1. If insolvency proceedings must be commenced for the family of companies, does your law permit a joint proceeding, ie, a single court file, a single judge, a single list of creditors, single notice list, or must the case for each member of the family proceed separately with no practical acknowledgement of the related proceedings?
No group insolvency law in Poland
Polish law does not provide for specific rules in case of insolvency of a family of companies. Thus far, Polish courts have not yet developed any case law in that respect.
Each legal entity is therefore treated separately under the law with regard to its insolvency in the process of examining whether or not such proceedings have to begin vis-a-vis the respective entity and after its commencement. Even where there exists a close ownership relationship between the companies and these companies appear to the public to be a single business entity, this will not affect the requirement of treating their insolvency under Polish law separately. Under the Polish Bankruptcy and Reorganisation Act (Ustawa Prawo Upad³oœciowe i Naprawcze; the ‘Insolvency Act’), which came into effect on 1 October 2003, all legal entities are treated as if there was no connection between them with regard to direct or indirect identical shareholders.
As a rule, procedural consolidation of related proceedings is therefore not possible under Polish law. This means, in particular, that each time more than one member of a family of companies becomes insolvent, a separate list of creditors and a separate notice list have to be prepared for each respective legal entity, under a separate court file. Generally, the law does not directly stipulate that insolvency proceedings relating to one member of the corporate family has to, or even may, be taken into consideration in the course of proceedings of another entity from the same corporate family. The only exception to the above general rule is Article 219 of the Polish Civil Proceedings Code (Kodeks Postepowania Cywilnego). Under certain conditions, this provision gives the court the discretionary power to link the proceedings or to combine cases which are pending before it. This exception only applies where at least some extent of factual or legal connection exists between the cases, which enables the court to deal with both cases at the same time in an efficient manner. This provision applies only where the same insolvency court (the ‘court’) is competent to decide on the filings of the different members of a corporate family (for instance because the corporate seat of all companies is situated within the district of the same court).
Insolvency procedures in Poland
Generally, Polish law provides for two types of insolvency proceedings. The first type, the insolvency liquidation procedure (postêpowanie upad³oœciowe obejmujce likwidacje majatku upadlego; the ‘liquidation procedure’) is an equivalent of Chapter 7 liquidation in the US. The other type, bankruptcy involving the possibility of concluding insolvency arrangements (the ‘arrangement procedure’), may take the form of either the reorganisation arrangement procedure (postêpowanie upad³oœciowe obejmuj¹ce zawarcie uk³adu; the ‘reorganisation arrangement procedure’) and the liquidation arrangement procedure (postêpowanie upad³oœciowe obejmuj¹ce zawarcie uk³adu likwidacyjnego; the ‘liquidation arrangement procedure’), and resembles the Reorganisation Arrangement Procedure Chapter 11 reorganisation in the US. The reorganisation arrangement procedure is to be regarded as the primary insolvency proceeding. The Polish Insolvency Act provides also for a third type of proceeding – reparation proceedings (postêpowanie naprawcze). This, however, is technically not an insolvency proceeding, but a type of proceeding which focuses on entities under the threat of insolvency in the near future. The reparation proceedings may be opened only upon the submission of the bankrupt entity and aim at the conclusion of a respective reparation agreement to avoid bankruptcy.
The liquidation procedure, which as a rule also applies to corporate families, leads to the liquidation of the bankrupt’s estate separately for each legal entity to satisfy the creditors’ claims while winding up the insolvent entity. The arrangement procedure leads to satisfaction of the creditors according to the specific arrangement while (1) reorganising and continuing the insolvent entity according to the specific reorganisation arrangement (the ‘reorganisation arrangement’) or (2) winding up the insolvent entity according to the specific liquidation arrangement (the ‘liquidation arrangement’) which allows liquidation procedures different to the statutory ones in the liquidation procedure to be applied.
