The end of the pandemic? – It's time to file for bankruptcy!

The Act on special solutions related to the prevention, counteracting and combating of COVID-19, other infectious diseases and crisis situations caused by them ("Covid Act") introduced a number of ad hoc changes for the duration of the pandemic. They did not omit the provisions regarding the liability of obligated persons who are legally obliged to file for bankruptcy. Now that the legislator has decided to change the state of epidemic to a state of epidemic threat, and in the near future we will probably return to a state of full "normality", these provisions will no longer apply. So what about bankruptcy filings? How can the management board of capital companies and other persons protect themselves against liability? What are the penalties for failing to file a bankruptcy petition on time? This and much more below.

What is a bankruptcy petition?

An application for a declaration of insolvency is the step that initiates the insolvency proceedings set out in the Act of 28 February 2003 – Insolvency Law. It is filed with the commercial division of the district court for the main centre of the debtor’s core business. Bankruptcy proceedings are initiated at the request of parties who are entitled to file such a petition – never ex officio. This means that this application is a mandatory requirement and, unless it is successfully filed, bankruptcy proceedings will not be commenced. The right to file such a petition lies primarily with the debtor – for example, an insolvent company (through persons authorised to represent it) – but also with its creditors and other parties expressly specified in the provisions of the Act. The bankruptcy proceedings themselves constitute separate civil proceedings, the primary aim of which – in accordance with the principle of optimisation – is to satisfy the bankrupt’s creditors to the greatest possible extent. At the same time, where reasonable considerations so permit, the proceedings should be conducted in such a way as to preserve the debtor’s existing business. Insolvency proceedings are conducted under the supervision of the competent Commercial Court, which, in its order declaring bankruptcy, appoints a liquidator, i.e. a person responsible, amongst other things, for the liquidation of the bankrupt’s assets and for distributing to creditors their respective shares of the proceeds from the sale of the assets forming part of the bankruptcy estate. Bankruptcy is declared solely against a debtor who has become insolvent. The state of insolvency must be assessed in each case in the light of Article 11 of the Act on Insolvency Proceedings. However, as a very rough simplification, it may be assumed that a debtor is insolvent if they have ceased to repay their debts, lack the funds to do so, fails to meet their obligations for other reasons, or has no realistic prospect of regaining financial liquidity that would allow them to satisfy creditors in a timely manner. At the same time, it should be borne in mind that, in the case of companies limited by shares, the legislator has introduced a specific provision, according to which: ‘A debtor which is a legal person (…) is also insolvent where its financial liabilities exceed the value of its assets, and this situation persists for a period exceeding twenty-four months.’

When should you file for bankruptcy?

Application for declaration of bankruptcy – in accordance with Art. 21 of the Bankruptcy Law - the debtor is obliged to submit a maximum of within thirty days from the date on which the grounds for declaring bankruptcy arose, i.e., the aforementioned state of insolvency. Crucially, in accordance with established case law, the moment for filing a bankruptcy petition is of an objective nature and cannot be left to the debtor's discretion. Therefore, it is critically important that, if any doubts arise as to whether a given business activity bears the hallmarks of insolvency, one consults a professional to assess whether insolvency within the meaning of the relevant provisions actually exists, and subsequently provides appropriate advice. It should be remembered that the petition filed by the debtor must meet a number of requirements set out in the Bankruptcy Act. Consequently, a situation may arise where the aforementioned 30 days prove insufficient to independently compile and properly prepare the entire documentation. In such a situation, it is worth turning to a professional for help, who will provide relevant advice and prepare everything in accordance with the appropriate legal regulations.

Who is legally obliged to file for bankruptcy?

The obligation to file a petition for declaration of bankruptcy within the time limit rests on the debtor who has become insolvent. At the same time, it should be borne in mind that the category of debtors is not uniform, as both entrepreneurs and natural persons not conducting business activity have the possibility of declaring bankruptcy. In the case of entrepreneurs running a sole proprietorship, identifying the entity obliged to file for bankruptcy does not pose any difficulty – it is, of course, the debtor themselves. What is the situation in the case of legal persons? In accordance with Article 21(2) of the Bankruptcy Law Act: "If the debtor is a legal person or another organisational unit without legal personality, to which separate legislation grants legal capacity, the obligation referred to in paragraph 1 rests on anyone who, on the basis of the statute, the company agreement or the articles of association, has the right to manage the debtor's affairs and to represent the debtor, either independently or jointly with other persons.". It follows from the above that in the case of legal persons the obligation to submit the application within the appropriate deadline rests primarily with the Management Board (in the case of limited liability companies and joint-stock companies) or its partners (in the case of partnerships), but also with the liquidators or the successor manager.

