"In July 2011 our Attorney, Dr. Bunk has published in the German Insolvency Magazine ZInsO an article on the director´s liability provisions of the polish law with a special focus on Art. 299 KSH (Polish Company Law Statutes). The article deals with the potentially high personal risks of foreign managers acting as directors in polish subsidiary companies. Special attention is being paid to the unusual distribution of the burden of proof in the case of a potential liability case forwarded by a third party creditor against the director."

A. Introductory remarks
Currently there are about 5,000 to 6,000 corporations in Poland, incorporated under Polish laws, whose major or sole shareholder is a German parental company. Those corporations act partially merely as an extended workbench, partially they form economically independent units with their own markets and supplier relationships.In many cases a personal identity exists between the formal board memberships of the Polish subsidiary and the board memberships of the parental company, whereas the actual operative management is done by local people or a delegated operations manager. Those are regularly furnished with a single proxy, which is sufficient for the day-to-day requirements and the sequence of operations. However, only few participants realize that a structure like this also involves significant civil, tax and criminal risks for the executive directors. This is based mainly upon fundamentally modified liabilities of a managing director of a Polish corporation in the case of an insolvency. The main characteristics will be described in detail subsequently, however due to lack of space and the predominant practical impact, in particular the situation of a Polish limited liability company (Spółka z ograniczoną odpowiedzialnością - Sp. z o.o.) is taken into consideration. Here again in particular the regulations of article 299 KSH (Kodeks Społek Handlowych - law on commercial companies) as well as article 116 OP (Ordynacji Podatkowej - fiscal code) shall be dealt with.
The statutory definition of the state of insolvency of a Sp. z o.o. and the correlated danger of infringement of obligations to file for the opening of insolvency proceedings are of significant relevance for the potential liability of executive directors in accordance with article 299 KSH and 116 OP. Thus a short description of reasons for the opening of insolvency proceedings is recommended.

B. Reasons for the opening of insolvency proceedings and filing obligations of the executive director
I. Reasons for the opening of insolvency proceedings
1.
Polish law states two separate reasons for the opening of insolvency proceedings, both of which are outlined in article 11 of the law on insolvency and restructuring (PrUpN). Whereas the definition in art 11 sec 1 resembles in its content the German term of illiquidity (Zahlungsunfähigkeit) and is applicable towards all companies (corporations as well as business partnerships), the definition provided by art 11 sec 2 can be best compared to the German term of over-indebtedness (Überschuldung). However, the latter is stated only as a reason for the opening of insolvency proceedings for companies with an own legal personality (corporations, associations etc.). Despite the different definition, the Polish PrUpN refers to both cases as "illiquidity" (Niewypłacalnośc). For better comprehension, the term "illiquidity" (art 11 sec 1 PrUpN) and the term "over-indebtedness" (art 11 sec 2 PrUpN) shall subsequently be used.

2. Illiquidity
2.1.
In accordance with art 11 sec 1 a reason for the opening of insolvency proceedings is given, if a debtor does not pay his due and mature payment obligations. Under Polish law we are faced with similar questions as when dealing with the German term of "illiquidity". Although in accordance with the old Polish bankruptcy law, there was a legal distinction between a slow-down or delay of payments and the definite cessation of payment, the new law on insolvency and restructuring does not distinguish between those two cases anymore. Nevertheless, it is being discussed in literature and judicature, if the case of a mere slow-down or default in payments, in which it is foreseeable that it was only caused by an imbalanced cash-flow, which will be rectified in due course, shall be deemed as illiquidity in accordance with art 11 sec 1. Whereas the German insolvency law only refers to the state of illiquidity at a precise point in time, also providing for a minimum percentage of the lack of liquid funds, the boundaries under Polish law and Polish case law, - even after the reform of the statutory provisions - are much more vague. In Polish literature there are both strings of opinions, supporters of a more strict interpretation (in terms of illiquidity at a precise point in time), as well as other opinions, which even see the state of insolvency as given if very marginal mature sums have not been paid. Judicature has not yet taken a final standpoint in this discussion. However, in practice the courts assume illiquidity, if undisputed obligations of a significant extent have not been settled within 30 to 40 days after maturity date. In those cases the court is regularly of the opinion that not a mere slow-down or default in payment occurred but the state of illiquidity is given and therefore a state of insolvency. It is certain that:

1. there must be more than one unsettled payment obligation (the provision speaks of obligations in plural) and
2. the mere hope for an external investor or for further shareholder investments cannot overcome the illiquidity.

