What are the possible consequences for failure to comply with these duties, and can the management board assert as a defence that the authority approving the financial reports has failed to reach a decision?
The members of the management board of a Polish company bear many obligations, including those connected with preparation, approval and filing with the registry court of documents concerning the close of the financial year. In practice it sometimes happens that the management board does not comply with these obligations, particularly when there is a fear that the shareholders will not approve the documents within the required time. Does this expose the management board members to any consequences?
Phase 1—preparation of documents
Under Art. 52(1) of the Accounting Act, the members of the management board are required to ensure that the annual financial report is prepared no later than three months after the balance-sheet date. In practice this means that if the company’s financial year coincides with the calendar year, the management board members have until the end of the following March to comply with this obligation. That is the maximum period and cannot be extended in the company’s articles of association. All elements of the financial report must be dated and signed by the person entrusted with maintaining the accounting records as well as all members of the management board. Refusal to sign, for whatever reason, requires a written justification attached to the financial report.
This provision does not mean that the management board members are required to prepare the financial report themselves. However, they must create the appropriate organisational conditions enabling preparation of the report by the designated persons within the time indicated in the Accounting Act. The members of the management board of a joint-stock company (other than companies in organisation), or a limited-liability company meeting at least two of the three conditions set forth in Art. 64(1)(4) of the Accounting Act, are also required to present the annual financial report to an auditor for examination.
The financial report is not the only year-end document in a Polish company. The members of the management board are also required to prepare a business report with important information about the asset position and financial condition of the unit, including an assessment of the results achieved, an indication of risk factors, and a description of threats. The Accounting Act specifies what information should be contained in the business report but does not provide a specimen for the document, as the contents largely depend on the specifics of the company’s operations. Like the financial report, the business report is signed by all members of the management board. However, it is not signed by the person entrusted with maintaining the accounting books (even if that person was involved in preparing the business report).
Not all management board members are aware that the Accounting Act provides for criminal sanctions for failure to prepare these documents. Under Art. 77(2) of the act, anyone responsible for failure to prepare a financial report or business report, preparation of these reports not in compliance with the act, or inclusion of inaccurate data in the reports, is subject to a fine and/or imprisonment of up to two years. Fines are imposed under the Criminal Code, which means that the fine may range from PLN 100 to as high as PLN 1,080,000, and imprisonment can range from one month to two years. Moreover, if the financial report does not meet the requirements set forth in the Accounting Act, the management board members (along with members of the supervisory board or other supervisory authority existing in the company) are jointly and severally liable to the company for injury caused by their act or omission (Accounting Act Art. 4a(2)).
Management board members are also responsible for failure to submit the financial report to an auditor for examination (if the conditions in the act requiring an audit apply). Under Art. 79(1) of the Accounting Act, in such case the management board members are subject to a fine (within the range indicated above) or probation.
Phase 2—approval of documents
The documents prepared by the management board are presented to the shareholders for approval at the ordinary (annual) shareholders’ meeting. Under Art. 53(1) of the Accounting Act, the financial report of the unit must be approved no later than 6 months after the balance-sheet date. In practice this means that in companies whose financial year coincides with the calendar year, the management board must convene the ordinary shareholders’ meeting so that it is held by the end of June of the following calendar year. The Commercial Companies Code contains comparable provisions for both types of company (SA and sp. z o.o.) concerning the deadline for convening the annual meeting, and specifies the matters that should be submitted to a vote, including review and approval of the financial report and the business report for the prior financial year.
Failure to comply with this obligation is subject to sanctions under Commercial Companies Code Art. 594 §1(3), which provides that a member of the management board of a company responsible for the management board’s failure to convene the annual shareholders’ meeting is subject to a fine of up to PLN 20,000, imposed by the registry court.
The agenda of the annual meeting also includes adoption of a resolution on distribution of profit or coverage of loss. There are two major restrictions on disposal of the company’s net financial result flowing from the management board’s failure to comply with its obligations in this respect.
