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Directors’ Liability in Poland

27-10-2014

1)    Are directors liable for management decisions

 

Under Polish law, the management board members bear the liability on the basis of the Code of Commercial Companies (hereinafter referred to as ‘the CCC’). The CCC deals with the following basis of the liability: towards a company, for liabilities of a company towards third parties, as well as connected with restructuring of a company (mergers, divisions and transformation of companies).

 

The management board members can also bear liability on the basis of the bankruptcy law or tax law. The liability on the basis of the bankruptcy law generally applies in case the company becomes insolvent (i.a. ceases paying its debts) and the management board members fail to perform their duty to file a bankruptcy petition within two weeks of the day on which the basis to declare the company bankrupt appeared.

 

Besides the liability of an entity on which a tax duty is imposed directly, provisions of the tax law regulate also the liability of persons other than a legal entity directly obliged to pay taxes (so called the liability of the third parties – i.e., in some cases the management board members). Polish accountancy law also regulates such liability.

 

2)    What is the general criteria for being liable?

 

Under the Polish legal system, the liability of the management board members is based on three factors: faulty action or omission of the management board member and cause-effect link between such action or omission and occurrence of damage (sometimes a liability is at stake even when there is no damage, having the ‘guarantee character’). The legal model of liability of the management board members results from failure to comply with their duty to carry on the company’s business and act on it’s behalf with a due diligence of the highest level.

 

3)    Can directors be directly liable for company debts in front of the company’s creditors without proving that directors have been guilty? In which cases?

 

As mentioned above, the liability of the management board members is based on fault and it is connected with the insolvency of the company and non –filing of the petition of bankruptcy in due time.

 

In accordance with the CCC, if the execution against the company proves ineffective, members of the management board shall be jointly and severally liable for the company's liabilities towards company’s creditors. A member of the management board may be discharged from the above liability, if he proves that the petition in bankruptcy was timely filed or arrangement proceedings were initiated, or that a failure to file the petition in bankruptcy or a failure to initiate arrangement proceedings occurred through no fault on the side of management board member, or that despite the failure to file the petition or initiate arrangement proceedings the creditor suffered no damage. The above possibility of discharging from liability shall not prejudice the provisions whereby further liability of members of the management board is envisaged (for example on the basis of penal or fiscal law provisions) neither the possibility to seek the redress on the general basis of liability by the shareholders and third parties.

 

 

4)    Can directors be liable in case of insolvency of the company? Is this situation of responsibility frequent in your jurisdiction in insolvency cases?

 

Yes, the management board members can be liable in such situations. According to the bankruptcy law, in case where company becomes insolvent, each of members of management board has a duty to file a bankruptcy petition to the court, within two weeks of the day on which the basis to declare the company bankrupt appeared. Such petition initiates the bankruptcy proceedings which major goal is to pay off the creditors of the company to the possible extent on a fair and equal basis.

Failure to comply with this duty leads to a liability of the management board members towards the creditors of company. In such case each creditor must prove that his claims would be satisfied if bankruptcy proceedings would have been initiated in due time.

The management board member is discharged from this liability if he proves that the bankruptcy petition was timely filed or arrangement proceeding were initiated, or that a failure to file the petition in bankruptcy or a failure to initiate arrangement proceedings occurred through no fault on his part, or that despite the failure to file the petition or initiate arrangement proceedings the third person (the creditor) suffered no damage.

 

Such cases are quite frequent in Poland as usually it is the only way for the creditors of the insolvent company to recover their receivables.

 

5)    Are directors liable in the case of closing business without filling insolvency?

 

Polish law does not provide for a separate basis of the liability in such cases. The directors bear the liability on the general, earlier mentioned basis. However it should be noted that in Poland closing of the company is the end result of liquidation proceedings. In such proceedings the companies’ affairs are carried out by the liquidator or liquidators which are former management board members unless shareholders (or the court) appoint other person or persons as liquidators. To the liquidators applies the same rules of liability as to the management board members. In essence, the liability for the debts is borne by the persons (management board members or liquidators) who faulty failed to fulfill to the earlier mentioned duties (considered by law as the source of the damage).

 

6)    Do you have a specific action to sue a director when he/she produces damages not to the company but to the creditors or shareholders? Is this legal action successful for recovering the damage suffered by the claimant?

