As I have already mentioned in my previous article, the most popular type of company set up in Poland is the Limited Liability Company (LLC). Many foreign investors choose this legal structure for its simplicity and low costs, and often – especially in the smaller ones – investors themselves wish to manage (or co-manage) the company, so they become members of the Management Board.
However, many of them do not pay due attention to legal consequences of such a decision and are not aware of the legal liability connected with this position. I am compelled to underline that many foreign clients invest in Poland in a form of an LLC being groundlessly convinced that the limited liability refers to the whole business in Poland and all the people involved in it. They think that, if something goes wrong and the business of a subsidiary fails, they can just close it, leave the debts behind and start somewhere else.
This is not the case: The members of the Management Board, indeed, could be forced to pay a high price for it. Let’s take a look at this topic.
According to the Polish company law the Management Board Members of an LLC are jointly and severally responsible for the debts of the company in case it does not satisfy its creditors.
Basically, in order to pursue a Member of the Management Board a creditor needs to sue the company first and initiate the enforcement proceedings. In case the enforcement proceedings turn out to be totally or partly ineffective for the lack of the company’s assets – this fact will be confirmed by the bailiff. On this basis the creditor is entitled to sue the member of the Management Board and demand all the amounts that the company didn’t pay to him/her as well as the interest and costs of the court proceedings, including the attorney’s fees. As you may imagine, the amount at stake is high.
How can a Member of the Management Board defend from the liability for the company’s debts? By proving one of the following:
- he/she filed for company’s bankruptcy in a due time;
- the court declared the restructuring proceedings towards the company in a due time,
- it is not his/her fault the non-filing for the bankruptcy or restructuring proceedings in a due time;
- the creditor did not incur damage due to the fact that the aforementioned procedures were not initiated in a due time.
The burden of proof shall lie with the Manager. In other words, if he/she needs to prove at least one of those circumstances, while the plaintiff only needs to prove the existence of an unpaid company’s debt.
Establishing the “due time” is a crucial point. It is considered appropriate to file for bankruptcy when:
- the company for 3 consecutive months has problems with invoices paying; or
- the company is indebted above the value of its assets for more than 2 years; or
Often an appalling event proving that the company is in serious trouble arises when the bank refused to continue the financing or worse, terminates the loan and no other bank is wishing to provide the company with the financing. .
By contrast, the restructuring may be initiated when the company is still in a relatively good condition: through an agreement with creditors for the deferment or reduction of some payments together with the implementation of certain business improvements, the restructuring agreement may bring the company back into business. Despite the restructuring being relatively expensive, it allows to maintain the company alive, overcome difficulties and get back into the game.
When it is too late or there is no good recovery plan, the only remaining solution is the liquidation of the company within the insolvency proceedings. However, also these proceedings provoke expenses: the insolvent company needs to have resources to finance the judicial fees, the accountants, the receiver’s fees, the attorney’s fees, the employee’s salaries and all other costs during the insolvency process.
If the company does not have enough assets, the court will not even open the insolvency proceedings and if, during the proceedings a shortage of funds arises, the proceedings will be closed.
If the demand for opening of the insolvency or restructuring proceedings is filed too late, the Manager cannot release himself/herself from the liability for the debts of the company and all the damages incurred by the company’s creditors as a result of a belated opening of the insolvency proceedings. As the damage is often equivalent of the unpaid debt, the creditors have two separate legal bases to sue the Management Board Members and get back from them the money they didn’t get from the company.
In extreme cases, when the negligence of the Management Board is truly gross and the damage caused to creditors due to the belated filing for bankruptcy is very high, the court may impose on the Management Board Members a prohibition of running enterprise and holding positions in enterprises.
My advice is to accept the position of Management Board Members with extreme caution and, when the first signs of corporate difficulty arise, to react immediately and contact a lawyer expert in the matter: not only for the company’s sake, but also to protect their own assets and interest.