Milewska Legal

Declaration of insolvency of a limited liability company – does it really protect a member of the management board?

4 November 2022

People generally believe that submitting a bankruptcy petition of a limited liability company and declaring it insolvent by the court enables the management board to rest assured. This belief originates from focusing only on the content of art. 299 of Polish Commercial Companies Code (hereinafter: CCC), without the correct analysis of the bankruptcy law provisions. However, in reality, even after declaring the company bankrupt, the assets of members of the management board might not be protected. Why does it happen?

Art. 299 of CCC – liability of members of the management board

Most of the members of management boards of limited liability companies are aware of enforceability of art. 299 of CCC (and its fiscal counterpart – art. 166 of tax ordinance). It stipulates that in the event that execution from the company’s assets proves ineffective (thus, in the most classic example – the bailiff discontinues an execution against the company due to the lack of its assets), members of the management board of that company are jointly and severally liable for the company’s debts (thus, all members of the management board are liable, and at the same time – each of them is liable for the entirety of the company’s debt, it is not divided into parts in proportion to the number of the members of the management board).

In order to be relieved of such liability, a member of the management board shall demonstrate the existence of at least one of the following circumstances:
1. that the bankruptcy petition has been submitted in due time or, at the same time, a decision to open restructuring proceedings or to approve an arrangement has been issued, or
2. that the failure to submit the bankruptcy petition was not due to their fault , or
3. that despite the failure to submit a bankruptcy petition and the failure to issue a decision to open restructuring proceedings or to approve an arrangement in the proceedings for the approval of an arrangement, the creditor has not suffered any damage.

In practice, members of the management board often try to indemnify themselves by invoking the timely submission of a bankruptcy petition. If, on top of that, the court actually declares the company insolvent – members of the management board almost take the existence of the first prerequisite releasing them from liability for the company’s debts for granted (their reasoning: company has been declared insolvent = bankruptcy petition has been submitted in due time). Unfortunately, this is a deceptive belief. Why?

When does the bankruptcy court declare the bankruptcy of a limited liability company?

The insolvency court declares a limited liability company insolvent if all of the following conditions are met:
1. the company is insolvent – that is if it does not pay its due debts (insolvency is presumed to occur if such delay in repayments exceeds 3 months or if the debts exceed the value of the company’s assets and this state persists for more than 24 months);
2. the company’s assets are sufficient to cover the costs of the bankruptcy proceedings and to at least partially satisfy the creditors (the court is obliged to dismiss the bankruptcy petition if the company has no assets to cover the costs or its assets are sufficient only to cover the costs of the proceedings).

The key point is therefore that the bankruptcy court does not examine the timing of the submission of the bankruptcy petition. This means only that the declaration of bankruptcy is admissible even if the petition was not filed “in due time” as provided for in art. 299 of CCC.

What are the consequences of the aforementioned situation? No protection of the assets of the members of the management board of the limited liability company. What is more – the possibility of creditors suing for payment of the entire amount owed by the company of any member of the management board of a limited liability company. Even in the case of filing a bankruptcy petition a year after the insolvency occurred, both prerequisites (insolvency and assets sufficient to cover the costs of the bankruptcy proceedings with some surplus) may occur – the bankruptcy court will then declare the company insolvent. However, the petition may be submitted at the wrong time – if such a petition had been filed e.g. 9 months earlier, the company’s assets would have been better and the creditors would have received a larger part of their receivables. In such a case, it would be an effective motion (leading to the declaration of the company’s bankruptcy), but filed “at the wrong time” (i.e. too late to benefit from the protection of art. 299.2 of CCC).

Therefore, when members of the management board ask us whether they can feel 100% safe after the declaration of insolvency of the company in which management board they served, we always answer the same: you can certainly feel much safer than if the bankruptcy petition had not been filed at all. However, members of the management board can only feel completely safe after the expiry of the limitation period for a possible claim by the company’s creditors. A declaration of bankruptcy by itself does not protect a board member against liability under art. 299 of CCC.

Daria Milewska

attorney

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