but coming from a gérant, de jure or de facto, such an act risks constituting misuse of company assets. A gérant who leaves his current account in debit exposes himself to revocation, and where he has made unjustified payments to himself from the company's bank accounts and booked them to his current account, the company's insolvency proceedings can be extended to him personally. On liquidation, the liquidator can seek nullity of the debit account and repayment of the balance, within five years of the opening of the liquidation.

Timing matters for the characterisation: the prohibition is assessed at the date the contract is concluded, so a loan granted to someone before his appointment as gérant is neither a prohibited nor a regulated agreement, provided its terms and conditions are not subsequently altered — and it does not have to be repaid on appointment.

Repayment: the right, and its dangers

The default right. Unless a blocking agreement or a clause in the bylaws fixes repayment terms, a shareholder can ask for his advance back at any time — outside any formal withdrawal, and whatever the company's financial position (Cass. com. 24 June 1997, no. 95-20056).

• The company must repay even where it is itself owed money by a business the shareholder runs.
• In practice, agreements usually set a notice period so the company can free up the cash, and any repayment conditions in the bylaws must be followed.
• What the company cannot do is "block" the loan — tie repayment to time passing — without the shareholder's consent.

When the clock starts. Limitation runs from the moment the shareholder asks for repayment, not before.

• The claim is not time-barred for as long as the shareholder has not asked for repayment — even where dividends were credited to the account years earlier, time does not run from the distribution decision (Cass. com. 18 October 2017, no. 15-21906).
• Once he does demand repayment, he must sue within five years of that demand.

When the company is in difficulty. Here the right largely falls away, and repaying can rebound on the person who took the money.

• Once safeguard, reorganisation or liquidation proceedings open, the shareholder can no longer obtain actual repayment. He must file his claim like any other creditor, and will be paid only after the preferential creditors — which rarely leaves anything.
• Repayment made shortly before the declaration of cessation of payments can be set aside where the shareholder-manager could not have been unaware of the company's position.
• It can also be a management fault. A manager who repaid €100,000 to himself and €50,000 to another shareholder three days after a judgment ordering the company to pay €166,000, then declared cessation of payments a fortnight later, was ordered to pay €150,000: repayment is available at any time only so long as it does not amount to a preferential payment to the detriment of other creditors (Cass. com. 24 May 2018, no. 17-10119).
• Selling company assets to clear debts and recover current accounts without providing for employee claims is, likewise, a management fault.

Personal bankruptcy is possible where a manager has concealed assets, or paid one creditor after cessation of payments to the prejudice of others. But repayment of a current account made before the date of cessation of payments is neither a misappropriation of assets — it discharges a genuine company debt — nor a preferential payment.

Tax treatment

Deducting the interest — the company's side. The company's deduction of interest on shareholder current accounts is subject to two conditions:

• the capital must be fully paid up; and
• the rate must not exceed the ceiling — the annual average of the effective average rates charged by credit institutions for variable-rate loans to businesses of more than two years' initial duration. For a 12-month financial year ending on 31 December 2025 that ceiling was 4.55%. It is reset each period, so check the rate for your own year-end.

How the limits apply:

• both apply to directly-holding shareholders — individuals or entities, French or foreign;
• the cap is assessed on gross interest, account by account, with no offsetting between an excess on one account and a shortfall on another;
• interest paid to shareholders must be reported on the annual single tax return by 15 February, whether or not it is deductible.

Tax on the recipient's side. For the shareholder receiving it:

• deductible interest is income from claims, deposits and current accounts, subject to income tax;
• interest disallowed to the company is taxed differently — as distributed income, where the company is within corporation tax;
• for individuals, fixed-income products bear the 12.8% flat tax plus 17.2% social levies, with the same whole-year, irrevocable option for the progressive scale described in our guide to the SARL's tax regime;
• interest paid to a beneficiary domiciled or established outside France bears a withholding at source.

One point for groups. Where a parent within corporation tax receives interest from its subsidiary above the deduction limits, the excess added back into the subsidiary's profit can qualify for the parent-subsidiary exemption — but only the part over the rate cap, not interest disallowed because the subsidiary's capital was not fully paid up.

Bonds, bons de caisse and inter-company loans

Bonds. A SARL may issue registered bonds provided it makes no public offer of them and meets two conditions: 

• it has appointed a statutory auditor, and 
• its accounts for the last three 12-month financial years have been duly approved by the shareholders — which means in practice the company must be more than three years old. 

Failing either condition, the contracts concluded or the bonds issued are void (c. com. art. L 223-11). 

No condition attaches to the amount of the capital or its payment. The issue itself is decided by the shareholders' meeting, and the same nullity sanctions a failure to observe that. 

Beyond bonds, the a SARL is prohibited from issuing securities (such as preferred shares or other instruments) and gérants who issue them face six months' imprisonment and a €9,000 fine. 

