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Easier to file for bankruptcy

An amendment to the Polish Bankruptcy Law went into effect on 22 December 2010, giving debtors a chance to supplement deficient bankruptcy petitions while maintaining the original filing date.

Under the Bankruptcy & Reorganisation Law dated 28 February 2003, the debtor is required to file a bankruptcy petition within two weeks after it becomes insolvent (Art. 21(1)). If the deadline is not met, the debtor is liable for resulting damages. (In the case of a legal person or organisational unit without legal personality, the debtor’s representatives, e.g. the members of the management board, are liable.) Thus the consequences of failure to file a bankruptcy petition on time may be serious. The bankruptcy court may also strip the debtor’s representatives of the right to conduct business activity for up to 10 years, and the members of the management board may also be personally liable for the company’s debts under Commercial Companies Code Art. 299.
In practice, these negative consequences have also arisen in cases where a bankruptcy petition was filed on time, but it was formally defective or incomplete, failing to meet the conditions set forth in Bankruptcy Law Art. 22 or 23, or the fee was not paid. These provisions require numerous documents to be submitted with the bankruptcy petition, particularly when filed by the debtor, such as a list of the debtor’s assets and estimated value, a balance sheet prepared within the past 30 days, a description of the circumstances indicating that the debtor is insolvent, a list of creditors, and so on. It is a long list, and most of the items are not readily available but must be prepared especially for the purpose of filing the bankruptcy petition.
Legal practitioners as well as bankruptcy judges admit that preparing a bankruptcy petition with all the required enclosures within the course of two weeks is extremely difficult. Nonetheless, filing of an incomplete petition, which did not meet the formal requirements—whether or not the debtor was represented by counsel—resulted in rejection of the petition without an opportunity to amend it to supply the missing items.
The grounds for dismissal of a bankruptcy petition were considered by the Polish Constitutional Tribunal, which held in a judgment issued in November 2009 that Bankruptcy Law Art. 28 is unconstitutional because it does not provide an opportunity to supplement a defective bankruptcy petition where the petitioner is not represented by an advocate or legal adviser. In the court’s view, such a restrictive regulation violated the right to due process guaranteed by the Polish Constitution.
The amended Art. 28 gives a petitioner who is not represented by counsel seven days from service of the order rejecting a bankruptcy petition to supplement the petition or pay the fee for the petition, while retaining the original filing date of the petition. The new rule also provides a right to refile the petition even if the petitioner is represented by counsel, but in that case the petition is returned without a summons to supplement or pay for the petition. In either case, a grace period is given to the petitioner only once.
In light of the amendment, it appears that a debtor preparing to file for bankruptcy who realises that it will not in a position to file a complete petition should nonetheless file a petition within the statutory 14-day period following insolvency, even if the petition is incomplete. Then the debtor should gather any missing documentation as quickly as possible so that it will be in a position to file a complete petition within 7 days after rejection of the original petition. In reality this extends the deadline to file a complete petition not only by the 7 days referred to in the law, but also by the period required for the court to review the original petition and serve the order rejecting the petition on the debtor.
Practice will show what effect the amendment will have on the number of properly filed bankruptcy petitions.
In terms of the goals which the Bankruptcy Law is designed to serve, the amendment appears justified. On one hand, the debtor will still be required to file a petition within a short time, and the debtor’s representatives must remain aware if the debtor becomes insolvent, while, on the other hand, problems that arise in complying with the 14-day deadline will not in and of themselves result in liability for failure to file a complete bankruptcy petition on time. Under the previous rule, filing an incomplete petition was treated the same as filing no petition at all.
Michał Barłowski
This article was originally published in Rzeczpospolita daily on 18–19 December 2010.