Limited liability company (sp. z o.o.) cannot be represented by its management board when entering into an agreement with one of its own management board members. Under Article 210 of the Commercial Companies Code (KSH), the company is then represented by its supervisory board or by a proxy appointed by a resolution of the shareholders’ meeting. An error in representation makes the agreement invalid, creating tax risk and operational risk. Find out how to enter into such an agreement correctly and what to avoid.
Why the management board cannot sign an agreement with itself
A limited liability company is generally represented by its management board when entering into agreements. An exception applies when the company wants to enter into an agreement with one of its own management board members, for example an employment agreement, a management contract, a lease, a sale or a loan.
If the management board represented the company in such agreements, its members would appear on both sides. This is a classic conflict of interest, which is why the law excludes the management board from representation in these cases.
Article 210 KSH: a rule you need to know
Under Article 210 § 1 of the Commercial Companies Code:
“In an agreement between the company and a member of its management board, and in a dispute with that member, the company is represented by the supervisory board or by a proxy appointed by a resolution of the shareholders’ meeting.”
Who may represent the company in an agreement with a management board member
- The supervisory board, if one has been established in the company.
- A proxy, appointed by a resolution of the shareholders’ meeting.
Who may not represent the company
- A commercial proxy (prokurent), even if appointed earlier in the company. The rule in Article 210 KSH is mandatory. A commercial proxy does not bypass it.
Company representation by the supervisory board
If the company has a supervisory board, it represents the company when an agreement is entered into with a management board member. The supervisory board should adopt a resolution that:
- Authorizes one of its members to enter into an agreement with a management board member.
- Sets out guidelines for the agreement, such as the type of agreement, main duties and scope of remuneration.
You do not need to include every term of the future agreement in the resolution. The authorization may cover a specific agreement or define a type of agreements entered into with a management board member on a recurring basis.
Company representation by a proxy
If the company does not have a supervisory board, it is represented in an agreement with a management board member by a proxy appointed by a resolution of the shareholders’ meeting.
Who may act as a proxy under Article 210 KSH
The law does not expressly specify this. It is generally accepted, however, that the proxy should not be:
- the management board member with whom the agreement is to be entered into,
- another management board member,
- a company employee, as someone subordinate to the management board.
What a resolution appointing a proxy should contain
- The proxy’s identity, including their first and last name.
- The act the proxy is appointed to perform, such as entering into a management contract with a specific management board member.
The proxy does not need detailed guidelines on the terms of the agreement and may set its terms independently, although this rarely happens in practice.
Important: the resolution itself constitutes the power of attorney. You do not need to prepare a separate power of attorney document.
Sole management board member and sole shareholder: notarial deed required
If the company’s sole management board member is also its sole shareholder, an additional safeguard applies. Article 210 § 2 KSH requires that:
- the agreement be executed in the form of a notarial deed, without appointing a proxy,
- the notary send the agreement to the competent registration court (KRS).
This applies to every agreement between that management board member and the company.
General power of attorney: why it will not work
Appointing a proxy “once and for all” for all agreements with the management board is defective. This follows from the case law of the Supreme Court.
Permitted types of power of attorney
- Specific: identifies a particular agreement, its terms and scope.
- By type: defines in advance the types of agreements for which the proxy is authorized, such as employment agreements with management board members.
Impermissible power of attorney
- General: authorizes the proxy to represent the company in all matters involving a management board member. Such a power of attorney is invalid.
A power of attorney may, however, be for an indefinite period and remain in force until revoked by a resolution of the shareholders’ meeting.
Special case: a limited partnership with a limited liability company
Suppose that an agreement to form a limited partnership is entered into by Adam Nowak, Jan Kowalski and Kowalski Sp. z o.o. (a company with more than one shareholder and no supervisory board), in which Jan Kowalski is the president of the management board.
What proper representation looks like
- The shareholders’ meeting of Kowalski Sp. z o.o. must appoint a proxy to enter into the limited partnership agreement because the agreement is being entered into with Jan Kowalski, the company’s president of the management board.
- At the same time, the agreement is being entered into with Adam Nowak, so Kowalski Sp. z o.o. must also be represented by its management board.
