Liability of board directors when enforcement against a limited liability company proves ineffective
Read the article on serving as a management board director in a limited liability company
Serving as a management board director in a Polish-based limited liability company does not only involve managing its affairs or its representation, but – most importantly – assuming liability for the company’s obligations existing at the moment when a director starts holding his or her function. A director will be held liable for the company’s obligations when their enforcement against the company’s assets proves ineffective. What can absolve a board member from liability in this respect?
Claims may be pursued by creditors against a board director on the basis of either a court debt collector’s decision to discontinue ineffective enforcement or on the basis of a distribution plan made in the course of bankruptcy proceedings if the claim was not repaid during the bankruptcy proceedings and when a petition for the company’s bankruptcy was not filed in “due time” (as explained below).
A situation when a company has been struck off the register and ceased to legally exist is a special case in which creditors may pursue their claims in an lawsuit filed directly against board directors.
Board directors of a limited liability company may be absolved of liability by proving any of the following exoneration circumstances:
1. A board director files for bankruptcy in due time (or a ruling opening restructuring proceedings or approving an arrangement with creditors in arrangement approval proceedings is issued in due time). “Due time” for a board member to file for bankruptcy is 30 days of the occurrence of grounds for declaring bankruptcy, i.e. of the moment in which the company, due to the lack of funds, is no longer able to repay all of its creditors, but its assets enable their partial repayment in bankruptcy proceedings.
Before assuming his or her function in the company, a board director must get to know its financial standing (by carrying out an audit, for example). A director who has assumed his or her function in an insolvent company must file for bankruptcy even if the company has no assets that would cover the costs of bankruptcy proceedings or has assets that would cover merely such costs (which is grounds for dismissing a bankruptcy petition). If the board director fails to do so, he or she will be liable, jointly and severally with the other directors, for the company’s obligations existing at the time of assuming his or her function. The time limit for filing for bankruptcy is counted from the moment such a director assumes his or her function.
If the petition for bankruptcy filed by the company is returned because formal defects have not been cured (e.g. the court fee on the petition has not been paid), a board director will not be able to effectively absolve him- or herself from liability for the company’s obligations.
2. A petition for bankruptcy is not filed in due time but the board director is not at fault. As board directors are required to use a higher degree of diligence in performing their duties, there is a presumption that they are at fault if a petition for bankruptcy is filed late. To prove that a board director is not at fault, it must be demonstrated that the actual situation in which the board member found him- or herself objectively prevented him or her filing for bankruptcy in due time, e.g. fraudulent misrepresentation as to the company’s financials or a director’s chronic illness preventing him or her from holding his or her function. A board member, however, will not be absolved from such liability by invoking ignorance of the company’s financial position due to the internal division of responsibilities among board directors.
3. The absence of damage to a creditor despite the fact that no petition for bankruptcy was filed in due time. This concerns a situation where a creditor’s claim would not have been repaid anyway (e.g. because the company had no funds), even if bankruptcy proceedings had been initiated in due time. A board director is liable to such a creditor only for such portion of claims existing at the time of his or her holding the function as would have been repaid if the bankruptcy proceedings had been initiated in due time.
If you have any questions or need clarification, feel free to contact us.
Aleksandra Chomicka, CDZ Chajec & Partners, contributed to this article.
