When may one shareholder be held liable for the obligation of another?
28.07.2011
corporate
When acquiring shares in a Polish limited-liability company, the buyer should check the legal basis for any recent payments made to shareholders.
If another shareholder received an improper payment, the risk of liability to refund the payment to the company may also apply to a new minority shareholder.
It is commonly understood that the shareholders of a limited-liability company are not liable for the debts of the company, not to mention debts of other shareholders. In an economic sense, a shareholder’s liability is limited to the value of the investment that the shareholder has made in the company. There are exceptional situations, however, in which a shareholder may be held liable under specific provisions of the Commercial Companies Code. One example is a shareholder’s liability to the company for improper payments to shareholders.
In practice, there are many examples of improper payments to shareholders, such as:
- a dividend in an impermissible amount,
- refund of surcharges in violation of law or the articles of association, or
- payments in performance of an invalid legal act (particularly common in this respect are payments to a sole shareholder, or a shareholder who is also a member of the management board, in violation of Commercial Companies Code Art. 15, 173 or 210).
Because it is impossible to set forth an exhaustive list of all instances in which payments may have been made to shareholders improperly, it is necessary to examine each payment on a case-by-case basis.
Under Commercial Companies Code Art. 198, a shareholder who received a payment in violation of law or the articles of association is liable for refund of the payment, but the members of the company’s authorities may also be liable. And if refund of the payment cannot be obtained from the recipients or the individuals responsible for making the payment, then the other shareholders are liable to the company up to the full amount of the loss necessary to cover the entire share capital, in proportion to their shares. Any amounts that cannot be collected from a given shareholder are divided among the other shareholders in proportion to their shares. Under the express provisions of the code, such persons cannot be released from liability to the company for reimbursement of such amounts.
Art. 198 is not worded very precisely, and interpretation of this provision raises numerous doubts of great practical importance. For example, it is not entirely clear which shareholders are required to participate in the reimbursement. Only those who were shareholders when the unlawful payment was made? Or their legal successors as well? Or only those who are shareholders when the company asserts the claim for repayment? To be on the safe side, it should be assumed that liability applies to shareholders as of the time the payment was made, as well as their legal successors. The obligation to reimburse the company for a benefit received may be regarded as a payment due on the shares under Commercial Companies Code Art. 186. Thus, when buying shares in a limited-liability company, particular care should be devoted to determining whether the company made any payments to shareholders over the last three years, at least. It is in the best interest of the acquirer of the shares to examine the legal grounds under which such payments were made.
The code also does not state clearly the point in time at which the degree of coverage of the share capital should be determined for purposes of the liability of other shareholders: a fixed amount as of a specific time (e.g. the time when the unlawful payment was made), or a variable amount (necessary to cover the share capital in full at any given time). A conservative approach to this issue calls for considering the state of the coverage of the share capital at any and all times, until the unlawful payment is recovered in full. In any event, the upper limit of the shareholders’ liability will be the amount of the unlawful payment. But this leads to the conclusion that there is a particular threat to the potential acquirer of shares when the company is in poor financial condition because of the lack of full coverage of the share capital. In such situations, the acquirer of the shares should be particularly cautious and carefully examine payments made by the company to its previous shareholders.
The wording under which the amount remaining to be repaid should be divided among the other shareholders in relation to their shares is also unclear. It appears that the basis for determining such relationship is not the total number of shares in the company, but the total shares held by the shareholders among whom the shortfall should be divided. Only under this approach is it possible to make up the complete loss to the company. However, this approach entails a significant risk for the shareholders, because they may bear full responsibility for refunding the unlawful payment even if they were not involved at all in the payment. In an extreme instance, a shareholder with a very small percentage of the shares may be required to make up the full amount of a payment made to another shareholder, if the company is unable to recover such amount from the shareholder that received the payment, the members of the authorities responsible for making the payment, or the other shareholders. This is thus a risk that particularly needs to be considered when acquiring a minority stake in a company.
When a person is held liable for a payment to the company on behalf of a shareholder who has received an unlawful payment (e.g. a member of the management board or supervisory board, or other shareholders), upon payment the person acquires a statutory subrogation claim for the amount paid to the company, against the shareholder that received the unlawful payment, under Civil Code Art. 518, in which the third party stands in the shoes of the satisfied creditor (the company).
Claims for reimbursement of amounts unlawfully received by a shareholder expire three years after the payment was made.
Dr Jarosław Grykiel, Corporate Law practice, Wardyński & Partners