Issues related to bankruptcy, liquidation and responsibility
Together with an entrepreneur we would like to consider both possibilities: the bankruptcy with a possibility to make an arrangement and the bankruptcy by liquidation of company’ s assets.
When the new bankruptcy and reorganisation law entered into force many doubts have arisen due to its applications. As practicing lawyers, we are perfectly aware of the law that should be both coherent and clear, but unfortunately the reality appears totally different.

The debtor is insolvent if it fails to perform its due obligations. It means that every person who fails to perform its due obligations is insolvent. Using this interpretation of the law, every person who fails to perform its due obligations shall be subject to the bankruptcy proceedings – and that is where a question arises: are the problems temporary?; is the decision on continuing company’s economic activity going to result in sanctions in the form of the ban on business activity or the enforcement against board member’s property.

The court may dismiss the petition to declare bankruptcy if the delay in performing obligations does not exceed three months and the amount of unperformed obligations does not exceed 10% of the balance sheet value of the debtor’s enterprise.

There is another aspect: entrusting company’s assets with third parties (that may act variously as seen from our own experience) we risk many embezzlements and incorrectness but the consequences of these actions are always taken by the bankrupt. Many examples on such situations may be found on searching the Internet.

Now, it is time to ask a question: if it is a good idea to entrust the company board (before filing the petition to declare bankruptcy) with a company with considerable experience; in this way we also entrust the responsibility of not filing the petition to declare bankruptcy at the right time. By united effort we may handle perhaps only a temporary crisis of the company.


Bankruptcy is no longer an antidote against embezzlement and false financial analyses.
If the company assets is not sufficient to cover all obligations, the judge-commissioner shall discontinue bankruptcy proceedings and return the company to the bankrupt. We face the same problem that the one arising before filing the petition to declare bankruptcy except that the company has disposed of the most valuable assets.

Next question to consider: is the sale of the company before bankruptcy a better solution? Its strongest advantage is at the moment of conveyance of shares’ property rights; appointment of a new management board – but we forget to consider the next issue: is the bankruptcy intended to remove the company from register or discontinue bankruptcy proceedings?
We are pained by the attitude of some law firms that often suggest bankruptcy to their own advantage. If the bankruptcy proceedings are not finished successfully they gain a client who is going to seek legal guidance for a long time; each lawyer would be glad to have such clients.
Assuming the interpretation used by Prof. Zedler, we may say that even the insolvent is every business entity that fails to perform its due obligations, when the conditions of article 12 (of the Bankruptcy and Reorganisation Law) apply, the court may dismiss the petition to declare bankruptcy. It is a dangerous situation as filing the petition to declare bankruptcy has by itself very disastrous consequences on company’s reputation and very often its contracting parties/customers refuse to cooperate with such entity as they are in fear of its bankruptcy. Because of that, similarly to the judge S.Gurgul, we would opt for the revival of the previous provision/definition of insolvency. It seems that the statement ‘ceases paying its debts’ is more suitable to the needs of the market economy. It should be pointed out that the term ‘insolvency’ is not limited to the mentioned act but it is also used in other legal regulations.
According to the act of 29 December 2003 on Protection of employees’ claims in case of employer’s insolvency (Dz. U. of 2002, Number 9, item 85 with amendments), the insolvent is among others an entity towards which bankruptcy was declared.

There is the following problem which has arisen into practice. In case when first we have bankruptcy proceedings with possibility to make arrangement and then these proceedings are changed into liquidation proceedings – then if there are any employees’ claims, they will not accepted by the Guaranteed Employee Benefits Fund. This is due to the fact that the Act on Protection of Employee Claims in case of Employer’s insolvency says that the employer, trustee, liquidator or other person is obliged to draw up a collective list of all unsatisfied employees’ claims within one month from the declaration of employer’s insolvency. When the employer or other person obliged to do so, fails to draw up the list, the term is missed and the Guaranteed Employee Benefits Fund is not bound to satisfy any such claims. So this act should be changed as to correspond to the Bankruptcy and Reorganisation Law.

