Related-Party Agreements in the French SARL: Prohibited, Regulated and Free Conventions

Contracting with your own SARL: three categories, three very different outcomes

Every contract between a French SARL and its manager (gérant), one of its shareholders (associés), or a company sharing a manager with it falls into one of three legal boxes.

Some are simply forbidden — loans, overdrafts and guarantees for the individuals running or owning the company are struck by absolute nullity (c. com. art. L 223-21). Most are "regulated": valid, but subject to a special report and a shareholder vote from which the interested party is excluded (c. com. art. L 223-19). And a narrow remainder is "free": routine operations on arm's-length terms that escape any control (c. com. art. L 223-20).

Misclassifying an agreement rarely destroys it — but it shifts the contract's harmful consequences onto the gérant or the contracting associé personally, and it can start, stop or restart limitation clocks in ways that surprise everyone years later. This guide maps the three categories, the persons they apply to, the two approval procedures, and what actually happens when the procedure is skipped.

Prohibited conventions: loans, overdrafts and guarantees

The gérants, the associés who are natural persons, the legal representatives of corporate associés — and the spouses, ascendants and descendants of all of them — are forbidden to contract borrowings from the company in any form whatsoever, to have it grant them an overdraft on current account or otherwise, or to have it guarantee or endorse their personal commitments towards third parties. The prohibition protects the company's assets from the people best placed to raid them, and it admits one significant exception: a corporate associé may carry out these operations. A SARL acting as parent may therefore guarantee a subsidiary-associé's commitment or borrow from it — the operation then simply passes into the regulated-agreements procedure instead.

The sanction is absolute nullity, invocable by anyone with an interest — associés, third parties, company creditors alike. Its reach can exceed the guarantee itself: where a SARL's guarantee (cautionnement) secured a loan to its gérants and was the very condition of that loan, the nullity of the guarantee extended to the loan, the whole scheme being contrary to public policy (Cass. com. 25 April 2006, no. 05-12734).

Concluding a prohibited convention is not, however, an automatic ground for the gérant's judicial revocation — it justifies removal only where it significantly affects the company's situation.

On timing, two clocks must be kept apart: the nullity action follows the ordinary limitation rules — 5 years today, and the nullity can still be raised as a defence within the limitation window — while a claim for damages against the gérant after a prohibited overdraft is annulled is a director-liability action, time-barred after 3 years.

Regulated conventions: the default category

Everything else concluded, directly or through an interposed person, between the SARL and one of its gérants or associés is in principle a regulated agreement. Control is exercised after the fact, by a special report and a shareholder vote, rather than by prior authorisation — with one exception examined below, where prior approval is required. The free category is a strict exception to be construed narrowly: when in doubt, an agreement is regulated.

What counts as the "agreement". The procedure reaches the conclusion of the convention, but equally its amendment and its termination by mutual consent (Cass. com. 27 February 1996, no. 94-12454). Renewal of a contract within the field is itself submitted to the procedure — though the mere continuing effects of an already-authorised open-ended convention are not. Tacit renewal deserves particular care: since renewal by tacite reconduction gives rise to a new contract, each tacit rollover is a new convention that must pass through the procedure again. With respect to the gérant's own situation, two points deserve attention: his employment contract with the company is a regulated agreement, while the fixing of his remuneration by the shareholders is not.

What counts in practice. The decided cases show how wide the regulated category runs. It has covered the conclusion, renewal or termination of a commercial lease between the company and a manager, including the lease of the SARL's business premises from an SCI in which the gérant is a shareholder; a 23-month occupancy agreement, outside the commercial-lease rules, between an SCI and a SARL sharing a manager; the amendment of a lease by avenant, even where the original lease had been authorised; a departure allowance granted to a manager; a works contract between two companies with a common manager on terms that disadvantaged one of them; administrative assistance agreements; an agreement over a manager's invention; a life-insurance contract for a company officer; the transfer of accounting and administrative management to a related company; the company paying the manager's home entertainment expenses; the arrangement where the manager borrows from a bank personally, lends the money on to the company, and the company pays the bank's interest directly; a contract giving managers a personal advantage financed by the company for nothing in return; and current-account advances by a shareholder, together with blocking agreements that pay interest on the sums left in the account.

