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Liability of shareholders of a limited liability company

18.11.2021

In a limited liability company, the shareholders are not liable for obligations of the company but the company itself - as a separate legal entity. There are, however, exceptions to this rule.

Liability of shareholders of a limited liability company

General rules of liability in a limited liability company

One of the structural foundations of a limited liability company, which largely determines the attractiveness of using this legal form in business transactions, is the principle of excluding the shareholders' liability provided for in Art. 151 §4 of the Commercial Companies Code (“CCC”). According to it, the company, as a legal entity, is responsible for the obligations of a limited liability company. The company bears this liability on its own and with all its assets. Therefore, shareholders are not liable for obligations of the company, but still risk the contributions they made to the company and, possibly, additional performances (additional capital payments, recurring in-kind performances).

Importantly, in Polish law there is no risk of the situation known as “piercing of corporate veil” present in the United States, where liability is born by shareholders who have abused the company's form for illegal purposes, in particular to harm creditors. This does not mean, however, that shareholders of a limited liability company never bear personal liability. Nevertheless, this is an exception to the principle which excludes the liability of shareholders, which can only be modified by introducing different liability rules adopted directly in the Commercial Companies Code or in other special provisions.

Special rules of shareholders’ liability

The Polish Commercial Companies Code provides for the following situations where shareholders bear personal liability:

  • When assuming obligations before entering the company in the business register (Art. 13 CCC), the liability varies depending on whether the shareholder has acted personally in the company’s name or not. If the shareholder acted personally in the company’s name, he bears unlimited liability for obligations assumed at that time jointly and severally with other persons acting in the company’s name (Art. 13 §1 CCC). If a shareholder did not take any actions personally, he is only liable up to the value of the unpaid contribution (Art. 13 §2 CCC).
  • In the event that a shareholder made a defective in-kind contribution (Art. 14 §2 CCC) or where the value of in-kind contribution is considerably overestimated (Art. 175 §1 CCC). In the former case, the shareholder is obliged to compensate the company for the difference between the value assumed in the articles of association and the sales value of the contribution, unless the articles provide otherwise. In the latter case – the shareholder who made such contribution and members of the management board who, while being aware of this fact, applied for the company's registration, are jointly and severally liable to compensate the company for the shortfall;
  • If the shareholder, while taking part in the establishment of the company, caused damage to the company contrary to the law and through his fault (Art. 292 CCC) - such a situation will occur, for example, in the case of payment of remuneration for services provided when establishing a company from assets allocated to cover the share capital, overstating contributions, incorrect formulation of the articles of association, obtaining benefits disproportionate to the expenditure made.

Shareholder liability for shares

The Commercial Companies Codes also provides for joint and several liability of the seller and the purchaser of a share for outstanding performances due to the company in connection with the disposed share or its part (Art. 186 §1 CCC) and beneficiaries of rights attached to a share or shares (Art. 184 §1 CCC).  The said liability relates to performances attached to a share i.e. recurring in-kind performances or additional capital payments.

Shareholder / board member liability  

Moreover, the provision of Art. 151 §4 CCC does not exclude the liability provided for in Art. 299 §1 CCC of members of the management board who are also shareholders of a limited liability company, which was confirmed by a judicial decision of the Supreme Court of 14 February 2003, case file no. IV CKN 1779/00. In the light of Art. 299 §1 CCC, it does not matter whether a member of the management board is also a shareholder or a person who is not a shareholder. Thus, the principle of excluding the liability of a shareholder in a limited liability company may be compromised by the fact that a shareholder simultaneously performs a function in a limited liability company.

Liability for actions to the determinant of the company

Moreover, it should be remembered that a shareholder of a limited liability company may also be liable on the basis of a fault for his own actions, if they meet the conditions of acting to the detriment of the company or third parties or fulfill the criteria of a crime. The above was decided by the Supreme Court in its judicial decision of 24 November 2009, case file no. V CSK 169/09, which rightly pointed out that in such a case the personal liability of a shareholder of a company for his own culpable actions causing damage to third parties should be distinguished from the liability of a shareholder for the obligations of that company.

Civil liability of a shareholder

A shareholder will also be liable towards a limited liability company under general civil liability. This means that the shareholder will be liable for non-performance or improper performance of his obligations towards the company, regardless of the source of the obligation. Such a source may be directly the articles of association (e.g. an obligation to recurring in-kind performances - Art. 176 § 1 CCC or if any obligations towards the company are imposed on the shareholders - Art. 159 CCC), a civil law contract between the company and the shareholders (e.g. for the provision of services, lease or supply), or the shareholders' agreement regulating, in addition to the articles of association, mutual obligations of the shareholders.

Liability of a shareholder related to the company restructuring

The shareholder may be liable for the obligations of a limited liability company in the event of a merger process involving a partnership, namely when a limited liability company takes over a partnership or a new limited liability company is established as a result of the merger. In this case, the shareholders of a new limited liability company, are liable for 3 years from the date of the merger under the existing rules, jointly and severally towards the creditors, and jointly and severally liable with the limited liability company for the liabilities of the partnership that arose before the merger.

A similar solution as in the case of a merger with a partnership is provided for in the provisions on the transformation of a partnership into a limited liability company. The partners of the transformed company, for 3 years from the date of transformation, are liable for its liabilities that arose before the transformation, under the existing rules, jointly and severally with the transformed limited liability company.

Shareholders liability before the Registry Court

If in a given limited liability company the right to appoint the management board is vested in the partners who, however, did not appoint this body, or the appointment was defective, preventing its proper functioning (e.g. board vacancies), the registry court may request the shareholders to remove the indicated defects under pain of a fine to "protect the integrity of business transactions". The fine may be imposed repeatedly.

Liability for binding instructions of a parent company

On 2 September 2021, the government draft act amending the Commercial Companies Code and certain other acts was read for the first time at the Sejm session, providing for the introduction of new rules to the holding law which regulates the principles of cooperation between parent companies and their subsidiaries.

The new rules concern among other things:

  • direct liability of a parent company towards its shareholders for reducing the value of the company's shares in the event that the subsidiary complied with the parent company's binding instructions;
  • liability of a parent company for the consequences of issuing a binding instruction subsequently executed by the subsidiary - both towards the subsidiary and its creditors, as well as shareholders.

The draft also provides for the possibility of the parent company to request the subsidiary to buy shares of shareholders or minority shareholders, if it directly holds at least 90% of the subsidiary's share capital (squeeze out).

The new regulations will also apply to limited liability companies. Currently, a squeeze out is only possible in joint-stock companies and only by a maximum of five shareholders who jointly hold at least 95% of the shares (or 90% in public companies).

The planned changes are expected to strengthen the supervision of owners and supervisory boards in companies, as well as to improve the management of groups of companies. The new regulations would, as a rule, enter into force six months after their publication in the Journal of Laws.

Liability of a shareholder in a limited liability company - summary

As discussed above, it should be stated that liability of a shareholder in a limited liability company is not completely excluded. There are circumstances when a shareholder will be liable towards its creditors jointly and severally with a limited liability company for the assumed obligations. But a shareholder may also be liable towards the company, under certain circumstances, for example, when he overstates the value of the contribution made, causes damage to the company through his culpable actions or fails to meet his obligations towards the company.

Author:

Paweł Góra,
Legal Adviser
TGC Corporate Lawyers

 

See also: Draft law on whistleblowers – sanctions for lack of procedures and reporting false information

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