In general, bankruptcy proceedings comprise the following stages:
In the proceedings to declare bankruptcy the court examines whether the debtor is capable of being declared bankrupt, ie whether the distressed entity ‘fails to perform its obligations’ (Art 11 s 1 Insolvency Act). That notwithstanding, even if the debtor duly performs its obligations, the court may also declare its bankruptcy ‘when the sum of its obligations exceeds the value of its assets’ (Art 11 s 2 Insolvency Act). Where the court confirms insolvency accordingly, it needs to examine whether proper economic basis exists for formally declaring bankruptcy. The court also decides on the manner of conducting bankruptcy proceedings, ie which type of insolvency proceedings apply to the given case. Pursuant to Article 36 Insolvency Act, the court conducts the proceedings to secure the debtor’s assets in the initial stage establishing an interim court supervisor (tymczasowy nadzorca s¹dowy) who controls the debtor’s administration of assets.
At this stage, the preliminary meeting of creditors (wstêpne zgromadzenie wierzycieli), a fairly new legal institution intended to improve the creditors’ position, is convened by the court before bankruptcy of the debtor is declared, if, after a preliminary examination of the petition to declare bankruptcy by the court, it is clear that solid reasons exist for declaring bankruptcy (Arts 44-50 Insolvency Act). The purpose of this meeting is, in particular, to adopt resolutions on the manner of conduct of the bankruptcy proceedings (liquidation of the bankrupt’s assets or a reorganisation/liquidation arrangement) and on the choice of members of the creditors’ committee. The resolutions of the preliminary meeting of creditors are binding upon the court, unless they are in violation of the law. The preliminary meeting of creditors may also express its opinion as to the appointment of the trustee, court supervisor or administrator. The unique character of the preliminary meeting of creditors is its ability to enter into a reorganisation or liquidation arrangement and – provided the arrangement is performed – to achieve a swift satisfaction of the creditors and, in the first case, to avoid liquidation of the debtor.
If the court deems the bankruptcy petition to be well-founded it will adopt a decision declaring the debtor’s bankruptcy. In this decision the court determines the type of bankruptcy proceeding (liquidation or reorganisation) to be conducted in the specific case, summons the creditors to file claims, appoints a judge-commissionaire (Sêdzia-komisarz, Polish judge supervising the procedure) and determines the manner of administrating the bankrupt’s estate.
Depending on the type of bankruptcy proceeding, different entities may be entitled to administer the bankrupt’s estate. In the reorganisation arrangement procedure the bankrupt’s estate may be administered by the bankrupt entity itself under the supervision of a court supervisor (self-administration; zarz¹d w³asny) or a court appointed administrator. In the liquidation procedure or liquidation arrangement procedure the bankrupt’s estate is administered by the court-appointed trustee.
After bankruptcy is declared, this decision is made public in the Polish Court and Business Gazette (Monitor S¹dowy i Gospodarczy – MSiG) as well as in a local daily newspaper and the creditors are formally invited to file their claims within a determined time limit. After the lapse of this time limit and after the verification of the claims, the trustee, court supervisor or administrator (depending on the bankruptcy proceeding as mentioned above) will prepare the list of claims (lista wierzytelnoœci) which is presented to the judge-commissionaire who then orders the publication of an announcement stating that the list of claims has been prepared. Objections may be filed within two weeks of publication and will be considered by the judge-commissionaire. Afterwards, the list of claims is approved by the judge-commissionaire.
