It may seem that being a member of the board of directors of a limited company is all about perks. However, while the position is indeed usually followed by a number of benefits and attractive remuneration, strict liability should not be overlooked. Perhaps it is then better to become a proxy in a limited liability company? We explain the liability of a board member and a proxy in a limited liability company.
What is a proxy?
The institution of proxy is regulated in the provisions of the Polish Civil Code. It is a type of power of attorney with an exceptionally broad scope. It may be granted only by an entrepreneur entered in the register of entrepreneurs CEIDG or KRS. A proxy may be granted only by an entrepreneur entered in the register of entrepreneurs of the CEIDG or KRS. A proxy may be granted for all judicial and extrajudicial actions related to the running of an enterprise, with the exception of a few actions enumerated in Article 1093 of the Polish Civil Code, which require a separate power of attorney, i.e:
- disposal of an enterprise or putting it into temporary use;
- disposal or encumbrance of real estate.
In the case of a branch, the proxy may be limited to the scope of the register of affairs entered in the register of the branch of the company. In practice, this means that in many matters the scope of the proxy’s activities will overlap with those that can be performed by members of the company’s management board. In particular, the proxy may sign contracts acting on behalf of the company, as well as incur obligations.
The scope of the proxy may not be limited with effect towards third parties, unless such a possibility results directly from specific provisions. This means that all legal acts performed by the proxy have an effect in trading against other entities.
It is worth remembering that the establishment of a proxy by Polish law is entirely optional. A company may appoint a proxy (or several proxies), but there is no obligation to do so. It is permissible to define representation differently in the case of a proxy. In this respect, a distinction is made between an independent proxy and a joint proxy, including a proper and improper proxy. Importantly, as a rule, the proxy does not make decisions concerning the company on his or her own, but only carries out instructions given to him or her.
You can find out more about the proxy in our article: What is a proxy and who can become a proxy?
What is the liability of a proxy by the Polish law?
Since the range of potential actions of a proxy is so broad, one would expect the laws to strictly regulate his liability. However, it turns out that it is quite the opposite. The provisions of Polish Commercial Companies Code do not provide for the proxy’s subsidiary liability for the company’s obligations, as is the case with members of the management board.
To a certain extent, however, proxies may be held liable for the company’s public-law liabilities. Pursuant to the wording of Article 116 §3 of Polish Tax Ordinance, in a situation where a capital company in organisation does not have a management board, its proxy or partners, if a proxy has not been appointed, are liable for tax liabilities.
Thus, if a proxy acts as a power of attorney, he or she may be liable for tax debts of a company in organisation. In practice, such a situation is quite rare, and a company in organisation generally exists for a short period of time.
The proxy is also liable for his acts and omissions on a fault basis. Thus, if he or she leads to damage to the company in this way, he or she may be held liable under Article 415 of the Civil Code.
What do the members of the board of directors in a limited company do by the Polish law?
The members of the management board of a limited liability company have an executive function. Their tasks include managing the affairs of the company and representing it externally. The management board is always an obligatory body, regardless of the company’s capital and the number of shareholders forming it. It must consist of at least one person, although it often consists of more than one person. The articles of association of a limited liability company may stipulate the principles of company representation in various ways, e.g. by requiring the cooperation of two members of the management board for incurring liabilities above a certain amount.
You can find out more about the duties of a management board member in the article: What does a management board member do in a limited liability company?
Subsidiary liability of a board member for the company’s obligations by the Polish law
The issue of a board member’s liability presents a much less optimistic picture than that of proxies. First of all, they are subsidiarily, jointly and severally liable with all their assets for the company’s presumed liabilities.
Thus, if it turns out that a legal person does not have sufficient assets to cover its liabilities, the creditor may hold all or selected members of the management board liable. It is sufficient for him to demonstrate the ineffectiveness of enforcement from the company’s assets.
Article 299 of the Code of Commercial Companies provides for a number of prerequisites, the fulfilment of which (at least one) exempts a board member from liability. However, these are difficult processes, requiring an excellent knowledge of the case law and well-considered procedural tactics. These prerequisites include:
- the timely filing of a bankruptcy petition;
- timely issuance by the court of an order to open restructuring proceedings or to approve an arrangement in proceedings for the approval of an arrangement;
- no fault of the management board member in failing to file the bankruptcy petition;
- no fault of the creditor despite the board member’s failure to comply with the obligation to file a bankruptcy petition or the court’s failure to issue appropriate proceedings.
Liability of a management board member for the company’s tax liabilities by the Polish law
Article 116 of the Tax Ordinance provides for the liability of management board members for the public-law liabilities of a capital company and a capital company in organisation. They are liable with all their assets if enforcement against the company’s assets has proved wholly or partially ineffective. The applicable regulations provide for the possibility of exemption from liability in this respect. To this end, a board member must:
- timely file a bankruptcy petition or open restructuring proceedings;
- prove the absence of fault in the failure to file the bankruptcy petition;
- indicate the company’s property from which enforcement enables tax arrears to be satisfied to a significant extent.
The tax liability of members of the management board extends to tax debts whose due date has expired while they are members of the management board.
Regardless of the above, a member of the management board may also be held liable on a fault basis for the act or omission by which he or she caused the damage. In addition, there is a significantly higher risk of criminal liability on the part of board members than in the case of proxies.
Is it better to be a member of the management board or a proxy in a company?
The performance of the function of the member of the management board requires a significantly higher than the function of the proxy. Whereas in the case of proxies one can mainly speak of liability for damages on a fault basis and limited tax liability, in the case of management board members there is broad civil liability, as well as bankruptcy, corporate and criminal liability. In addition, members of the board of directors have the duty to approve the financial statements and the need to receive a discharge as approval of the activities carried out. The question of which function is better to perform is difficult to answer unequivocally. Indeed, board members, in exchange for strict liability, gain real influence over the company’s activities.
If you read our article, you have questions concerning the proxy and responsibility of a member of the board of directors – contact us. We will be happy to answer any questions you may have.