Last year’s amendment to the Commercial Companies Code introduced the business judgement rule, well-known to Anglo-Saxons, i.e. the assessment of the actions of members of company bodies within the framework of reasonable business risk (Article 293 § 3 of the Commercial Companies Code and Article 483 § 3 of the Commercial Companies Code).

In other words, as a company manager, you will exercise due diligence despite the loss if you comprehensively check the counterparty, perform due diligence on the acquired company, verify the legal status of the acquired property. Finally, the legislator has recognised the inherent element of business, i.e. the taking of reasonable risks, which must not bring negative consequences to the person managing the company.

The infliction of property damage by the board is not only a civil matter

It may seem that causing damage to a company by a careless manager is, after all, a matter for a civil court. In reality, however, this is also a criminal law issue, as our client found out – fortunately with a happy ending.

The Penal Code includes Article 296, which imposes criminal liability on managers of, for example, companies or cooperatives, who by their actions or omissions caused significant property damage or brought about an imminent threat of such damage to the managed entity.

A prerequisite is that the damage must be the result of an abuse of power or breach of duty on the part of, for example, a member of the board of directors, the CEO or another employee at management level.

An interesting practical fact: the criminal damage to the company is often used in the context of commercial disputes. In order to gain an advantage e.g. in a corporate dispute, conflicting parties sometimes try to use the prosecution precisely by means of Article 296 KK.

Umbrella protection – legitimate risks in court judgments

It is not uncommon, for example, that a board member may not understand why the shareholders/supervisory board ‘politely report’ to the law enforcement authorities about the decisions he/she has made. How is the board supposed to invest the funds raised by the company if it is forbidden to undertake lucrative activities, albeit, as is usually the case in such cases, with considerable risk?

In the Criminal Code, it is in vain to find provisions that directly exclude liability under Article 296 KK. For example, there is no so-called Code countertrip of legitimate risk, a criminal law institution that would exclude the unlawfulness of an action due to legitimate risk. This does not mean that the infliction of damage always incriminates the manager. It is an open question whether a person’s action definitely qualifies as an abuse of power or a breach of duty.

Therefore, help must be sought in court judgments. They contain important theses for business, which protect managers of private property (e.g. capital companies) or public property (e.g. management of municipal property) from criminal liability. The more interesting of these are included below.

Starting with the Supreme Court, one may find judgments which indicate that the economic justification of actions taken decompletes the elements of the offence under Article 296 of the CC[1]. In another judgment, it was explained that abuse of power or breach of duty is selection of inappropriate measures leading to excessive economic risk[2].

A very important conclusion arising from the analysis of the case law is the attribution of an important role to the assistance of professionals when making investment decisions. The jurisprudence of the appellate courts rightly indicates that basing actions on the opinion of professionals excludes criminal liability. Examples mentioned are appraisal reports[3], or legal opinions[4].

The judgments also recognise the need to weigh the decisions taken in the context of potential gains and losses while taking into account the likelihood of success[5].

It is also worth mentioning that the courts’ consideration of risky decision-making is not limited to private property only. An element of risk is also admitted in the disposal of municipal property. It must be borne in mind that profit maximisation must not be the guiding motive of local government officials.

D&O insurance an effective protection against criminal liability for mismanagement?

In practice, it is common for company managers to take out a D&O (Directors & Officers) policy. Its purpose is to provide financial security (no liability out of “own pocket”) in the event of managerial malpractice. Does the insurance also protect in the event of criminal misconduct? To use a legal classic, it depends.

More often than not, in the case of economic crimes, such as the managerial mismanagement in question, the courts will impose a fine or a restriction of liberty, which may consist of salary deductions. So we have a kind of receivable measurable in a specific sum of money, so maybe the insurer will cover the penalty? Unfortunately – the answer is no. D&O will not cover an adjudicated fine or restriction of liberty. D&O policies contain clauses that exclude the liability of insurance companies for penalties imposed under criminal law.

D&O policies, on the other hand, are useful insofar as they cover defence costs associated with, for example, suspected mismanagement. At least this is the case until a final judgment is passed. Then, depending on the verdict and the contents of the T&Cs, the insurer, for example, can make a claim against the convicted person if he intentionally caused the damage.

In practice, therefore, it is not worth waiting passively for a settlement in the hope that the D&O policy will cover the adjudicated penalty anyway. A solid argumentation built up from the very first steps of the investigation may prove to be a lifeline. Consulting professionals is also invaluable when making business decisions.

[1] Judgment of the Supreme Court – Criminal Chamber of 3 July 2019. V KK 256/18.

[2] Judgment of the Supreme Court – Criminal Chamber of 16 February 2017. III KK 238/16.

[3] Judgment of the Court of Appeal in Szczecin of 30 March 2017. II AKa 37/17.

[4] Judgment of the Court of Appeal in Katowice of 29 November 2006. II AKa 96/06.

[5] Judgment of the Court of Appeal in Warsaw – II Criminal Division of 20 May 2021. II AKa 406/19; Judgment of the Court of Appeal in Gdańsk – II Criminal Division of 24 August 2017. II AKa 155/17; Judgment of the Court of Appeal in Wrocław – II Criminal Division of 17 April 2019. II AKa 407/18.