Liquidation procedure
In the bankruptcy proceeding comprising the liquidation of the bankrupt’s assets (Arts 306360 Insolvency Act) it is a general rule that the personal claims which arose prior to the declaration of bankruptcy shall be satisfied by distributing the bankrupt’s estate’s funds, and the claims secured by a mortgage, pledge, registered pledge or a tax lien shall be satisfied from the proceeds of sale of the encumbered property or rights. The bankrupt’s estate is liquidated by the trustee in conformity with a liquidation plan prepared by the trustee and setting forth the methods of sale of assets of the bankrupt. The distribution of the funds from the liquidation of the bankrupt’s estate occurs pro rata whereby the approved claims are satisfied according to the priority resulting from classifying the claim in one of the four classes specified in Article 342 Insolvency Act (including, in particular, the following claims: in class 1 – costs of the bankruptcy proceedings, social security benefits, claims arising under employment relationships, in class 2 – taxes and other public levies, class 3 – other claims if they are not subject to satisfaction within class four, liquidated damages, costs of the proceedings and execution, and finally class 4 – interest not included in the aforementioned classes, administrative fines and amounts resulting from donations and legacies). The first two classes are considered privileged claims.
Arrangement procedures as in-fact consolidation
The abovementioned insolvency arrangement proceedings provided for by the Insolvency Act, namely (1) the reorganisation arrangement procedure (Art 14 Insolvency Act) and (2) the liquidation arrangement procedure (Art 271 Insolvency Act), may be used to achieve an in-fact consolidation of the insolvency proceedings. The same applies where the court has decided to allow self-administration in accordance to Article 76 Insolvency Act. The implementation of these two additional options may be combined with the personal union described further below.
After making the decision that, in a given case, the conditions for a declaration of insolvency have been fulfilled, the competent court has to decide whether a possible conclusion of a reorganisation arrangement may serve the interests of the creditors better than a liquidation of the bankrupt’s estate. This is generally the case where a distressed company still has a realistic prospect of being either sold or made profitable in the future. If it arrives at such a conclusion and adopts a decision that the creditors shall be entitled to negotiate and adopt a reorganisation arrangement, the role of the court in further proceedings is normally limited to the supervision of the bankrupt’s estate and the supervision over negotiations among the creditors. With a few exceptions, creditors are not limited in the course of negotiations regarding the contents of the reorganisation arrangement. Therefore, provisions relating to a whole family of companies may be introduced to the reorganisation arrangement by the creditors. The role of the bankrupt entity to influence the process is limited. The bankrupt may propose solutions with respect to the estate or raise objections to the reorganisation arrangement; however this opinion is not binding on the court when approving the arrangement. The reorganisation arrangement comes into force if a majority of creditors representing at least two-thirds of the total amount of the claims laid down in the list of creditors vote for it (Art 285 Insolvency Act) and the insolvency court grants its approval thereto (Art 288 Insolvency Act). The court may refuse its consent only if the reorganisation arrangement infringes the law, is evidently unenforceable or manifestly harmful to creditors who voted against it (Art 288 Insolvency Act). Creditors who object to a reorganisation arrangement may file a complaint against the approval of the insolvency court.
To accelerate the liquidation proceedings, for instance in respect of a subsidiary in a family of companies which is unlikely to be sold or made profitable in the future, the Insolvency Act provides for a liquidation arrangement (Art 271 Insolvency Act). The conclusion and confirmation of this arrangement follows the same rules as the provisions governing the establishment of a reorganisation arrangement referred to above. The conditions provided for in the liquidation arrangement on how to implement the envisaged liquidation of the bankrupt’s estate may deviate from statutory rules (eg one of the creditors may take over the bankrupt’s enterprise and the other one his real estate).
Article 16 Insolvency Act provides that the court may change its decision on the type of proceedings if the factual developments so demand. Thus, the court may change its assigned decision on the declaration of bankruptcy involving the liquidation of the bankrupt’s estate and may adopt a decision for a declaration of bankruptcy involving the possibility of concluding a reorganisation arrangement if grounds for conducting such proceedings become apparent only in the course of proceedings. Article 17 section 1 Insolvency Act contains the opposite regulation. These provisions allow certain flexibility in decisions of the court. So if, for example, an arrangement between the creditors is reached on the level of the dominant company in the family of companies (even abroad) there is always the possibility of transposing its provisions to other members of the corporate family. Even the commencement of liquidation proceedings concerning such a member is not an obstacle to such an effect.
