Insolvency status – principles of liability of members of the management board of a limited liability company [Poland]

A specific characteristic of the liability distribution in a limited liability company is that while the company itself is liable for its obligations with all its assets, the partners’ liability is limited only to the amount of their contributions. In some cases, the limited liability of the partners in a limited liability company is balanced by the full liability of the management board members for the company’s obligations.

Principles of liability of management board members arising from the Commercial Companies Code

Pursuant to Article 299 § 1 of the Commercial Companies Code, if enforcement against the company proves ineffective, the members of the management board are jointly and severally liable for its obligations.In order for a management board member to be released from liability, he or she must meet one of the following conditions, which will be discussed in detail later in the article:

• a bankruptcy petition was filed in due time or at the same time the court issued a decision to open restructuring proceedings or to approve the arrangement in the arrangement approval proceedings,
• the failure to file a bankruptcy petition was not due to the fault of a management board member,
• despite the fact that a member of the management board did not file a bankruptcy petition and that no decision was issued to open restructuring proceedings or that the arrangement was not approved in the arrangement approval proceedings, the creditor did not suffer any damage.

The liability of management board members specified in the above-mentioned article is:

• subsidiary – arises only when enforcement against the company proves ineffective,
• personal – a member of the management board is liable for the obligations of the limited liability company with all his/her assets, and
• joint and several – the creditor may pursue the entire claim from any member of the management board, and the one who fulfils the obligation assumes the rights of the satisfied creditor.

A management board member’s liability covers the company’s liabilities, including interest, as well as the costs of court proceedings and discontinued enforcement proceedings. Furthermore, liability extends to debts that arose or became due while the member was in office, provided that grounds for filing a bankruptcy petition existed at the time. Resignation or dismissal from the management board does not release the member from liability for obligations that arose during the period when the member should have filed such a petition.

Conditions for insolvency

The issue of insolvency is regulated by the Act of 28 February 2003 – Bankruptcy Law, and in particular Article 11 of this Act, according to which insolvency is a financial condition of the debtor in which:

• he has lost the ability to meet his due pecuniary obligations if this delay exceeds three months, or
• its monetary liabilities exceed the value of its assets, and this condition persists for a period longer than twenty-four months.

The first condition concerns a situation where a debtor is unable to meet its due financial obligations. The requirement arises when the creditor can effectively demand the debtor’s performance. If the due date is specified, the obligation becomes due upon its arrival. However, in the case of obligations without a specified due date, the debtor must fulfil the obligation immediately upon the creditor’s demand. The Supreme Court¹ specifies that a debtor is insolvent only when, due to a lack of funds, they fail to meet a majority of their obligations for an extended period. This means that the lack of liquidity cannot be a temporary and short-lived situation.

A debtor is also considered insolvent when their financial obligations exceed the value of their assets, and this situation persists for a period longer than twenty-four months. The rule is that the amount of liabilities must exceed the value of assets for a continuous twenty-four-month period. However, the view that episodic, even recurring, moments in which the debtor’s assets exceed its liabilities do not suspend the accrual of this period is worthy of recognition².

The presence of the second condition does not necessarily constitute a finding of insolvency. The court may dismiss a bankruptcy petition if the debtor is not at risk of losing the ability to settle its obligations in the near future.

¹ Judgment of the Supreme Court of 19 January 2011, file reference V CSK 211/10.

² P. Janda [in:] Bankruptcy Law. Commentary, 3rd edition, Warsaw 2023, article 11, https://sip.lex.pl/#/commentary/587739220/736076

Circumstances exempting members of the management board from liability for the company’s obligations to creditors

First, to be released from liability, a management board member must prove that a bankruptcy petition was filed in a timely manner or that a decision was issued at the same time to open restructuring proceedings or approve an arrangement in the arrangement approval proceedings. Each management board member is obligated, no later than 30 days from the date the grounds for declaring bankruptcy arose, to file a bankruptcy petition with the court.