Liability for failure to file for bankruptcy

The consequences of failing to file a bankruptcy petition can be very severe and stem from numerous legislative acts. Referring first to the Bankruptcy Act already discussed, two fundamental bases should be pointed out. Pursuant to the wording of Article 21(3) of the Bankruptcy Act, persons who were obliged to file a bankruptcy petition shall bear liability for the damage caused as a result of failing to file it within the appropriate time limit. This means that if damage was incurred by a creditor as a result of the failure to file the petition, the person who, contrary to their legal obligation, failed to file the petition shall be liable to repair it. At the same time, it is presumed that the damage encompasses the amount of the creditor's unsatisfied claim against the debtor. This liability is of a tortious nature, the perpetrator is liable on the principle of fault and – which is extremely important – is liable for this damage with all his assets. Furthermore, practice shows that it is not easy to be released from this liability, due to the presumption that the failure to submit the relevant application occurred through the fault of the person obliged to submit it. Another basis for liability is Article 373(1)(1) of the Bankruptcy Law, which stipulates that:

The court may order deprivation for a period of one to ten years of the right to run a business on one's own account or within a civil partnership and to serve as a successor manager, member of the supervisory board, member of the audit committee, representative or attorney of a natural person conducting business activity in the field of this activity, a commercial company, a state-owned enterprise, a cooperative, a foundation or an association of a person who, due to his own fault and being obliged to do so under the Act, did not submit an application for declaration of bankruptcy within the statutory deadline

An equally important basis for liability in the context of a limited liability company is Article 299 of the Commercial Companies Code. According to this regulation, if enforcement against the company's assets turns out to be ineffective, then the members of the management board will be jointly and severally liable for its obligations with their private assets. This sounds quite serious, but there are ways to protect yourself from this kind of unpleasantness. It is enough to demonstrate that that the debtor filed for bankruptcy in due time. It should also be remembered that in addition to civil liability, failure to file a bankruptcy petition on time may also result in criminal liability.For in accordance with Article 586 of the Code of Commercial Partnerships and Companies, "Anyone who, being a member of a company's management board or a liquidator, fails to file a petition for the bankruptcy of a commercial company despite the existence of conditions justifying the company's bankruptcy under the provisions – shall be subject to a fine, the penalty of restriction of liberty or deprivation of liberty for up to one year." The above demonstrates how important it is to file for bankruptcy at the appropriate time. At the same time, determining this moment can be – as noted above – extremely difficult for persons who do not possess the necessary experience in this regard.

Filing for bankruptcy and Covid.

In introducing the Covid Act, the legislature provided for certain specific regulations concerning the time limit within which a bankruptcy petition must be filed. Pursuant to Article 15zzra of the aforementioned Act – if the debtor's insolvency, and thus the basis for filing a bankruptcy petition, arose during the period of the state of epidemic threat or the state of epidemic declared due to Covid-19, and the state of insolvency arose due to Covid-19, the 30-day time limit for filing a bankruptcy petition does not begin, and if already begun, it is interrupted. It begins to run anew only after the expiry of the aforementioned states. Furthermore, the legislature also introduced a presumption that any insolvency arising during the period of the state of epidemic threat or the state of epidemic declared due to COVID-19 occurred precisely due to COVID-19. To clarify this somewhat convoluted provision, the essential elements should be pointed out:

1. During the period of epidemic or epidemic threat, the deadline for submitting bankruptcy applications does not run.
2. If, in the case of a given debtor, the 30-day deadline for submitting an application ran before the introduction of the state of epidemic threat in 2020, it has been interrupted. It will run again (once again 30 days) after the end of the said states.
3. If insolvency arose as a result of Covid-19 and occurred during the state of epidemic or epidemic threat, the debtor was not (and still is not) obliged to submit an application for bankruptcy until the state of epidemic or epidemic threat ends.
4. It is assumed that any insolvency arising during the epidemic or epidemic threat is related to Covid-19, so the debtor does not have to prove it. In this respect, the so-called reversal of the burden of proof. However, if a dispute arises and it is shown that the state of insolvency resulted, for example, from uneconomical conduct of business activity, and the pandemic had no impact on it, then the described provision does not apply and the "normal" 30-day deadline applies.
5. To put it simply, the period for filing a bankruptcy petition ends 30 days after the end of the state of epidemic and the state of epidemic threat.

However, this provision in no way exempts you from the obligation to file a bankruptcy petition! What should be emphasized - the debtor has the opportunity to submit such an application before the commencement of the above-mentioned period. deadline.

What if Covid regulations no longer apply?

However, as the authorities of the Republic of Poland are consistently lifting existing restrictions, business owners should be aware of what they need to take care of in the near future. A few days ago (6 May 2022), the Minister of Health announced that as of 16 May 2022, the state of the epidemic would be replaced by a state of epidemic threat. Do not worry – for now this does not change anything yet, nonetheless all debtors who became insolvent and took advantage of Article 15zzra of the COVID Act must be on their guard. When the aforementioned Article 15zzra of the COVID Act loses its binding force, i.e., when both the state of the epidemic and the state of epidemic threat cease in Poland, the time limits for filing for bankruptcy will begin to run. Together with them will appear the above-described responsibility for failure to fulfill this obligation! However, the above means that the state of epidemic threat will most likely be lifted soon then all 30-day deadlines for filing a bankruptcy petition will begin to run. Thus, debtors will have a relatively short period of time to assess whether there are any indications of insolvency and to prepare appropriate applications for declaring bankruptcy. These activities may take a long time and will not always be obvious to the debtor. Therefore, we offer you full support in the scope described above. As part of the Law Firm's activities, we will assess whether there is a requirement to submit an application, i.e. whether the debtor is indeed insolvent, and we will also prepare the necessary application along with all documentation, ensuring that the entire process is as painless as possible. Please contact us!