When we think of the position of a board member of a capital company[1] , one of the first things that intuitively springs to mind is the benefits associated with such a role. Such benefits may include, for example: high salaries, share options (known as MSOPs, from ‘Management Stock Option Plan’), a high-end company car, or the prestige associated with the position in the broadest sense. When fantasising about becoming the CEO of a global giant such as Apple Inc., it is easy to forget that these privileges are accompanied by numerous duties and the responsibility that follows them. 
 
The aim of this publication is to familiarise the reader with the basic duties of board members and to outline the principles of their liability.

Basic duties of a member of the board of a capital company

The primary role of the board of a capital company is to manage its day-to-day operations and make key decisions. This role corresponds to the basic duties of the board, namely managing the company’s affairs and representing it[2] . These are, of course, not the only duties of the management board – examples of specific duties arising from legal provisions include, amongst others, preparing the financial statements and ensuring that the company fulfils a range of reporting and audit obligations, organising the work of the management board, convening meetings of the governing bodies, and implementing the resolutions of those bodies.

Representation of a capital company

Representing the company naturally involves making and accepting declarations of intent on its behalf, including, in particular, entering into contracts with third parties. The rules of representation, which members of the management board are obliged to observe, are governed by the articles of association or the company’s statutes; in the absence of such provisions, the rules set out in the Commercial Companies Code (“CCC”) apply[3] . The most common competing methods of representation include (i) individual representation, whereby each member of the management board is authorised to represent the company independently, and (ii) joint representation by two persons, whereby the representation of the company requires the joint action of two members of the management board or one member of the management board together with a proxy. Other arrangements are, of course, also permissible, including a hybrid arrangement which grants the power of sole representation only to selected members of the management board (for example, the chairman).
 
The manner in which each capital company is represented is disclosed in the National Court Register (KRS), which is available online at[4] , enabling third parties to verify at any time whether a given company is being represented correctly.
 
The management board’s power to represent the company is one of the two pillars of the management board’s activities. For this reason, any restriction on this power constitutes an exception[5] to the general rule. An example of a provision excluding this power is Article 210 of the Commercial Companies Code[6] concerning the conclusion of a contract between the company and a member of the management board, and a dispute between these parties. In the situations referred to, the management board’s authority to represent the company is excluded due to a potential conflict of interest between individual members of the management board, and the company may be represented by the supervisory board (which, in the case of a limited liability company, is not a mandatory body) or a special proxy appointed by a resolution of the company’s shareholders’ meeting. This rule does not apply where the sole member of the management board is also the sole shareholder of the company, in which case the act must be executed in notarial form to be valid.
 
Other instances where the management board’s power to represent the company is restricted include cases where the effective performance of an act is conditional upon obtaining the consent of another company body. An example of this is the requirement to obtain the consent of the shareholders’ meeting or the general meeting to enter into a credit agreement, loan agreement, guarantee or other similar agreement, inter alia, with members of the company’s bodies or for the benefit of such persons[7] .

Management of the company’s affairs

The management of the company’s affairs essentially involves carrying out internal activities necessary for its proper functioning. These activities boil down to making economic, organisational or personnel decisions, although their subsequent implementation often requires representing the company externally (for example, by concluding an annex to a contract with a company employee, following a prior decision in this regard). The manner in which the company’s affairs are conducted should be determined by the provisions of the articles of association, and in the absence of relevant provisions therein, by the provisions of the Commercial Companies Code.
 
In the case of a limited liability company, unless the articles of association provide otherwise, where the management board of a limited liability company consists of more than one member, each member of the management board may, without a prior resolution of the management board, conduct matters not exceeding the scope of the company’s ordinary activities. However, matters exceeding the scope of the company’s ordinary activities, as well as ordinary matters, require a prior resolution of the company’s management board if even one of the other members of the management board objects to their conduct.
 
In the case of a public limited company with a multi-member management board, unless the articles of association provide otherwise, the principle of joint management of the company’s affairs applies[8] . Thus, based on statutory provisions, in every matter—regardless of whether it is a routine activity of the company or an activity exceeding the scope of the company’s routine activities—it is necessary for the members of the management board to act jointly by adopting an appropriate resolution. The principle of collegiality does not cover the subsequent implementation of resolutions already adopted, nor the preparation of draft resolutions.
 
