The SCI annual cycle: management report, accounts approval, profit allocation

The SCI annual cycle: management report, accounts approval, profit allocation

Once a year, an SCI (société civile immobilière) has to close its books and account to its members. The gérant renders a written report on the company's activity, the members consider it and, where required, approve the accounts, decide what happens to the year's profit, and vote on any agreement the company has entered into with the gérant. For a small family SCI this cycle is light; for a larger one it is more formal. But in every case the gérant's duty to render an annual account is real, and a gérant who neglects it exposes themselves to liability and to removal. This guide sets out the annual cycle step by step: the gérant's duty to render account, what the management report must contain, when and how the accounts are approved, how the profit is allocated, and how a deal with the gérant is put to the members.

The subject matters because the annual cycle is where the members' information rights and the gérant's accountability meet, and where a poorly run SCI stores up trouble. A gérant who renders no account, an assembly held without the report, a profit distributed against the rules, or a deal with the gérant slipped through without a vote - each of these can be undone later, and each is a common ground of dispute in a family SCI. Running the annual cycle properly, even in a small company where everyone trusts everyone, is what keeps the SCI compliant and its decisions secure.

The gérant must render account every year

The heart of the annual cycle is a duty on the gérant. The gérant must, at least once in the year, render account of their management to the members, on the basis of a written report on the company's activity over the past year or accounting period, and the members vote on that report (C. civ. Art. 1856). This is not optional and does not depend on the members asking for it: the gérant must render account of their management even where the members do not request it (Cass. com., 23 October 2019). The modalities - the mode of consultation, the convocation rules, the majority and quorum, the allocation of profits - are largely left to the articles, but the underlying obligation to submit a written report on the company's activity is imposed by the Civil Code and cannot be dispensed with.

Neglecting the duty has consequences. A gérant who abstains from rendering account of their management may engage their liability towards the members, and the sanction can extend to the nullity of the assembly - though that nullity requires a préjudice to be shown, and mere formal irregularities or delays in sending the report do not attract it where the members were in fact properly informed despite them. So the substance matters more than the form: a total failure to inform the members, in particular the failure of the written account required by Article 1856, is what exposes the decision, while a minor procedural slip that did not actually deprive the members of information generally does not. The lesson for a gérant is to render a real account every year, in writing, whether or not anyone has asked - it is both a legal duty and the surest protection against a later challenge.

The management report: what it must contain

The report on the management must describe the company's activity over the past year or accounting period (C. civ. Art. 1856), and it must give the members loyal, objective and precise information so that they can vote with full knowledge. It is also the occasion for the gérant to take stock, with the necessary distance, of the year's activity, the difficulties met and the progress made, and it can be presented concisely, using tables or a narrative as suits the company.

In practice the report covers the property and the results. A first part is generally devoted to the patrimony and its evolution over the year - and where premises intended for letting stand empty, the report notes the efforts under way to find tenants. Building by building, the significant events are described: the letting position as a percentage of premises let, and the major renovation or improvement works falling to the SCI, with their final cost against the estimates. The report then indicates the profits realised or foreseeable and the losses incurred or foreseen (C. civ. Art. 1856), setting out the year's results and their progression or decline against the previous year, the charges other than depreciation, and the depreciation charge where one is taken. So the report is not a formality but a genuine account of the company's property, its letting, its works and its results - the information on which the members' vote rests.

The report must reach the members in time. The gérant's report is sent to each member, by simple letter, at least fifteen days before the date of the assembly called to rule on the rendering of the accounts, or joined to the registered letter sent for a written consultation. The convocation to the assembly must contain the agenda and be accompanied by the required documents. So the fifteen-day rule that governs the convocation of a meeting also frames the delivery of the report: the members must have the gérant's written account, and the supporting documents, at least fifteen days before they are asked to vote on it.

What must your SCI's annual meeting cover?

The annual meeting has several items. Pick the one you want to understand - the check explains it.

Approving the accounts and the quitus

Whether the members must formally approve the accounts depends on the size of the SCI. Except for civil companies of a certain size, the members do not have to approve the accounts before deciding the allocation of the results - but in every case the gérant must render account of the management. So a small family SCI can move straight from the gérant's report to the decision on what to do with the year's result, without a separate step of approving a formal set of accounts. A civil company of a certain size carrying on an economic activity, by contrast, is required to establish annual accounts comprising a balance sheet, a profit-and-loss account and notes, and to submit the gérant's report to the members within six months of the close of the accounting period. The size thresholds are the same ones that trigger the appointment of a statutory auditor, and most family SCIs fall well below them; but a large SCI, or one carrying on a genuine economic activity, has to run the fuller procedure.