Next doubt, also referring to article 12, concerns the term of ‘balance sheet value’. The term is not fully specified by Bankruptcy Law. The judge S. Gurgul affirms in his commentary that ‘enterprise’s balance sheet value shall be calculated according to accounting provisions but the term is not defined by the Act. In business vocabulary this term indicates such elements as enterprise’s financial liquidity ratio (capability to pay debts on time); assets liquidity ratio; due amounts and obligations rotation, owner’s capital and reserve value etc. ‘ (S. Gurgul, op., p.45-46). However, Prof. F. Zedler claims that ‘enterprise’s balance sheet value shall be calculated according to provisions on accountancy. Pursuant to provisions of the Accounting Act enterprise’s balance sheet value is the difference between enterprise’s assets and its due obligations (liabilities)’ (F. Zedler, op. cit., p.45J).

We think that the balance sheet value should be understood differently to Prof. Zedler’s opinion. Accounting provisions do not define the term of total balance sheet. Taking basic accounting rules into consideration, we shall assume that the enterprise’s balance sheet value is the total balance sheet reflecting the company equity. Owing to the balance sheet equilibrium, it is of no significance if we indicate total balance sheet on assets or on liabilities. Assets total balance sheet reflects the company equity and liabilities total balance sheet indicates the equity financial sources. So. Prof. Zedler’s stand is inexplicable. If we calculate the balance sheet value by deducting liabilities from the assets – then the value resulting from the balance would be lowered. The legislator says in article 12 of the Bankruptcy Law that we should compare balance sheet value with unsatisfied obligations (liabilities).

The following problem refers to the petition to declare bankruptcy, which formal rules are specified by articles 22-25 of the Bankruptcy Law. In case of bankruptcy proceedings with possibility to make an arrangement, the debtor is obliged to attach to the petition the arrangement proposals together with proposals to perform the arrangement (article 23). And here is the doubt: what should we include in arrangement proposals? Pursuant to article 269, the arrangement proposals shall determine the method of restructuring the bankrupt’s obligations as well as include a justification. Therefore, if the provision says what shall be included in the arrangement proposals (method of restructuring and justification) then only that what is included in proposals and justification constitutes an arrangement proposal. The elements which should be included in the justification are specified by article 280 of the Bankruptcy Law. So, the proposals to perform the arrangement constitute one element of the justification. The doubt is a question if these arrangement proposals are to be ‘fragmentary’ at the stage of filing the petition to declare bankruptcy with possibility to make an arrangement? if the legislator mentions arrangement proposals together with methods and sources of financing the performance of the arrangement? Or perhaps the legislator made a mistake and he stresses these possibilities of financing the performance of the arrangement. In practice, we are on the position that since the arrangement proposals should accompany the petition and the provision clearly specifies what are arrangement proposals then they must constitute the method of restructuring and the justification. If the petition does not include these elements, it is returned to the petitioner. The judge S. Gurgul has a different opinion on the subject claiming that ‘the lack of justification for arrangement proposals shall not be treated as the formal lack of the pleading if it does not concern the information required according to the content of the petition to declare bankruptcy. The lack of justification shall not cause the petition to be returned to the petitioner’ (S. Gurgul, op. c/r, p 748). S. Gurgul justifies his view by the content of the article 280, paragraph 2 which says that the judge-commissioner may allow for a limited justification of the arrangement proposal if due to the size and nature of the bankrupt’s enterprise establishment of all the data listed in article 280, paragraph 1, is not necessary in order to ensure the proper performance of the arrangement.

We think that this provision shouldn’t be applied at the stage of analyzing formal lacks as it refers to the proceedings that follow bankruptcy declaration. The provision clearly specifies that the person authorized to issue the decision is the judge-commissioner, who appears in the proceedings at the moment of bankruptcy declaration.
 

1.1. Actions preceding the decision of bankruptcy declaration

1.The Act on Bankruptcy and Reorganisation Law specifies the entities in respect of which bankruptcy may be declared. The bankruptcy may refer to a natural person, a legal person or any specified organizational units, conducting in its own name an economic or professional activity (article 5, act on bankruptcy and reorganization law of 28 February 2003). Bankruptcy cannot be declared in respect of the State Treasury, units of local government, independent public health institutions, natural persons operating an agricultural farm and other persons/institutions defined in article 6 of the Act.

2. The insolvency constitutes a basis for declaring bankruptcy; when the debtor fails to perform its due obligations or when a debtor is a legal person also when the sum of its obligations exceeds the value of its assets, even if the debtor duly performs these obligations (article 11), the court considers the petition being guided by creditors’ interest i.e. deciding on the type of bankruptcy; but it shall dismiss the petition to declare bankruptcy when assets of the insolvent debtor are not sufficient to cover the cost of the proceedings (articles 11-17);
3. The petition to declare bankruptcy may be filed by the debtor (who is obliged to do so no later than within 14 days of the date on which the basis for declaring bankruptcy occurred) and/or any of its creditors.