The statutory principle of joint management may give rise to organisational problems linked to the need to adopt numerous management board resolutions. For this reason, in large public limited companies, it is considered advisable to decentralise these powers and distribute them amongst individual members of the management board, or even to delegate some of these powers to the management staff reporting to the board. Such a division may be based on a distinction between the company’s ordinary activities and activities exceeding the scope of its ordinary activities, or it may be based on a division of the company’s affairs according to their nature. Crucially, deviating from the principle of collegiality requires the introduction of appropriate provisions into the articles of association of the joint-stock company. Consequently, the introduction of such a division in the management board’s rules of procedure, regardless of whether it is adopted by the management board, the supervisory board or the general meeting of shareholders, must be regarded as ineffective and failing to exempt from liability members of the management board of a joint-stock company who, according to such rules, would be excluded from handling matters of a specific nature.
 
The need to depart from the statutory model, or to clarify the nature of matters that will be deemed to exceed the scope of the company’s ordinary activities, may of course also arise in the case of a limited liability company. Such a modification also requires an amendment to the articles of association.
 
The above considerations are significant in that a culpable breach of the rules governing the conduct of the company’s affairs by members of its management board exposes them to liability for damages under Article 293 of the Commercial Companies Code or Article 483 § 1 of the Commercial Companies Code, as applicable. This subject is discussed in more detail later in the text.

Liability of a member of the management board of a capital company

The liability of members of the management boards of capital companies is varied in nature – it ranges from organisational liability towards the owner(s) of the managed company to the most severe form of liability, namely criminal liability.
 
When listing the various types of liability, we can distinguish:

• organisational liability;
• financial liability – towards the company;
• financial liability – towards the company’s creditors;
• tax liability;
• criminal liability.

A detailed discussion of all types of liability is beyond the scope of this publication. However, we have taken the liberty of presenting below a selection of interesting information regarding certain types of liability.

Organisational liability

Organisational liability essentially boils down to the possibility of removing a board member from their position as a consequence of actions taken or omitted. As members of the management team, board members are accountable to the company’s governing bodies (the shareholders’ meeting, the general meeting of shareholders or the supervisory board). In this context, it is worth bearing in mind that the company’s articles of association may restrict this possibility to valid grounds[9] , thereby strengthening the position of a board member for the duration of their term of office. In such a case, the adoption of a resolution to remove a person from their position without stating a valid reason may be challenged in court.

Financial liability to the company

There are numerous provisions governing the basis for the liability of management board members to the capital company itself[10] . However, the primary provision in this area is Article 293 of the Commercial Companies Code[11] for limited liability companies (sp. z o.o.), and its equivalents, Articles 483 and 300¹²⁵ .
 
On the basis of the aforementioned regulation, the following can be identified as grounds for the liability of members of the management board of capital companies:

1. an act or omission by a member of the management board that is contrary to the law or the provisions of the articles of association;
2. the culpable nature of the breach;
3. damage suffered by the company;
4. a causal link between the act or omission and the damage.

The requirement of unlawfulness boils down to the need to demonstrate that a specific act or omission by a board member was contrary to the provisions of generally applicable law or the provisions of the articles of association or the company’s statutes.
 
Culpability should be understood as the possibility of charging a board member, in connection with their action, with failing to behave correctly (in accordance with the law and the principles of social coexistence), even though such behaviour was possible in the given circumstances.
 
In practice, the standard of care required of board members should take into account the size of the company in question or the nature of its business. Different requirements should be imposed on board members of a single-member limited liability company and on board members of a listed public limited company operating in a regulated sector.
 
Damage is, of course, a loss to the company’s assets, which may take the form of a loss (a reduction in assets or an increase in liabilities) or lost benefits (a value that neither increased the company’s assets nor reduced its liabilities as a result of a management board member’s action).
 
A sufficient causal link between the act or omission and the damage boils down, in simple terms, to establishing that the damage is a normal (but not necessarily inevitable) consequence of the act or omission in question.
 
The cumulative fulfilment of the above conditions allows us to conclude that a board member is liable for damage incurred by the company under their management. This means that, provided additional formal requirements are met (such as the adoption of an appropriate resolution by the company’s governing body), a board member may be sued for damages by the company under their management.

Financial liability towards the company’s creditors

The fundamental principle of capital companies is the exclusion of liability of partners/shareholders for the liabilities of a limited liability company, a public limited company or a simple public limited company, respectively[12] . Thus, partners (shareholders) do not bear liability with their personal assets for the company’s liabilities.
 
