Management board members' liability for a company's debts

Running a business through a limited liability company feels safe and, as the name suggests, limits liability for the company’s debts. Under Polish law, the general rule is that the company itself - not its shareholders - is liable for its own obligations. This means a shareholder’s liability is limited to the value of their contribution and does not extend to their personal assets.

There are, however, exceptions to this rule. In certain situations, liability for the company’s obligations can shift to other persons, including members of the management board.

The management board of a limited liability company

The management board of a limited liability company is appointed by a shareholders’ resolution, and its main task is to represent the company externally and to conduct its affairs. Every limited liability company must have at least one management board member, usually its president.

Management board members can incur personal liability for the company’s obligations if enforcement against the company’s assets proves ineffective. In practice, this means that if the company cannot settle its debts, creditors may bring claims directly against the management board members, who then answer with their entire personal estate.

The liability of management board members

Under Article 299 of the Commercial Companies Code (Kodeks spółek handlowych, KSH), management board members can incur personal liability for the company’s obligations where enforcement against the company’s assets proves impossible. In practice, creditors who cannot recover a debt from the company very often bring proceedings directly against its management board members.

How can a management board member avoid liability under Article 299 KSH?

The KSH sets out several situations in which a management board member can avoid liability:

• Filing a bankruptcy petition in good time - if the management board member shows that they filed the company’s bankruptcy petition at the proper time, they can avoid liability.
• The opening of restructuring proceedings - if the court has issued a decision opening such proceedings or approving an arrangement, the management board member can avoid liability.
• Absence of fault on the management board member’s part - where the failure to file the bankruptcy petition was not their fault.
• No loss to the creditor - where the creditor suffered no loss despite the management board member’s inaction.

In addition, it can also be argued that a management board member’s liability is tortious in nature and arises from the improper management of the company, which may provide a basis for a defense in court.

FAQ

1. Does every management board member answer for the company’s debts?

Yes. If enforcement against the company’s assets is ineffective, liability can extend to every management board member, unless one of them shows that they are not at fault.

2. What steps should be taken to avoid personal liability?

A management board member should monitor the company’s financial position on an ongoing basis, file for bankruptcy in good time where necessary, and keep careful records.

3. What happens if the company settles its debts after an action has been brought against a management board member?

If the company settles its obligations, the management board member’s liability lapses.