A SARL also may not guarantee a securities issue, on pain of nullity, save for issues by a regional development company or bonds carrying the State's subsidiary guarantee. 

Bons de caisse. These are financial products aimed at individuals, evidenced by a registered certificate, issuable by businesses as well as credit institutions. Their attraction for a company is the payment profile: the holder is repaid, and receives the interest, only at maturity. The PACTE law relaxed two constraints — a business may now issue them from the end of its first year of trading rather than its third, and the maximum subscription period is seven years rather than five. The related minibons regime, a sub-category offered through crowdfunding platforms, was abolished with effect from 24 December 2021, having been made redundant by the new ability of legal entities to lend through crowdfunding.

Intra-group and inter-company loans. The banking monopoly forbids anyone other than a credit institution or financing company from carrying out credit transactions habitually. Two carve-outs matter here: 

• Treasury operations are permitted between companies linked by capital ties giving one of them effective control over the others, and 
• a SARL with a statutory auditor may, ancillary to its main activity, make short loans to micro-enterprises, small and medium enterprises or intermediate-sized enterprises with which it has economic links justifying them — a facility whose maximum duration the PACTE law extended from two years to three, available to companies whose last accounts were certified by an auditor or which appointed one voluntarily.

Financial expense limits. Two regimes can restrict a company's deduction of financial charges. Interest on loans and advances between related companies cannot exceed a limit computed either by reference to the shareholder-account rate cap or, where the company can justify it, by reference to the market rate — interest above the applicable rate being permanently excluded from deduction. Separately, net financial charges may be capped at 30% of tax EBITDA or €3 million, with particular limits for thin-capitalised entities. Where several regimes apply in the same year they are applied successively, the rate cap first and the EBITDA limitation second, each computed net of charges already reintegrated under the previous one.

The personal guarantee: what the gérant is really signing

Gérants routinely guarantee their company's bank facilities personally, and landlords and other creditors ask relatives and shareholders to do the same. Guarantee law was substantially rewritten by an ordinance of 15 September 2021, which gathered rules previously scattered across the Consumer Code, the Monetary and Financial Code and the Civil Code into the Civil Code alone. The critical practical point is the transition: guarantees concluded before 1 January 2022 remain governed by the old law, except for the information obligations, which have applied to them since 1 January 2022. So the first question about any guarantee is when it was signed.

Disproportionate guarantees

The rules protect individual guarantors against a guarantee to a professional creditor that is clearly out of proportion to their means.

• From 1 January 2022: where the guarantee is manifestly disproportionate to the guarantor's income and assets, it is reduced to what the guarantor could reasonably have committed at the date of signing — judged as at that date (C. civ. art. 2300).
• Under the earlier regime: the creditor simply could not enforce the guarantee at all unless the guarantor's assets, when called on, allowed him to meet it. The case law from that period is still useful.

The guarantor must prove the disproportion. In assessing it:

• What counts: the guarantor's overall indebtedness, including guarantees already given; regular income up to the commitment (even income from the guaranteed company that later disappeared on its liquidation); and the current account he holds in that company.
• What doesn't: hoped-for returns from the deal; a prior guarantee he has been released from; and commitments taken on after the guarantee, even if they funded the same transaction.
• Spouses: if the spouse consented to commit community assets, both the community assets and the spouse's income are counted; under a separation regime, only the guarantor's own. A community property counts even where it couldn't in fact be seized because the spouse didn't consent.

Finally, a bank cannot rely on the borrower's loan file alone — it must ask the guarantor about his own finances, though a court may use an information sheet drawn up later to assess the position as at the date of signing.

The duty to warn, the handwritten statement, and information

The duty to warn. The ordinance of 15 September 2021 (n° 2021-1192) reforming the law of guarantees reshaped the creditor's duty to warn the guarantor, for guarantees concluded from 1 January 2022:

• The duty now applies even to sophisticated guarantors, but only where the guarantor is an individual — an unsophisticated company acting as guarantor no longer benefits from it.
• The sanction has changed. Previously, a guarantor who had not been warned had to bring a liability claim against the creditor and prove the loss caused by the failure. Now the creditor instead forfeits its rights against the guarantor to the extent of the loss the guarantor suffered — so the guarantor's protection operates as a reduction of what he owes, without a separate action.

Under the earlier law, the creditor could only be reproached for failing to warn a guarantor who was not sophisticated — a quality inferred from the person's role:

• Treated as sophisticated (no warning owed): a gérant who was also sole shareholder; a gérante and 51% shareholder holding a pharmacy doctorate, together with her 49% co-shareholder qualified in financial markets; and a manager who had worked as an accountant for 18 years.
• Not sophisticated by that fact alone: simply being a shareholder does not make a guarantor sophisticated.

The two protections operate independently: a sophisticated guarantor can still argue the guarantee was disproportionate, and an unsophisticated guarantor can still rely on the failure to warn even where the guarantee was not disproportionate.

