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The Warsaw Voice » Law » January 21, 2009
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Cleaning Up Defective Acts of the Management Board
January 21, 2009   
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In a recent volte-face, the Polish Supreme Court has allowed later ratification of an act in law passed without authorization by persons acting as the management board of a co-operative. This could have widespreadramifications for companies in general.

The act of the board is the act of the legal person
By law, legal persons act through their bodies: usually the management board (the "board"). The board manages the legal person's affairs and represents it in dealings with third parties.

The board, as a governing body, differs from an attorney-in-fact (pełnomocnik). Whereas the law allows the principal to confirm at a later date acts in law performed by a representative that exceeded his/her authorization, no such provision exists with regard to defective acts by the board.

When can a board's act be defective?
Managers at times do business without clear authorization. Contracts are signed by boards which are not entitled to do so. This can be for various reasons, for example shareholders might forget to renew a manager's term of office (hence, he or she loses legal capacity). Further, the law or the company's bylaws can specify the minimum number of board members, and an under-strength board, called a "truncated board", is deemed an invalid governing body. This may be caused by the expiration of a mandate or by death, resignation or dismissal. Finally, in some cases, the powers of the board may be strictly specified or limited by law. All transactions completed by managers whose mandate expired or who lacked due authorization or power, or by a truncated board were as a rule deemed null and void and, thus, not binding upon parties. However, that does not mean the company would necessarily want to strip managers of authority or dissolve contracts signed by them. Often, companies prefer to legalize such transactions. The trouble lies in the lack of an officially authorized opportunity.

Silence of law
Polish law expresses a profound ambiguity toward the consequences of acts of the board taken without due competence and in particular, the law does not provide for the possibility of curing such acts. Exceptionally, under the commercial company code, a transaction entered into by a company board without shareholder or supervisory board approval can be cured afterwards through obtaining the missing consent by a certain deadline. This provision does not extend to curing other defective acts of the board.

For many years, courts and commentators have struggled with this problem. The Supreme Court has repeatedly stated that an act of a board that overstepped its competences is null and void and cannot be subsequently validated by a company confirmation. In practice, the only way out was to repeat the act in a correct fashion - which is not always possible.

Management board needs to receive fair treatment
The logic of this approach was questioned. The nullity of acts of the board created a risk of abuses and jeopardized business safety. A contracting party might have known about the board's errors and might use it tactically to contest the validity of the contract and avoid contractual obligations. The contracting party, on the other hand, could claim damages only from the board, not the company.

The key issue was whether representation by the board could be viewed in a similar light to representation by the attorney-in-fact, especially as both of them represent a legal person and can execute contracts on its behalf. Could defective acts of the board be validated later on, as with attorneys-in-fact?

The Supreme Court has resolved doubts
The antidote for the above doubts was found in the aforementioned similarity between board and attorney-in-fact. Recently, the Supreme Court acknowledged that an act in law performed by the board of a co-operative without the approval of the other governing body required by law may be subsequently confirmed by the co-operative and thus, validated. But the stated reasoning went further - it provided strong grounds to defend that an act of an unauthorized or truncated board can also be subsequently ratified by the company.

Milestone ahead
This case is a breakthrough. The innovation lies in empowerment of legal persons to endorse the board's decisions undertaken without authorization. Both parties to a contract count on the success of the transaction, which would be unattainable in the case of invalidity. The right to validate a defective legal transaction is unquestionably good for business stability and safety.

One word of caution: court judgments are not a source of law in Poland. Fortunately, thus far, the change of approach seems to have been widely accepted by doctrine and legal practitioners.

Magdalena Karpińska counsel, SALANS Warsaw Corporate and M&A team
Natalia Ławniczak paralegal, SALANS Warsaw Corporate and M&A team
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