Where the members do vote on the report, the approval has a defined effect. The members' approval of the gérant's annual report on the company's activity over the year entails the approval of the results shown in that report, and the approval of the report and of the gérant's management amounts to a quitus in the gérant's favour. But the quitus does not do as much as it appears to. The quitus does not prevent liability actions against the gérant for an irregularity or a management fault (Cass. civ., 3e, 27 May 2021, no. 19-16716): a member who later discovers that the accounts were falsified, or that the gérant committed a fault the report did not disclose, keeps the right to sue despite having voted the quitus. So approving the accounts settles the figures as presented and discharges the gérant for the management as reported, but it is not a blanket release - a fault that was concealed or that only emerges later remains actionable. This is why the report must be complete and honest: the protection the quitus gives the gérant is only as good as the information on which the members voted it.

A member who considers the accounts distorted cannot simply have the approval annulled on that ground alone. The nullity of an SCI's deliberations can be sought only in the narrow cases the law allows - the breach of an imperative provision or a defect of consent or capacity - and a complaint that the accounts understate the company's position, for instance because the gérant occupies company premises free of charge, does not by itself void the approving resolution. The member's remedy in that situation lies in a liability action against the gérant, which the quitus does not bar, rather than in the annulment of the vote. So the annual approval is more robust than it might seem: it is not undone by every subsequent grievance about the figures, and the route to redress runs through the gérant's personal responsibility.

Allocating the profits - and the losses

Once the result is settled, the members decide what becomes of it. The distribution of the profits or, on the contrary, their allocation to reserve accounts obeys the statutory rules alone - civil companies are not required to constitute a legal reserve, unlike commercial companies. So an SCI is free, within its own articles, to distribute the whole profit, to place part or all of it in reserve, or to carry it forward, and it is not obliged to set aside the legal-reserve fraction that binds an SARL or an SA. The members' resolution allocates the year's result to one of these destinations, and the choice is governed only by what the articles provide and by the ordinary majority rules the articles set.

How much of any distributed profit each member receives is, absent a clause, a matter of capital share. In the silence of the articles, each member's participation in the profits, like their contribution to the losses, is proportional to their share in the capital, and a member who has contributed only industry has a share equal to that of the member who contributed the least (C. civ. Art. 1844-1). So the default is strict proportionality to capital, with a floor for the industry contributor who brought no money or property. The articles may depart from this and provide for an unequal sharing of the profits and the losses, but such clauses cannot alter the rules on the members' liability, and they meet a firm outer limit in the prohibition of the clause léonine: Article 1844-1 of the Civil Code does not forbid the members from fixing a division of profits and losses in a proportion different from their contributions, but what is prohibited is a near-total exoneration of one member from the losses or a near-exclusive vocation of one member to the profits. So a family SCI can weight the shares of profit and loss away from bare capital proportions - to reflect who does the work, or a transmission plan - provided no member is left with almost all the upside or almost none of the downside.

The distinction between two different notions of loss matters here. The contribution to the losses operates in the relations between the members, whereas the obligation to the debts is the members' engagement towards the company's creditors. The allocation clause in the articles bears on the first - how the members share a loss among themselves - and cannot touch the second, because the members' indefinite liability to third parties in proportion to their shares is a feature of the civil company that the articles cannot contract away against creditors. So an unequal-sharing clause changes who bears a loss internally; it does not change what a creditor can recover from each member. Where the year closes in loss, the members may impute the loss on reserves if there are any, carry it forward, or take it in charge by an appropriate means - a reduction of capital, a contribution of new funds, or an allocation to the current accounts - and the choice again follows the articles and the members' decision.