Who signs what
- Adam Nowak and Jan Kowalski sign on their own behalf as individuals.
- The appointed proxy and Jan Kowalski sign on behalf of Kowalski Sp. z o.o.
This is one of many situations that may appear simple at first but can, in practice, create a risk that the agreement will be invalid.
Consequences of improper representation: invalid agreement and tax risk
If the company was not represented in an agreement with a management board member by the supervisory board, a properly appointed proxy or, in the case of a sole shareholder, a notary, the agreement is invalid.
What this means in practice
- Tax risk: if the invalid agreement generated tax-deductible costs, the tax office may challenge them and remove them from the company’s costs.
- Tax arrears: the company will have to pay additional CIT for periods in which it accounted for costs under the invalid agreement.
- Risk during a tax audit: this is one of the areas most often reviewed when examining employment and cost records.
Can an improperly signed agreement be cured (convalidation)?
Lawyers and courts are divided. For years, the prevailing view was that an improperly signed agreement could not be cured, meaning it could not be made valid retroactively.
What the 2018 amendment to Article 39 of the Civil Code changed
- There is a possibility of convalidation, particularly when the company should have been represented by a supervisory board, as a corporate body.
- Doubts remain when the agreement should have been signed by a proxy, because a proxy is not a company body and the amended Article 39 of the Civil Code refers specifically to corporate bodies.
If your company has an agreement with a management board member and you are unsure whether representation was proper, analyze that specific situation. The sooner you identify the problem, the more options for addressing it may be available.
Summary: what to do to avoid a mistake
- Check whether the company has a supervisory board. If so, it represents the company in an agreement with a management board member.
- If there is no supervisory board, convene a shareholders’ meeting and appoint a proxy by resolution. Identify the specific person and the scope of their authority.
- Do not appoint a general proxy: the power of attorney must be specific or defined by type.
- Sole shareholder and sole management board member? The agreement must be executed as a notarial deed.
- Never sign the agreement through a commercial proxy: a commercial proxy does not replace the rule in Article 210 KSH.
- Review existing agreements with management board members: if any was signed without proper representation, determine whether it can be cured.
If you need support in entering into an agreement with a management board member or want to review existing agreements, get in touch with us.
Frequently asked questions
Who may represent a limited liability company when entering into an agreement with a management board member? Under Article 210 § 1 KSH, a limited liability company is represented in an agreement with a management board member by its supervisory board or by a proxy appointed by a resolution of the shareholders’ meeting. The management board is excluded from this role, and signing the agreement through the management board makes it invalid. If the sole management board member is also the sole shareholder, the agreement must be executed as a notarial deed.
Can a commercial proxy sign an agreement between the company and a management board member? No. The rule in Article 210 KSH is mandatory and a commercial proxy does not bypass it, even if the commercial proxy was properly appointed in the company. An agreement with a management board member may be signed only by the supervisory board or by a proxy appointed by a resolution of the shareholders’ meeting.
How should a proxy be appointed to enter into an agreement with a management board member? Convene a shareholders’ meeting and adopt a resolution identifying the proxy by first and last name and specifying the act for which the proxy is appointed, such as entering into a particular management contract. The proxy should not be a management board member or a company employee, and the power of attorney must be specific or defined by type. A general power of attorney covering all matters with the management board is invalid. The resolution itself constitutes the power of attorney, so you do not need a separate document.
What happens if an agreement with a management board member was signed by the wrong person? The agreement is invalid. In practice, this creates tax risk: the tax office may challenge the tax-deductible costs resulting from the agreement and require the company to pay additional CIT for the periods in which those costs were accounted for. This is one of the areas most often reviewed during a tax audit of employment and cost records.
Can an agreement with a management board member that was signed incorrectly be cured? Following the 2018 amendment to Article 39 of the Civil Code, there is a possibility of convalidation, mainly when the company should have been represented by a supervisory board as a corporate body. Doubts remain when a proxy should have signed: the amended provision refers to corporate bodies, and a proxy is not a company body. If your company has an agreement signed without proper representation, analyze that specific situation. The sooner you identify the problem, the more options for addressing it may be available.
