Limited liability may mean unlimited liability
Just as a child clings to its baby blanket well past the time when it provides any real protection from the world, senior managers of a limited liability company often cling to the mistaken belief that they are protected from any personal responsibility for the company's actions. From the moment a person joins the management board of a limited liability company, he should remember that limited liability in particular instances may mean unlimited personal liability.
Limitations on the financial liability of a company go to the heart of the concept of limited liability. As a general rule, the financial liability of a company is limited to its assets. This means, among other things, anyone with a claim against the company may not go after its shareholders to receive compensation.
While shareholders are protected by a company's limited liability status, the same is not necessarily true for members of the management board. In some situations, members of the management board may bear personal liability for the company's obligations.
One of the classic situations is the failure to recognize that a company is bankrupt. In the case of a company's insolvency, a member of the management board may be released from liability if he can show that:
Bankruptcy had been declared or action to prevent bankruptcy (such as arrangement proceedings with creditors) had been initiated in a timely manner;
Failure to declare bankruptcy or to initiate arrangement proceedings was not due to the fault of the management board member; or
Despite bankruptcy not being declared and no arrangement proceedings having been initiated, the creditor suffered no damage (meaning simply that prior to discovering the insolvency or before the given member was appointed, the company already had no available assets or that there were no other creditors).
In addition to liability to third parties, the local tax office may hold management board members liable on similar principles for the company's tax arrears that accrued during their tenure on the company's management board. A new member of the management board, however, will not be liable for any unpaid taxes that accrued prior to his assuming office. One noted exception to liability is that a member of the management board will not be liable for any tax arrears that accrued during his tenure if the member can show the tax collector assets of the company that can balance the arrears.
Beyond issues of financial liability, in certain instances, a person suffering injury or damage may be entitled (or even be obliged) to inform a prosecutor about crimes resulting from the company's activity. A company, however, may not be accused of acting illegally. In this situation, the members of the management board and, potentially, other employees in managerial positions may be accused.
The list of situations in which members of the management board could be liable for corporate crimes is long and often some of these actions are not commonly considered crimes. While it is beyond the scope of this article to list all possible crimes, it is equally difficult to generalize the types of these crimes. The following examples, however, attempt to at least reflect generally where corporate crimes may arise. A company whose main activity is the production of technical equipment may violate the law on technical supervision. A food producer, for example, could fail to observe the rules of food production supervision. Almost any production facility may have problems with emissions of pollutants. Publishers or pharmaceutical companies could face issues with respect to intellectual property rights. An employer may fail to treat its employees properly. In each of these cases, laws are in place to protect, respectively, human health, the environment, intellectual property or employees' rights and to penalize violations. All relevant laws provide for criminal liability of persons (within the company) that were consciously or unconsciously responsible for committing crimes in these areas. In a limited liability company, the members of its management board are typically first on the list.
A number of strictly business-related crimes also exist. Polish law provides for penalties related to infringements of the internal relationship between directors and shareholders and the unlawful activities of one company against another. With respect to these internal relationships, the Commercial Companies Code provides that a member of the company's governing bodies (including the management board) is responsible to the company for damage caused by an act that is illegal or that violates a provision of the company's incorporation documentation. In performing their duties, members of a company's governing bodies must use good business practices and are liable to the company for any damage caused by a failure to do so, unless the member can prove that the damage was not his fault. The Commercial Companies Code also penalizes members of the management board for failing either to submit a list of shareholders to the registration court or to keep the share register.
Additionally, members of the management board should take care to ensure that certain required company data, including the firm's name, address of its registered office, registration number and name of the registration court, is placed on any commercial correspondence issued to a third party other than a regular customer or supplier. Otherwise, members of the management board may be assessed with a monetary fine.
While limited liability offers financial protection for the shareholders, it does not mean that companies and their senior management are free to do whatever they please.
This article was prepared by Lejb Fogelman, the managing partner of Hunton & Williams Poland, with the assistance of Paul Fogo, an associate attorney.
