Appointment of a convicted criminal to a corporate board | In Principle

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Appointment of a convicted criminal to a corporate board

Not everyone is qualified to serve on a corporate board. But what happens if a board member is appointed who is not qualified to serve?

There are various difficulties in determining who is permitted to serve as a member of the authorities of a Polish company (or as a liquidator), with the right to conduct the affairs of the company and incur obligations for the company. In commercial practice, an erroneous belief has been implanted that the fact that a person is entered in the Commercial Register of the National Court Register is sufficient proof that the person is authorised to act for the company. Mere entry in the register does not necessarily mean that the person is duly authorised, because the lack of authority may arise from a legally final judgment or may be expressly provided by statute. One source of such a prohibition is Art. 18 §2 of the Commercial Companies Code.

Who is not allowed to serve on corporate boards?

Commercial Companies Code Art. 18 §2 states grounds that exclude a person from serving as a member of the authorities of a capital company, i.e. a joint-stock company (SA) or a limited-liability company (sp. z o.o.) Under this provision, a person convicted under a legally final judgment of an offence established by chapters 33 through 37 of the Penal Code or Art. 585, 587, 590 or 591 of the Commercial Companies Code may not serve as a member of the management board or supervisory board (or as a liquidator). This prohibition generally last for 5 years after the conviction becomes legally final.

The purpose of this rule is to protect the economic stability of the companies themselves (and, indirectly, their shareholders), as well as the safety of commerce. The offences listed in Art. 18 §2 fall into various categories, involving e.g. information, documents, property, trade, currency and securities. It may generally be said that someone who is guilty of an offence of these types is less able to provide an assurance of reliability as a manager of a company than a person who has not. The rule is designed to remove untrustworthy persons from corporate boards.

The ineligibility of such persons to serve on corporate boards under Art. 18 §2 of the Commercial Companies Code is not regarded as a criminal sanction within the meaning of the Penal Code, but follows from the legally final conviction for one of the offences in question.

From the perspective of commercial practice, it is crucial to consider the legal effects of violation of the prohibition set forth in Art. 18 §2. The effects are twofold: concerning the persons who are subject to the prohibition and concerning actions taken by those persons.

Violation of Art. 18 §2—effects on the person

The prohibition in Art. 18 §2 should be understood as excluding the person’s eligibility to be a member of a corporate board. A person subject to the ban does not possess an individual qualification for “becoming” a board member, much like a person without full legal capacity, who is also ineligible to serve on a corporate board (Art. 18 §1).

It should be pointed out, however, that although resolutions—such as resolutions appointing a board member—that are contrary to law are invalid (as follows from Commercial Companies Code Art. 252 §1 and 425 §1), a finding of their invalidity may only be made through a judgment issued by the court after ruling on a claim asserted against the company.

The comments above apply to the case of appointment to a corporate board of a person who has already been convicted of an offence referred to in Art. 18 §2 and is subject to the statutory prohibition on serving in that capacity at the time of appointment. The legal situation of a person who is already serving on a corporate board at the time he or she is convicted of one of these offences is different. The law does not expressly state the legal results in such a case. Moreover, the circumstances in which a board member’s appointment terminates as listed in Commercial Companies Code Art. 202, 218, 369, and 386 in connection with Art. 369 do not refer to the case in which the grounds for the ban in Art. 18 §2 are fulfilled at a time when the person in question is currently serving as a board member.

Some commentators have taken the view that when this occurs, the person should simply immediately resign or be dismissed from office. But under the prevailing view, supported by the rulings of the Supreme Court of Poland, based on a functional interpretation of Art. 18 §2, the person’s appointment is deemed to terminate automatically, by operation of law, when the conviction becomes legally final.

Violation of Art. 18 §2—effects on transactions

A finding that a person serving on a corporate board has ceased to hold office (or indeed never held office) may have major consequences for the company itself and for third parties who entered into transactions with the company represented by the person in question.

It should be accepted that a legal act made for the company by a member of the management board whose appointment had terminated (or who was never effectively appointed) generally results in the invalidity of the act.

For a long time the prevailing view in the case law was that this type of legal act by a “false authority” should be regarded as absolutely void pursuant to Civil Code Art. 39 in connection with Art. 58.

However, the most recent rulings by the Supreme Court (e.g. the resolution of 14 September 2007 in Case No. III CZP 31/07), based in part on the views expressed in the literature, call for the regulations concerning acts by a “false proxy” with apparent authority (Civil Code Art. 103 and 104) to be applied as relevant to actions by persons on behalf of a company as management board members without proper authority.

Guided by this interpretation, it may be argued that such actions suffer from “suspended ineffectiveness,” but will have legal effect if and when they are ratified by a person duly authorised to represent the company.

Maciej Szewczyk, Mergers & Acquisitions Practice, Wardyński & Partners