Vol 2 (2005) - Issue 4

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Bankruptcy and Reconstruction Law in Poland

Introduction

The new Polish Bankruptcy and Reconstruction Law, hereinafter referred to as the Bankruptcy Law, has been in force for over a year. This law replaced two laws of 1936, which were in force till 15 November 2003, namely the Bankruptcy Law and the Composition Law (hereinafter referred to as the old law).

The Bankruptcy Law covers typical insolvencies of business entities (individual bankruptcy, such as those existing under the laws of USA or Germany, are not covered) and reconstruction proceedings with creditors. One of the most important reasons underlying the decision of the Polish Parliament not to incorporate in the Bankruptcy Law regulations concerning individual (consumer) bankruptcies was the practical argument that the Polish judicial system would be ineffective in dealing with the sheer number of cases that would come before Polish economic courts. This would result in paralysis of the system, notwithstanding the fact that even without individual bankruptcies cases there has been a steady increase in the number of cases registered by bankruptcy courts after 2000 by approx. 50% per year.

Bankruptcy proceedings may be conducted with the aim of totally liquidating the bankrupt’s assets or with a restructuring aim - a bankruptcy composition proceeding. A normal liquidation and winding up of a business entity is not covered by the Bankruptcy Law, since this is covered by the laws of the Commercial Companies’ Code. Of course a company which is undergoing liquidation may be subject to bankruptcy proceedings on the same terms as a company which is not in liquidation, i.e. one where the winding-up procedure has not been started.
Restructuring of the company’s debt can also be done via negotiations with its creditors without using the procedure defined by the Bankruptcy Law, although, at least in principle, this is less favourable to the entity conducting court restructuring – with the declaration on the commencement of formal restructuring (subject to no court objection), all financial liabilities towards the entity shall be suspended, the accrual of interest against the entity is suspended and no new enforcement proceeding can be started against it, whereas the existing ones are suspended.

Executive and non-executive board of directors’ obligations

The Polish Commercial Companies’ Code is based on a two-tier system of corporate governance - there is a clear distinction in public companies and in limited liability companies between the role of the executive organs responsible for the representation and running of the business of the company, and the role of the non-executive directors. Although formally based on the obligation to maintain current and permanent supervision of the company’s business and the executive board, the supervisory board role de facto is very often limited to the holding of a couple of meetings per fiscal year and one meeting preceding the yearly AGM to issue opinions on the economic and financial documents of the company which are to be approved at the AGM. Such practice, although very common, on strictly legal grounds may be seen as one which does not fully cover the individual obligation of each board member to act with due care.
This different role of the non-executive board reflected in its responsibilities and liabilities is also reflected in the Bankruptcy Law, as under its provisions the non-executive board may not be directly penalized for misconduct and breach of law leading to bankruptcy.