Criminal liability of the management board of a housing community for causing financial damage to the community (Article 296 of the Polish Criminal Code)

Under certain circumstances, the management board of a housing community in Poland may be held criminally liable for causing financial damage to the community. The basis for such liability may be Article 296 of the Polish Criminal Code, which penalises so-called mismanagement. The provision also covers the actions of the administrator if the management of the housing community has been entrusted to an external entity.

Pursuant to Article 296 of the Polish Criminal Code, anyone who, being obliged under a statutory provision, a decision of a competent authority or a contract to deal with the property or business activities of a natural person, a legal person or an organisational unit without legal personality, by abusing the powers granted to them or failing to fulfil their obligations, causes significant financial damage to that person, shall be subject to imprisonment for a term of between 3 months and 5 years.

Our practice shows that owners of premises in housing communities are increasingly reporting suspected offences committed by members of the management board. However, it should be noted that the provision of Article 296 of the Polish Criminal Code does not apply in every case. In this article, we explain in which situations the management board of a housing community (housing community manager) may be held criminally liable.

Is the management board of a housing community criminally liable under Article 296 of the Polish Criminal Code?

Yes, the criminal liability of the management board of a housing community under article 296 of the Polish Criminal Code is beyond doubt in the light of the provisions and case law. Article 296 of the Polish Criminal Code protects the interests of any entity which, on the basis of a statutory provision, a decision of a competent authority or a contract, entrusts another person with the management of its financial affairs or business activities (cf. P. Kardas, Commentary on Article 296 of the Polish Criminal Code in: A. Zoll (ed.), Criminal Code. Special Part, Volume III, Lex 2016 Legal Information System, thesis 4 with literature and case law). In other words, the perpetrator of the offence under Article 296 of the Polish Criminal Code may be a person obliged to manage other people’s property affairs. Such persons will undoubtedly include the management board of a housing community and the administrator of a housing community.

The management board of a housing community acts as a body which, generally speaking, manages the property and financial affairs of the community. At the same time, ‘financial affairs’ within the meaning of the provision should be understood broadly, and the nature and content of the obligation entrusting the management board with the management of other people’s financial affairs remain key, which makes it possible to cover it with the protection resulting from Article 296 of the Polish Criminal Code.

Under the Act on the Ownership of Premises:

• Article 21 of the Polish Act on the Ownership of Premises – the management board manages the affairs of the housing community and represents it externally and in relations between the community and individual owners of premises. This also includes the management of the community’s finances.

• Article 29(1) of the Polish Act on the Ownership of Premises – the management board (or administrator appointed pursuant to Art. 18(1) of the Polish Act on the Ownership of Premises) is obliged to keep the community’s accounts in accordance with the law, including off-balance sheet records of costs and advances paid by owners and settlements for other items related to the common property.

• Article 30(1)(2) of the Polish Act on the Ownership of Premises – the management board or administrator entrusted with the management of the common property is obliged to submit an annual report on its activities to the owners.

On this basis, the management board of the community has formal obligations and powers to deal with the community’s property matters, which makes it a potential entity liable under Article 296 of the Polish Criminal Code.

A practical example from Polish case law:

‘The provision of Article 296 of the Polish Criminal Code protects the property interests of an entity that has entrusted their management to another person, as well as a certain standard of due diligence in managing other people’s property interests.’ (judgment of the Polish Court of Appeal in Gdańsk of 5 March 2021, 2nd Criminal Division, ref. no. II AKa 294/20)

Who can report a crime committed by the management of a housing community?

Offences under Article 296 of the Polish Criminal Code are, as a rule, prosecuted ex officio. In practice, however, proceedings are very rarely initiated without prior notification.

In theory, any member of a housing community may notify the public prosecutor’s office, but in practice, notifications of suspected offences under Article 296 of the Polish Criminal Code are often sent to the public prosecutor’s office after an audit of the management board, which we discuss in more detail in the article: Audit of the housing community management board – right to inspect documents and scope of control.

Notifications are also often formulated on the basis of information obtained by the housing community council, which has better access to current information about the work of the management board – we describe this in more detail in a separate article.

At the beginning of the criminal process, the law enforcement authority acts as an arbitrator in the dispute between the management board and the person who reports the offence. Therefore, any report of a suspected offence by the housing community management board should be supported by relevant evidence to substantiate the offence. This may include:

–    the association’s financial documents,

–    agreements concluded by the management board,

–    reports on the activities of the management board,

–    correspondence concerning financial decisions.