4. After the petition was filled, the court shall ex officio conduct the proceedings to secure the assets. The court appoints an interim court supervisor or mandatory administration of the debtor’s assets and it may apply other measures to secure the assets of the debtor;
5. The court shall convene a preliminary meeting of creditors which may adopt resolutions on the conduct of further bankruptcy proceedings (arrangements or liquidation of the assets);
6. The court shall give decision on the declaration of the bankruptcy or dismissal of the petition within two months from the date on which the petition was filled (if the petition is dismissed by the court, the appeal against its decision may be done by the petitioner only)
7. The bankruptcy proceedings shall be held in the court that declared the bankruptcy but they may be transferred to the other court.



1.2. Court’s decision

If no basis exists to declare bankruptcy with the possibility to make an arrangement, the court shall declare bankruptcy by liquidation of the debtor’s assets. (article 15) The liquidation proceedings shall enable all creditors to be satisfied. The act indicates that the court shall declare bankruptcy with the possibility to make an arrangement if it is determined likely that under an arrangement the creditors will be satisfied to a higher degree. Bankruptcy proceedings with the possibility to make an arrangement shall not be conducted if in the view of the debtor’s previous conduct it is not certain that the arrangement will be performed, unless the arrangement proposals include a liquidation arrangement. (article 14)

The court may convert the decision declaring bankruptcy with the possibility to make an arrangement to a decision declaring bankruptcy by liquidation of the debtor’s assets if the basis justifying such proceedings is disclosed in the course of the proceedings. The decision of the court is not subject to appeal if the obligation to convert the decision declaring bankruptcy with the possibility to make an arrangement to a decision declaring bankruptcy proceedings is provided in the Law. (article 16-17)
The date of court’s decision declaring bankruptcy was issued shall be considered the date of bankruptcy. (article 52)

1.3. Effects of declaring bankruptcy by liquidation of the bankrupt’s assets.

1.Effects of declaring bankruptcy with respect to the Bankrupt (articles 57-60):
When the bankruptcy by liquidation of the bankrupt’s assets is declared, the bankrupt is deprived of the right to administer his assets. The bankrupt is obliged to indicate and release all of its assets to the trustee as well as surrender all documents related to its assets and accounts (book accounts, other records maintained for tax purposes, and correspondence). If a bankrupt conceals its assets, impedes the property determination of the bankruptcy estate or fails to provide with all necessary explanations concerning its assets, the judge-commissioner may impose coercive measures for execution of non-pecuniary performances, as specified in the Civil Proceedings Code.

2. Effects of declaring bankruptcy with respect to the bankrupt’s assets (articles 61-86)
On the day bankruptcy is declared, the bankrupt’s assets shall become the bankruptcy estate, which shall serve to satisfy the claims of the bankrupt’s creditors.
The bankruptcy estate shall not comprise the following: property exempt by resolution of the meeting of creditors, irrecoverable claims exempted by the judge-commissioner; remuneration for work of the bankrupt in the part not subject to seizure. The trustee (court supervisor or administrator) prepares an inventory as well as an appraisal of the property of the bankruptcy estate. Assets which do not belong to the bankrupt shall be exempted from the bankruptcy estate. The person to whom an asset belongs fills the motion to the judge-commissioner to have assets exempted together with all evidence in support thereof. If the motion is dismissed, the applicant may bring a civil action to have the asset exempted from the bankruptcy estate.
The bankruptcy assets may not be encumbered with the law of property (pledge, mortgage) also with regard to the claims arising after the declaration of bankruptcy.

Bankrupt’s obligations are also treated differently than those in case of bankruptcy with the possibility to make an arrangement. It is assumed that (articles 91-118) the pecuniary and non-pecuniary proprietary obligations of the bankrupt shall become due on the date of declaring bankruptcy. The provisions say that a setoff of the bankrupt’s claim against the creditor’s claim shall be admissible if both claims existed on the date bankruptcy was declared. A setoff shall not be admissible if the creditor has become a debtor of the bankrupt after the date bankruptcy is declared; and also if the debtor of the bankrupt has acquired the claim through an assignment or endorsement after the declaration of bankruptcy or within the last year prior to the date bankruptcy is declared, knowing that basis existed for declaring bankruptcy.