 

The only specific action in Polish law is related to the insolvency of the Company (when the enforcement proceedings against the Company proves to be ineffective), which was explained in point 3-4 above.

 

Apart from the above, in the Polish legal system the management board members do not bear the liability for the damage made to third parties as their actions or omissions generally are treated as actions or omissions of the company. Under Polish Civil Code, the legal entities are liable for damages caused by actions or omissions of their management board. If the company is liable, then in some cases, the management board members can bear the liability towards the company (as a result of the recourse action of the company against its director).

 

However, in case the damage to the creditor or shareholder is made by the management board members exceeding their managerial capacity, the company is not liable for the damage.

 

7)    Can be liable other persons than directors/board members? Ex. managers, officers?

 

Generally, the liability connected with the company’s activity is imposed on the company or on management board (in specific, earlier mentioned circumstances). Managers or officers of the company other than management board members can only bear the liability in an indirect way. Such persons can bear a liability towards the company for the damage caused to the company as a result of their actions on behalf of the company. In such cases the company is held liable directly for the damage and it can have a recourse action for compensation towards the managers or officers whose faulty actions or omissions caused the damage. Such claim is limited to the extent of the damage caused to the company (for example to the amount which the company had to pay to the third party as compensation). It should be noted that in case of the damage caused to the third parties by the employees of the company, their liability is limited on the basis of labour law to the amount equal to three months’ remuneration, unless the damage was caused deliberately.

 

8)    What do you estimate would be the expected time for obtaining an enforceable judgment in a legal action before court against the directors? For example a temporary enforcement pending of court of appeal decision?

 

Obtaining enforceable judgment usually takes from a few months up to two years months in the court of the first instance, and usually six months or longer in the court of the second instance. Such time depends mostly on the complexity of the case as well as character and number of evidences. It is also possible in some cases (for example in claims for payment) to secure the claim before obtaining the final judgment on the basis of the application on security of claim addressed to the court. Such security decision should be issued within 7 days from the date when the relevant motion is filed to the court or within one month, in case a court hearing is required. In practice it takes from 2 weeks up to about three months to obtain an appropriate security decision from the court.

 

9)    Is it feasible /convenient to include in the by-laws of the company the arbitration clause for claiming to directors? What is the expected time for the arbitration award?

 

Polish law has recently been subject to changes in this respect. Before the recent amendments to the arbitration proceeding rules were introduced, the feasibility of such clauses were a subject matter of the dispute in the legal doctrine. The currently binding legal provisions stipulate that arbitration clause included in the deed of association of the company (by-laws) binds only the company and their shareholders. In consequence, it is not possible to include in the by-laws of the company effective arbitration clause for purposes of using it in claims against the management board of the company. However, it is not excluded to apply an arbitration clause in contracts between directors and the company, unless the director is an employee of the company. In any case, such clause will not be binding upon third parties, including creditors of the company.

 

With respect to the applying arbitration clause in disputes between directors and the company, time frames for obtaining the arbitration verdict depend on the arbitration tribunal and rules chosen by the parties. In case of institutional arbitration tribunals (for example by Polish Chamber of Commerce), the time of proceedings does not substantially differs from that before regular state courts.

 

10)What are expected fees and costs for a lawsuit like this?

 

The costs of a lawsuit against the director include mainly the court fee for statement of claims in the amount of 5% of the claim value, as well as minor stamp duties for the power of attorney to the court (if the claimant is represented by the attorney), various fees connected with the evidences (including usually the costs of expert opinions, etc.) and remuneration of the attorney of the other party which is subject to return in case of losing the case.

 

11)What is/are/ the usual system/s for estimating the fees? Ex. Hourly rate, cap fixed budget, success fee – quota litis

 

The amount due as a remuneration for legal representation can be freely agreed between the attorney and the client, with the limitation that it cannot by solely dependent on the outcome of the case (success fee- quota litis), though it can be combined (partially as a success fee and partially as fixed fee or on hourly rates).

 

In case there is a necessity of paying the remuneration of the other party’s attorney winning the case, the amount depends on the decision of the court. The court usually takes into account the regulation of the Minister of Justice on remuneration due to the attorneys assigned by the court. This regulation stipulates the fixed remuneration based on the value of the subject matter of a dispute. Such fixed remuneration varies from 60 PLN up to 7200 PLN depending the value of the claim and can be adjudicated as a multiplication of the above amount (up to six times).