February 24, 2020
As a director, it is up to you to keep a finger on your company’s pulse and to call for help if necessary. In the UK, you may become personally liable for the company’s debts only under certain circumstances. If you are a director in an English private company and your company becomes insolvent, you may become personally liable if creditors can prove that you made a fraudulent or negligent misrepresentation in the course of negotiating a contract between the company and the third party. You can also become personally liable if fraudulent trading or transactions at an undervalue can be proven.
This may include, but is 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.
This is how it works under English law. How it is in Poland?
As a director of a Polish limited liability company, you should be aware that you can become personally liable for the company’s debts even if you haven’t done anything wrong. The personal liability of a director under Polish law is automatic. This is quite unusual regulation which does not exist in other jurisdictions.
According to Article 299 of the Commercial Code, directors (i.e. natural persons) 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 limited liability company to court, obtains the award and then the execution of the award is not possible because the company has no assets, then directors become personally liable for the company’s debt even if no fraudulent trading or misrepresentation took place. Liability of directors is joint and several.
The directors can defend themselves only if they can prove in the court of law that:
(a) they filed a motion for insolvency of a company in appropriate time which means that the motion for insolvency was filed within 14 days from the moment when the company became technically insolvent or
(b) the creditor did not sustain any damage despite the fact that the motion for insolvency was not filed or that composition proceedings were not commenced or
(c) it is not their fault that the motion for insolvency was not filed or that composition proceedings were not commenced.
In the day-to-day practice, it is difficult to defend yourself. The most common defense is that directors filed the motion for insolvency in appropriate time. The difficulty is that it is not easy to ascertain the exact moment when the company becomes insolvent. Insolvency is the state of being unable to pay the money owed on time. Especially, the balance-sheet insolvency is difficult to be established.
There could be some receivables which are not paid but there are grounds to believe that they will be paid sooner or later. The could be other signals to be considered. Everything needs to be assessed and the risk of wrong assessment falls on directors.
Sometimes, for instance, the loss of a major client may trigger insolvency. Directors have to monitor situation and be ready to file a motion for insolvency if the need arises otherwise they will become personally liable.
Is there any way to avoid this liability as a director of a Polish company?
Unfortunately, the answer is negative, especially that the liability of directors is joint and several. If the company has debts and directors did not file a motion for insolvency in appropriate time, it is very likely that a creditor can easily obtain the verdict that the directors are personally liable.
One of the solution to improve the situation of a particular director, 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 director handles 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 has not been aware of the overall situation of the company and therefore he is not personally liable.
Another solution is to seek indemnity from the parent company. The parent company can guarantee to a director in Poland that he or she will be held harmless.
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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