The handwritten statement. For guarantees from 1 January 2022, the guarantor no longer copies a fixed formula. He must write, on pain of nullity (C. civ. art. 2297):

• that he commits, as guarantor, to pay the creditor what the debtor owes on default, up to an amount in principal and accessories, in figures and in words;
• for a joint and several guarantee, that he cannot require the creditor to pursue the debtor first or divide the claim between guarantors — omit this and he keeps those benefits.

The old law required the exact prescribed wording, and its case law still maps what matters:

• Annulled: wording that failed to identify the beneficiary; an error naming the debtor; writing income "or" assets instead of "and" (which changed the scope).
• Merely limited, not void: omitting assets (recourse limited to income); omitting interest (limited to principal).
• Still valid: "bank" for "lender"; adding "personal and joint"; a merger-substitution reference; a swapped comma; the amount was not required in both figures and words.

Annual and default information. Since 1 January 2022 one obligation replaces the scattered old ones, binding all professional creditors, including for earlier guarantees (C. civ. art. 2302):

• By 31 March each year: inform every individual guarantor of the principal, interest and accessories outstanding at 31 December, and remind him of the term — or, if indefinite, of his right to end it at any time.
• Sub-guarantors who are individuals now have their own right; the first-rank guarantor passes on what he receives within a month.
• On default: the creditor must tell the guarantor of the debtor's first unremedied payment incident (unpaid for a month); the guarantor must then warn the debtor before paying, or he loses his recourse if the debtor could then have had the claim extinguished.

Under the old law, missing the annual information cost the creditor the interest accrued since the last one, with payments deemed applied to principal first — and it applied even where the guarantor was the company's own manager.

Who counts as a professional creditor. A professional creditor is one whose claim arose in the exercise of his profession or is directly connected with one of his professional activities, even a non-principal one — so a drinks retailer that lent money to a company to buy screws and took a guarantee was a professional creditor. Guarantees given to non-professional creditors have become rare as a result.

What events do and do not end a guarantee

What ends a guarantee — and what does not

Some events people assume will release a guarantor do not.

• Illness does not release a guarantor.
• Death ends the guarantee only going forward: the guarantor passes on no commitment to his heirs for debts arising after the death, but the heirs remain bound for debts that arose before it, even if not yet due — and the annual information must be given to those heirs.
• A change in the company's legal form does not extinguish the guarantee where no new legal person is created. So a SARL converting into a société anonyme leaves the guarantor bound.

The gérant who guarantees his own company. A gérant who guarantees the company's debts stays liable for debts arising after he leaves office — unless he expressly stated that the guarantee was tied to his functions and would end with them.

• The bank owes him no information or advice about his commitment continuing after he sells his shares.
• In one case, a manager whose open-ended guarantee covered future debts was held liable for a new loan the bank granted after he had left office but before he revoked the guarantee.

What happens in case of merger?

From 1 January 2022, where the debtor entity is dissolved by merger, demerger or universal transfer of assets:

• the guarantor remains bound for debts arising before the operation became enforceable against third parties;
• he is bound for debts arising afterwards only if he consented at the time of the operation — or, for debts owed to the creditor company, in advance.

This codifies the earlier rule that a guarantor of an absorbed company's debts is bound for the absorbing company's later debts only on an express manifestation of will (Cass. com. 17 May 2017, no. 15-15745). Points from the older case law still hold:

• a guarantor of a loan taken out before the creditor's merger stays bound even though the debt was not yet due at the merger date;
• he cannot rely on a retroactive effective date agreed between the merging parties — the date that counts is the meeting approving the merger;
• a completion guarantee not called by the date of absorption was only a potential debt, so the guarantor was not bound for it;
• where a company that owns let premises is absorbed, the guarantee of the rent passes automatically to the absorbing company unless otherwise agreed.

From a tax perspective, capital repaid by a guarantor is not deductible from its taxable income, and neither is interest it pays for the debtor.

A company manager may nevertheless deduct sums paid under a guarantee given for his company, where three conditions are all met:

• the commitment was given in the normal management of the business;
• it is connected with his role as manager — deduction is allowed for managers holding the majority or near-totality of the capital; and
• its amount does not exceed three times the remuneration allowed to him, or that he could reasonably expect, when he gave the guarantee.

Those sums are set against the income he received from the company that year; any excess is a categorical loss deductible from his total income.

For a company guaranteeing another company, the sums paid are deductible where they correspond to a normal act of management. Giving a guarantee free of charge to a third party, or to a financially sound subsidiary, does not qualify.

The financing sources compared

Frequently asked questions

This article states French law as published in the sources available at the date shown above, for general information only. Guarantee law was reformed with effect from 1 January 2022 and the rules applying to a given guarantee depend on its date; interest-rate caps change annually. It is not legal advice and does not create an attorney-client relationship.