A limited liability company (LLC) is one of the most popular forms of conducting business in Poland, mainly due to the limited liability of shareholders for the company’s obligations. This feature is also present in other capital companies, including the simple joint-stock company. However, establishing an LLC is the easiest and quickest—it requires an initial share capital of just 5,000 PLN.
Besides the shareholders, who are the owners of the company, there is a management board appointed by them. The shareholders themselves are not liable for the obligations or actions related to the company. A significantly larger portion of responsibility in an LLC lies with the management board members. The issue of the board’s obligations towards the company is more complex, so in this article, we will attempt to shed light on this topic.
The Basic Role of the Management Board in a Limited Liability Company
As mentioned at the beginning, shareholders are not responsible for the company’s daily operations. Their main role is to make decisions on key, strategic matters for the company.
The management board appointed by the owners is responsible for running the company’s affairs and representing it externally. Basic duties include, among others, ensuring proper accounting, timely submission of financial statements, and acting in the company’s interest.
Management Board Member Liability for Company Obligations
When a company incurs debt, such as borrowing money, the debtor is the company itself, not its shareholders. Therefore, the company’s creditor cannot demand repayment of that debt from the shareholders. When the company’s funds are insufficient to cover the debt, the entire responsibility falls on the management board members, who must cover the company’s obligations with their personal assets.
How does this work?
If execution against the company’s assets proves ineffective, the management board members are jointly and severally liable for the company’s financial obligations with all their personal assets.
Management Board Member Liability for Damage
Who Is Liable?
Liability for damage applies to:
- Members of the Management Board
- Members of the Supervisory Board
- Liquidators.
Note: Shareholders acting solely as owners are typically excluded, unless they also serve in one of the roles above. The provision does not extend to proxies or attorneys-in-fact appointed for specific tasks.
Principles of Liability
Liability arises from actions or omissions that are:
- Contrary to Law
Violations of statutory provisions, including the Commercial Companies Code and other relevant laws.
- Contrary to the Company’s Articles of Association
Breaching internal regulations or failing to follow required procedures.
This liability is contractual, based on the relationship between the company and its bodies members, and can be both joint and several, when harm results from collective actions of the company’s bodies.
Modifying Liability
Companies and their bodies members can agree to modify liability terms, potentially imposing stricter obligations than those required by law.
Exoneration from Liability
To such avoid liability individuals must demonstrate:
- Absence of Fault
They performed their duties properly and did not cause harm.
- Due Diligence
They exercised the care expected of professionals in their position.
Elevated Standard of Care
Management board members are held to a higher standard of care due to the professional nature of their duties, which includes:
- Knowledge of Company Operations and Finances
- Compliance with Legal Obligations
- Active Oversight and Management.
Ignorance of financial issues or lack of necessary expertise does not absolve one from liability.
The Business Judgment Rule
The “business judgment rule” protects board members from liability for decisions that harm the company if those decisions were:
- Made Loyally
In good faith and with the company’s best interests in mind
- Within Justified Business Risk
Based on reasonable information, analysis, and appropriate under the circumstances.
This rule recognizes that business decisions inherently involve risk and aims to encourage prudent decision-making without fear of undue liability.
Does This Liability Expire?
Yes, the statute of limitations also applies to this liability.
In the event of liability of a member of the management board of a limited liability company a three-year limitation period applies. The claim becomes time-barred after three years from the date on which the injured party learned, or with due diligence could have learned, about the damage and the person obliged to repair it. However, this period cannot be longer than ten years from the date on which the event causing the damage occurred.
It is therefore important to determine exactly when the limitation period begins.
Does the Vote of Approval Have an Impact on the Liability?
The liability of members of bodies may also be affected by granting them a vote of approval. However, this is not a necessary relationship. There are cases where a vote of approval, although granted, does not exclude liability.
