Poland: State of epidemic threat vs. management board’s liability for failure to file for bankruptcy on time

There is no doubt that the coronavirus pandemic and the ensuing state of epidemic threat will affect many businesses, some of which may even suffer cash flow difficulties. Struggling businesses may be faced with the question whether their financial troubles are serious enough to lead to insolvency.

This brings us to another question, i.e. whether the restrictions imposed as a result of the state of epidemic threat and legislation passed in connection with it affect Polish businesses’ obligations related to filing for bankruptcy within the prescribed deadline.

Obligation to file for bankruptcy

Unfortunately, none of the legislative acts adopted so far in response to the pandemic modifies the obligation to file for bankruptcy. After the Cabinet Council meeting of March 18, 2020, the President and Prime Minister announced a number of relief measures to mitigate the coronavirus’ impact on businesses. With detailed legislative solutions still in progress, the government remains silent on a regulation that would match the one adopted in Germany, where the obligation to file for bankruptcy was suspended until September 30, 2020.

In all likelihood, the insolvency criteria and deadlines for filing for bankruptcy will remain unchanged in spite of the crisis caused by the coronavirus pandemic.

Consequently, we need to bear in mind that:
– each insolvent business is required to file for bankruptcy within 30 days from the day of becoming insolvent;
– this deadline is triggered irrespective of the subjective impossibility to determine if a business has become insolvent; in other words, even if someone cannot tell whether their business is insolvent, they are still required to file for bankruptcy within 30 days of the day when the company is no longer able to pay its financial obligations;
– any potential difficulties resulting from the recently restricted operation of courts, authorities or banks do not prevent this deadline from being triggered, either.

Liability for damage resulting from failure to file for bankruptcy on time

The potential liability of a company’s directors might be assessed from a somewhat different perspective when a creditor suffers damage as a result of failure to file for bankruptcy on time (article 21 section 3 of the Bankruptcy Law; article 299 § 1 of the Commercial Companies Code; article 116 § 1 of the Tax Code).

In each of the above cases, a management board member may be exempt from liability if s/he is able to demonstrate (among others) that s/he is not at fault for the failure to file for bankruptcy on time.

Will it be possible for management board members to avoid liability due to the coronavirus pandemic in each case? Of course not.

The situation of a management board member who is hospitalized or quarantined due to coronavirus infection, and is consequently unable to manage company affairs, seems relatively clear. An infected management board member has very limited options of signing any document, e.g. a bankruptcy petition or a relevant power of attorney, which may potentially be used as the basis for exemption from liability for failure to file for bankruptcy on time.

It should be noted, however, that if the aforesaid circumstances apply to only one of several members of a governing body, its other members remain liable for failure to file for bankruptcy on time.

The situation might get more complex when management board members are able to run company affairs (e.g. none of is hospitalized or quarantined) but have limited access to financial information necessary to assess the company’s condition because the accounting staff member responsible for providing them is hospitalized, quarantined or has limited access to documents by reason of working from home. Situations of this kind should be analyzed closely on a case-by-case basis.

Undoubtedly, management board members should always remember about three basic issues:
– a management board member occupies a special place in the company structure. His/her actions must pass the test of increased due diligence required of professionals;
– if, as a result of the coronavirus pandemic, a company finds itself in financial distress, its management board should make sure that a proper record of the difficulties is kept. For instance, if access to electronic documents is limited by reason of server malfunction, a relevant e-mail message should be sent to the service provider or an internal memo should be prepared. These solutions may seem trivial but will be important once a management board member runs the risk of being held accountable for damage suffered by a creditor as a result of failure to file for bankruptcy on time;
– a management board member who steps down or is dismissed after the bankruptcy filing deadline is triggered may still be held accountable for damage, which is all the more reason to keep in mind the issues discussed above.

Recommended actions:

1. Staying on top of the company’s financial situation and taking notice of all problems (incl. minor and temporary ones) with timely payments because seemingly trivial events may have serious consequences when a crisis hits the market.
2. Responding immediately to any difficulties (e.g. negotiating with business partners, renegotiating payment deadlines and terms).
3. Recording diligently any difficulties the company encounters and remedial actions taken in response.

We are available to help businesses and management board members through this difficult time. Our law firm is a one-stop shop for any questions you may have. Do not hesitate to contact us for any assistance.