A Polish limited liability company has its own assets and, as a rule, is solely liable for its obligations. Limited liability does not, however, mean that members of its management board are always protected from personal liability.

Consider a typical situation: the company stops paying its invoices. A creditor obtains a court judgment and initiates enforcement proceedings, but it turns out that there are no funds in the company’s bank accounts and its remaining assets are insufficient to satisfy the debt. Does the creditor simply have to accept the loss?

Not necessarily. In certain circumstances, the creditor may pursue its claims directly against the members of the company’s management board.

When can management board members be liable for the company’s debts?

The legal basis for such liability is Article 299 of the Polish Commercial Companies Code. If enforcement against a limited liability company proves unsuccessful, the members of its management board may be jointly and severally liable for the company’s obligations.

This does not mean, however, that a management board member automatically becomes liable for every debt left unpaid by the company. The creditor must first establish the existence of the company’s obligation and demonstrate that enforcement against the company has been unsuccessful.

In practice, an important piece of evidence is a bailiff’s decision discontinuing enforcement proceedings due to the absence of assets from which the creditor could obtain satisfaction. However, this is not the only way of proving that enforcement against the company would be ineffective.

Only then does the possibility arise of pursuing claims against the persons who served on the company’s management board.

What does joint and several liability of management board members mean?

If several management board members are liable for the same obligation, the creditor does not have to divide the amount claimed between them.

The creditor may claim the entire amount from all liable management board members jointly, from several of them or even from just one of them. Any subsequent settlements between the management board members themselves are a separate matter.

From the creditor’s perspective, this has significant practical importance. If the company has no assets, it is worth checking not only who currently sits on its management board, but also who served on the board during the period relevant to the potential liability.

How can a management board member protect their personal assets?

Unsuccessful enforcement against the company does not mean that a management board member has no defence available.

The law provides for several circumstances in which a management board member may avoid liability. In particular, the board member may demonstrate that a bankruptcy petition was filed at the appropriate time or that, at the appropriate time, restructuring measures referred to in Article 299 of the Commercial Companies Code were taken.

A management board member may also defend themselves by proving that the failure to file for bankruptcy was not attributable to them or that, despite the absence of appropriate action, the creditor suffered no loss.

In practice, the key issue is therefore not only whether the management board took action, but also when it did so.

The “appropriate time” – when should the management board take action?

This is one of the most important and, at the same time, one of the most difficult aspects of management board liability.

A common mistake is to assume that the problem arises only when the company has no assets left or ceases operating. In reality, the obligation to take appropriate action may arise much earlier – once the company becomes insolvent.

For this reason, management board members should continuously monitor the company’s financial condition. The fact that the company continues to trade, issue invoices, perform contracts or negotiate with a potential investor does not necessarily mean that it is not insolvent.

In practice, difficult questions often arise:

• Is a temporary shortage of cash already a reason to take formal action?
• Can the management board wait for a major contract that is expected to improve the company’s financial position?
• What should be done if the company owns valuable assets but is unable to pay its current liabilities on time?

There is no single answer that will apply to every company. This is why, where liquidity is deteriorating, particular importance should be attached to documenting the company’s financial position and the decisions taken by the management board.

Waiting until the company is no longer capable of continuing its business may prove to be too late.

Restructuring as a means of protecting the company and its management board

Financial difficulties do not necessarily have to lead directly to bankruptcy.

At the right stage, restructuring proceedings may offer a solution aimed at addressing the company’s debt problems while allowing it to continue operating.

From the perspective of management board members, the timing of such action may also have additional significance. Article 299 of the Commercial Companies Code recognises certain restructuring measures as circumstances that may allow a management board member to avoid personal liability.

The key issue, however, remains timing

Restructuring measures should therefore not be treated as an automatic means of excluding management board liability, particularly if they are initiated only after the company has been insolvent for a considerable period and has no realistic prospect of satisfying its creditors.

The management board should therefore respond to warning signs early rather than waiting until creditors have initiated successive enforcement proceedings.

Former management board members may also be at risk

Resignation from, or removal from, the management board does not automatically eliminate liability connected with the period during which a person held office.

A person who ceased to be a management board member several months or even years earlier may therefore still receive a demand for payment and subsequently face court proceedings concerning the company’s debts.

When assessing such a person’s potential liability, it is necessary to determine, in particular, when they served on the management board, when the company’s obligation existed and what the company’s financial position was at the relevant time.

The date on which a management board member was removed from the National Court Register should therefore not be treated as an automatic cut-off point for liability.

Division of responsibilities within the management board is a weak line of defence

In many companies, responsibilities are divided among management board members. One member may be responsible for finance, while another deals with sales, technology or operations.

From a business perspective, such a division is entirely natural. The problem arises where a management board member assumes that, because they were not responsible for finance, they did not need to concern themselves with the company’s financial condition.

Such an argument may prove insufficient.

Serving as a member of the management board entails a duty to maintain an appropriate level of awareness of the company’s situation. Leaving all financial matters entirely to another management board member, the CFO or the accountant may therefore create significant risk.

This is particularly dangerous where a management board member fails for an extended period to review cash flows, overdue liabilities or information concerning enforcement proceedings against the company simply because such matters were regarded as falling outside their area of responsibility.

The most common mistakes made by management board members

In practice, liability issues often result not from a single decision, but from a series of actions that may initially appear commercially reasonable.

“One more month and the situation will improve.”

The management board waits for financing, the sale of an asset, a new investor or payment of a major invoice. Each additional month may, however, become relevant when assessing later whether appropriate action was taken in time.

“The other management board member was responsible for finance.”

An internal division of responsibilities may be organisationally important, but it will not always provide an effective defence against a creditor’s claim.

“The accountants did not tell us there was a problem.”

Professional accounting support is an important source of information for the management board, but it does not replace the management board’s own duties.

“The company is still operating.”

The fact that the company continues to sell goods or services does not necessarily mean that it remains solvent.

“I will resign from the management board and the problem will disappear.”

Resignation may limit exposure to future developments, but it does not automatically eliminate liability relating to the period during which the person already served on the management board.

Time to sue – when does the claim become time-barred?

Claims against management board members cannot be pursued indefinitely.

In Polish case law, liability under Article 299 of the Commercial Companies Code is generally treated as having a compensatory nature, which means that, as a rule, a three-year limitation period applies.

The key practical issue is determining when that period begins to run.

Frequently, this will be the point at which the creditor learns that enforcement against the company has been unsuccessful, for example upon receiving a bailiff’s decision discontinuing the enforcement proceedings.

It should not, however, be assumed that in every case the limitation period will begin precisely on the date on which such a decision is issued or served. What may matter is the point at which the creditor actually obtained sufficient knowledge to conclude that the company would not be able to satisfy the debt and to identify the person potentially liable.

For this reason, both the creditor and the management board member should carefully analyse the chronology of the particular case.

The earlier you act, the more options you have

The issue of management board liability for the debts of a Polish limited liability company is particularly significant because the problem often becomes apparent only when the company’s situation is already very serious.

From the perspective of a management board member, early analysis makes it possible to assess whether restructuring or bankruptcy measures should be considered and what risks are associated with continuing the company’s operations.

From the creditor’s perspective, unsuccessful enforcement against the company does not necessarily mean that the debt must be written off permanently.

In both cases, timing, documentation and a proper understanding of what was happening within the company before the problem arose can be decisive.

Loewen, its’ thinkable.

Author: attorney-at-law Maciej Siejbik