Issuing binding instructions within the group of companies

On 13 October 2022, an amendment to the Code of Commercial Companies came into force. One of the key changes was the introduction of a separate section dedicated to a group of companies and, within this, the regulation of the institution of binding instructions.

Binding instructions are intended to be a tool for the efficient management of a group of companies. The following article aims to signal some important issues regarding binding instructions.

The essence of binding instructions

A group of companies consists of a parent company and subsidiaries, which are capital companies guided by a common strategy in order to pursue a common interest (art. 4 § 1 item 5¹ of the Act of 15 September 2000. – Code of Commercial Partnerships and Companies (hereinafter: „CCC”).

Binding instructions, on the other hand, are instructions that a parent company may issue to a subsidiary, within a group of companies, which relate to the conduct of the company’s affairs and are justified by the interests of the group of companies, unless specific provisions provide otherwise (Article 21² § 1 CCC). Binding instructions may, for example, relate to the following: securing the obligations of group members, e.g. by granting a surety or establishing a mortgage, creating a common fund, providing financing to a group member, transferring technology to a group member, limiting intra-group competition or transforming a subsidiary (its division, merger or transformation)[1] . However, when issuing binding instructions, it is important not to assume that the interests of the group of companies override those of the parent company or the interests of the subsidiary. A balance should be sought between the interests of all entities.

In legal terms, binding instructions are to be considered as bilateral legal acts. This means that in order for an act to be considered a binding instruction, it is necessary that it be issued by the parent company and accepted by the subsidiary. The mere issuance of a binding instructions does not mean that there is a binding instructions, as the subsidiary cannot remain passive in order to speak of a properly formed binding instructions within a group of companies.

The parent company issues a binding instruction in written or electronic form under pain of invalidity (article 21² § 2 CCC). In principle, a binding instruction may be issued by the management board, a proxy or a duly authorised representative of the parent company[2]. However, due to the particular situation in which the parent company finds itself, such an instruction may also be issued by its liquidator, bankruptcy trustee, administrator of the mass of arrangement or sanctioning mass, and if a court supervisor has been appointed and the issuance of a binding instruction exceeds the nature of ordinary management activities, then the consent of the court supervisor will be required for the issuance of a binding instruction[3].

What constitutes a binding instruction

The Commercial Companies Code regulates what basic elements a binding instruction should contain. A binding instruction should indicate:

• at least the behaviour of the subsidiary expected by the parent company in connection with the execution of a binding instruction,
• interest of the group of companies that justifies the execution of a binding instruction by a subsidiary,
• the possible benefits or damages of the subsidiary that will result from the execution of the binding instruction, as well as the envisaged manner and timeframe for compensating the subsidiary for the damage suffered as a result of the execution of the binding instruction (Article 21² 3 CCC). However, in cases where the binding instruction is neutral in terms of benefits and damages, this circumstance may also be included in the wording of the instruction.

A binding instruction may be expanded to include additional elements if this would only facilitate the subsidiary’s performance of its obligation, but it may not lack any of the aforementioned elements. An instruction issued with the omission of any of them does not meet the statutory requirements and is therefore not binding.

The conduct indicated in the binding instruction should be sufficiently concrete and fall within the sphere of managing the subsidiary’s affairs. In addition, it should be in accordance with the law, with the principles of social co-existence and not aimed at circumventing the law. Otherwise, it would be invalid (article 58 § 1 and 2 of the Civil Code in connection with article 2 of the Commercial Companies Code)[4]. Interestingly, such conduct does not have to consist only of doing, but may also consist of omission or suppression by the subsidiary. It may be of a one-off, periodic or continuous nature. Its performance may be subject to a time limit.

Actions of the subsidiary taken after receipt of a binding instruction

The subsidiary’s management board, upon receipt of a binding instruction, has three courses of action. It can pass a resolution to implement the binding instruction and then have it implemented. The resolution should contain at least the mandatory elements of a binding instruction. The subsidiary is obliged to notify the parent company of the adoption of the aforementioned resolution. As soon as the resolution in question is passed, the subsidiary and its bodies become bound by the binding instruction[5] . The management board may also refuse to comply with a binding instruction in exceptional circumstances. Alternatively, members of the management board may resign with due observance of the relevant procedure[6] .

Refusal to comply with a binding instruction  

The subsidiary should, in principle, accept a binding instruction. Refusal to accept a binding instruction is an exception and may only occur in strictly defined cases prescribed by law. The legislator makes a distinction here between subsidiaries that are and are not sole proprietorships. Both a single-member company subsidiary and a non-single-member company subsidiary participating in a group of companies shall pass a resolution refusing to comply with a binding instruction if its compliance would lead to the insolvency or threat of insolvency of that company. On the other hand, a subsidiary company participating in a group of companies which is not a single-member company shall additionally adopt a resolution to refuse to carry out a binding instruction if there is a justified fear that it is contrary to the interest of that company and will cause damage to it which will not be repaired (article 21⁴  § 1 and 2 of the Code of Commercial Companies). The legislator’s use of the word „undertakes” rather than „may undertake” clearly indicates that it is not only the right but also the duty of the subsidiary’s management board to adopt a resolution when the above circumstances occur. The articles of association or statutes of a subsidiary participating in a group of companies may provide for additional grounds for refusal to comply with a binding instruction. A resolution of the subsidiary’s management board to refuse to carry out a binding instruction is mandatory. It should contain a justification and, as in the case of a resolution to accept a binding instruction, the parent company must be informed of its adoption (art. 21⁴ § 3 and 5 c.c.c., art. 21³ § 4 c.c.c.).

Liability of parent company and subsidiary

A member of the management board, supervisory board, audit committee and liquidator of a subsidiary company is not liable for damage caused by the execution of a binding instruction, including under articles 293, 300¹²⁵ and 483 of the Commercial Companies Code. A member of the management board, supervisory board, audit committee and liquidator of the parent company acting in the interest of the group of companies shall also not be so liable (article 21⁵ CCC). However, the exemption from liability will only apply if the binding instruction was carried out in accordance with its content and, at the same time, the binding instruction was issued in accordance with the requirements for a binding instruction and after the resolution to carry it out was adopted, carried out in the absence of the prerequisites set out in article 21⁴ § 1-3 of the CCC[7]. The Commercial Companies Code in turn provides for the liability of the parent company for the consequences of the issuance of a binding instruction and its execution by the subsidiary. This is a liability to the subsidiary itself (article 21¹² of the CCC), to a shareholder of the subsidiary (article 21¹³ of the CCC) and to a creditor of the subsidiary (article 21¹⁴ of the CCC).

Based on the above, it can be seen that the issue of binding instructions issued by a parent company to its subsidiaries operating within the same group of companies is complex and multi-threaded. The need to familiarise oneself in detail with the new provisions introduced into the Commercial Companies Code on the grounds of the amendment is all the more important as failure to comply with statutory obligations may result in the invalidity of a binding instruction and, consequently, in the absence of an obligation to carry it out. In addition, the infliction of damage as a result of issuing such an instruction entails the liability of the parent company.

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[1] R. Adamus (ed.), Commercial Companies Code. Commentary to the amendments. Holding law. Changes in the functioning of capital company bodies, Warsaw 2022, Article 21² .

[2] M. Koralewski, Binding instructions within a group of companies, LEX/el. 2022.

[3] R. Adamus, op. cit.

[4] Z. Jara (ed.), Commercial Companies Code. Commentary. 4th Edition, Warsaw 2022, art. 21² .

[5] M. Koralewski, op. cit.

[6] R. Adamus, op. cit.

[7] Z. Jara, op. cit.