2.2
The Polish statutory or case law does not provide for a provision similar to the German law, in which the illiquidity is compulsorily assumed in cases of an ascertained deficient cover in funds (see German Supreme Court, BGH IX ZR 123/04 of 24.5.2005). The Polish limitations are fluent and on a case by case basis.
Although art 21 sec 1 PrUpN obliges the debtor to file for the opening of insolvency proceedings within 14 days after the state of insolvency occurred, art 12 sec 1 PrUpN on the other hand provides that the court can reject an insolvency application, if the delay in the settlement of pending payment obligations does not exceed 3 months and the accumulated sum does not exceed more than 10 % of the companies balance sheet total! (Under specific circumstances an extraordinarily high amount). However it is inadmissible to conclude e contrario that a case of a slow-down or delay in payment of less than 10% of the balance sheet total and a delay of less than 3 months would not construe a reason for the opening of insolvency proceedings. The possibility of rejection in accordance with art 12 lies in the full discretion of the court and can be rendered, even if the state of insolvency has been reached. The function of art 12 is to provide the insolvency court with a corrective tool in cases of frivolous third party filings, if the formal definitions for a state of insolvency are met, but only based on a minor payment default. However, a relief in obligations for the management board is not connected to this.

2.3
An important question is also, whether obligations which are mature, but their legal existence is opposed by the debtor are to be taken into consideration.
While for legally enforceable claims, judicature and literature are of the opinion that this is the case (this refers also to enforceable orders of public tax or social administration), it is contestable for simple claims opposed by the debtor. It can be assumed that claims, for which the opposition by the debtor is not evidently abusing the law, may be left out. Moreover, in practice it is admissible with the help of an effective claims management system, to lawfully agree on deferments for payment with creditors of mature claims, whereby also an implied and silent approval can be sufficient. This can provide a substantive reduction in the potential risks of executive board members.

3. Over-indebtedness

3.1
As a second reason for the opening of insolvency proceedings, the Polish law defines the term of over-indebtedness. It is particularly applied to independent legal entities (corporations etc.), but also to dependent legal entities, which are granted a partial legal capacity.
When assessing over-indebtedness, contrary to German law, Polish insolvency law in practice does not distinguish between a going concern value and a liquidation value or anyhow considers questions with regard to the continuation of business. In practice the assessment of the term over-indebtedness is based upon the book and balance sheet values. This approach is not only of a dubitable economical value, but in our opinion this formalistic conclusion is also not compulsory. Polish insolvency law is providing some starting points, in which for the assessment of over-indebtedness the potential (going concern, or market) value of the assets is decisive. Nevertheless the practical impact of art 11 sec 2 is minor and the aforementioned questions have not yet been part of a detailed forensic debate. Currently some first approaches are observable, which question the strictly balance-sheet based approach.

3.2
Notwithstanding the pure formalistic standpoint, it currently being discussed, if an evident attempt to manipulate the balance sheet, for instance by an artificial puffing of built-up reserves or shareholders capital, must be corrected during assessment. It is further in discussion, if contingent liabilities (surety etc.), which are not on the balance sheet, but for which the probability of occurrence must be assessed as high, are to be taken into account. However a significant risk in the assessment of the value is attached to those issues and any uncertainties are burdened upon the executive directors.

3.3
Summing up: The terms illiquidity in the narrower sense (art 11 sec 1) as well as over- indebtedness (art 11 sec 2 PRUpN) are defined and handled in a much vaguer way than under the German insolvency law. This provides for a significant legal insecurity.

4. Admissibility of insolvency applications

4.1
For a Foreign observer this might seem obscure. However in Polish law practice it is very often difficult for the debtor to convince the competent court of the existence of reasons for the opening of insolvency proceedings, respectively to file a formally correct application.

4.2
In example under the current German law practice, the court only examines the legal capacity, the legal competence and the power of representation of the debtor, if an application for the opening of insolvency is filed by the debtor itself or his representatives; the application could (theoretically) even be made orally on record at the court registry. Polish law on the other hand, has significantly higher formal and substantive requirements for an admissible application. In Germany, the assessment on whether reasons for the opening of insolvency proceedings are given is delegated to the appointed preliminary insolvency administrator/assessor, whereas in Poland it is undertaken by the court itself (this although the Polish law provides in principle for a similar preliminary safeguarding procedure).