Personal union as in-fact consolidation
Furthermore, the Insolvency Act provides some additional measures which may be used for an in-fact consolidation of related insolvency proceedings after their commencement such as the personal union between court appointed trustees (syndyk) – whose main duty is to liquidate the bankrupt’s estate, administrators (zarz¹dca) – who are required to manage the enterprise in crisis so that the liquidation is avoided and the creditors’ claims are satisfied and court supervisors (nadzorca s¹dowy) – who control certain legal acts of the bankrupt of the respective different companies.
The applicable provisions of the Insolvency Act permit that the same person is the court-appointed trustee (administrator, court supervisor) in several different companies. This general rule also applies in cases were these companies form a family of companies. This decision is left to the discretion of the competent court which has to conduct the proceedings. However, the court’s decision has to be taken in a way which provides for the maximum satisfaction of the creditors’ claims and when rational for the preservation of the debtor’s enterprise (Art 2 Insolvency Act).
Polish law allows for one person to exercise at the same time the function of the court-appointed trustee in one company and that of the administrator or court supervisor in another.
The court may, at the request of the court-appointed trustee (administrator, court supervisor), appoint his deputies (Art 159 Insolvency Act). This action may be particularly useful for the purpose of factual consolidation of insolvency proceedings where one person exercises the function in the dominant company and in its subsidiaries.
(a) What if the members of the family are organised under or operate in different locations within your country? Can a company from a distant location in your country commence its bankruptcy proceedings where its affiliate is located, if the affiliate has already commenced its bankruptcy proceedings?
The venue for bankruptcy cases is governed by Article 19 Insolvency Act. Generally the district court of the main establishment of the bankrupt’s enterprise has jurisdiction (Art 19 s 1 Insolvency Act). If the bankrupt entity does not have an enterprise in the territory of Poland, only the district court of its registered seat or, in the absence of the above, of the location of its estate, may rule on his insolvency (Art 19 s 2 Insolvency Act). Bankruptcy proceedings may be commenced in the same jurisdiction as a company’s affiliate or general shareholder in the event that the main establishment of the bankrupt and of these entities is situated within the district of the same court. It does not however give a 100 per cent guarantee that the case is heard by the same judge.
(b) To the extent your country has different types of insolvency proceedings (such as Chapter 11 reorganisation and Chapter 7 liquidation in the US), do the members of the corporate family all have to proceed under the same type of proceedings?
As described above (question 1) there are actually three different types of insolvency proceedings in Poland. Regarding group insolvency, there is no legal obligation for the members of a corporate family to undergo the same type of proceedings. Similarly, there is no possibility for the creditors to conclude an agreement regarding the type of the legal proceedings which would be binding for all members of the corporate family. Finally, the decision on the type of insolvency proceedings to be instigated or continued remains at the discretion of the court competent for the respective company.
2. Does your law permit or prohibit a single administrator/trustee /receiver to administer the assets and the liabilities of the entire corporate family?
According to the Insolvency Act a single party may act as the court-appointed trustee, administrator or court supervisor for all members of a corporate family (see question 1 above). This applies also where members of a corporate family have claims against each other, regardless of the legal title of such claims. Because there are no provisions in the Insolvency Act relating directly to a group of companies, the obligation to publish the information regarding claims of members of a corporate family in the situation of insolvency is not contemplated in Polish law. In this respect the claims of members of a corporate family are on equal footing with claims of outside creditors.
(a) If so, is there a hearing for the court to determine whether the administration by a single party is appropriate? Are secured and unsecured creditors or other parties in interest allowed to object or be heard at such hearing?