A point on the nature of a profit completes the picture, because it governs when a member actually has a right to a sum. In company law the profits made by a company take on the character of fruits only when they are attributed in the form of dividends (Cass. com., 14 December 2010, no. 09-72267; Cass. com., 13 September 2017, no. 16-13674). So a member has no vested right to the year's profit until the members decide to distribute it: an undistributed profit belongs to the company, not to the members, and a member cannot claim a share of a profit that has been placed in reserve or carried forward rather than paid out. This is the counterpart of the members' freedom to reserve - but that freedom is not unlimited. A systematic reservation of the profits can be annulled for abuse of majority where it does not answer the company's object or interest and serves only to favour the majority: the courts have voided a carrying-forward of profits decided by two majority members where the sums already accounted for were enough to meet the works in view and the real purpose was to keep in the company the dividends due to their elderly father. Conversely, placing a substantial sum in reserve - more than €500,000 in one case - was held not abusive where no intention to favour the majority over the minority was shown, and an unequal distribution voted by the members was upheld where the majority's share had in fact diminished in favour of the minority and the division was not contrary to the company's interest (Cass. civ., 3e, 18 April 2019, no. 18-11881). So the members' freedom over the result is real but policed: reserve or distribute as the articles allow, but not in a way whose only object is to serve the majority at the minority's expense.

Where the SCI is subject to corporation tax, the annual report and the resolution carry two further items. If the company is subject to corporation tax, the management report and the text of the resolution must add the amount of the dividends put into payment in respect of the three preceding accounting periods, and the amount of the distributed income eligible for the 40% abatement and the amount excluded from it. So a corporation-tax SCI states, alongside the year's allocation, a short dividend history and the split of the distribution for the shareholders' own income-tax treatment - information a company taxed on property income (the transparent regime) does not have to give. The annual mechanics of rendering account are otherwise identical whichever tax regime applies; it is only these disclosures that the corporation-tax SCI adds.

Which annual-cycle problem are you facing?

Most disputes in a family SCI start at the annual cycle. Pick the problem closest to yours - the check explains where you stand.

Agreements between the SCI and its gérant

The last item of the annual cycle is the control of agreements between the company and its gérant. Civil companies carrying on an economic activity are subject to the procedure for the control of agreements concluded between the SCI and one of its gérants, its administrators or, more generally, any person exercising the role of a company officer; current agreements concluded on normal terms are not caught (C. com. Art. L. 612-5). So the procedure targets deals in which the gérant is on both sides - a lease of the SCI's property to the gérant, a loan, a service arranged between the company and its manager - but leaves aside the ordinary, arm's-length transactions of everyday running. Whether a given SCI is subject to the procedure at all turns on whether it carries on an economic activity; a purely patrimonial family SCI that simply holds and lets a building may fall outside it, while an SCI with a genuine economic activity is within it.

Where the procedure applies, the agreement is dealt with at the annual meeting. During the annual assembly on the rendering or approval of the accounts, or in the written consultation that stands in for it, the members must rule on the report on the regulated agreements and so approve or refuse the agreements it relates, and a specific resolution is provided for that purpose. The report is drawn up either by the gérant or, where the SCI has one, by the statutory auditor. So the deal with the gérant is not swept up in the general approval of the accounts: it requires its own report and its own resolution, voted separately, so that the members address it consciously rather than by implication. The agenda of the annual meeting, which covers the presentation of the gérant's report and the rendering or approval of the accounts and implicitly carries the allocation of the result and the quitus, must therefore also, where necessary, carry the approval of the regulated agreements as a distinct point.

Two practical points follow. The interested gérant is not, in principle, barred from voting: in the absence of a legal prohibition, the gérant who is a member and interested in the agreement may vote, because every member has the right to take part in collective decisions and the articles cannot exclude the interested member from the vote (C. civ. Art. 1844, al. 1 and 1844-10, al. 2). The articles may adjust the voting arrangements - capping voices, requiring a reinforced majority for these resolutions - but cannot suppress the interested member's vote altogether, and a clause that did so would be voidable. Even so, where there is a real risk of a conflict of interest, the gérant may act wisely by abstaining. And the sanction for skipping the procedure is measured: an agreement that is not approved, or not submitted to the control procedure, nonetheless produces its effects, but the consequences prejudicial to the company that result from such an agreement may be charged to the gérant, individually or jointly as the case may be. So failing to put the deal to the members does not void it, but it shifts the risk onto the gérant, who answers for any harm it causes the company - another reason to run the specific resolution properly rather than let the agreement pass unexamined.

The SCI annual cycle at a glance

Frequently Asked Questions

This article is for general information only and states French law as published in the sources available at the date shown above. It does not constitute legal advice. The requirements of an SCI's annual cycle depend on the company's size, activity and articles. Always seek qualified legal advice before running the annual accounts and decisions of an SCI.