4.3
Art 22 and 23 of the law on insolvency and restructuring (PrUpN) provides among others, that with the filing of the insolvency application the debtor (if it is a corporation) must present the following

- a detailed preliminary balance sheet, which must not be older than 30 days,
- a preliminary estimation of the expected market value of the companies assets,
- a list of creditors also containing provided collateral, a list of claims including extent and payment date as well as the date when the collateral was given,
- a compilation of all obligations settled within the last six months,
- a list of debtors including extent and payment date of the claims,
- a list of enforceable claims as well as pending enforcement proceedings against the debtors moveable or immovable assets,
- a list of the management board and any proxy holders along with the persons resident addresses.

Finally the debtor shall announce, whether in his opinion a liquidation or a debt relief proceeding shall be processed. The latter is in principle comparable to the German insolvency plan proceeding.
If the latter is the case, it is expected that the debtor already presents a preliminary insolvency plan, including data on the estimated quotes. All given data and documents must be confirmed to be true in writing by the legal representative of the debtor. By this confirmation the representative of the debtor becomes personally liable for any incorrect data.

4.4
A result of this (admittedly very excessive) provision is that in practice it can turn out very difficult to file a proper insolvency application on time. Consequently, the majority of filed insolvency applications are rejected by the courts due to substantive reasons, respectively the applicant is asked to amend his application. For this he is only given a
weeks time. If an application is rejected due to formal reasons (e.g. the non- presentation or the delayed presentation of required documents), this does not give the
executive board any exculpation with regard to the infringement of its timely application to file for insolvency.

II. Application rights and application obligations

Under Polish law, legal entities or persons who have the right to represent the company solely or jointly, have the right to file for insolvency. The law expressively speaks of persons, who are authorized to represent the company and not of members of the executive board in the narrower sense. Therefore in Polish literature there is an opinion that the right to file for insolvency is also given to a proxy holder. This indeed is very different from Germany. However subsequently it will only be referred to the executive board's obligations.
The authorized representative does not only have the right to file for insolvency in accordance with art 22 sec 2 Nr. 1 PrUpN, but also the obligation to do so, if reasons for the opening of insolvency proceedings are given in accordance with art 21 sec 2 PrUpN. An infringement of this obligation can trigger severe penal law sanctions and civil law obligations. However, the obligation to file for insolvency, at least in the majorities opinion and even in the opinion authors, supporting a right to file for insolvency for a proxy holder, is not extended upon a proxy holder and such obligations are limited to formal members of the executive board.

C. Liability risks for an executive director in the crisis of a Polish company

The management board of a Polish corporation (here a limited liability company- Sp .z o. o.) is faced with a multifarious compilation of criminal, civil and administrative sanctions, if they infringe the obligations burdened on them by the law on insolvency and restructuring. A detailed compilation of those would go beyond the scope of this elaboration. We refer to the respective elaborations and limit our analysis to the two most significant provisions upon which civil claims against former executive directors are regularly based.

I. Civil consequences of article 299 KSH
The liabilities as described in art 299 of the Polish KSH (Kodeks Społek Handlowych- law on commercial companies) and art 116 OP (Ordynacji Podatkowej- fiscal code) are of major importance for the management body.

Art 299 § 1 KSH provides for the following:
If a claim enforcement against the company (corporation) proves fruitless, the members of the executive board jointly are liable for those obligations as co-debtors (translation of the author).
The fundamental difference between this provision and the German provision of art 15 a) Insolvency Act in association with § 823 sec 2 German Civil Code lies not with the substance of the claim, but with the burden of proof.
Under German law, the creditor, in order to prove and substantiate his damage claim, has to prove the cause and extent of his insolvency damage and it´s being caused by the infringement of obligations (on the timely filing for insolvency) of the executive board member. Under Polish law (art 299 § 2 last alternative), the managing director must on the contrary prove that a neglect of his duties has not led to a damage or to a lesser damage. The Polish creditor however, has only to prove that he has an existing claim against the company, which remains unsettled despite enforcement attempts into the companies assets. He does not have to prove a causal connection between the forgotten or delayed application and the occurred damage.
The claiming creditor does not even have to prove a neglect of the managing director's duties, i.e. the failure or delay in filing for insolvency. Under German law, the burden of proof with regard to objective matters of fact such as a delayed filing for insolvency and the occurrence of damage lies with the creditor. Only in case of a negligent behaviour on the side of the management body an alleviation of the burden of proof in favor of the creditor occurs (refutable presumption of neglect at detectability of insolvency). Under Polish law on the contrary, the burden of proof lies with the managing director of a Polish company. Art 299 § 2 provides for a possibility of exculpation of the managing director, if he can show positive evidence that he filed for insolvency in due course. However at the same time this provision contains a refutable presumption to the disadvantage of the managing director, i.e. that he has negligently infringed his obligation to file for insolvency. The only alleviation is that the timely filing for insolvency does not necessarily have to be made by the managing director himself, but an application by another creditor in due course ceases his liability as well.
However, in practice the distribution of the burden of proof puts the managing director in a situation with almost insurmountable obstacles. He has to provide positive evidence in proceedings that at the time of him being managing/executive director, the company was not insolvent. It must be taken into consideration that in practice he usually does not have any access to company documents anymore, since the company will usually have already entered insolvency proceedings and is currently run by the appointed insolvency administrator (and not necessary an ally). If one follows an opinion of legal literature, where very strict requisitions for the definitions of the state of insolvency are set (in accordance with some opinions already two unsettled claims are sufficient), it becomes obvious that the managing director is fighting a lost battle. Even worse, the judicature is of the opinion that a timely application (within 14 days), which has been rejected due to formal reasons (which is not unlikely given the aforementioned formal requirements) does not lead to an exculpation. For low-mass proceedings, the judicature of the higher courts sees considers any attempts of exculpation as failed already from the start.
A belated exchange of the management board does not cease the liability of the former management director, if the reasons for the liability have already occurred prior to his resignation.