Each court makes a decision on the court-appointed trustee (administrator, court supervisor) for each company. The appointment of the same person as a court-appointed trustee (administrator, court supervisor) in a number of companies belonging to the same family of companies may therefore only be achieved through joint action of courts competent for each one of these companies. Such coordination may take place at the beginning as well as at the later stage of the proceedings. However, in the latter case, the court generally cannot act without the request of the creditors’ council (or at least one of its members). Without the council’s initiative it may only dismiss the court-appointed trustee (administrator, court supervisor) if the latter does not fulfil his duties properly (Art 170 s 1 and 170 s 2 Insolvency Act). Creditors may propose candidates for the court-appointed trustee (administrator, court supervisor), in particular on the initial creditors’ assembly (Art 45 s 1 Insolvency Act). The court is obliged to convene such an assembly if conditions for declaring bankruptcy are met, but in the opinion of the court there is still a chance of avoiding the liquidation of bankrupt’s assets. The initial creditors’ assembly may also vote on a reorganisation arrangement (see question 1 above).
(b) What about joint representation by other professionals, such as law firms or accounting or auditing firms?
Because a single hearing for a family of companies is not permitted in Polish law, such joint representation is not possible. This does not mean that the same professional firm is forbidden to provide services to some or most members of a corporate family in bankruptcy. In most cases it may even be recommended from the business point of view that the family of companies is counselled by a professional firm which is aware of the relations within the family of companies. Court-appointed trustees (administrators, court supervisors) of the family of companies may effect the joint representation by professional firms exactly in the same manner as the courts may coordinate the appointment of its officers in the proceedings (see question 2(a) above). However, this is only possible if material conflicts of interest between professional firms and eg members of a corporate family do not exist.
3. Does your law encourage or discourage overlapping boards or management teams for separate members of a corporate family?
The Code of Commercial Companies (Kodeks Spó³ek Handlowych, the CCC) permits overlapping management boards. The only limit here is the actual potential of a member of the management board to exercise diligence required with respect to the professional nature of his activity in several companies. If such a person does not fulfil his duties of good management to the company where he holds the post, he may not only be dismissed by the shareholders/supervisory board but may also become liable for damages to the company whose interests he has neglected (Arts 293 and 483 CCC). He has also to be especially careful in effecting deals between companies which he manages. If the dealings between such companies do not correspond to the arm’s length rule this may render him liable for damages to the company to which interests his actions were detrimental.
(a) If the directors of a parent company are not directors of the subsidiary, but they either directly or indirectly manage the affairs of the subsidiary anyway, do your country’s laws render such people de facto or ‘shadow’ directors of the subsidiary?
Polish law generally adopts a very formal approach to this issue and it does not recognise the concepts of de facto or ‘shadow’ directors of a company or families of companies. Persons who exercise informal influence over company’s operations may be held liable towards such a company or third persons only on the grounds of the general civil liability based on tort or contract. This limitation does not exclude the situation where the parent company is held liable by its subsidiary if it exercises undue influence over the operations of the subsidiary so that the subsidiary suffers damage. In such a case, the liability of the directors of the subsidiary may also be considered because they owe a duty not to the parent company or its directors but to the company whose affairs they manage.
(b) Do the duties or responsibilities of officers or directors of a family of companies change when the companies become insolvent? For example does their duty shift from responsibility to the shareholders to a responsibility to the creditors. What if only one of the companies becomes insolvent?
Liquidation procedure
From the date of declaration of bankruptcy including the liquidation of the bankrupt’s estate (see question 1 above), the governing bodies of the insolvent company are deprived of their competences in favour of the court-appointed trustee (Art 173 Insolvency Act). From that date onwards they are not allowed to manage the affairs of the company and make use of its estate or to make dispositions concerning that estate (Art 75 s 1 Insolvency Act). All legal acts of the management board, commercial proxies or other representatives of the insolvent company to be liquidated, which take place after the date of declaring its bankruptcy are null and void (Art 77 s 1 Insolvency Act). However, the governing bodies of such a company, are not automatically dissolved as of the date of declaration of bankruptcy (with the exception of commercial proxies) and can therefore assist and advise the official trustee in respect of the performance of his duties. The official trustee’s main duty is to satisfy the claims of the creditors. His potential liability is therefore mainly towards the creditors (Art 2 Insolvency Act).
