Accountability of limited company board members for company obligations

To begin with, it needs to be stressed that a limited company (spółka z ograniczoną odpowiedzialnością, spółka z o.o.) and persons linked to the company (e.g. shareholders, board members, supervisory board members) are separate and independent legal entities. A limited company participates in legal transactions as an autonomous legal existence equipped with legal personality, legal capacity, capacity to perform acts in law – capacity to obtain rights and incur liabilities.

So, in case when a limited company incurs some liability – it is the company that is the debtor – not the shareholders. Therefore, the creditor will not be entitled to demand the shareholders to settle the claim towards the company. According to Code of Commercial Companies, the shareholders shall not be liable for company obligations.

Shareholders are in turn entitled to participate in the company profit in the form of a dividend. From this point of view, choosing a limited company as the legal form for business seems to be very beneficial and appealing. Running a business of such legal structure, the shareholders may share profits among each other and minimise the losses up to the amount of the contributions made, as it is the company that will eventually be liable for any obligations.

Shareholders are, putting it simply, „company owners”. They constitute the body called Shareholders’ Meeting, at which any important decisions concerning the company are made based on resolutions. The company is in turn represented by the Management Board. The scope of the Board’s accountability is very broad. Board Members are liable towards the company itself as well as various institutions (e.g. register or tax institutions) and company counterparties for the obligations incurred by the company, and the liability is auxiliary – exist in the situation when execution from the company proves ineffective.

So, a creditor of a limited company, in order to satisfy the debt, as they cannot satisfy it from the company’s assets, may reach to personal assets of a board member. The board member and the company shall in this case be liable jointly and severally, until the creditor is fully satisfied. Liability of the board members is therefore very strict.

It needs to be pointed out that ineffectiveness of execution does not need to apply to all company assets. It is enough if the creditor wishing to satisfy their claim demonstrates that one type of execution used by them proved ineffective. This may take place based on any evidence indicating that the company does not have any assets allowing for the creditor to be satisfied. It is in the board member’s interest to indicate that the company has assets sufficient to satisfy the creditor.

In Supreme Court decisions and doctrine it is assumed that liability for company obligations is held by the persons who were board members at the time the obligations were incurred or became due. This means that the persons who were board members when the obligation was incurred and those performing board member duties at the time the obligation already existed and was due shall be liable for particular company liabilities.

Here one should emphasize the fact that a board member is liable for company liabilities also after being removed from National Court Register. The liability arises with the adoption of the resolution appointing them as a board member, not at the moment of providing an entry into National Court Register, the nature of which is only declarative.

Meanwhile, the Code of Commercial Companies predicts the situations when a board member may extricate themselves from the liability. This may happen when it is demonstrated that:

1. A motion for declaration of bankruptcy was filed in due time or at the same time a decision about instituting restructuring proceedings or about approval of settlement in proceedings regarding settlement approval was issued,
2. Failure to file a motion for declaration of bankruptcy was not due to their fault,
3. Despite the failure to file a motion for declaration of bankruptcy or issue a decision to institute restructuring proceedings or lack of approval of settlement in proceedings regarding settlement approval the creditor did not suffer any damage.

However, board members will not be liable for failure to file a motion for bankruptcy at the time execution proceedings are carried out by administration order or through a sale of the company, pursuant to the provisions of Civil Procedure Code, if the obligation to file a motion for bankruptcy arose during the execution.

As the above suggests, it is misleading to thing that choosing a limited company as legal structure for business will save us from incurred liabilities and the resulting debts. Board members and the company will be jointly and severally liable in case execution proves ineffective. The obligation will be of personal nature, i.e. the possible debts will be satisfied from all personal assets of a board member.

The practice shows that the board members of a limited company are usually the company’s shareholders, which means that the possible danger of execution regarding unsuccessful ventures and investment will affect them as well.