Bankruptcy law: The Notion of Insolvency, Amendments from 1 January 2016

Amendments to the provisions on bankruptcy law with reference to the notion of insolvency contained in Art. 11 of the Act of 28 February 2003 Bankruptcy Law (hereinafter referred to as: the Act) came into force on 1 January 2016.

First of all, insolvency of the debtor was related, in Art. 11 Par. 1 of the Act, to the loss of ability to fulfil maturing financial liabilities. Within the meaning of the Act, the loss of the above-mentioned ability shall take place at the moment when the delay in the payment of financial liabilities is longer than three months.

Then the legislator specified that insolvency shall also take place when the amount of financial liabilities exceeds the value of their property, in which the elements not included in bankruptcy estate pursuant to Art. 11 Par. 3 are not counted. However, it is required that the state of financial liabilities exceeding the value of debtor's property should last for a period longer than twenty-four months.
Future liabilities are not counted as the above-specified debt (including liabilities subject to the condition precedent), as well as obligations towards a partner or shareholder from a loan or other legal transaction with similar effect, referred to in Art. 342 Par. 1 Item 4 of the Act, and therefore belonging to the fourth category of receivables to be satisfied from bankruptcy estate funds.  The indicated fourth category includes receivables of partners of shareholders from a loan or other legal transaction with similar effect, in particular delivery of goods with deferred payment term, made to the benefit of the insolvent party being a capital company in the period of five years prior to declaring bankruptcy, together with interest.

In the new legal status, in Art. 11 of the Act we find the assumption that liabilities of a debtor exceed the value of their property when, according to the balance sheet, the sum of their liabilities exceeds the value of their assets, and this condition lasts for a period longer than twenty-four months. The above balance of liabilities shall not include provisions for liabilities and liabilities towards related parties.

However, it shall be specified that pursuant to Par. 6 of the above- discussed provision, the court may refuse a motion for declaring bankruptcy, if there is no danger of losing the ability of the debtor to pay their financial liabilities within a short time.
It shall be emphasized that the provision of Art. 11 of the Act shall be applicable for partnerships (specified in the Code of Commercial Companies) in which at least one shareholder responsible for company's liabilities is a natural person with unlimited liability, only to a limited extent, i.e. in regulations of Par. 1 and 1a.

Clarification of the concept of insolvency by the legislator is absolutely crucial due to the fact that insolvency of the debtor is a basis for declaring bankruptcy. Moreover, it determines the proper amount of time until submitting a declaration of insolvency or initiating composition proceedings, which in turn may e.g. protect a member of the board against the liability resulting from Art. 299 of the Code of Commercial Companies, i.e. joint and several liability for the company's obligations, should execution against the company prove to be ineffective.

Publication date: January 5, 2016, author: Anna Tomiło

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