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The Warsaw Voice » Law » May 7, 2008
A D V I C E F R O M S A L A N S
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Board Members Can Lose Their Homes
May 7, 2008   
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Management board members sometimes worry over being sued and having to pay out their own pocket due to a court holding them liable for a disaster that befell their company. This article focuses on their personal civil liability and how to limit it.

In general, the statutory civil liability of management board members falls into one of two categories: (i) liability for breach of the general duty of care; or (ii) specific liability arising in strictly prescribed circumstances. At the same time, this liability may take the form of either liability towards the company or liability towards its creditors or other third parties.

Liability towards the company
Under company law, management board members can be held personally liable for any damage they caused to the company through acting negligently. They are protected from this liability if they carry out their appointed tasks with a professional duty of care.

The liability towards the company also covers damage caused by acts or omissions made by the members of the management board in breach of law or the company's charter documents. This liability arises only if the actions or omissions resulted from the fault (including negligence) of the given management board member.

Management board members can also incur personal liability under other specific instances such as: (i) liability for damage caused to the company upon incorporation through failure to observe required procedures, whether intentionally or negligently; (ii) liability to pay the company the balance arising from any overvaluation of an in-kind contribution to a limited liability company; or (iii) liability for undue payments to shareholders.

One line of defense is for board members to obtain acknowledgment by the general shareholders meeting of due discharge of their duties (absolutorium in Polish). This acknowledgment is effective only with regard to the duties it specifically refers to, based on the facts and documents presented at the general shareholders meeting. Therefore, should new circumstances come to light or old ones prove to be false, the acknowledgment will not effectively discharge the board member from liability. This defense will also prove to be without force if the resolution on acknowledgment is successfully challenged or the company goes bankrupt.


Liability towards creditors
Let's face it, the main reason people set up companies is so they can undertake risky activities without having to risk losing their house if a lawsuit blows up in their face.

Normally, board members are immune from liability for the company's acts. The courts will only allow creditors bearing a court judgment to seize company property. The courts will not allow creditors to "pierce the corporate veil" and seize property owned personally by members of the board.

In only two specific situations does Polish law allow the corporate veil to be pierced and management board members held jointly liable along with the company to the company's creditors (including seizing board members' personal assets, bank accounts, and so on).

The first situation concerns defects or bad faith acts in the registration of the company they govern or in registration of an increase of the company's share capital (i.e. by submitting whether intentionally or through negligence false data in the written statement to the registry court confirming that the capital contributions have been made or properly secured). A management board member cannot defend themself by arguing that he or she had relied on other members or that other members were at fault.

The second, and nightmare, scenario is where enforcement against the company proves ineffective. In this case a management board member may avoid liability by proving either that bankruptcy was filed for in a timely fashion, or that failure to file for bankruptcy was not due to their fault, or that despite the failure to file for bankruptcy the creditor did not incur any loss or damage.

In light of the slightly scary personal exposures involved, the sobriquet of "limited liability" may prove ephemeral, especially to those who play fast and loose with the law. By far the best and easiest way to minimize this risk is simply to comply with your statutory duties - although this can be hard when dealing with bankruptcy law.

Maciej Olszewski
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