This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.
The accession of Poland to the EU changed the legal approach to the instigation of bankruptcy and insolvency in Poland.
Introduction
Previously, the bankruptcy of a company seated in Poland was exclusively a matter of meeting the relevant criteria and following the procedural rules provided in the domestic insolvency law. Now a company in Poland may also find itself under bankruptcy proceedings it is completely unfamiliar with because they have been initiated outside of Poland, with unknown criteria and based upon a decision of a non-Polish official body. Apart from this, there is still a threat of involvement under domestic bankruptcy proceedings governed by the Polish Act on Bankruptcy and Composition (Prawo upadłosciowe i naprawcze; the Bankruptcy Law). It makes the situation of the managers of Polish companies complicated: they have to bear in mind risks relating to the insolvency of their company under the domestic law and at the same time be prepared for the possibility of losing administration rights as a result of an international bankruptcy.
Legal grounds for bankruptcies
Insolvencies in Poland are governed by the Bankruptcy Law, which distinguishes between two types of insolvency proceedings: bankruptcy proceedings (Postepowanie upadłościowe), which relate to distressed companies and judicial composition proceedings (Postępowanie naprawcze) for companies only jeopardised by insolvency (and which will not be discussed in this article). EU proceedings are regulated by EC Regulation 1346/2000 (the EC Regulation), which implies the application of one of the European laws, depending on the jurisdiction where the proceedings have been instigated.
Domestic procedures
In accordance with the Bankruptcy Law, the grounds for the initiation of proceedings for both existing bankruptcy subcategories (i.e. bankruptcies including liquidation of the bankrupt's assets and bankruptcies open for arrangement) is the insolvency of the company. Under the Bankruptcy Law a company qualifies as insolvent if it is illiquid or over-indebted. Illiquidity in general means that the debtor cannot pay its debts in due time. Over-indebtedness is where the company's liabilities exceed the balance-sheet value of its assets, even if it is current in the discharge of its obligations.
To instigate bankruptcy proceedings, a debtor's management board or a creditor has to file a bankruptcy petition with the bankruptcy court. The opening of the proceedings takes place on the date of issuance of the court ruling on the declaration of bankruptcy. The court must open bankruptcy proceedings whenever it has been established that a company is insolvent under the Bankruptcy Law. However, the court may dismiss a bankruptcy petition where a delay in the discharge of obligations has not exceeded three months and the sum of outstanding obligations is no higher than 10% of the balance- sheet value of the debtor's enterprise.
A typical result of the opening of bankruptcy proceedings based on the domestic regulation is that upon the issuance of a declaration of bankruptcy, including liquidation of the bankrupt's assets, the management board of the bankrupt company forfeits the right of administration and the freedom of enjoyment and control of the property included in the bankrupt's estate.
The EC Regulation
The EC Regulation has priority over the Bankruptcy Law. The EC Regulation requires the recognition of all proceedings opened in a fellow member state, without a formal recognition procedure, from the time that it becomes effective in the state in which the proceedings are being opened.
According to the EC Regulation, the courts of the EU member state in which the centre of a debtor's main interests (COMI) is situated has jurisdiction to open insolvency proceedings. Further to this, if a debtor has COMI outside of Poland, a non-Polish jurisdiction shall determine the circumstances of lodging the bankruptcy petition and all the procedures which govern such proceedings. This gives rise to the unique situation that, on behalf of a Polish entity, one can lodge a bankruptcy petition with a non-Polish court, arguing on the grounds of the EC Regulation that its COMI is located in that jurisdiction, and that the local court should recognise the application on the grounds of the court's (non- Polish) rules.
In view of the above, the instigation of bankruptcy proceedings in an EU member state against a Polish debtor depends on where the COMI is located and where the bankruptcy petition has been lodged.
Conclusion
The legal situation discussed above, which appeared after Poland's accession to the EU, has complicated the life of managers running businesses in Poland which, in turn, has increased their need for professional advice with respect to the insolvency law.
The instigation of bankruptcy proceedings in an EU member state against a Polish debtor depends on where the centre of the debtor's main interests is located and where the bankruptcy petition has been lodged.
This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