Criminal Liability of Management Board Members
If a management board member knowingly fails to file a bankruptcy petition, they may face criminal liability. According to the Penal Code, for acting to the detriment of the company’s creditors, a management board member can be sentenced to a fine, restriction of liberty, or even imprisonment. Such sanctions aim to prevent situations where management board members deliberately avoid filing for bankruptcy to conceal the company’s difficult financial situation.
Management Board Liability for Tax and Social Security Obligations
The members of the management board are jointly and severally liable for tax and social security of a limited liability company or a limited liability company in organization with all their assets, if enforcement against the company’s assets turned out to be wholly or partially ineffective.
The members of the management board are jointly and severally liable for tax arrears of a limited liability company or a limited liability company in organization with all their assets, if enforcement against the company’s assets turned out to be wholly or partially ineffective, and a management board member has not demonstrated that:
- A bankruptcy petition was filed in due time or restructuring proceedings were opened or an arrangement was approved in the arrangement approval proceedings
- The failure to file a bankruptcy petition was without his fault.
As well as does not indicate the company’s property from which enforcement will enable a significant part of the company’s tax arrears to be satisfied.
Circumstances Excluding Board Members' Liability
A management board member can exonerate themselves from liability if they can prove that:
- Timely Filing of Bankruptcy Petition or Opening of Restructuring Proceedings
A bankruptcy petition was filed on time, or a decision to open restructuring proceedings or approve an arrangement in arrangement approval proceedings was issued within the same timeframe. The management board should file a bankruptcy petition within 30 days from the day the company became insolvent.
- Lack of Fault in Failing to File for Bankruptcy
The board member should have exercised due diligence stemming from the professional nature of their activities and maintained loyalty to the company. If, during their tenure, the grounds for declaring bankruptcy arose and they did not file the petition, they should demonstrate that they were not at fault in this omission. Evidence of no fault might include prolonged illness or being denied access to the company’s information, provided they took steps to obtain such information.
- Creditor Did Not Suffer Damage Despite Failure to File for Bankruptcy
The absence of damage means that, despite not filing the petition on time, the creditor’s ability to satisfy their claims from the company’s assets did not diminish.
Regardless of these conditions, a board member can always raise the defense of set-off or statute of limitations.
Procedure for Creditors Seeking Liability
Creditors can pursue monetary claims by filing a lawsuit at the court competent for the domicile of the defendant board member. However, the right to effectively seek compensation is limited by time.
Claims for damages caused by a tort expire three years from the date the injured party learned or, exercising due diligence, could have learned about the damage and the person obliged to repair it. Nevertheless, this period cannot exceed ten years from the date the event causing the damage occurred. Independently, the claim against the company may also become time-barred.
Bankruptcy Law Liability
Creditors can pursue monetary claims by filing a lawsuit at the court competent for the domicile of the defendant board member. However, the right to effectively seek compensation is limited by time.
Claims for damages caused by a tort expire three years from the date the injured party learned or, exercising due diligence, could have learned about the damage and the person obliged to repair it. Nevertheless, this period cannot exceed ten years from the date the event causing the damage occurred. Independently, the claim against the company may also become time-barred.
- Failure to File for Bankruptcy
They did not file a bankruptcy petition within the statutory period, despite being obliged to do so by law.
- Contributing to Failure to File
They significantly contributed to not filing a bankruptcy petition on time while actually managing the debtor’s enterprise.
- Failure to Hand Over Assets Post-Bankruptcy
After the bankruptcy declaration, they did not hand over or indicate the assets, accounting books, correspondence, or other documents of the bankrupt entity, including electronic data, which they were obliged to submit by law.
Conclusion
The liability of management board members – including financial liability – is primarily associated with the violation of basic duties related to performing functions on the management board. These include initiating bankruptcy or restructuring proceedings in a timely manner. In practice, the initiation of these proceedings is the basic circumstance that allows a member of the management board to be free from the need to repay the company’s debts from private assets.
Note: this article does not constitute legal advice.
If you are interested in the liability of members of the management board of a limited liability company, schedule a consultation with us! We offer extensive knowledge supported by many years of experience.