Reorganisation arrangement procedure
A similar situation occurs in the event of insolvency proceedings with the possibility of concluding a reorganisation arrangement. The bankrupt company is prevented from managing its affairs (Art 182 Insolvency Act) unless no self-administration has been determined. The competences originally belonging to the management board are exercised by the administrator appointed by the court. The management board of the relevant company is forbidden from managing its affairs and making use of its estate as well as from making dispositions concerning that estate (Art 75 s 1 Insolvency Act). All legal acts regarding the property of the insolvent company executed by its management board or commercial proxies or other representatives after the date of declaration of bankruptcy are null and void (Art 77 s 1 Insolvency Act), as is the case during the liquidation procedure. The only difference in comparison to the liquidation procedure lies in the purpose of an administrator’s actions. His main aim is to reorganise the insolvent company. His other duty is to administer the enterprise of the bankrupt in accordance with the principles of proper business conduct. As this duty is very similar to that of the management board of the company, the administrator may be held responsible not only towards the creditors of the company but also in some cases towards its shareholders and the company itself (Art 160 s 3 Insolvency Act).
The last type of managing the affairs of an insolvent company is, as mentioned above, self-management of that company under the supervision of a court supervisor (Art 180 Insolvency Act). In general, the range of competences exercised by the court supervisor is not determined by statutory law and therefore he can flexibly determine his activities in each insolvency proceeding.
4. Are there rules and do they change regarding members of the corporate family transferring assets among one another (such as by way of loans, capitalisation, other transactions) when the members are insolvent?
Inter-company agreements generally follow the principles of Polish insolvency and companies’ law. In this context different specific rules apply to agreements concluded before and after the date of declaration of bankruptcy, those concluded afterwards being ineffective by force of law or by decision of the insolvency court. Due to the limited scope of this publication we shall refrain from describing the general rules in detail.
With respect to agreements concluded before the date of declaration of bankruptcy the most important influence of the declared bankruptcy regarding members of a corporate family is introduced by the provisions of Article 14 s 3 CCC. Pursuant to that article, in the event that one company is a shareholder in another company (even having as little as one per cent of its share capital) its claim under a loan granted to that company is deemed to be the contribution of that shareholder to the company where a respective proceeding has commenced with regard to the latter company within two years of the date of execution of the loan agreement. This regulation means that in most cases loans by the members of a corporate family to its insolvent member are lost as they become a part of the bankrupt’s estate and are used to satisfy the claims of its creditors.
In the case of insolvency with the possibility of conclusion of the reorganisation arrangement other newly-concluded agreements between the members of corporate family are generally unaffected by the declaration of bankruptcy. They may only need approval by the court supervisor. Regarding insolvency with liquidation of the bankrupt’s estate, the court-appointed trustee’s main purpose is to liquidate the bankrupt’s estate and only additionally to preserve the enterprise of the bankrupt and therefore he may be unwilling to enter new contractual relationships.
The general provisions apply to cash sweep procedures which are not specifically regulated under Polish insolvency or company law (see question 4 above).
5. How does your law treat claims of one member of a corporate family against other members of corporate family?
In general, the Insolvency Act does not distinguish between the claims of one member of a corporate family against other members of a corporate family and the claims of third parties. If such claims are filed in a timely way they have the same priority as other claims from the respective group of claims. Exceptions to that general rule are set out in Article 14 CCC and Articles 127-131 Insolvency Act (see question 4 above).
6. Does your law allow for pooling of assets and liabilities of all members of the corporate family, so that a creditor of one member becomes in essence, a creditor of all members sometimes referred to as ‘substantive consolidation’?