In practice, access to the community’s documentation will be crucial, and the management board is generally obliged to make it available (details: Control of the housing community management board – right to inspect documents and scope of control). However, you should not report the matter to the public prosecutor’s office without gathering the relevant evidence, hoping that the law enforcement authorities will do all the work. At least at the initial stage, you need to substantiate your suspicion of a crime.

What actions (omissions) of the housing community management board can be considered mismanagement?

The offence under Article 296 § 1 of the Polish Criminal Code can only be committed intentionally, with direct intent. In practice, this means that the management board of a housing community, as the perpetrator, must consciously and deliberately take actions contrary to the obligations arising from the entrusting of other people’s property matters to it, knowing that by its conduct it is abusing its powers or failing to fulfil its obligations, resulting in significant financial damage. In other words, an accidental mistake or an ill-advised decision is not sufficient, as there must be a conscious intention to cause damage or a gross disregard of duties.

As accurately pointed out in the doctrine: “it is obvious that the basis for liability for the offence specified in Article 296 of the Polish Criminal Code cannot be any action or omission of a perpetrator who is authorised and obliged to deal with the property or business activities of another entity, but only such an act or omission which constitutes a violation of the rules of performance of the tasks entrusted to the trustee” (P. Kardas, Controversial issues in the interpretation of the offence of abuse of trust, Journal of Criminal Law and Penal Sciences, Year X: 2006, issue 2).

When taking action or omitting to act, the management board must therefore be aware that its behaviour constitutes an abuse of its powers or a failure to fulfil its obligations, and that as a result of the abuse of its powers or failure to fulfil its obligations, it causes financial damage to that person and accepts such behaviour.

In practice, offences most often occur in situations where members of the management board:

• commission services (e.g. renovation services) from entities with no experience in the industry or charging fees significantly above market standards,

• conclude contracts without any tender process, often with entities having personal or capital ties to members of the management board,

• conclude contracts on behalf of the housing community for remuneration significantly lower than market rates, for example, providing advertising space on a residential building for several years at a non-market price,

• fail to take actions that should have been taken in the interest of the community, e.g. they do not respond to serious financial irregularities.

The doctrine also points out that mismanagement (including by the management board of a housing community) does not necessarily boil down to a violation of formal powers or obligations, but may also consist of actions contrary to the purpose for which the management board was appointed (see P. Kardas, in: A. Zoll, KK. Commentary. Special Part, vol. 3, 1999, p. 290, note 46; O. Górniok (ed.), Economic and Commercial Law, vol. 10, p. 76, note 4). The opinions cited essentially boil down to the recognition that in this case it is possible to apply an informal criterion of rational action based on the principle of ‘good stewardship’.

Is the knowledge of the housing community’s management board relevant in assessing whether a crime has been committed?

The alleged failure of the management board to fulfil its obligations should be assessed in the light of its actual knowledge and experience and the objectively existing circumstances at the time of the decision, and not in the context of potential expertise, e.g. that of an expert in a given field. At the same time, the management board can and should be attributed with knowledge resulting directly from the nature and content of its duties and powers, which it has assumed and exercised in managing the community’s assets. This means that the management board should be aware of the consequences of its actions and omissions in the context of the community’s financial interests, and a lack of such awareness may constitute grounds for criminal liability.

It should also be remembered that if the management board of a housing community is unsure of the consequences of its actions or interpretation of its duties, it may draw on the knowledge and experience of legal, financial or other specialists.

Does a resolution of the housing community protect the management board from criminal liability?

In situations where the management board’s decision to take a specific action is conditional on the prior adoption of a resolution by the owners of the premises, it sometimes happens that the members of the management board are unaware (or mistakenly assume the opposite) that the mere adoption of such a resolution does not release them from their obligation to exercise due diligence and care for the interests of the community when taking action, because ‘the community wanted it’.

In practice, however, it is often the case that the resolution itself is adopted without the voters having read the content of the agreement. What is more, in practice, the resolution is adopted before the agreement itself has been concluded and its detailed terms and conditions have been specified, and even before the contractor has been selected. In practice, resolutions of this kind are therefore often blanket in nature, i.e. they authorise the management board to perform certain types of activities without specifying the detailed terms and conditions under which a given agreement should be concluded. Practice shows that it is at this stage that the door is potentially opened to abuse on the part of the housing community management board.