Inter-company loans. A SARL whose last accounts were certified by an auditor, or which appointed one voluntarily, may grant ancillary loans of under 3 years to micro-enterprises, PMEs or ETIs with which it has genuine economic links, outside any group. Those loan contracts pass through the regulated-agreements control — unless current and on normal terms — and only in the lending company, with the auditor attesting in a statement joined to the management report the initial amount and outstanding capital of each loan.

The persons falling within the scope of the regulated-conventions procedure

The procedure applies to conventions with any gérant and — unlike in the SA or SAS — with every associé, whatever the size of the holding. It extends to conventions with another company in which a gérant or associé of the SARL is simultaneously gérant, administrateur, directeur général, member of the directoire or of the conseil de surveillance, or an associé with unlimited liability for the debts — typically an associé of a société civile or an SNC. Read literally, the list omits the président of an SAS, but catches its directeur général or directeur général délégué. The overlap of offices alone triggers the procedure, even where the common manager has no personal stake in the deal — which is why parent-subsidiary agreements form the bulk of regulated conventions in practice, and the rule applies equally where the counterparty is a foreign company with a common manager.

Spouses, ascendants and descendants are not, as such, within the list, and no presumption of interposition attaches to family ties: a convention with the gérant's spouse passes through the procedure only where the spouse in fact acted as an interposed person — a factual question, established where the gérant or associé is shown to be the true beneficiary. Straw-man arrangements are the paradigm case; and for spouses married under a community regime, conventions over common assets are vulnerable enough that following the procedure is simply prudent. An SCI letting premises to the SARL is not treated as its associés' prête-nom merely because the gérant or associés of the SARL own it — the lease operations need approval only where the SARL is shown to act in the personal interest of the landlord company's majority associés. A clientele-guarantee convention between a succession indivision and a SARL, one associé being also a co-indivisaire, was held regulated.

Free conventions: the narrow exception

Conventions bearing on current operations concluded on normal terms escape any authorisation, declaration or control. The two conditions are cumulative. "Current" means operations the company carries out habitually within the activity defined by its corporate object — so a one-off transaction cannot qualify. "Normal terms" means no exorbitant gain and no exceptional conditions — exclusivity clauses, abnormally long payment periods, unusually generous rebates — for the gérant, the associé or the related company; the terms must match those the company grants third parties, judged by its own practice and that of its sector. Classification is a question of fact, resolved against the exception: the regulated procedure is the common law, the free category the exception, restrictively construed.

The decided lines are instructive. Avenants covering only operations of the same nature as others already carried out within the statutory activity are current operations — but an avenant to the company's lease granted by a manager is regulated. To escape the procedure, an act of disposition must fall within the ordinary course, be limited in scope and be concluded on terms usual enough to resemble a habitual operation. A works contract showing a net margin out of line with the company's other contracts was neither current nor normal, and a contract making the company carry the cost of a personal advantage for its managers, without counterpart, cannot be a current operation.

The procedure: report, presentation, vote

Two routes — and when prior approval is required

The ordinary route is a posteriori: the convention is concluded, then submitted to the shareholders. One configuration reverses the order: where the company has no auditor and the convention is concluded with a gérant who is not an associé, the agreement must be approved by the meeting in advance, deciding on the gérant's report under the same conditions as the ordinary route. Everywhere else, control follows conclusion.

The special report

The report falls to the gérant — unless the company has an auditor, in which case the auditor drafts it, and the gérant must notify him of each regulated convention within 1 month of its conclusion; where conventions concluded in earlier years continued to run, the auditor is informed within 1 month of the year-end. The auditor's task is to gather the conventions signalled to him or discovered in his work, verify them against the underlying documents, and report. One carve-out: an auditor appointed for the 3-year small-entities engagement has no duty to produce the report, which then reverts to the gérant. The report's content is prescribed: the list of conventions submitted for approval, the names of the interested gérants or associés, the nature and object of each convention, its essential terms — prices and tariffs, rebates and commissions, payment periods, stipulated interest, security granted, and anything else letting the associés assess the company's interest — and the volumes delivered and sums paid or received during the year under conventions from earlier years still being performed. The auditor is not liable for the harmful convention itself, even one omitted from his report; he answers only for an insufficient report causing the loss of a chance not to approve it.