As Polish law treats members of a corporate family as separate entities (see question 1 above) a pooling of assets and liabilities of all members of the corporate family is not possible. It would, among other things, contradict one the most important principles of Polish civil law which stipulates that a change of the debtor is not allowed without the creditor’s consent (Art 519 of the Polish Civil Code (Kodeks Cywilny)). Furthermore, the pooling of assets might be harmful to the safety of transactions as parties to the contract often would not be able to determine if their partner was a member of a corporate family and therefore the payment could be jeopardised.
However, the creditors may voluntarily achieve the effect of such pooling of assets and liabilities by concluding a reorganisation arrangement (Art 14 Insolvency Act) or a liquidation arrangement (Art 271 Insolvency Act).
7. How are secured creditors treated with respect to a family of companies? For instance, if a creditor has a security interest in the assets of one member of the family, and a guarantee from another member of the family, are both such claims valid in insolvency proceedings of the entire family?
The general principle of Polish civil law is that collateral is effective only with respect to the entities on which behalf it was established. Other entities cannot make use of the collateral unless parties stipulated otherwise to that effect. With some exceptions (mortgages on real estate) all collateral remains valid after the insolvency proceeding is commenced. This general rule also applies to members of a corporate family.
8. Do your laws or courts provide for post-insolvency commencement of new financing that allows continued operation of business and provides adequate protection to the lender who made the loan? Explain.
There are no explicit regulations regarding the post insolvency commencement of new financing under Polish law. General rules apply which distinguish between natural and legal persons.
Natural persons are free to commence new business activity in the same or different branch after completion of insolvency proceedings if they have not been deprived of the right to carry out business activity by a court. However, the Insolvency Act does not contain any provisions regulating their access to new financing. They are treated like any other business entity in that respect.
Nevertheless, the law supports the new business start of natural persons that went bankrupt in a different way. Article 369 Insolvency Act gives the court the discretionary power to reduce whole or part of the bankrupt’s debts not paid in insolvency proceedings due to insufficient value of the estate. This reduction, thus, is only possible with respect to debts outstanding after the completion of a liquidation procedure and may affect listed claims as well as claims that were not filed during the liquidation procedure. Individuals aiming to start a new business and, thus, to reduce the remaining debts, have to fulfil all of the following conditions:
Legal persons generally cease to exist after completion of the liquidation procedure so there is no need or possibility to grant them new financing. As regards the reorganisation arrangement procedure reorganising the relevant company according to the approved reorganisation arrangement, the company as a legal person is subject to the same rules in matters of financing as other business entities.
9. Are directors and officers subject to civil or criminal sanctions if:
(a) Fraud or misrepresentation of a company’s finances are discovered?
Fraud or misrepresentation of a company’s finances usually results in both criminal and civil liability.
Criminal liability may be imposed under the Criminal Code (Kodeks Karny) for eg fraud (Art 286 Criminal Code), undue exercise of function (Art 296 Criminal Code) or crimes in connection with insolvency (Arts 300-302 Criminal Code; Arts 522-523 Insolvency Law) and under specific provisions of the Act on Accounting (Ustawa o rachunkowoœci) and the Code of Commercial Companies.
Civil sanctions may be imposed under the Civil Code towards third parties (general liability for torts is regulated in Art 415 Civil Code) and under the Code of Commercial Companies towards the company (Arts 293 and 483 CCC).
(b) They allow the company to continue to operate while knowing it does not have the ability to pay the debt being incurred?
In cases that cannot be classified as fraud or misrepresentation (see question 9(a) above) usually only civil sanctions are of practical relevance. Article 21 Insolvency Act gives the debtor a period of two weeks to file with the court a petition to declare bankruptcy after the grounds to declare bankruptcy have come into existence. If the debtor is a company, this obligation rests with each member of the management board and any other person who has the right to represent the company. It can be argued that this duty applies only to members of the management board and liquidators of the company (they replace the management board in the course of winding up of the company). Commercial proxies are not subject to such an obligation, as they do not have access to the full financial data of the company.
