“Business beware”: Proposed new Act on Criminal Liability of Collective Entities | In Principle

The proposal for a new Act on Criminal Liability of Collective Entities published on 28 May 2018 on the Government Legislation Centre website indicates a sea change in the approach to corporate criminal responsibility in Poland. The aim is to achieve more effective punishment of commercial and fiscal offences committed through corporate entities. This is apparent in the wide range of sanctions that could be imposed on collective entities.

Changes in the regime for corporate liability of collective entities are needed in light of the ineffectiveness of the current rules. Under the current act, in 2005–2017 there were between one and 35 cases filed each year (by comparison, every year about 2.5 million cases against individuals are filed with the criminal courts in Poland). As indicated in the justification for the proposal, in practice the existing regulations have mainly been used against small enterprises, which was not the aim when criminal responsibility of collective entities was introduced into the Polish legal system.

The proposal would greatly expand the list of measures that could be applied against collective entities during the proceedings and following a conviction. Applying such measures during the preliminary proceedings could have a major impact on the legal and commercial functioning of the entity before any final judgment is issued. If convicted, the farthest-reaching sanction that could be imposed is liquidation or dissolution of the entity.

Much harsher punishments and measures

The proposal provides for much tougher punishments, as the upper limit of fines would be raised to PLN 30 million (currently PLN 5 million, but additionally capped at 3% of the firm’s revenue for the year).

The punishment may be doubled, i.e. to as high as PLN 60 million, if it is shown that a corporate body or person exercising internal control was informed of irregularities by whistleblowers, but nonetheless no internal investigation was conducted and the irregularities or violations were not eliminated.

The new act would significantly expand the list of criminal and compensatory measures the court could order alongside or instead of a fine.

When ruling on punishment or other measures, the courts are to consider:

• The seriousness of the irregularities in complying with rules of proper behaviour
• The extent of the benefits that were or could have been obtained by the entity
• The financial situation of the collective entity
• The social consequences of the punishment
• The impact of the punishment on the entity’s further operations.

These grounds are intended to offer a buffer mechanism so that the sanctions imposed do not kill off the entity.

If the collective entity cannot be held criminally responsible but did obtain a financial gain from the offence, that does not mean the entity escapes all sanctions. In such case the following can be ordered against the entity:

• Forfeiture in whole or part of assets or property rights of the entity or their equivalent
• Exemplary damages if forfeiture would be disproportionate
• Return of material gains or equivalent, in whole or part
• Payment of up to PLN 1 million if it is exceedingly difficult or impossible to determine the amount of gains.

Interestingly, a ruling on forfeiture, return of material gains, or cash payment could be issued by the court during the course of the proceedings, if the evidence demonstrates that the entity is not criminally responsible for the prohibited act but did receive a material gain from commission of the act. In such case, the criminal proceeding would be discontinued. Thus, practically speaking, the court would rule on the entity’s guilt while the case was still ongoing, and proceed to impose a sanction on the entity.

Dissolution or liquidation of enterprise

Particularly notable are the sanction of “dissolution or liquidation of the collective entity” and the measure of “permanent or temporary closing of a branch of the collective entity.” Undoubtedly these are the most far-reaching sanctions, as they can entirely remove the entity from commercial and legal existence, and would be decided by a criminal court rather than a commercial court.

But the court could order such measures only as a last resort, and only against entities used entirely or in a significant part for commission of a serious offence (punishable by imprisonment of 5 years or more).

If the court ordered the dissolution or liquidation of the entity, it would also have to order at the same time that the assets and property rights of the entity are transferred to the State Treasury (the bill is silent on the entity’s obligations), unless they belong to the injured party or other person.

Then the State Treasury would exercise all entitlements in the liquidation proceeding. A crucial point: the liability of the State Treasury would be limited to the value of the collective entity’s assets, and thus the creditors of a dishonest firm might not receive payment of their claims.

Burdens during proceedings

It is not just the ultimate consequences of the criminal trial of a collective entity that can be burdensome for the entity. The trial itself and the related obligations can make it hard to continue doing business.

Invalidity of legal acts by “suspected entity”

Once an order has been issued asserting criminal charges against an entity, the entity would be required to notify the authority conducting the proceeding of:

• Any change in the entity’s registered office
• Any change in the articles of association governing the organisation of the collective entity
• Appointment or termination of commercial proxies
• Legal acts having as their subject:
  • The enterprise operated by the collective entity
  • Sales of shares in the capital of the collective entity
  • Encumbrance of the shares
• Reduction of the share capital
• Intended merger or reorganisation of the entity
• Intended disposal of real estate belonging to the entity.

Such acts would be void if made without notifying the authority conducting the proceeding at least 14 days in advance.

Moreover, the prosecutor or court would have a wide range of available measures that could be applied against the collective entity until a legally final judgment was obtained, in order to secure the proper conduct of the proceeding or enforcement of the penalty to be imposed on the entity. These measures would include:

• Appointment of involuntary administration of the enterprise for the duration of the proceeding (as well as after the proceeding is completed)
• Establishment of security interests against the entity’s property
• Ordering preventive measures such as:
  • Ban on promotion or advertising
  • Ban on concluding contracts of a specified nature
  • Ban on conducting business of a specified nature
  • Ban on encumbering the assets of the entity or disposing of assets of the entity specified by the court, without the approval of the court
  • Ban on seeking the award of public contracts for the duration of the proceeding
  • Stopping the disbursement of grants or subsidies
  • Ban on merger, division or reorganisation of the collective entity.

These preventive measures could be applied while the criminal proceeding is pending (at the preparatory stage and before the court) in situations set forth in the act. During the preparatory proceedings, the decision to apply such measures would be taken by the prosecutor. Even if such decisions were subject to judicial review, this approach would still present an existential threat to the commercial entity subjected to such measures.

Summary

Although there is undoubtedly a need for change, the jump from the current act to the proposed new act is huge. The unmistakable impression is that lawmakers are using the proposal to shout, “Business beware!”

Aleksandra Stępniewska, adwokat, Maria Kozłowska, Business Crime practice, Wardyński & Partners