Supreme Court favours extending management board liability for an insolvent company's debts
In resolution III CZP 65/17, the Supreme Court addressed management board members’ liability for the debts of a company entirely without funds that nevertheless incurs new obligations. How will the latest case law affect board decisions and creditors’ enforcement of claims?
On 1 December, the Supreme Court answered a legal question on liability under Article 299 § 1 KSH of management board members who failed to petition for bankruptcy in time where the company was entirely insolvent and they continued incurring obligations. The reference also highlighted loss, whose absence excludes liability, and how it should be understood. In the underlying case, the claimant pursued board members after repeated enforcement attempts against the company proved ineffective. The defendants argued that, despite their failure to petition, creditors suffered no loss. Had they fulfilled their duty, it would not have affected the amount recovered by the claimant because the company was already entirely insolvent when they took office.
The Supreme Court criticised this reasoning. In its view, these circumstances do not exclude board members' liability for the company's debts.
The duty to petition for bankruptcy exists even where it is obvious that the petition will subsequently be dismissed for lack of funds to cover the proceedings' costs.
The position would be similar if the company's assets covered only those costs but not existing claims. Failure to initiate bankruptcy proceedings at the appropriate time enables further obligations to be incurred. Worsening an already adverse financial position makes later debt enforcement considerably more difficult.
Until now, similar cases followed two approaches. Some courts accepted the widely used argument advanced by board members in their defence. Others emphasised the connection between incurring further obligations, worsening the company's financial position and making recovery harder for creditors. Under the new case law, recovering debts from indebted companies is much more effective and straightforward. Greater emphasis on board members' personal liability should improve their decisions. Incurring new obligations when a company is in financial difficulty always entails considerable risk for creditors.
Faced with potential liability for the company's debts, board members will undoubtedly be more cautious about incurring further obligations and more diligent in fulfilling their duties to initiate bankruptcy proceedings.
