Limited liability company issues

The majority of foreign entities wishing to do business in Poland choose a limited liability company. Typically, it is a good choice.

The main benefit of a company limited by shares is that the liability of the shareholders is limited to the amount paid on their shares in the company. It follows that if the shares are fully paid up, the shareholders will not normally be liable to contribute further amounts in the event of the company becoming insolvent. A company is a separate legal entity, distinct from its shareholders and directors. This makes it an attractive proposition for a foreign investor looking to establish a business in Poland. Separate legal entity status enables the company to enter into contracts directly and offers the parent company protection from the subsidiary’s liabilities.

Some key issues relating to Polish limited liability companies:
 
Disclosure obligations

Companies incorporated in Poland are obliged each year to file with the commercial register the minutes of the annual general meeting of shareholders together with the annual accounts. All information filed at the commercial register is available to the public, with some limited exceptions.

Upon first registration in the commercial register, each company must file its constitutional documents along with particulars of directors, information regarding ownership of shares and the company’s address. Companies are obliged to update the commercial register whenever certain details change, for example if a new director is appointed or resigns or if the shares are sold.
 
Directors’ liability

Although a company is treated as a distinct legal entity, Polish law imposes personal liability on the directors of a company in a number of ways. The most important one is the personal liability for the company’s debts if the company has no money to pay its debts. This  is quite unusual solution which does not exist in other jurisdictions. Directors do not need to be involved in any wrongful trading or fraudulent activity.

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.

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.

One  of  the  solutions  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.

Finance

There are three main types of finance available to a limited liability company:
 

• • equity – whereby shareholders invest funds in return for shares
  • additional payments  to the share capital  (“doplaty”) – whereby shareholders pay money into the company  to finance its activity; it is called “quasi-equity” financing
  • loan – this is often preferable to companies for tax reasons. A company’s assets may be used as security for borrowings to fund the business. If it is a loan from a shareholder, it should be arm’s length.