The abovementioned persons make themselves liable for any damage suffered by the creditors of the company as a result of any delay in the filing with the court the petition for bankruptcy (Art 21 s 3 Insolvency Act).
Criminal liability for failure to file for bankruptcy is regulated by Article 586 CCC. Pursuant to that provision a person who, while serving a member of the management board of a company or its liquidator, fails to file for bankruptcy of the company despite the existence of circumstances justifying bankruptcy of the company, is criminally liable.
(c) Same as (b) above but the directors believe that if some event occurs (eg chance to obtain new contract in prospect, new equity infusion, or new financing) it will be able to save the company and pay its bills?
The obligation to file with the court a petition to declare bankruptcy is independent of personal intents or beliefs and therefore is not affected by any hypothetical assumptions. However, in legal practice courts may take into consideration concerns that arise in connection with the current business prospects of the company in crisis. This may happen particularly when deciding on the fault of the management board’s members by adjudicating damages for delay or the absence of a petition to declare bankruptcy.
B. INTERNATIONAL FAMILY OF COMPANIES
1. If one or more members of the corporate family is incorporated under or governed by the laws of another country, does that change your answers to any of the questions set forth above?
No.
2. If insolvency/restructuring proceedings are instituted for corporate family members in different countries:
EU companies
The issues of cross-border insolvency of EU companies are regulated in EU Regulation No 1346/2000 (the ‘Insolvency Regulation’).
In the case of the insolvency of EU companies, Polish courts may open main insolvency proceedings (proceedings whose effects are not limited to one country) if the centre of main interest (COMI) of the company is located in Poland. The place of the registered office of a company is presumed to be a centre of its main interests (Art 3 s 1 Insolvency Regulation). If the company possesses an establishment in Poland, Polish courts may open secondary insolvency proceedings whose effect will be limited only to the estate situated in Poland (Art 3 s 2 Insolvency Regulation). The above jurisdiction is not exclusive and the courts of other EU countries may open main or secondary insolvency proceedings after the opening of the insolvency proceedings in Poland. However, it can be argued that main insolvency proceedings may be only opened if the court of another EU country was not aware that main proceedings had been opened in Poland.
Rulings of the courts of EU member states with respect to opening insolvency proceedings are recognised automatically in the whole territory of the EU (Arts 16 and 17 Insolvency Regulation). If insolvency proceedings are instigated in Poland they are governed by Polish law. Polish law is applicable irrespective of the law of incorporation of the company.
The above rules generally apply for companies whose centre of main interests is situated within one EU country but whose assets are spread among other EU countries.
Non-EU companies
The issues of cross-border insolvency of non-EU companies are regulated by Articles 378 417 of the Insolvency Act, which correspond to the model law of UNCITRAL regarding international bankruptcy.
If the centre of the non-EU company’s main interests is situated in Poland, Polish courts exercise jurisdiction over the insolvency of such a company (Art 382 s 1 Insolvency Act). Contrary to the provisions of the Insolvency Regulation this jurisdiction is exclusive. If the centre of a company’s main interests lies outside Poland, Polish courts are competent to open secondary proceedings if the company has assets in Poland (Art 382 s 2 Insolvency Act). The requirements are therefore less stringent than those set out in the Insolvency Regulation, where the jurisdiction is conditional upon possessing an establishment. In the event of insolvency of non-EU companies, insolvency proceedings opened in Poland are governed by Polish law. Polish law is applicable irrespective of the law of incorporation of the company. If insolvency proceedings are opened outside Poland, the laws of the country where bankruptcy was declared are also applicable to the proceedings in Poland.
In case of companies from non-EU countries the recognition of insolvency proceedings is possible only after completion of a special procedure before a Polish court which is regulated by Articles 385 404 Insolvency Act. However, foreign insolvency proceedings cannot be recognised in Poland if Polish courts have exclusive jurisdiction, or recognition is not reconcilable with fundamental principles of the Polish legal order (Art 392 of the Insolvency Act).
