Liability of management board members for reimbursement of public funds: How to protect yourself?
Members of a company’s management board can be jointly and severally liable for the company’s obligations, including public-law liabilities, such as repayment of public funds granted for project financing. This liability can apply to both active and former members who were in office when the obligations arose. It is worth remembering when members of the management board can be held liable for the company’s obligation to repay financing, and the steps they can take to avoid this liability.
The liability of management board members for the company’s obligations, including repayment of public funds granted for project financing, is a key issue for companies and for agencies administering public funds. This topic becomes particularly acute in the context of the increasing number of EU-funded projects, where strict regulations on state aid require careful compliance.
The liability of management board members becomes crucial when irregularities are found in the implemented project leading to the obligation to repay public funds, and the company itself does not have sufficient assets to repay them.
Pursuant to Art. 116 of Poland’s Tax Ordinance, members of the management board of certain corporate entities are jointly and severally liable with the taxpayer for tax arrears, including obligations related to state aid, if enforcement against the company’s assets is ineffective. This liability applies to both active and former members of the management board who served during the period when the obligations arose. Additionally, the Commercial Companies Code provides for the liability of management board members for failure to perform their legal duties, such as filing a bankruptcy petition when the company is at risk of insolvency.
Management board members can avoid liability for the company’s arrears if certain conditions are met. Pursuant to the Tax Ordinance, a management board member may avoid liability for the company’s tax arrears if he or she files a timely bankruptcy petition or takes measures to prevent bankruptcy (such as initiating arrangement proceedings). And the bankruptcy petition must be filed at the right time, i.e. when the company is at risk of insolvency. A late bankruptcy filing may not constitute an effective defence against liability for the company’s obligations.
Demonstrating that the company had assets from which execution could satisfy the arrears can also help avoid liability. It is also good practice to properly document any actions by the management board, so the members can demonstrate that appropriate steps were undertaken to avoid liability.
The issue of joint and several liability of members of the management board for obligations to repay EU funding was addressed by the Supreme Administrative Court of Poland in a series of rulings issued on 11 December 2024 (case nos. I GSK 768/21, I GSK 769/21, I GSK 1546/21 and I GSK 1579/21), denying cassation appeals against judgments by the Province Administrative Court in Warsaw (case nos. V SA/Wa 1204/20, V SA/Wa 1203/20, V SA/Wa 1206/20 and V SA/Wa 1238/20, respectively).
These judgments reveal the direction the Polish courts are taking on the issue of liability of management board members (current and former) for the company’s state-aid obligations, including the obligation to repay funds. In particular, they confirm that management board members who served during the period when the obligations arose can be held liable even if they no longer serve in that role.
The facts considered by the administrative courts in these related cases concerned issuance by an administrative body of a decision finding that a former member of the management board of a company (a beneficiary of public funds) was jointly and severally liable for non-tax state budget receivables established by a final decision ordering reimbursement of the public funds, including funds from the EU budget, in connection with an irregularity identified in the project. The irregularity involved conclusion by the beneficiary of a consolidation agreement transferring the beneficiary’s rights and obligations to another entity without the prior consent of the institution (which was required by the grant agreement).
The judgments of the province administrative court addressed the issue of former management board members’ liability, which in practice can be difficult for administrative authorities to show. In these judgments, the court held that liability for the company’s obligations can extend not only to current management board members, but also to those who served in the past and were formally management board members when the arrears arose.
Proving board membership
The province administrative court emphasised that administrative authorities are required to determine precisely whether the person was actually a member of the management board at the time the arrears arose. The court pointed to the need to document membership on the board during a specific period, which can be problematic in the case of former management board members, especially when documentation from the time in question is incomplete or disputed.
Under Tax Ordinance Art. 116 §1, members of the management board are jointly and severally liable for the tax arrears of a limited-liability company, a limited-liability company in organisation, a joint-stock company or a joint-stock company in organisation, if enforcement against the company’s assets proved to be wholly or partially ineffective, and the management board member:
1) Failed to demonstrate that:
(a) A timely bankruptcy petition was filed or proceedings to prevent bankruptcy (arrangement proceedings) were initiated, or
(b) The failure to file a bankruptcy petition or initiate proceedings to prevent bankruptcy occurred through no fault of the management board member; and
2) Failed to point to assets of the company execution from which would enable satisfaction of the company’s tax arrears to a significant extent.
Under Art. 116 §2, the liability of management board members includes:
- Tax arrears on obligations for which the payment deadline fell during their tenure as management board members
- Arrears listed in Art. 52 of the Tax Ordinance arising during the performance of duties as a member of the management board.
Under Art. 116 §2, a board member’s liability for the company’s obligations is determined by whether this person formally and actually performed the duties of a management board member, where “performing” the duties of a member of the management board is understood as holding the position from the moment of (proper) appointment until the date of removal from the management board.
Under Art. 116a of the Tax Ordinance, members of the governing bodies of legal entities other than those listed in Art. 116 are also jointly and severally liable with all their assets for the tax arrears of such entities, in which case Art. 116 applies as relevant.
Issuance of a decision holding a management board member liable for the company’s obligations requires proof of the affirmative prerequisites for liability, as well as a showing that there are no grounds excluding this liability in the case.
The affirmative grounds are:
- Serving as a member of the management board at the time when the tax arrears of the legal entity arose
- Ineffectiveness of enforcement against the assets of the legal entity.