A setoff shall be admissible if we have become creditors of the bankrupt as a result of paying off the debt owed by the bankrupt, for which we were liable personally or with certain proprietary items unless we have granted security within the last year prior to the date bankruptcy is declared, knowing see above. Whereas, if both claims existed on the date bankruptcy was declared, setoffs shall be admissible (pursuant to the Civil Code).


1.4. Creditors’ satisfaction in bankruptcy proceedings intended to liquidate the bankruptcy estate funds.

The satisfaction of creditors may be carried out according to different rules. Different procedure refers to secured receivables than to other categories of claims.

1. Satisfaction from the collateral – if the debtor disposes of secured receivables its claim is usually satisfied from the collateral securing the claim. Therefore, unless special provisions state otherwise these claims shall be satisfied from the proceeds of the sale of the encumbered asset, in an amount reduced by the costs connected with the sale. Interest covered by the collateral securities as well as the costs of proceedings in the amount not exceeding one tenth of the principal amount, shall be satisfied together with the claims. We have to remember that in the case of a sale of real property, a perpetual usufruct right to a sea vessel registered in the register of vessels – the priority of claims satisfaction goes to alimony claims, remuneration claims of the employees of the bankrupt working on the sold real property (up to the amount not exceeding three times the minimum remuneration for work) as well as disease-related pensions, workers’ compensation, disability or death benefits. The claims not covered are to be included in the plan of the bankruptcy estate distribution.


2. Satisfaction from the bankruptcy estate funds
Claims and amounts subject to satisfaction from the bankruptcy estate funds shall be divided into the following classes:

Class one – the costs of bankruptcy proceedings – remunerations of the trustee, of the still employed workers for their work done after the declaration of bankruptcy; taxes, other public levies for the period following the declaration of bankruptcy; then: pension and illness security contributions of the employees; amounts arising under employment relationships; farmers’ claims arising under agreements for the supply of products from their own agricultural farms for the previous two years; pensions, alimonies payable by the bankrupt; amounts resulting from the actions or abandonments of the trustee or administrator; also amounts resulting from reciprocal agreements concluded by the bankrupt before the declaration of bankruptcy, the performance of which has been requested by the trustee or administrator, amounts resulting from unjust enrichment of the bankruptcy estate.
Claims and amounts mentioned in the class one are satisfied when the appropriate amounts are successively contributed to the bankruptcy estate; therefore before the distribution of the bankruptcy estate funds; the claims that are not satisfied in this manner, shall be satisfied by way of distribution of the bankruptcy estate funds – two exceptions: costs of the bankruptcy proceedings shall be covered without delay, if the possessed funds so allow and alimonies payable by the bankrupt: each of the entitled persons shall be satisfied up to the amount of minimum remuneration for work;
Class two – public and social claims not subject to satisfaction within class one: taxes, other public levies, social security contributions due for the year preceding the date of declaration of bankruptcy, together with due interest and execution costs;
Class three – the majority of claims arising due to commercial relationships of the creditors and the bankrupt after the declaration of bankruptcy; personal claims as well as personal secured claims that were not satisfied from the collateral, the claim acquired after the declaration of bankruptcy by way of an assignment or endorsement;
Class four – interest not included in the classes of higher priority, to be satisfied in the order in which the principal amount is to be satisfied, as well as court and administrative fines and amounts resulting from donations and legacies; especially interest from the claims listed in class one and also claims included in class three for the period of one year preceding the declaration of bankruptcy. The trustee shall prepare a distribution plan of the bankruptcy estate funds. He specifies in it the amount subject to distribution, claims and rights of the persons participating in the distribution; the amount to be paid to each of the participants under the distribution; including: amounts to be paid out and amounts that shall be deposited with the court.

The trustee shall submit the plan to the judge-commissioner who may order the trustee to amend it. Then, the judge-commissioner shall notify the bankrupt and members of the creditors’ committee and a notice in Monitor Sądowy i Gospodarczy. The objection may be filed against the distribution plan within two weeks of the announcement date. The decision of the judge-commissioner shall be subject to appeal. The performance of the distribution plan shall take place immediately upon its approval. Together with the preparation of the distribution plan of the bankruptcy estate funds, the trustee shall draw up a separate distribution plan of the proceeds of the sale of the things or the rights.