To be released from liability, it is not necessary for a bankruptcy petition to be filed in a timely manner by a management board member seeking to exonerate themselves from liability on this basis – it is sufficient for another authorized person, such as another management board member, a proxy, or a creditor, to do so. Importantly, the moment at which the management board member became aware of the grounds for filing the petition is irrelevant, as the moment of insolvency itself is decisive for determining the moment of liability. This is the starting point of the 30-day period within which the management board member must file a bankruptcy petition if they wish to be covered by statutory protection.

In the practical application of this provision, management board members have thus far encountered significant difficulties in obtaining protection when filing restructuring applications and applications for arrangement approval. Article 299§ 1 of the Commercial Companies Code clearly states that protection is only available when a court issues a decision to open restructuring proceedings or approve an arrangement. This means that a management board member does not gain protection upon filing an application to open restructuring proceedings or approve an arrangement, but only upon issuance of the relevant ruling. To comply with the statutory 30-day deadline from the occurrence of grounds for declaring bankruptcy, a management board member had to first file a restructuring application and then hope for a swift court review – which, in practice, was unlikely.

The solution to this problem was the simultaneous filing of two petitions – one for bankruptcy and the other for restructuring. Following the amendment to Article 9a of the Bankruptcy Law, this solution is completely safe for management board members. The new provision requires the court to suspend the consideration of a bankruptcy petition, instead of dismissing it – as was the case previously – if the debtor is already subject to restructuring proceedings. This allows a management board member to effectively demonstrate compliance with the 30-day deadline, even if the decision to open restructuring is issued only after the deadline has passed. In practice, the new Article 9a eliminates the earlier risk of losing protection due to the rejection of a bankruptcy petition and makes simultaneous petitions a real protection for the management board, while allowing the court to first assess the chances of a successful restructuring of the company.

Second, a management board member can demonstrate that the failure to file a bankruptcy petition was not their fault. In practice, proving a management board member’s absence of fault is very difficult, which stems directly from the obligations imposed on management board members by law, such as Article 293 § 3 of the Commercial Companies Code. A management board member must prove that they were actually and objectively prevented from participating in the company’s management. A review of court rulings indicates a diverse list of circumstances that allow for an invocation of lack of fault: a prolonged, objectively unintentional absence (e.g., due to hospitalization) of a management board member, including the period during which the relevant petition was to be filed, as well as fraudulent misrepresentation of the company’s financial results. However, the division of roles within the company is not such a prerequisite. The Supreme Court³ emphasizes that even if, pursuant to an agreement between the management board members, a member is responsible for matters other than financial matters, this does not relieve them of the obligation to exercise due care over the company’s finances under Article 299 of the Commercial Companies Code.

The final circumstance that allows a management board member to be released from liability is the absence of damage to the company’s creditor. Damage under Article 299 of the Commercial Companies Code should be understood as a situation where a management board member – by failing to timely file a bankruptcy petition or initiating restructuring proceedings causes creditors to be satisfied in greater part than they would have received had the management board member filed the petition in a timely manner. In this situation, the management board member must prove that the funds included in the bankruptcy estate would not have been sufficient to satisfy the creditor. Therefore, if the delay in filing the petition did not worsen the creditor’s satisfaction, the management board member is not liable for damages.

³ Judgment of the Supreme Court of 9 December 2010, file reference III CSK 46/10, and of 15 April 2011, file reference III CSK 446/13.

Summary

Article 299 of the Commercial Companies Code and the Bankruptcy Law require the management board to respond quickly to any threat to the company’s financial liquidity. Failure to do so may result in the management board member’s personal, joint and several liability for all assets. Therefore, it is crucial to monitor the company’s financial situation, understand the grounds for insolvency, and make timely decisions on filing for bankruptcy or restructuring. Appropriate action not only protects the interests of creditors but also protects management board members by minimizing the risk of liability.

At TGC Corporate Lawyers and Advartis Group companies, we provide comprehensive analyses of company insolvency and the potential liability of management board members. We engage lawyers, auditors, and financial advisors in projects. This interdisciplinary approach allows us to precisely determine a company’s situation and implement measures to protect management board members from their personal liability, which can be very severe.

Contact us and minimize your liability risk: