The issue of subsidy repayment is a problem for basically every enterprise implementing a subsidised project. Practically no entity has such significant cash reserves to meet the institution’s demand to return the entire subsidy (in some cases we are even talking about tens of millions of zlotys) overnight.
The demand for the return of subsidies (often multi-million) constitutes a serious problem from the perspective of the company’s liquidity, often leading to its insolvency and, consequently, bankruptcy.
In this connection, one of the most frequent questions that is asked in our law firm is about the personal liability of board members for an unreimbursed grant. When does this liability materialise and under what conditions can a board member avoid this liability.
This issue is momentous especially in the context of the way in which this type of project is implemented, where grant funds are not accumulated in accounts, but are used to finance, or in fact reimburse, expenses already incurred for the purchase of fixed assets, intangible assets or services. Then, finding grant reimbursement funds overnight is practically beyond the reach of the vast majority of beneficiaries.
What does the legislation say
Firstly, the liability of the members of the management board for a reimbursable grant is currently governed by Article 116 of the Tax Ordinance by virtue of several references from the Public Finance Act. Accordingly, board members should expect to be liable on similar principles as in the case of tax liabilities. Similar, however, does not mean identical.
As a reminder, according to Article 116 of the Tax Ordinance, if enforcement against the assets of the beneficiary (legal person) proves to be ineffective, the authority may demand repayment from the members of its management board who are liable with all their personal assets.
It follows from the wording of the provision that in order to hold a member of the beneficiary’s management board liable, the authority should prove (in an administrative procedure) that:
(a) the liability arose while the person was acting as a member of the management board, and
(b) enforcement against the beneficiary has been unsuccessful in whole or in part.
What does the manager need to demonstrate to absolve himself of liability
A member of the management board, if he/she wishes to exempt himself/herself from liability for an unreimbursed grant, must demonstrate that:
1) a timely bankruptcy petition has been filed, restructuring proceedings have been opened or an arrangement has been approved in proceedings for the approval of an arrangement,
2) the bankruptcy petition was not filed through no fault of the board member,
The remainder of this entry will be devoted to these prerequisites. At this point, however, I would like to point out that a member of the beneficiary’s management board should not remain passive – especially in a situation where a repayment request has been received. Administrative authorities often take the view that it is the member of the management board who was in office at the time the grant was received who is responsible for the repayment obligations. However, this assumption is not always correct.
Back to the past - or what the right time mean
How should a board member recognise when to file for bankruptcy? Should he or she file such a petition as soon as he or she receives a request from the institution for voluntary repayment? Upon receipt of a negative audit finding? Or only upon receipt of the decision to reimburse? Or only after it has become final, i.e. after the appeal has been dismissed? Or only after the decision has become final, i.e. after the complaint to the administrative court has been (validly) dismissed?
Or is there no point in making such a request at all, because the board member should know that the claim for reimbursement already existed before the inspection and before the summons? And any such request made 'after’ will be late?
The answer to this question determines whether a member of the board of directors will succeed in benefiting from the exemption from liability at all.
In order to answer what is the 'right’ time to file for bankruptcy in restitution proceedings, reference must first be made to the legislation and its interpretation.
In accordance with Article 207 of the Public Finance Act:
If the funds allocated for the implementation of programmes financed with the participation of European funds are:
1) used against their designation, 2) used in breach of the procedures referred to in Article 184, 3) taken unduly or in excess - are subject to repayment together with interest at the rate specified for tax arrears, calculated from the date of delivery of the final decision referred to in paragraph 9, to the bank account indicated in that decision
"Right time" versus bankruptcy petitio
Should the board member then, in order to avoid liability for repayment, immediately file for bankruptcy at one of these three moments? Should such an application already have been made when the grant was received? Or when the project is put out to tender? Or finally immediately after the reimbursement decision?
In my view, accepting any of the above-mentioned moments as the „right time” to file a bankruptcy petition would lead to absurd conclusions. In particular, the view that the 'right time’ to file would already have occurred when the funds were received, irrespective of when the irregularity occurred and when it was discovered, which is important in the context of the fact that liability for irregularity is objective in nature, abstracting from the board’s 'knowledge’, is a curiosity. In such a situation, the board member would only be left, like Martie McFly, to go back in the past and rectify the 'mistake’ committed.