However, this does not mean that other persons are not liable. Limiting ourselves to the issue of the financial liability of members of a company’s management board towards its creditors, it should be noted that in the case of all capital companies, members of the management board of such companies may be liable for the company’s obligations towards third parties. The rules governing such liability are set out in Article 21(3) of the Act of 28 February 2003 – Bankruptcy Law and Article 31 of the Act of 13 October 1998 on the Social Insurance System, whilst in relation to limited liability companies, Article 299 of the Commercial Companies Code also applies.

Tax liability of management board members

The issue of the liability of members of the management board of capital companies for their tax liabilities is governed by Article 116(1) of the Tax Ordinance. This provision establishes the principle that, where the enforcement of tax arrears against the company proves wholly or partly ineffective, the members of its management board are jointly and severally liable with the company for the full amount with all their assets, unless they demonstrate the existence of one of the grounds for exemption under Article 116(1)(1) or (2) of the Tax Ordinance, which, in simple terms, include:

• the timely filing of a petition for the company’s bankruptcy;
• demonstrating that the failure to file a petition for the company’s bankruptcy was not the fault of the relevant member of the management board;
• identifying the company’s assets from which enforcement would enable the company’s tax arrears to be satisfied to a significant extent.

Criminal liability

In addition to liability for damages arising from actions taken in connection with the performance of their duties as members of the management board, members may also, in specific cases, be subject to criminal liability.
 
In accordance with the constitutional principle of nullum crimen sine lege, criminal liability can only be imposed if a criminal offence has been committed, i.e. if the act fulfils the elements of the offence as described in the law.
 
It is not possible here to describe all types of prohibited acts that may apply to the assessment of the actions of members of the management boards of capital companies. Such actions may, in fact, be assessed through the prism of the provisions of the Criminal Code, the Fiscal Penal Code, the Accounting Act, as well as other specific legal acts. As an example of such a provision, one may cite the offence of mismanagement under Article 296 of the Criminal Code, which penalises the causing of damage to a given entity (including a capital company) of damage exceeding PLN 200,000 by a person responsible for managing the entity’s financial affairs or business activities (such as a member of the management board), acting through an abuse of authority or a failure to fulfil their duties.  Importantly, a breach of a management board member’s duties resulting in damage of a lower value will not fulfil the criteria of this offence. This clearly illustrates the general principle that a specific breach of a management board member’s duties may, but need not, constitute an offence.

Authors: Paweł Postolko – Senior associate at SKP Law Firm, Tomasz Pieczyk – Managing Partner at SKP Law Firm.

[1] This term refers to a limited liability company, a public limited company and a simplified public limited company;

[2] These obligations are laid down in Article 201 § of the Commercial Companies Code, Article 300⁶²§ 1 of the Commercial Companies Code and Article 368 § 1 of the Commercial Companies Code, respectively;

[3] Article 205(1) of the Commercial Companies Code, Article 300^{(62) of}the Commercial Companies Code and Article 373(1) of the Commercial Companies Code, respectively

[4] https://wyszukiwarka-krs.ms.gov.pl/

[5] See, in this regard, for example, the judgment of the Supreme Court of 24 November 2016, II CSK 126/16.

[6] For a simple joint-stock company and a joint-stock company – Article 300^{(67) of}the Commercial Companies Code and Article 379 of the Commercial Companies Code, respectively.

[7] See Article 15 § 1 of the Commercial Companies Code

[8] Yes, Article 371 § 2 of the Commercial Companies Code

[9] Articles 203(1) and (2) of the Commercial Companies Code, Articles 370(1) and (2) of the Commercial Companies Code and Article 300⁶³(1) and (2) of the Commercial Companies Code, respectively

[10] For example: Article 293, Article 483 of the Commercial Companies Code, Article 300¹²⁵ , Article 292, Article 480 of the Commercial Companies Code, Article 300¹²⁴  of the Commercial Companies Code, Article 481, Article 484 of the Commercial Companies Code, Article 300¹²³  of the Commercial Companies Code, Article 175 § 1 of the Commercial Companies Code, Article 300^{(10)   of}the Commercial Companies Code, Articles 198 and 350 of the Commercial Companies Code, Article 4a(2) of the Accounting Act

[11] A member of the management board, supervisory board, audit committee and a liquidator shall be liable to the company for damage caused by an act or omission contrary to the law or the provisions of the articles of association, unless he or she is not at fault.

[12] Accordingly, Article 151(3) of the Commercial Companies Code, Article 301(5) of the Commercial Companies Code and Article 300¹(4) of the Commercial Companies Code