Will the concept of “piercing the corporate veil” be accepted in Polish law? Is the Polish lawmaker ready to break one of the major rules of the Polish companies’ law? The Polish government is working on a law introducing shareholders’ liability to the creditors of a company.
We have already touched upon the issue of admissibility of shareholders’ liability for a subsidiary’s debts (Piercing the Corporate Veil in Poland – Is This Possible?). So-called “piercing the corporate veil” is a concept not present in Polish law, nor is it recognized by the courts. Under Polish law, capital companies – due to their separate legal personality – independently bear responsibility for their liabilities. For that reason, the shareholders are not liable for the debts of the company. Such exclusion of liability is a cornerstone of Polish companies’ law.
Piercing the Corporate Veil Rule Absent in Poland
There are approx. 350,000 limited liability companies (spółka z ograniczoną odpowiedzialnością – LLC) and 12,000 joint-stock companies (spółka akcyjna – S.A.) registered and existing in Poland. In many cases, the limited liability companies are single-shareholder entities, being members of larger groups. Further, in many cases members of the management board of the parent and subsidiary are identical, meaning that the subsidiary is very often not an independent company, but rather a vehicle for business. There is nothing wrong with it in general, nor is anything wrong with the exclusion of shareholders’ liability. On the other hand, it can pose a risk in terms of the functioning of whole corporate groups and relations among them.
However, over time this concept was abused by certain shareholders. The capital requirements for creation of either LLC or S.A. were lowered to PLN 5,000 and, thus, the share capital ceased to be a real guarantee. The separate legal personality of the companies and exclusion of shareholders’ liability made it tempting for some dishonest entrepreneurs to use companies as tools for fraud. For a long time in the economic sphere there have been cases that justified the need to break through the protective layer of capital companies. Examples include undercapitalisation of the company, mixing the assets of the company and its shareholder, depriving the company of its assets, not equipping the company from the beginning with enough assets to cope with economic risks and many others. All these practices have one thing in common: the fact that the parent company uses the separation of the legal entity of the subsidiary to avoid business risks.
Polish law has not recognized the concept of piercing the corporate veil and, thus, the shareholder could not be liable for the debt of its company.
Draft of New Law – How Would It Work?
The Polish lawmaker reacted by announcing that the government is working on a draft bill introducing the liability of the dominant entity for damage inflicted upon a subsidiary or subsidiary’s creditors by the abuse of the dominant entity. The detailed wording of the bill is not yet know, nor has it been officially adopted by the government (it was expected to happen in Q2 2019, now delayed to Q3 2019), though some details are known.
The liability of the dominant entity is defined as the liability for damage inflicted to the subsidiary and subsidiary’s creditors (including employees of the subsidiary), by the subsidiary dominant entity, through abuse of dominance (i.e. exercising the dominant influence in the way violating good customs and detrimental to subsidiary and/or its creditors). Such liability is ex delicto (civil law tort) liability. This poses the first question: is it necessary to introduce new rules? So far, the concept of introducing the shareholder’s liability for actions (and debts) of a subsidiary by invoking civil law tort seems possible even without new law. The concept of shareholder’s liability for company debt is recognized by statutory law in Italy. In other countries, such as the UK, Germany, Austria, Switzerland and the US, this concept is accepted by courts (without any particular statutory law in force).
In order to strengthen the protection of creditors, the draft bill provides for the presumption of guilt of the dominant entity, which will be obliged to compensate for the damage caused to the subsidiary, unless it proves that it does not bear it. Needless to say, this favours creditors to a great extent and provides more legal protection to them. At the same time, the distribution of the burden of proof as one of the fundamental principles of civil law will be reversed. The burden of proof should be borne by the injured party – according to the draft bill, it is incumbent on the parent company.
The dominant entity is defined very widely as a person or group of persons exerting, directly or indirectly, decisive influence on the company. In particular, the “dominance” is understood as exercising the majority of votes, having the decisive voice on the management board, having the right to appoint the majority of the management board or supervisory board or having the right to the majority of the assets of the company. The dominant entity does not have to hold shares of the company – the bank providing the loan or the State Treasury are, according to the draft, dominant entities. The lawmaker provided certain examples of abuse of dominance, listing the following situations: causing the subsidiary to undertake actions being commercially unjustified, depriving the subsidiary of the assets without providing adequate equivalent or failure to provide means adequate to scope or type of business of the company. In view of the very broadly defined scope of the premises of liability and the introduction of vague concepts, the question arises: what will they actually mean and, as a result, how broad will the scope of this liability be?
Controversies and Doubts
According to information released by the government, the dominant entity is to be liable for damage inflicted to the subsidiary by abuse of dominance and not for all debts of the subsidiary. The list of potential plaintiffs include: subsidiary itself, minority shareholders and creditors of the subsidiary (including the employees). The creditors could file the claim only if they cannot enforce their claim from the subsidiary. There are a few questions there. How will the “damage” be defined? Is the real damage caused by the dominant to the subsidiary by the abuse of dominance or is it the amount of unpaid debt? According to the general rules of Polish law, it should be the first case. Will the damage include lost profit? Again, according to the general rules of Polish law, it should.
Even before the draft of new law has been widely circulated the new concept has been crushed by the jurisprudence. They claimed that the draft violates the cornerstone of Polish corporate law (i.e. ring fencing between the shareholder and the company) and creates additional risk factors. So far, it has been pointed out that the draft bill may have the most severe consequences through the effect of paralysing business activity and the risk of arbitrary assessment of specific violations in light of imprecise premises.
The draft is still at the very early stage – the government has not made it official yet, so various things may happen. We will keep it monitored.