Transformation does not reset the clock: a convention between the associés and gérants of a SARL remains valid after its transformation into an SA without re-running the procedure, the transformed company continuing the old one; and where the reporting regime changes with the form, the report covers in principle only conventions authorised and concluded after the transformation.

Presentation and the vote

The report is presented to a meeting or joined to the documents sent for a written consultation. It need not wait for the annual accounts meeting — which in any event cannot be replaced by written consultation — and can go to any specially convened meeting or, if the statuts allow, through a written consultation with the report sent by registered letter alongside the resolutions. A gérant who flagged an avenant in the management report at one meeting and gave the updated amount in the next year's special report committed no fault. Although no statutory communication rule exists, practice — and often the statuts — call for the report to be sent to the associés at least 15 days before the meeting and held at the registered office over the same period. The unanimous-act technique sits badly with the interested party's duty of abstention, and appears workable only for the prior-approval route where the interested gérant is not an associé.

The associés vote at ordinary majority — more than half the parts, failing which a second consultation at the majority of votes cast unless the statuts exclude it. The interested gérant or associé cannot take part, and his parts are excluded from both quorum and majority; the abstention applies to the a posteriori approval and to the prior-approval route alike (Cass. com. 13 February 1996, no. 93-17565). If the interested party votes anyway, the vote carries the same consequences as a refusal, exposing the co-contractant's liability. Approval must be specific: approving the annual accounts does not approve the conventions. Statutory clauses extending the voting ban to persons the law does not cover are void. The ban is personal and thorough — a gérant party to the convention cannot vote even in his other capacity as legal representative of a corporate associé, though that company can have another associé represent it — yet it does not reach the earlier, separate resolution authorising the company to enter into the future contract: the gérant could vote the meeting's authorisation to sell the business to an EURL of which he was sole associé, the abstention striking only the approval vote after conclusion.

When the procedure fails — or the approval does

Refused approval does not kill the convention. It produces its effects regardless — but the gérant and, where applicable, the contracting associé bear, individually or jointly and severally, the consequences of the contract prejudicial to the company. The same regime applies where no report was drawn up at all or the associés were never consulted, irregular approval being assimilated to refusal (Cass. com. 28 June 1988, no. 87-11628); whether the convention was actually prejudicial is for the trial judges. And the procedural shield is not total: a convention that failed the regulated-agreements approval can still be annulled on general grounds, as where its cause is illicit.

Limitation. The liability action prescribes in 3 years from the harmful fact or, where concealed, from its revelation — 10 years where the fact is a crime. The 3-year period also governs nullity actions founded on breach of the regulated-agreements rules, while nullity grounded in the general law of contracts follows the ordinary 5-year rule. Absent concealment, time runs from the convention's conclusion, not from the meeting that refused approval. Where concealment exists, revelation is assessed claimant by claimant — the judges ask when the person suing actually learned of the convention — and a gérant who states in the management report, wrongly, that no regulated convention was concluded may thereby conceal one, postponing the start of the period. Two further wrinkles: the nullity may be raised perpetually as a defence where the convention was never performed, and even a duly authorised convention remains open to annulment for an attack on the company's interest amounting to abus de majorité or for illicit cause — as unauthorised assistance-and-treasury conventions between a parent and its SARL subsidiary were annulled at the new gérant's suit after a share sale. Finally, shareholder approval closes no other doors: the associés' control under this procedure does not prevent an expertise de gestion over the same operations.

The three categories side by side

Frequently asked questions about SARL related-party agreements

This article states French law as published in the sources available at the date shown above, for general information only. It is not legal advice, does not create an attorney-client relationship, and rules and case law evolve. Take advice on your specific situation before acting.