3. Acquisition of the bankruptcy estate funds
Creditors, except from collecting their own claims, are also interested in acquisition of the particular parts of the bankruptcy estate funds. However, pursuant to the bankruptcy law, the trustee shall first try to sale the bankrupt’s enterprise as a whole. Then, if the sale of the bankrupt’s enterprise as a whole is not possible, an organized part of the enterprise may be sold.
The sale of the enterprise shall be effected by way of tender, to which the provisions of the Civil Code and Bankruptcy Law apply.


1.5. Closure of bankruptcy proceedings

1. Discontinuance of the bankruptcy proceedings when:
- following the opening of the bankruptcy proceedings, the assets remaining after exemption of the debtor’s proprietary items are not sufficient to satisfy the costs of the proceedings;
- there are no liquid assets to cover the cost of the proceedings and advance payment on account of the cost have not been extended by the set deadline by the creditors;
- all of the creditors who have filed claims request the discontinuance of the proceedings; result: on the day the decision discontinuing the bankruptcy proceedings becomes valid, the bankrupt shall recover the right to administer its assets: claims for the costs of the proceedings shall expire;

2. Revocation of bankruptcy proceedings when:
- after considering a valid rejection or dismissal of the petition to declare bankruptcy; result: the bankrupt may revoke the termination of the agreements, made by the trustee or administrator if the termination notice has not yet elapsed; the bankrupt may, within one month of the date of announcement or service of the decision rescind the agreements concluded by the trustee or administrator which have not yet been performed.

3. Closure of bankruptcy proceedings when:
- the proceedings included the liquidation of the assets and in the course of the proceedings all creditors have been satisfied – the court (decrees the closure of the bankruptcy proceedings);
- the proceedings have not satisfied fully the creditors; the court shall, upon the performance of the final distribution plan, decree the closure of the bankruptcy proceedings.
 

1.6. Special bankruptcy proceedings
Some bankruptcy proceedings shall be concluded in accordance with additional provisions, complementary or modified rules specified by the Bankruptcy Law; it applies to i.e. bankruptcy proceedings opened after the death of an insolvent debtor, which in all case results in the liquidation of the bankrupt’s assets. Separate provisions apply to the bankruptcy proceedings against banks, credit institutions and their branches, insurance undertakings.
 

1.7.Accountancy of the company under bankruptcy proceedings

Upon the date of the decision declaring bankruptcy by liquidation of assets, the assumption on the continuation of the business activity (article 29 of the Accounting Act) is not justifiable. The business entity that keeps books of accounts is therefore obliged to comply with particular obligations specified in the Act; these are:

1. Inventory of company assets and liabilities on a day preceding the decision declaring bankruptcy;

2. Closure of the books of account preparation of the financial statement on a day preceding the decision declaring bankruptcy; no later than within 3 months from the date when these events occurred (article 12):
- entity assets remeasurement at the lower of the realisable net selling prices and the cost of acquisition or manufacture, less accumulated depreciation or amortization and permanent impairment loss; and an entity recognizes a provision against additional costs and losses caused by discontinuance of its operations (article 29, 1 and 2);
- the difference that resulted from the remeasurement and recognizing the provision is recognized in the revaluation reserve in equity (article 29, 2a).
The financial statement of the day preceding the declaration of bankruptcy by liquidation of assets is subject to approval by the last board of directors.

3. The opening of the books of accounts as at the start date of initiating bankruptcy proceedings – within 15 days from the date when these events occurred (article 12);
- Equities’ parts combination into one master fund (article 36, 3);
The entity under bankruptcy proceedings keeps then its books of accounts according to approved accounting policy – adopted from the board of the insolvent company, together with possible modifications adapting its rules to the present legal condition of the company. Next, the complete financial statement for the trading year is done. The introduction to the financial statement must include a note that the financial statement was made with the assumption that the business activity is not going to be continued. For the purpose of the financial statement, the appraisal is carried out each time pursuant to the caution rule (article 29) and the possible difference is transferred to the capital from reserve capital.
The insolvent’s books of accounts are closed and the financial statement is made on the date of bankruptcy proceedings closure.

The accountancy of the entity under bankruptcy proceedings is carried out by the trustee who usually commission it from specialized entities. The inventory pursuant to provisions of the Accounting Act is made by the trustee or, at his motion, the debt collector or the notary
Article 290 Where the members of the management board have deliberately or through negligence given false information in the statement referred in Article 167, paragraph 1, subparagraph 2 or in Article 258, paragraph 2, subparagraph 3, they shall be liable to creditors of the company jointly and severally with the company for three years from the company registration date or initial capital increase registration date.