As the CJEU points out:
"It is therefore irrelevant to the commencement of the limitation period that the date on which the national authorities became aware of the irregularity in question. (...) In these circumstances, allowing the possibility that the period provided for in the fourth subparagraph of Article 3 para. In those circumstances, allowing the period provided for in the fourth subparagraph of Article 3(1) of Regulation No 2988/95 to run only from the time when the administrative authorities first ascertain the irregularity would be tantamount to encouraging the administrative authorities not to pursue the irregularity and, at the same time, exposing economic operators, first, to a long period of legal uncertainty and, second, to the risk that, after that period has elapsed, they will no longer be able to furnish proof of the legality of the transactions in question (....) the time-limit begins to run from the day on which that irregularity ceased to exist, irrespective of the day on which the national authorities became aware of that irregularity".
Judgment of the Court of Justice of the European Union of 11 June 2015, in Case C-52/14, Pfeifer & Langen GmbH & Co. KG v Bundesanstalt für Landwirtschaft und Ernährung, ECLI:EU:C:2015:381
Referring to this view, it would therefore have to be considered that the 'relevant time’ should be identified with the moment when the irregularity justifying the claim for reimbursement occurred, i.e. when the tender was announced or conducted, when incorrect statements were made, when indicators were not achieved, etc.
However, should board members always then file for bankruptcy at this point? Even if, in their opinion, the institution is not right and they would like to demonstrate this before the authority or before the court? This brings us to another important issue – the contentiousness of the reimbursement claim.
"Disputability" of the reimbursement clai
The objective nature of the irregularity means that very often the members of the Board are not aware of its occurrence and, as a rule, they gain knowledge of the irregularity e.g. from the project control protocol. This moment is certainly the right moment for the board to analyse whether an irregularity really occurred and whether the beneficiary agrees with the findings of the controllers.
If it accepts the findings of the auditors, then the board of directors should assess at this point whether, taking into account the reimbursement receivable, there is a state of insolvency of the company justifying the obligation to file an application.
However, in a situation where the beneficiary does not agree with the allegations and intends to contest them in an administrative or administrative court procedure, the restitution claim is disputable and, as such, should not be taken into account when calculating the state of insolvency of the company.
The Insolvency Law, in Article 12a, explicitly defines the situation in which it is the creditor who files a bankruptcy petition when its claim is disputed. In such a case, the court dismisses the petition if the debtor demonstrates that the claim is entirely disputed and that the dispute arose between the parties before the bankruptcy petition was filed. Thus, if the beneficiary had disputed the authority’s position from the outset, for example by filing a response to the demand for payment and then disputing the legitimacy of the reimbursement proceedings, in such a situation the bankruptcy petition filed by the granting authority would be dismissed on the grounds that the claim was disputed.
Importantly, however, a dispute over a repayment claim cannot be a sham.
So much for theory - but what about practice?
Above, I have presented an ideal state that addresses most of the existing doubts in case law. Unfortunately, at this moment there are no established views in the jurisprudence of administrative courts that address the liability of management board members. Suffice it to say that for many years the key issues on the grounds of liability of management board members for tax liabilities of companies, such as the relation of bankruptcy law provisions to the content of Article 116 of the Tax Ordinance, have not been clarified.
Administrative courts in cases concerning liability of managers for an unreimbursed subsidy have to answer many more problematic issues, starting from the moment of determining the „proper time” for declaring bankruptcy as well as the moment of determining the very „emergence” of the reimbursable receivable. The matter is certainly not improved by the fact that the provisions of Article 116 of the Tax Ordinance are to be applied 'mutatis mutandis’ to the liability of management board members for an unreimbursed grant. This is important when considering the fact that liability for irregularities is objective in nature, detached from the knowledge or fault of management board members. Hence, an unreflective assumption that the repayment decision is declaratory and that a member of the management board who was in the company at the time of receiving the payment would already be liable for the repayment obligations would contravene the basic principles of the legal order. The tendency seen in the case law to objectivise the liability of members of company bodies in the case of repayment debts would take on an additional significance leading to absurd conclusions, the foremost of which would be the conclusion that it would be necessary to submit, together with the application for payment, also an application for bankruptcy of the beneficiary.
Certainly, the administrative judiciary is facing quite a problem – there are already more and more cases of liability of members of the management board and a clear settlement of the liability rules would contribute to consolidate the legal certainty of beneficiaries and institutions themselves.
You can read more on the topic I have described in an article of my co-authorship which appeared in Zeszyty Naukowe Sądownictwa Administracyjnego – Liability of a member of a beneficiary’s management board for a non-reimbursed EU grant.
And below you can see an infographic we prepared some time ago on this topic.
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KRZYSZTOF BRYSIEWICZ
Managing Partner / Legal Counsel
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