Specification of the subject of the company’s business in the register | In Principle

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Specification of the subject of the company’s business in the register

Practical remarks based on the regulations on the National Court Register and the Polish Classification of Activity.

Specification of the subject of the activity of a company or partnership is an essential element of its articles of association (or statute)—part of the minimum content of this document. While the Commercial Companies Code does not define this concept, the subject of the firm’s activity should inform other parties of the business it performs and establish the framework within which partners (of a partnership) or the management board (of a company) should act in pursuing its purposes.

A practical consequence of the lack of a legal definition of the subject of activity is that the permissible scope of adopting a certain subject of activity in the entity’s articles of association or statute is determined by the purpose of the company or partnership and mandatorily applicable provisions of law.

The subject of activity must not be stated too vaguely—for example, simply stating “economic activity” would not give sufficient notice to other parties of what the entity is involved in. Moreover, in the case of a company, this would in practice prevent the registry court from reviewing whether the subject of the company’s activity complies with the law under Commercial Companies Code Art. 21 §1(2). It should be pointed out that the concept of “economic activity” could even cover criminal activity, as long as—under the definition set forth in Art. 2 of the Business Freedom Act—the activity generates financial gain and is performed in an organised and ongoing manner (which might be the case with most organised crime groups).

Specification of subject of activity in the National Court Register

The subject of activity of a company or partnership is one of the pieces of information about the entity that is subject to disclosure in the Commercial Register of the National Court Register (KRS).

While the law has not regulated in detail the issue of selection of the subject of the activity (leaving great leeway to the interested parties), the method of disclosure of the subject of activity is regulated in detail.

Art. 40(1) of the National Court Register Act provides that the subject of activity must be entered in the register “according to the Polish Classification of Activity (PKD).”

PKD is a numbered set of verbal descriptions of specific types of activity known as PKD codes. PKD codes are consistent with the European classification system known as NACE, which enables a comparison of the subject of activity of entities established in different countries.

Use your own words, but the court will take the description from PKD

According to the Regulation of the Minister of Justice of 17 November 2014, the verbal description of the subject of activity of an entity indicated in the application for entry in the Commercial Register need not coincide with the description from PKD. This means that the entity must state in the application for entry in KRS only a PKD code consistent with the regulation, but the verbal description may be phrased in the entity’s discretion, or rather according to the actual wording of the subject of activity in the articles of association or statute of the entity.

The description of the subject of activity in this founding document need not be identical to any of the PKD descriptions. But if the entity decides to identify the subject of its activity without using the somewhat vague terminology from PKD, it may have trouble obtaining an entry in the Commercial Register.

The practice of the registry courts is to more or less automatically assign to PKD codes the verbal descriptions drawn from PKD. In effect, the description in the entry made by the court may differ—even significantly—from the actual wording of the articles of association or statute.

State after amendment of KRS Act

These comments remain current under the law in force from 1 December 2014 after entry into force of the act of 26 June 2014 amending the KRS Act.

The amendment required companies and partnerships to disclose in the register their principal activity, while also limiting the total number of items the entity could list to 10.

The justification for the proposal for the amendment explained that the purpose of the change was to introduce greater certainty as to the actual subject of activity of the given entity. According to the drafters of the proposal, another party reading a firm’s KRS entry, often listing dozens of different items under the subject of activity, could not determine what business the company was really involved in.

Whether the amended regulations will achieve the intended goal is doubtful, however.

As it now reads, after selection of the principal activity, the KRS Act does not specify the criteria according to which the entity should choose the remaining 9 items as its subjects of activity to be listed in KRS. These could be types of activity which the entity performs, or—apparently—could be items chosen at random from those listed in the articles of association or statute. This approach thus may not result in greater certainty in commerce, particularly given that the entity is not required to conduct the activity stated in the register but only within the range specified in the articles of association or statute.

There are also doubts concerning designation of the principal subject of activity. Under the current law, disclosure of this information in the register appears to suggest that some particular significance is attributed to this information. This raises the question of the criteria that should be used to identify this subject, how often the information must be updated, and what would be the consequences if it is not identified accurately.

Above all, however, it is doubtful how the duty to list a somewhat arbitrarily chosen number of items from the company’s subject of activity should comply with the goal of the truthfulness of the information entered in the register (which is the subject of the statutory presumption referred to in KRS Act Art. 17(2)).

Neither the KRS Act nor the justification for the recent amendment provides an answer to these questions.

Maciej Szewczyk and Martyna Robakowska, Mergers & Acquisitions Practice, Wardyński & Partners