It is therefore impossible to argue that the adoption of a resolution by the housing community, which will be implemented by the management board of the housing community, will exempt it from criminal liability.

What is ‘significant financial damage’ in a housing community?

The legislator has established a threshold of liability, indicating that the damage must be of significant value, i.e. PLN 200,000 (in accordance with the definition of ‘significant value’ in Article 115 § 5 of the Polish Criminal Code). Consequently, causing damage to a housing community of a lower value, or failure to cause damage, will be punishable only in the form of an attempt, provided that it is established that the perpetrator attempted to cause significant damage.

At the same time, it seems that the very concept of property damage should generally be interpreted in accordance with its civil law meaning, given that there is no definition of ‘damage’ in criminal law. Legal doctrine indicates that property damage, within the meaning of Article 296 § 1 of the Polish Criminal Code, is the difference in the economic value of the victim’s property between the actual value of the property (at the time of the offence) and the hypothetical value, i.e. the value that would have existed if the perpetrator had not committed the acts specified in that provision (see R. Zawłocki, in: SPK, vol. 9, 2015, pp. 484-488).

If, however, the damage in the amount of PLN 200,000 has not been proven, There are also other provisions of a similar nature, for the violation of which the management board of a housing community may be liable:

• article 303 of the Polish Criminal Code, according to which anyone who causes financial damage to a natural person, legal person or organisational unit without legal personality by failing to keep business records or by keeping them in an unreliable or untruthful manner, in particular by destroying, removing, concealing, altering or forging documents relating to that activity,

• article 296a of the Polish Criminal Code, according to which anyone who, while performing a managerial function in an organisational unit conducting business activity or while being employed by it, or under a contract of mandate or a contract for specific work, demands or accepts a financial or personal benefit or a promise thereof, in exchange for the abuse of their powers or failure to fulfil their obligations, which may cause financial damage to that entity or constitute an act of unfair competition or an unacceptable preferential treatment of the purchaser or recipient of goods, services or benefits, shall be subject to imprisonment for a term of between 3 months and 5 years.

• article 231 of the Polish Criminal Code, according to which a public official who, by exceeding his or her powers or failing to fulfil his or her duties, acts to the detriment of public or private interests, shall be subject to imprisonment for up to 3 years.

Is an attempt to commit a crime by the management board of a housing community punishable?

In practice, it may happen that the management board of a housing community intends to embezzle the community’s funds, and the members of the community or the housing community council become aware of this and stop the action. In this situation, the management board of the community may be criminally liable for attempting to commit a crime.

The offence under Article 296 § 1 of the Polish Criminal Code may occur in the form of an attempt in two variants:

• attempted but incomplete – the perpetrator’s actions are directly aimed at committing a crime, but no abuse of authority or dereliction of duty occurs.

• completed attempt – there is an abuse of authority or a failure to fulfil obligations, but no significant financial damage is caused. In this variant, it is irrelevant whether the damage occurred at all or whether it was below the ‘significant’ threshold.

In practice, the first variant (uncompleted attempt) is less common, as it requires proof that the perpetrator’s behaviour was clearly aimed at causing significant financial damage through an unrealised breach of the management board’s powers.

Is the management board of a housing community also civilly liable in addition to criminal liability?

As a side note, it is also worth mentioning that the management board of a housing community is also liable under civil law, not just criminal law. Although the provisions of the Polish Act on Ownership of Premises do not contain separate regulations concerning the liability for damages of members of the management board of a housing community, this does not exclude the possibility of civil damage arising when the management board, in connection with its function, acts inappropriately or neglects its duties.

Pursuant to Article 1(2) of the Polish Act on Ownership of Premises, in such a case, the provisions of the Civil Code governing the grounds and conditions for liability for damages shall apply. If damage is caused as a result of non-performance or improper performance of obligations under the Act or resolutions adopted by the owners of premises, a member of the management board shall be contractually liable under Article 471 of the Civil Code. However, in the event of damage caused by a tortious act, a member of the management board shall be liable under Article 415 of the Civil Code.

Summary

The criminal liability of the management board of a housing community is a real legal risk, not a theoretical construct. The offence of mismanagement under Article 296 of the Polish Criminal Code may be attributed to members of the management board if they abuse their powers or fail to fulfil their duties, acting to the detriment of the community and causing significant financial damage. What is crucial here is not only a formal exceeding of powers, but also actions contrary to the purpose of the function and the principle of ‘good stewardship’.