Liability of management board members

20 May 2024 | Knowledge, News, The Right Focus

The liability of management board members is a complex and multifaceted issue, as it can be considered from different perspectives, i.e.:

  • What actions result in liability – a company’s debts and damage
  • Towards whom does it exist – creditors, the company itself or public authorities
  • What are the potential consequences – financial, criminal consequences and a prohibition from holding office

It is therefore worth taking a closer look at these issues, especially in light of recent developments.

Liability to company creditors

According to Article 299 of the Companies & Partnerships Code, it is management board members – when it comes to limited liability companies – that are liable in person for private debts.

In the case of joint-stock companies, however, Article 21 of the Bankruptcy Law provides that the management board may be held liable for damage caused by failure to file for bankruptcy in due time. It should be remembered that there is a presumption of fault in this respect, which may be rebutted in proceedings for taking of evidence.

Importantly, failure to file for bankruptcy in a timely manner may result in a ban of up to 10 years on conducting business or holding certain positions, including management or supervisory board positions.

In addition, pursuant to Article 291 of the Companies & Partnerships Code, management board members may also be held liable for making false statements to the National Court Register, i.e. that contributions by all shareholders or contributions to increased share capital have been made in full. The liability period is then three years from the date of the company’s or the capital increase’s registration, respectively. Importantly, management board members are liable regardless of whether they have intentionally or negligently provided false information and it is also irrelevant whether the damage was caused to the company or its creditors.

Pursuant to Article 175 of the Companies & Partnerships Code, management board members who, at the time of the company’s registration, were aware on the date of the Articles of Association that the value of in-kind contributions had been significantly overstated are also jointly and severally liable with the shareholder making such a contribution to compensate the company for the missing value and cannot be released from this obligation.

Articles 293 and 483 of the Companies & Partnerships Code should also be mentioned when discussing the liability of management board members, who are also liable for damage caused by an act or negligence contrary to the law or the company’s Articles of Association, unless they are not at fault.

A claim for damages must be brought within 3 years of the date on which the company became aware of the damage and the person who caused it, but no later than 10 years after the unlawful act or negligence of the management board member. In the above situation, there is a presumption of fault on the part of the board member.

Business Judgement Rule

Of particular note is the 2022 amendment to the Companies & Partnerships Code, introducing the Business Judgement Rule and the interest of groups of companies.

The Business Judgement Rule means that the actions of management board members should not be judged on the basis of results, but on the correctness of the decision-making process. There can therefore be no liability of a board member in a situation of so-called legitimate business risk.

On the other hand, the Code provides for the civil, criminal and organisational liability of management board members in the event of acts contrary to the interests of a group of companies or an unlawful instruction from a parent company. It is also important to consider liability under other norms and the invalidity of an unlawful instruction.

We have written more about the Business Judgement Rule and the interest of a group of companies here. https://www.kochanski.pl/nowelizacja-kodeksu-spolek-handlowych-business-judgement-rule-i-interes-grupy-spolek/

Liability for tax and administrative arrears

Another point worth mentioning is the liability for a company’s tax arrears. In the event of ineffective enforcement, management board members are jointly and severally liable with all their assets. It should also be noted that in this case, it is not necessary to go to court and that the issuance of an appropriate decision is sufficient. The same procedure applies to social security liabilities.

On the other hand, if the company does not fulfil its administrative obligations, the legislation provides for the possibility of imposing a penalty on its management board members:

  • By the UOKiK President, up to PLN 2 million if anti-competitive agreements have been concluded
  • By the KNF on the issuer

Current regulatory trends should also be noted:

  • Liability of the management board for the implementation and quality of technical and organisational solutions under the NIS2 Directive
  • Sanctions for failure to establish an internal notification procedure
  • Establishment of such a procedure in any material violation of the Whistleblower Protection Act

Individual and collective criminal liability

From 1 October 2023, harsher penalties have been applied to white-collar crimes, in particular:

  • Mismanagement or abuse of trust
  • Money laundering (including smurfing, mixing, and transfer pricing)
  • Managerial bribery
  • Unreliable accounting

In addition, the following crimes are considered felonies:

  • If the value of damage or assets is between PLN 5 million and PLN 10 million, liable parties may receive 3 to 20 years’ imprisonment
  • If the value of damage or assets exceeds PLN 10 million, liable parties may receive 5 to 25 years’ imprisonment

Other crimes against economic and property interests in civil law transactions include:

  • Financial fraud
  • Failure to satisfy a creditor’s claims
  • Acting to the detriment of creditors
  • Favouring creditors
  • Unreliable record keeping

As regards ‘collective’ criminal liability, the starting point is the Act on the Liability of Collective Entities for Punishable Offences.

The conditions for holding a company criminally liable are as follows:

  • Committing one of the listed prohibited acts
  • Commitment of such an act by an individual related to the company (e.g. a management board member, an employee)
  • The company benefiting or being able to benefit from crime
  • Conviction of a direct perpetrator (with exceptions),
  • Guilt of a collective entity for committing a prohibited act

An exhaustive list of crimes or fiscal offences for which the company may be held liable includes:

  • Environmental offences
  • Offences against economic transactions
  • Falsification of a document or use of a falsified document
  • Misrepresentation in a document
  • Fraud
  • Tax evasion

These are subject to:

  • A fine of up to PLN 5 million
  • Forfeiture
  • Specific prohibitions

Environmental offences

In the context of growing environmental awareness, it is worth recalling that management board members may also be held liable for environmental offences.

Chapter XII of the Criminal Code lists, inter alia, the following offences:

  • Destruction of the natural environment
  • Pollution of water, air or land
  • Improper storage, treatment or transport of waste

This type of offence is punishable by up to 10 years’ imprisonment, but if it results in a fatality or serious injury to a number of people, 20 years’ imprisonment may be imposed.

Liability for unintentional acts is also foreseen, with environmental offences being also covered by specific statutes.

Given this high level of liability for management board members and the rigour applicable to them, mitigating measures are becoming increasingly important. These include:

  • Obtaining professional advice on key decisions (part of the Business Judgement Rule)
  • Division of responsibilities among management board members
  • Implementation of corporate governance
  • Obtaining discharge

Other solutions include, for example, D&O insurance, indemnity agreements (indemnification, hold harmless letters), acting on the basis of a specific resolution of the supervisory or ownership body, and corporate compliance.

It is therefore a good idea to have proven advisers on your side, so that running a company becomes less risky and more business-oriented.

Questions? Contact us

Natalia Kotłowska-Wochna

Mikołaj Kuterek

 

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Contact us:

Natalia Kotłowska-Wochna

Natalia Kotłowska-Wochna

Attorney-at-Law / Head of New Tech M&A / NewTech Practice Group / Head of the Poznan Office

+48 606 689 185

n.kotlowska@kochanski.pl