We use cookies to personalise the website and offer you the greatest added value. They are, among other purposes, used to analyse visitor usage in order to improve the website for you. By using this website, you agree to their use. Further information can be found in our data privacy statement.



Management board's liability – may the company's creditor be my creditor?

PrintMailRate-it

by Anna Smagowicz-Tokarz, Kamil Twardowski

31 May 2022 


Can a management board's liability to a limited liability company be split? Rödl & Partner's experts discuss practical methods to secure board members' interests in case of a court dispute. 


Management board member vs company creditors 


A management board member is liable for the company's contracts and obligations. This includes all obligations which the company assumes during the board member's term in office. Management board member's liability is:


  • subsidiary – it is primarily the company which is liable for its obligations. Once the enforcement against the company is unsuccessful, the creditor may reach out for the board member's property;
  • personal – a board member is liable with all his/her assets;
  • joint and several – each board member is equally liable towards creditors. A creditor may choose which board member to pursue.

Even though there is no legal provision which would stipulate liability of management board members in joint-stock companies, this does not mean they are not liable towards creditors. 


Basis for claims against board members


In order to hold a board member liable, the creditor should demonstrate that the company has an outstanding obligation (assumed during that board member's term in office), confirmed in a court ruling or order, and should confirm that the enforcement against the company has proven ineffective.


In order to defend against the creditor's claims, the board member should demonstrate that he/she has filed for bankruptcy or restructuring proceedings in time. If no such petition has been filed, he/she needs to demonstrate that this has not been his/her fault. A board member may also demonstrate that even though a petition for bankruptcy has not been filed and restructuring proceedings have not been launched, the creditor has suffered no damage. A creditor may raise claims against a board member for 3 years after the date when he learns about the damage but no later than 10 years after the event that causes the damage. 


A public entity as a creditor


The creditor is sometimes a public entity. Management board members may be liable for the company's obligations towards e.g. tax authorities, the Social Insurance Institution or the Solidarity Fund. The criteria for liability in all such cases are the same as for liability in private cases. The liability for tax obligations rests with a board member of an incorporated company. This applies to claims which became due while the board member was in office. A board member may be held liable if enforcement against the taxpayer's assets has proven ineffective or has been discontinued because it is impossible to recover more than the costs of enforcement. A board member is liable with all his/her assets jointly and severally with the taxpayer.


The following can be done to avoid liability for the company's tax obligations:


  • demonstrate that a petition for bankruptcy was filed in due time;
  • demonstrate that the petition for bankruptcy was not filed for reasons not attributable to the board member;
  • a management board member may also indicate the company's assets from which tax arrears may be enforced.


In practice, in the course of tax proceedings, a board member should demonstrate that there were no grounds for declaring bankruptcy while he/she was in office or should point out procedural errors. Proceedings do not automatically involve all management board members. 


Management board's liability – can it be split?


Management responsibilities may be distributed among the company's management board members. However, this does not give them sufficient protection if a third party or the company seeks to hold them liable. The distribution of responsibilities may lead to a separate assessment of liability (if any) of each board member against the company and to differences among recourse claims against individual board members. There are a few examples of cases concerning management board members' liability for the company's tax arrears in which not all but only some board members were held liable, albeit in very specific and exceptional circumstances.  This is because, as a rule, all board members are jointly and severally liable for the company's obligations.  Third parties (creditors) may seek claims but only after they first claim against the company and the company fails to satisfy the claim, a court issues a final and non-appealable ruling, and claim enforcement proves ineffective. Then, creditors may seek their claims from the board members directly.


Even if a board member obtains an official discharge of duties, this may prove not a good defence weapon if, after the year-end closing and approval of financial statements, it turns out that the board member included untrue figures in the financial statements and hid it from the other board members. If at the time of approving the financial statements shareholders do not have certain information because it has not been disclosed in the financial statements or has been misrepresented, the discharge of duties will not protect the board member from the company's claims.  


Practical tools – defence file


The concept of defence file originates from tax law. It describes the course of action in view of various tax interpretations. The objective of a defence file is to demonstrate that the decision-making process is transparent and correct. The documents collected in the file serve to prove that there have been no fraud in decision making and the whole process has been in line with the law and articles of association. They also show that a board member has received the approval from the company bodies. A board member may try to build up a defence file by collecting various documents, e.g. a shareholders' resolution, a management board's resolution or documents such as e-mails, notes with instructions which have led to a decision while showing that the decision could not be made by just any board member.

 

Sitting on a management board is a very responsible job which gives a lot of powers to act on behalf of the company. Yet, board members sometimes make decisions which may harm the company.



In case of any questions or doubts regarding the above-mentioned issue, please contact our experts. 

Contact

Contact Person Picture

Anna Smagowicz-Tokarz

Attorney at law (Poland)

Associate Partner

Send inquiry

Profile


Deutschland Weltweit Search Menu