Lack of due diligence is not an unlawful act

A management board member’s failure to apply due diligence does not result in liability to the company without a specific unlawful act causing injury to the company.

Judgment of the Warsaw Court of Appeal dated 18 August 2011 (Case No. I ACa 54/11)

Under Art. 293 §1 or Art. 483 §1 of the Commercial Companies Code, a member of the management board of a capital company in Poland (i.e. a limited-liability company or joint-stock company), or a member of the supervisory board or audit committee or a liquidator, is liable to the company for injury caused by a culpable act or omission that is contrary to law or the articles of association of the company. Under Art. 293 §2 or Art. 483 §2, such persons are also required to apply due diligence in light of the professional nature of the function they hold.

In the case in question, the company sought damages from former members of the management board under Art. 293. The court of first instance denied the claim, holding that the company had not proved that the defendants were guilty of an unlawful act or omission. The court of appeal upheld the judgment and denied the plaintiff’s appeal.

In the court’s view, it is insufficient under Art. 293 for the company to make a general allegation that the board members’ act or omission was contrary to law or the articles of association. Rather, unlawfulness should be assessed in light of Art. 87 of the Polish Constitution. Under that view, an act or omission is unlawful if it is contrary to the Constitution or a statute, treaty, executive regulation or local ordinance. The articles of association may be relied on only when they provide for specific duties (in the form of commandments, prohibitions or guidelines) which the defendant violated, resulting in injury to the company.

Thus when a company charges a member of its authorities with acting contrary to the law or the articles of association, the violation must be proved on the basis of specific regulations of law or provisions of the articles of association.

The appeal court rejected the company’s position that mere failure to apply the due diligence appropriate to the professional nature of the function is itself an unlawful act. The court held that the issue of due diligence should only be considered as a final step, to help measure the degree of fault on the defendant’s part. First the defendant must be shown to have violated applicable law or the provisions of the articles of association. Only then will the court assess whether and to what extent the defendant complied with the duty to apply the due diligence of a “scrupulous merchant”.

Agnieszka Szydlik, Corporate Law practice, Wardyński & Partners