Exoneration of a management board member from joint and several liability: the implications for businesses of a judgment of the Provincial Administrative Court in Wroclaw

19 February 2024 | Knowledge, News, Tax Focus, The Right Focus

Polish courts frequently resolve disputes concerning the liability of members of a company’s management board for tax arrears. These cases are extremely complex, as they require consideration of both tax and bankruptcy law. The courts have to take into account various factors such as financial management, timeliness of filing documents and possible restructuring measures, as the issue at stake is the liability of board members for the company’s tax debts.

In this context, it is worth considering the recent judgment of the Provincial Administrative Court[1] in Wroclaw (Case No. I SA/Wr 337/22) [2],  which highlighted a certain important issue relating to the joint and several liability of management board members under Article 116 of the General Tax Code[3].

Management board members are jointly and severally liable for the tax arrears of a limited liability company

A company had corporate income tax arrears. The first-instance tax authority found that the management board had not filed for bankruptcy on time and had not provided evidence that any restructuring measures or actions related to the arrangement approval procedure had then been taken.

It also found that there were grounds for declaring bankruptcy at the time of the management board member’s term of office, however the manager failed to provide any documents explaining the reasons for his failure to do so. Therefore, the tax authority decided that the company’s management board member was jointly and severally liable for the company’s tax debt.

However, it is worth pointing out a key element of the case at hand. At the time of the proceedings, the company had only one creditor, the Tax Office.

One or more creditors – what is the basis for the joint and several liability of management board members

In order to understand the nature of the problem, it is necessary to refer to Article 116 § 1 of the General Tax Code, which states that “the members of the management board of a limited liability company are jointly and severally liable with all their assets for the tax arrears of the company […] if the enforcement of the company’s assets proved to be wholly or partially ineffective and no management board member proved in due time that a bankruptcy petition had been filed or that reorganisation proceedings had been initiated at the time.”

The legislator thus refers us to legal norms that go beyond the tax sphere. The part of the provision that deals with the situation in which a management board member has failed to prove the filing of a bankruptcy petition in due time is particularly relevant here.

This is because, in accordance with Article 2(1) of the Bankruptcy Law[4], “bankruptcy proceedings shall be conducted in such a way as to satisfy creditors’ claims to the greatest extent possible”.

The key word here is the term “creditors”, which is used in the plural.

Therefore, at least two creditors are required for the opening of bankruptcy proceedings. This assumption is also confirmed by case law, which indicates that bankruptcy proceedings must be a collective procedure that serves the interests of at least two creditors.

How to avoid joint and several liability for a company’s tax debts

In order for a management board member to avoid joint and several liability under Article 116 of the General Tax Code, the company must file for bankruptcy.

However, if the company has only one creditor, this is not possible. And even if the company were to file such a petition, it would be rejected.

It is therefore clear that there is a legal loophole in this respect.

On the one hand, tax legislation provides for the possibility of being released from joint and several liability. However, if a management board member tries to exercise this right, their bankruptcy petition may be rejected as it does not meet the formal requirements.

It is therefore positive that the PAC sided with the management board member and ruled that he was not obliged to file for bankruptcy.

Importantly, the court held that such action could not lead to liability for the company’s debts, as the incompleteness of the legal system should not lead to tax liability.

However, it is important to remember that every tax case is different and Polish case law is not a binding source of law.

And although another court may take these judgments into account in a subsequent case, it is not obliged to do so. So it’s always worthwhile consulting expert advisers, to help you navigate the maze of options at such a critical stage of the business life cycle.

Questions? Contact us

Jan Janukowicz

 

[1] Provincial Administrative Court, hereinafter: PAC.

[2] Judgment of the PAC in Wroclaw of 21 December 2023, I SA/Wr 337/22, LEX no. 3667578.

[3] General Tax Code Act of 29 August 1997 (consolidated text in: Journal of Laws of 2023, item 2383, as amended), hereinafter: General Tax Code.

[4] Bankruptcy Law Act of 28 February 2003 (consolidated text in: Journal of Laws of 2022, item 1520, as amended) hereinafter: Bankruptcy Law.

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