First, division or coverage of the net financial result of companies required to audit their financial reports may occur only after approval of the financial report by the relevant body, preceded by issuance of an auditor’s opinion with or without reservations. Division or coverage of the net financial result without meeting this condition is invalid by operation of law (Accounting Act Art. 53(3)). In other words, if in violation of the Accounting Act the management board fails to submit the financial report to the auditor for examination, the shareholders’ meeting cannot adopt a resolution on disposition of the company’s net financial result. In practice, this means that any funds paid out to shareholders on the basis of such a resolution will be an undue payment, which the management board is obligated to refund to the company, jointly and severally with the shareholders receiving such payments, pursuant to Commercial Companies Code Art. 198 §1. Also in the case of companies whose financial reports are not required to be audited, there is a rule that division or coverage of the net financial result may occur only after approval of the financial report by the relevant body (Accounting Act Art. 53(4)). Failure to convene the ordinary (annual) meeting of shareholders thus prevents adoption of such a resolution, which is vitally important for the shareholders themselves (see also “Legal consequences of improper selection of the auditor to examine a company’s financial statement”).
Phase 3—filing documents with the registry court
After preparation and approval of the financial statement (first examined by an auditor if required by the Accounting Act) and the business report, and adoption of a resolution on distribution of the profit or coverage of the loss, the management board of the company is required to file the whole set of documents with the registry court within 15 days after approval of the annual financial report.
Convening the annual shareholders’ meeting does not always mean that the financial report and the business report will be approved. It sometimes happens in practice that because of a conflict between the shareholders, binding resolutions cannot be adopted (e.g. for lack of a quorum). What should the management board members do in this situation? Under Art. 69(2) of the Accounting Act, if the financial report is not approved within the period indicated above, it should be filed with the registry court within 15 days after the end of that period. In other words, the management board members are required to file the financial report with the registry court even if it has not been approved, and the mere fact that it has not been approved does not release them from this obligation. If it is approved later, they should refile it together with the other required documents, within 15 days after approval.
By contrast, Art. 27(2) of the Corporate Income Tax Act provides that as long as the financial report remains unapproved, the obligation to file the report with the tax office does not arise.
Proper performance of these actions is backed by a criminal sanction in Art. 79(1) of the Accounting Act. Management board members who fail to file the required documents with the proper registry court within the times indicated in the Accounting Act are subject to a fine or probation.
The National Court Register Act also contains provisions aimed at enforcing this obligation. Under Art. 24(1) of that act, if an application for entry in the register or documents whose filing is mandatory are not filed by the deadline, the registry court will summon the persons obliged to make the filings, providing them a further period of 7 days. If that deadline is not met, the registry court will impose a fine as provided in the Civil Procedure Code; the fine may be repeated.
More and more often, the registry courts commence compulsion proceedings, summoning the management board members to file the company’s overdue financial documents. If it is necessary to prepare missing financial statements, the management board members may not be in a position to comply with that obligation within the period designated by the court. The sanction for failure to file the required documents within the designated time is a fine imposed on the management board members; the fine may be repeated. If in the view of the registry court the compulsion proceeding will not bring about performance of the obligation (for example when the missing documents are not filed despite repeated summonses), the proceeding will be discontinued. But this does not exhaust the registry court’s authority. Discontinuance of a compulsion proceeding constitutes grounds for the court to commence on its own initiative a proceeding to dissolve the company without conducting liquidation. This means that the neglect by the management board members may even lead to deletion of the company from the commercial register, and, with it, cessation of the company’s legal existence.
An array of sanctions
The duties of management board members connected with preparation, approval and filing with the registry court of documents involving the completed financial year are vital for the proper and transparent functioning of companies. Proper performance of these obligations is also important from the point of view of legal security. The weight of these obligations is underscored by the number of sanctions of a criminal and organisational nature provided for failure to perform them. It should be borne in mind that neglect by the management board members can cause negative consequences not only for themselves, which is obvious, but also for the company and its shareholders. In extreme instances this can even result in involuntary dissolution of the company and deletion from the commercial register.
Marta Rybacka, legal adviser, Łukasz Śliwiński, legal adviser, M&A and Corporate practice, Wardyński & Partners