The grounds exonerating a board member from liability include:
- Timely filing of a bankruptcy petition or initiation of arrangement proceedings, or lack of fault in not filing such petitions, or
- Identification of property of the legal entity allowing for satisfaction of a significant part of the tax arrears.
In the case here, the defendant alleged that he had resigned from the management board, and offered evidence of delivery of his resignation letter. However, the administrative authorities did not regard this as sufficient evidence, particularly to show that the person actually resigned before the company’s arrears arose.
Importance of formalities when resigning from the management board
The province administrative court here stressed the importance of formal, proper documentation of resignation from the function of a management board member. Under current law, resignation is a unilateral legal act not requiring the company’s acceptance, but it must be properly submitted and documented. If the resignation is not properly documented (e.g. the relevant writings are missing, or there is no confirmation of receipt by the company), this can generate doubts about the liability of the former management board members.
Here the administrative authority relied on information from the full transcript from the National Court Register for the company. There is a legal presumption (under Art. 17(1) of the National Court Register Act) that the data entered in the National Court Register is true, but the court pointed out that this presumption is rebuttable. Particularly when the company failed to follow the legally prescribed procedures for deletion of the person from the register, the person cannot necessarily be deemed to still be lawfully representing the company as part of the management board.
As a result, entry and deletion of management board members from the commercial register is “declaratory” and not “constitutive”; it only confirms the underlying state of facts.
Thus, the province administrative court held, even if the commercial register does not disclose that the management board member’s appointment was terminated as a result of resignation, it can be shown that the person ceased to be a member of the management board at a date earlier than shown in the register. This is because the effectiveness of the statement of resignation from the management board, and removal from office, does not depend on making an entry to this effect in the register.
This follows from the rule that a statement of resignation from the management board, which must be communicated to the company, is an act covered by Art. 61 of the Civil Code, according to which a declaration of intent to be made to another person is deemed to be made at the moment when it reached the other person in such a way that the person could examine its contents.
Consequently, the resignation of a management board member becomes effective when the statement of resignation reaches the company. Pursuant to Art. 205 §2 of the Commercial Companies Code, declarations made to the company and service of documents on the company may be made to any member of the management board or a commercial proxy. Citing the resolution of a seven-judge panel of the Supreme Court of 31 March 2016 (case no. III CZP 89/15), the province administrative court held that a statement of resignation communicated in writing or sent electronically should be deemed to have been submitted to the company, and thus effectively made, upon arrival at the address of the company or the management board seat or address for service, at a time when at least one member of the management board or a commercial proxy had the opportunity to examine its contents in the ordinary course of business (i.e. taking into account business hours).
A management board member’s resignation should be formally documented, as the lack of proper documentation (e.g. the company’s acknowledgment of the resignation) may generate doubts as to when the mandate ended. As a result, a management board member who did not formally resign may still be considered liable for the company’s obligations that arose after the person ceased to serve as a member of the board. As the Supreme Administrative Court held, “To properly safeguard their interests, a person resigning from the management board of a company should, in their own interest, exercise due diligence in this regard and ensure that they can reliably demonstrate that they submitted their resignation from the management board.”
Documenting resignation (evidentiary obligation of administrative bodies)
In this case, the effect of the administrative authorities’ refusal to admit testimonial evidence is noteworthy. The management board member allegedly submitted his statement of resignation to the company by post, but it could not be determined from the entry in the log of the entity where his was employed at the time whether a written statement of resignation was sent to the company’s address on the indicated dates, because the log did not indicate the contents of the mailings. However, the authority refused to admit evidence in the form of testimony of the witnesses named in this regard.
The province administrative court found that the administrative authorities had not fulfilled their duty of gathering full documentation in the case. If there are any doubts regarding who was a member of the management board at the time in question, the administrative authority should conduct full evidentiary proceedings and carefully verify all the circumstances. In this case, due to the insufficient evidence, the administrative body should have admitted additional evidence to ascertain the effective date of resignation.
Determining the set of liable persons
It is vital to determine the set of persons liable for the company’s obligations. The province administrative court pointed out that while it was permissible to conduct several separate proceedings regarding the persons liable for the non-tax budgetary arrears for reimbursement of European funds, it could not fail to make a determination of the set of persons bearing such liability. It should always be checked whether the designated management board member will be the only person obligated to cover the liabilities in question. The Supreme Administrative Court took a similar view, noting that the authority here failed to explain at all why it pursued only the complainant, ignoring other persons against whom liability of this type might also be enforced.
The Tax Ordinance requires the administrative authorities to establish joint and several liability for the obligations of companies against all persons who may bear such liability. This is a technical issue. As the Supreme Administrative Court held in its judgment of 9 March 2009 (case no. I FPS 4/08), “Although it would be desirable to conduct a single proceeding against all obligated persons based on Art. 166 §1 of the Tax Ordinance, in light of the procedural regulations it cannot be considered erroneous to conduct separate proceedings, so long as those proceedings cover the aforementioned set of persons (i.e. all obligated persons).”
Conclusion
For former members of management boards, the cited judgments of the Supreme Administrative Court are an important indication that liability for the company’s obligations does not depend solely on entries in the National Court Register. Even though they are no longer actually serving as a management board member, if they have not followed the proper formalities for resignation and properly announced their resignation, they can be held liable for arrears incurred during their term of office. Thus it is crucial to properly document their resignation and diligently complete the formalities related to ending their service on the management board.
But on their part, the administrative authorities have an obligation to ensure full and fair documentation, so that the proceedings in such cases are conducted in accordance with the law.
Anna Kulińska, State Aid practice, Wardyński & Partners
