Liability in damages of a member of the management board for failure to file a timely bankruptcy petition for a limited-liability company | In Principle

A creditor of a company may seek to hold a member of the management board liable in damages if a bankruptcy petition for the company is not filed on time. The duty to file a bankruptcy petition when the company becomes insolvent rests on every member of the management board of a limited-liability company.

The purpose of the regulation imposing liability in damages on a member of the management board of a limited-liability company in the event of failure to file a timely bankruptcy petition for the company is to create additional security for the financial interests of the company’s creditors and to reinforce the credibility of the limited-liability company as an institution in which the shareholders’ exposure is limited to the assets of the company. A member of the management board of a limited-liability company may be held liable for a loss to a creditor of the company caused by the failure to file a timely bankruptcy petition for the company pursuant to Art. 299 of Poland’s Commercial Companies Code or Art. 21(3) of the Bankruptcy & Rehabilitation Law. This article is addressed to the first basis for liability—under the Commercial Companies Code.

A member of the management board of a limited-liability company is exposed to the risk of liability in damages under Commercial Companies Code Art. 299 when a petition seeking declaration of the company’s bankruptcy is not filed on a timely basis after the company becomes insolvent (i.e., under Bankruptcy Law Art. 11, when the company has ceased paying its debts as they fall due or the company’s obligations exceed the value of its assets, even if the company is currently meeting its obligations). Such liability may be imposed when execution against the company’s assets upon application of the creditor proves ineffective. If execution is ineffective, it is obvious that the creditor seeking execution, as well as any other creditor who must look to the assets of the company to satisfy its claim, has no chance of satisfying its claim against the company itself. Any creditor whose claim has become due and payable—not just the creditor whose attempt to execute against the company was ineffective—then obtains the ability to seek damages from the members of the company’s management board. Such cases are heard in a civil proceeding before the court for the location of the company’s registered office (Commercial Companies Code Art. 298).

There has been a dispute in the case law and the literature on whether the liability of management board members under Art. 299 is in the nature of tort liability or in the nature of a guarantee of the company’s obligations, but in recent years the Supreme Court of Poland has followed the view that liability under Art. 299 is governed by the principles of a tortious act causing injury to the creditors (e.g. resolution of a seven-judge panel of the Supreme Court dated 7 November 2008, Case No. III CZP 72/2008, LexPolonica No. 1961623).

A person may be held liable on this basis who was serving as a member of the management board of the company at a time when two conditions were both met: The company had an obligation to the creditor (even if it was not yet due and payable), and the company was insolvent. In practice, notwithstanding the literal wording of Commercial Companies Code Art. 299, a claim for damages on this basis may be asserted not only against a person who is currently a member of the management board, but also against former members of the management board (but for purposes of this article we will refer to such persons as management board members). The liability of such persons under Art. 299 is joint and several, with all of the legal consequences that follow from that.

In order to hold a management board member liable, the creditor must show that the company has a debt to the creditor reduced to a writ of execution (Supreme Court resolution of 15 June 1999, Case No. III CZP 10/99, LexPolonica No. 334994), and execution of the claim against the assets of the company proved ineffective or would be ineffective if it were conducted. (Commercial Companies Code Art. 299 applies to public and private debts, but may be excluded with respect to certain types of debts under other specific regulations, for example arrears in payment of taxes and social insurance contributions, which are subject to a similar liability regime under Art. 116 of the Tax Ordinance.)

In order to demonstrate that the grounds for liability under Commercial Companies Code Art. 299 have been met, the creditor essentially must prove that it has suffered a loss, generally equal to the amount of the debt which could not be collected from the company, together with any incidental amounts and the costs of the ineffective execution (resolution of a seven-judge panel of the Supreme Court dated 7 November 2008, Case No. III CZP 72/2008, LexPolonica No. 1961623). Notably, if the creditor obtained or could have obtained at least partial satisfaction of its claim, the execution cannot be regarded as ineffective (Supreme Court judgment of 16 March 2007, Case No. III CSK 404/2006, LexPolonica No. 2077161).

The case law takes a liberal approach to interpretation of the notion of “ineffective execution” (Supreme Court judgment of 9 May 2008, Case No. III CSK 364/07, LexPolonica No. 2143632). Ineffectiveness may be proved through any evidence showing that the company does not have assets out of which the creditor could be satisfied. For this purpose, it is not necessarily required to commence an execution proceeding against the company in favour of the specific creditor which is then discontinued because the execution was ineffective. It is sufficient to show that if execution were conducted on behalf of the specific creditor, it would obviously be ineffective. Thus an order by the bailiff discontinuing an execution proceeding for the creditor that is the plaintiff in the case because of the ineffectiveness of the execution is not the only evidence that may be presented. Indirect evidence may also suffice, such as:

• An order by the bailiff discontinuing execution in favour of another creditor because it was ineffective
• An order by the bankruptcy court denying a bankruptcy petition for the company because the company has insufficient assets to cover the costs of the bankruptcy proceeding
• The balance sheet of the company (or a list of assets prepared under Civil Procedure Code Art. 913 and following) showing that the company does not have the means to satisfy the creditor
• Proof that the company’s assets are encumbered to an extent that the creditor cannot expect to obtain satisfaction of its claims.

A member of the management board may be released from liability in damages, even though execution against the company’s assets was or would have been ineffective, by showing that a bankruptcy petition for the company (involving either liquidation or reorganisation) was filed by the proper time. It has been held that it is irrelevant whether the bankruptcy petition was filed by the management board member who is the defendant in the action seeking damages or by another entity entitled to file a bankruptcy petition (Supreme Court judgment of 9 May 2008, Case No. III CSK 364/07, LexPolonica No. 2143632.). It is sufficient that a bankruptcy petition was filed by the statutory deadline, and effectively. (A bankruptcy petition may not be regarded as effectively filed if it is rejected by the bankruptcy court on formal grounds.)

If a bankruptcy petition was not filed within the proper time, the situation of the management board member becomes worse, but he or she may still have a defence against liability for the creditor’s claims. Commercial Companies Code Art. 299 provides a rebuttable presumption that the grounds for the management board member to be held liable in damages exist (i.e. fault on the part of the management board member, injury to the creditor, and a causal relationship). To rebut this presumption, the management board member must prove that he or she was not at fault for failure to file a timely bankruptcy petition, or that the creditor did not suffer a loss for this reason. This may proved by showing that, for example:

• During the management board member’s term of office, the company was solvent
• The obligation of the company arose after the person was removed from the management board
• Within the proper time after appointment to the management board, after determining the financial condition of the company, the person filed a bankruptcy petition for the company
• From the beginning of the person’s term of office, the company lacked funds to cover the costs of a bankruptcy proceeding, and therefore a bankruptcy petition was not filed
• The creditor failed to satisfy its claims because it was slow to seek execution against the company’s assets.

If the management board member is unable to prove the absence of fault or the absence of a loss to the creditor, and a timely bankruptcy petition for the company was not filed, he or she should expect to be held liable to make up the loss to the creditor resulting from unlawful and culpable failure to file a bankruptcy petition for the company.

By way of conclusion, it should be mentioned that the Polish government is currently drafting a proposal to amend the Bankruptcy Law which would extend the statutory deadline for filing a bankruptcy petition from two weeks after insolvency to one month (Recommendation of the Ministry of Justice Team on Amendment of the Bankruptcy & Rehabilitation Law dated 19 December 2012). The proposed changes would also include an amendment to Commercial Companies Code Art. 299 to clarify the grounds for liability under this provision.

Michał Barłowski and Karol Czepukojć, Bankruptcy and Restructuring practices, Wardyński & Partners