II. Liability in accordance with art 116 OP (fiscal law) and other provisions

The provision of art 116 OP is in its wording, its structure and the distribution of the burden of proof comparable to art 299 KSH. Also here it is refutably presumed that in case of impossibility of collection of outstanding tax claims against a company, the managing director has neglected his duties in the sense of a failure to timely file for insolvency. An exculpation is theoretically possible by means of a positive evidence for the absence of a neglect of duties, but it faces the same difficulties as in the case of art. 299 KSH. Only with regard to the evidence for fruitlessness of enforcement, higher requirements must be met than in civil proceedings. Moreover, the privileged statute of tax claims in insolvency proceedings and peculiarities of Polish tax law work actually in favor of the respective managing director.
Managing directors of Polish subsidiaries, who take advantage of tax abatements provided in so called Special Economic Zones, are faced with a more peculiar risk. Usually with filing for insolvency the company is not able to fulfill the defined requirements attached to entrepreneurship within the Special Economic Zones anymore (minimum employment, fulfillment of certain investment requirements etc.), therefore the tax advantages which have been provided to the company, are subsequently revoked. The liability consequences in accordance with art 116 OP are devastating, if the potential amount of loss is taken into consideration.

III Further risks

In particular in case of a non-payment of VAT obligations an immediate tax audit must be expected. The tax authorities are usually not impressed by an instituted preliminarily safeguarding procedure after the filing for insolvency. If during the period of the preliminary proceedings the disbursements of salaries and wages is delayed or ceases, the commencement of an examination by the social insurance authorities (ZUS) as well as the labor inspection (PAP) is to be expected. Payment delays for salaries and wages therefore usually lead to the commencement of regulatory offence proceedings against the management board, where no means of exculpation are given.
It is to be noted that the Polish legal practice, to its greatest extent, is unfamiliar with the instrument of bridged financing of EPR claims during preliminary proceedings, although a National Insurance Fund exists. This means in practice that either the salaries are continually paid out of the companies funds, which regularly meets with the opposition of the preliminary insolvency administrator, or the employees do not receive any payments at all. The disbursement by the Insurance Fund is only made after the definite opening of insolvency proceedings, which might take a couple of months. Those are the reasons why usually the filing for insolvency and the commencement of preliminary safeguarding proceedings in Poland results in the immediate standstill of business.

Conclusion
In our practice, we have observed that only very few foreign executive directors of Polish subsidiaries are truly familiar with the risks associated with their appointment. In order to avoid liabilities in accordance with art 299 KSH or 116 OP in case of insolvency, the compliance with corresponding precautionary measures is absolutely necessary. These are among others:

1. The cash position and the balance-sheet situation of a Polish subsidiary should be under constant monitoring. Regular preparation of interim balance sheets is recommended. With regard to the risks deriving out of art 299 KSH, the management board should store informative and auditable documents not only at the seat of the company in Poland, but also duplicates in a neutral location (eg. Holding Headquarters).
2. If the filing for insolvency should become inevitable, the preparation of the application and the compilation of the required documents should be started in due course in order to counter any charges of failure to file for insolvency.
3. If the management board should become an object of criminal or regulatory proceedings, it is not advisable to deal with the authorities directly. This should only take place with the assistance of an experienced Polish lawyer.

Author: Dr. Artur Bunk MLE, Attorney at Law at bunk-alliance Rechtsanwälte, Berlin, Worms, Warsaw