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The Warsaw Voice » Law » November 7, 2007
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Gentlemen! Let's Go Bankrupt!
November 7, 2007   
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Shocking as it may seem, sometimes bankruptcy is the only way to avoid personal liability for your company's debts.

Although a cliché, it must be borne in mind that being a board member in a registered company (a limited-liability company-spółka z ograniczoną odpowiedzialnością or a joint-stock company-spółka akcyjna) brings with it a great burden of responsibility. Civil and tax law reinforces this by placing, under certain conditions, unlimited personal liability for the company's debts on the members of the board. Generally, these regulations apply when the company itself does not fulfill its financial obligations, either toward business partners or the Treasury, and the regular channels of recovery through court action fail to deliver. In short, go after the members of the board if you can't get satisfaction from the company.

The starting point in legal terms is article 299 of the Polish Commercial Company Code, which states that all board members in a limited-liability company are fully responsible for the company's debts when the "execution procedure" fails to deliver. It seems rather a harsh exception to the general rule and idea of "limited liability," taking into consideration that in such entities the members of the board are quite often shareholders themselves. It may be argued, though, that the demands of the market and the need for a degree of security in business dealings justify some pressure being put on management to lead the company in a responsible way. It can be argued that this provision sets the minimum standards of safety in business life required to secure the interests of other market players in general and the company's creditors in particular.

Anxious as they may be to protect a company's business partners, the legislators would not in any case wish to put aside the interest of the Treasury. Hence, unsurprisingly, the tax regulations (mainly article 116 of the Tax Ordinance) are even more severe. Moreover, they apply to both limited-liability and joint-stock companies. While under civil liability it is the creditor who must take an action to adjudge legal grounds against the board members (by filing a statement of claim), in the tax regime the authorities just issue a liability decision and the board member may only appeal it, so the initiative lies clearly on the other side. The same pattern, under the provisions of article 31 of the Social Security System Act (Ustawa o Systemie Ubezpieczeń Społecznych), also applies to contributions owed to the Social Insurance Institution (ZUS). The burden then lies on the individual to prove his "innocence" in court (an administrative procedure in case of taxes, a labor and social security court in case of ZUS).

Having already frightened you off any entrepreneurial notion you may ever have had, there is always a way out-but it is not an easy path. In order to avoid liability, board members must prove that either they filed a motion for bankruptcy "at the right time," or that they are not to blame for failing to do so. This might turn out to be an uphill struggle since the burden of proof is fully on their side. In terms of practice this means that it is not enough to claim that all their actions were taken both in good will and at the right time, but it must be proved without a doubt. To make matters worse, both legal commentaries and case law are very strict on this subject, stating that the "right time" means only two weeks from the time the company stopped paying its debts or the liabilities were no longer covered by its assets. Also, lack of guilt is extremely difficult to prove, considering the nature of the duties of management. To succeed in management, one must be very careful, well-informed and up-to-date.

Doing business obviously entails a certain amount of risk, but there is little sense in taking on exceptional risk, that of unlimited personal liability, when the company is already on the verge of bankruptcy. It is not worth it, even if we are talking about a business doing its level best to keep to the straight and narrow.

So, there is nothing to be surprised about then, when you hear one day that filing for bankruptcy can be-at least from a personal point of view-the ultimate but also the best solution. But then, of course, we wouldn't wish that on anyone…

Monika Olesińska-Tyczyńska
Patrick Radzimierski
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