Abuse of trust offence in the light of a holding law draft in Poland

The interest of a company and the interest of a capital group - current status

So far, the provisions of Polish law have not regulated in detail the relationship between a parent company and subsidiaries within the same group (apart from relations of domination and dependence, which are the basis of the group structure).

There are no regulations which take into account the common strategic interest of the group or rules of liability within the group. This creates fundamental problems in the area of criminal law and the liability of managers acting on behalf of subsidiaries.

Acting to the detriment of a company

The Polish Criminal Code provides for the offence of abuse of trust (often called ‘acting to the detriment of a company’).

▪ This crime may be committed by abuse of a right or failure to fulfil an obligation (breach of fiduciary duty) by persons dealing with business activities or managing a company's property/assets. In practice the offence affects members of the management board, managers, proxies.  The issue of whether an individual may be guilty of an offence is determined by the organisational structure of a company, its internal procedures and managerial/employment contracts).

▪ One of the main conditions for liability is causing material damage (actual damage and lost profits) or creating an imminent danger of causing it.

▪ The crime is prosecuted ex officio and punishable by imprisonment (in the most severe case, for up to 10 years).

Material damage

Causing material damage is essential to the manager’s liability for the abuse of trust offence. How is this assessed, if the company operates as part of a group and a particular transaction may be beneficial for the group as a whole, but not profitable for a subsidiary within the group? Unfortunately, the current regulations interpret the interests of a company very narrowly and only in relation to a specific company. The benefit obtained by the group as a whole is irrelevant when assessing the decisions of managers of Polish companies, if their actions lead to damage being suffered by subsidiaries.

Managers operating on the Polish market face the risk of criminal liability for making business decisions that are no more than an execution of shareholders’ decisions and an implementation of the group’s business strategy. In practice, this means that many transactions carried out in accordance with Polish law are contested by law enforcement authorities. This applies, inter alia, to transactions relating to ‘restructuring’ processes (squeeze-outs, buy-backs). For example, law enforcement authorities have the power to assess whether an intra-group transaction took place in accordance with market conditions and, if they decide otherwise, the difference between the actual price and the market price is considered as the subsidiary’s loss. In the circumstances a subsidiary is considered as a wronged party and has a separate legal position in criminal proceedings to that of its parent company or the group.

It is irrelevant that the entity which allegedly suffered damage is dependent on and, in fact, financed by the other party (parent company, other group subsidiary) to the transaction. According to the enforcement agencies, such transactions constitute grounds for bringing charges for acting to the detriment of the subsidiary.

Amendment to the Commercial Companies Code

A draft of the new provisions relating to group companies was presented in August this year. It introduces, among other things, a definition of a group of companies according to which the parent company and its subsidiaries are guided by a common economic strategy (the interest of the group of companies), enabling the parent company to exercise uniform management over its subsidiaries. Apart from the interests of the company, the parent company and the subsidiary are to be guided by the common interests of the group, respecting the rights of creditors and minority shareholders.

According to the draft provisions, the parent company may issue instructions binding on its subsidiaries. Their execution requires a prior resolution of the subsidiary's management board, which shall indicate at least:

▪ the interest of the group of companies justifying the execution of the parent company's instructions;

▪ the expected benefits or damage to the subsidiary resulting from the execution of the instructions;

▪ method and time for remedying the damage incurred by the subsidiary.

Members of the company’s management board or supervisory board will not be criminally liable for the offence of acting to the detriment of a company for following the instructions.

The proposed change recognises for the first time the strategic interests of the group and directly excludes criminal liability of managers of subsidiaries for actions which can be justified by the interests of the group. The draft is a response to calls over the years for provisions on liability within groups of companies to be implemented. The new provisions are intended to increase legal certainty and limit criminal liability for managers operating on the Polish market.

Ewelina Rutkowska
Raczkowski Law Firm
Poland

Ewelina Rutkowska is a lawyer who deals with business crime law. She supports Polish and international clients in conducting internal investigations. Ewelina advises on issues related to crisis management and specialises in building and implementing compliance management systems, including developing internal procedures in the area of anti-bribery/counteracting abuse. She conducts training sessions on compliance and business crime law matters. Ewelina is a PhD student at Warsaw University and the author of many press and scientific publications.