As a director, it is up to you to keep a finger on your company’s pulse and to call for help if necessary. Under the English law, if your company is deemed to be insolvent, and wrongful trading, fraudulent trading, preference payments, transactions at an undervalue can be proven, you may become personally liable. This may include, but are not limited to the following actions:
• issuing cheques when it is clear they will never be honoured;
• incurring credit when there is little or no prospect of payment;
• taking customer deposits when goods or services will not be supplied;
• selling goods at less than their true open market value.
Additionally, liability can often occur when personal guarantees have been given. Bank borrowings and lease agreements can often require personal guarantees.
What happens if we talk about the Polish company?
As a director of a Polish company, you should be aware that there are rules in place in Poland that a director is personally liable even if he or she has not done anything wrong. This is quite unusual solution which does not exist in other jurisdictions.
According to Article 299 of the Commercial Code, directors are personally liable for the company’s debts if the execution against the company turns out to be ineffective. So, if a creditor takes the company to court, wins the case and then tries to execute the judgement against the company but the company has no assets, then the creditor is allowed to sue directors for the entire amount of the company’s debt even if no wrongful trading or fraudulent actions were involved. Directors become liable for the company’s debts automatically; no fault or wrongful action has to be proven.
The directors can defend themselves only if they can prove in the court of law that they filed a timely motion for insolvency which means 14 days from the moment when the company becomes technically insolvent. In the day-to-day practice, it is very difficult to ascertain the exact moment when the company is becoming insolvent. There could be some receivables which are not paid but should be paid. Sometimes even the loss of major client may trigger insolvency. The entire risk in this respect is shifted on the directors. They have to monitor situation and be ready to file a motion for insolvency immediately otherwise they will become personally liable.
Is there any way to avoid this liability as a director of a Polish company?
In practice, the answer is negative. If a company has debts and directors did not file a motion for insolvency on time, it is very likely that the directors will be held liable for all of the company’s debts. One of the solution to improve the situation is to divide responsibilities among the directors so that each of them is responsible only for his or her particular area. For instance: one person deals with the sales, another deals with the production and the third one deals with the accounting issues. If the scope of responsibility is clearly defined and the director’s actions may be assigned to the particular area, then a director from another area may defend himself by arguing that he or she has not been aware of the company’s situation and therefore cannot be held liable.
In conclusion, make sure you know your company’s financial position. If in doubt and you think your company could be heading towards insolvency, seek early, professional advice.
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