Legal Eye: Executive liability

What some executives may not realize, however, is that they too may be personally liable for their actions, and in some cases, their failure to act. Members of a management or supervisory board may, in certain circumstances, be held personally accountable for the debt of a Legal Person to a third party creditor.

Specifically, the Civil Code provides that "anyone, who acting as a body of a Legal Person, concludes a contract in its name without being its body or exceeding the scope of authorization of that body, shall ... redress any damages which the other party has incurred..." - Art. 39.

Liability is not limited to merely acting beyond the scope of one's mandate. In a Registered Partnership,  each partner is personally liable without limitation for the obligations of the entire partnership. In a limited liability company, management is liable not only to the company itself for "damage inflicted through an action or omission contrary to the law or the deed of the company" (Art. 293 of the Commercial Companies Code) for which it is responsible, but also to third party creditors if "execution against the company has proved ineffective" (Art. 299).

Personal liability

Liability is not dependent upon acting outside the scope of one's mandate or by not taking action when necessary. Making a wrong decision may also lead to personal liability. With respect to a limited liability company, a member of management must "discharge his duties with a degree of diligence proper for the professional nature of the activities" - Art. 293 (2).  In other words, the commission of a simple mistake may, in extreme cases, lead to personal culpability.

Personal liability differs between a joint-stock company and a limited liability company. As stated previously, management of either Legal Person is liable for any damage caused by acting beyond the scope of his or her mandate. Those occupying the executive suite in a limited liability company, however, have even greater exposure to personal liability under the legal mechanism of subsidiary liability. Under subsidiary liability, management in a limited liability company can be held jointly and severally liable for the company's debts if the company is unable to satisfy its debt obligation to a third party creditor. Personal liability may only be avoided if it can be proven that the company filed for bankruptcy in a timely manner or that arrangement proceedings were initiated in due course.

Criminal offense

One final note. Just as an individual member of management may be held to account for his or her actions, so too is his or her employer. Depending on the nature of the transgression committed by a member of management (or for that matter any employee), a Legal Person may be subject not only to civil prosecution, but criminal prosecution as well. A Legal Person may itself be convicted of a criminal offense if a member of its management or staff is convicted of a crime to which the Legal Person stood to benefit. Additionally, in order to be held criminally liable for the actions of an employee, a prosecutor must demonstrate that the Legal Person was not "diligent" in hiring or supervising the convicted employee.

A Legal Person may mitigate such risk by performing a thorough back-ground check on each prospective employee, including those occupying the executive suite.

Paul Fogo is a senior attorney with Miller, Canfield, W. Babicki, A. Chelchowski & Partners. fogo@pl.millercanfield.com