Foreign managers appointed to serve on boards of Polish subsidiaries often do not know what they can do and what they must do. Consequently they are not aware of what liability goes with either of these. They should be.
Before discussing the directors of a Polish limited-liability company (spółka z ograniczoną odpowiedzialnością, the most commonly used corporate vehicle for running business in Poland), it is practical to make a little disambiguation. While in this article I refer to company “directors,” technically such reference applies to members of the management board. It is not pure semantics, though.
Who is a director?
A “director” in a Polish company may be either a management board member or any employee who is entrusted with certain internal powers (e.g. administrative director, HR director, sales director, etc) but reports to the management board. Accordingly, a “director” who is not a member of the management board has no actual (or implied) power to bind the company (unless issued an appropriate power of attorney by the management board).
Corporate governance in brief
Now, as the terminology is clarified, another point to be tackled is the proper understanding of the corporate governance scheme we have in Poland. In brief, in case of LLCs the only mandatory corporate body (except for the shareholders’ meeting) is the management board. This does not mean that a Polish management board is equivalent to an English or American board of directors. While common-law systems generally provide for a single board of directors, who are then split among executive and non-executive directors, under Polish law the directors (again, members of the management board) are always executive directors. An LLC may (and only in a limited number of instances must) have an additional board—the supervisory board (or a supervisory committee), which comprises what a common-law practitioner could call non-executive directors.
Regardless of whether a supervisory board (or committee) exists in a company, there is always a practical split of competences between the management board (directors) and the shareholders. The latter are equipped with supervisory competences and are entitled to review company documents and request information. This oversight may be limited or even excluded (but excluded only in the articles of association) only if a supervisory board (or committee) has been created.
Limitations of directors’ authority
Although the management board is deemed to have authority in all matters regarding the conduct of company business and representing the company before third parties, this authority is subject to a number of limitations. First, there are statutory limitations, where certain activities (such as acquisition or disposal of real estate, disposal or encumbrance of the company’s enterprise, etc) must be consented to by the shareholders. Second, there may be (and often are) limitations imposed in the articles of association. The third group encompasses limitations but also obligations imposed by shareholders’ resolutions. In brief, the shareholders may not only demand that the management board not do certain things, but may also demand that some actions be taken by the directors.
This means that shareholders have (or may have) actual influence on virtually all important matters of the company (including such matters as deciding on payment of dividends—where the directors’ recommendation is just a recommendation for the shareholders, who are then free to decide as they like).
Right to run company business and to represent the company
Having said that, it might be practical to know what powers the directors actually have.
First, it is the management board that runs the company and manages its operations (shareholders cannot do that directly). This is why it was previously pointed out that all management board members are actually executive directors. Second, it is the directors who represent the company toward third parties (sign contracts or other statements and receive other parties’ statements). The shareholders cannot do that either.
As already noted, the shareholders can either oppose certain decisions of the directors, refuse to consent to them, or even overrule directors’ decision and require the directors to do something.
However, unless a given matter requires the shareholders’ consent by virtue of law (statute), failure to comply with the shareholders’ decision or instruction does not affect the validity or effectiveness of the directors’ action. Thus, for instance, if the articles of association (but not a statute) require the shareholders’ consent prior to entering into an agreement of some kind, an agreement entered into without such consent will nonetheless be valid and binding on the company. This may lead to the directors’ internal liability, however.
How to represent the company?
Irrespective of contrary provisions in the articles of association or shareholders’ resolutions, the directors’ right to represent the company and bind it cannot be excluded with effect against third parties. However, this does not mean that any director may always bind the company.
In brief, unless the articles of association provide otherwise, in order to effectively bind the company at least two directors (or a director and a commercial proxy (prokurent)) must act together. The articles often tend to vary this rule and provide for either individual empowerment or empowerment dependent on the class of directors (e.g. allowing the chairman of the management board to act alone but requiring other directors to act in pairs).
Another vital point to remember is that Polish law does not provide for any deemed or imputed authority of a person holding himself out as a director. Both directors’ names and the manner in which they should act (individually or in any other particular configurations) are reflected in the commercial register (commonly abbreviated as KRS). Accordingly, a third party may not claim that they were not aware of, for example, joint representation by two or more directors, applicable in a given company.
What the directors can do is one thing, and what they must do is another. Their powers related to conducting company affairs are effectively correlated with obligations ensuring that such affairs are indeed conducted properly and in the company’s best interest.
Further, the directors are particularly obliged to ensure due and timely preparation of statutory filings (including tax and corporate filings), preparation of the annual report on the company’s operations, the annual financial statement, convening of shareholders’ meetings, maintaining the share ledger, and so on.
Liability to the company and third parties
Directors’ powers and duties are linked with their liability, to the company and to third parties.
In the case of internal liability, the general rule is that a director may be held liable to the company if he caused damage to the company and such damage was caused by an act or omission of the director that was unlawful or violated the articles of association, unless no culpability can be ascribed to the director. Significantly, if the company does not sue a director liable to the company within a prescribed period, any shareholder may sue such director on behalf of the company.
A separate point regarding internal liability concerns the so-called corporate liability of a director, which means that a director’s failure to comply with a statute, the articles of association or shareholders’ instructions may lead to his dismissal. A vital comment here is that the law does not protect directors against such dismissal, and a resolution to this effect may formally be adopted by the shareholders at any time, including without giving the director an opportunity to be heard in advance.
External liability (to third parties) is subject to extensive limitations. In principle, while Polish law does not have an equivalent of the corporate veil doctrine, a similar concept applies in practice to directors.
In brief, the directors may be held personally liable for company debts only if enforcement against the company proves ineffective, and neither of the statutory exclusions applies. These exclusions involve, in particular, timely filing of a bankruptcy petition for the company, unless failure to make the filing was not due to the director’s fault or, despite the failure to file for bankruptcy, the company’s creditors did not incur damage.
Criminal (and other) liability
Apart from the above comments related to corporate and civil liability, directors’ actions or failure to act may be subject to tax, administrative, or criminal liability.
The last category is the most severe, and may result in a fine, probation, or even imprisonment.
Good to remember
It should be added each form of liability discussed above may apply to all the directors. This is irrespective of whether a given director was indeed involved in the company’s operations or was just a “nominee” director appointed by the shareholders to keep an eye on the group’s interests in the Polish subsidiary. If his fellow directors did something he might have prevented, or failed to do something that ought to have been done, he may be held liable as well.
Maciej A. Szewczyk, attorney-at-law, M&A and Corporate practice, Wardyński & Partners