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Overview of insolvency regulations: part three

Continuing with an examination of insolvency regulations in Poland, one could ask a tricky question: it is obvious that an entity will be deemed insolvent if it fails to satisfy (discharge) its due and payable obligations, but could an entity that does perform its obligations duly and in a timely manner be deemed insolvent as well? Surprisingly, insofar as corporations are concerned, the answer to the question is 'yes' and this is because of a concept commonly know under the name of technical insolvency.

According to the concept, which is reflected in Article 11 Sec. 2 of the Polish Bankruptcy Law, a company whose total value of liabilities exceeds the total value of its assets should also be deemed insolvent, even if it satisfies its liabilities in a timely manner.

The reason behind the approach is that the sole source out of which a corporation may satisfy its creditors' claims are the assets thereof (shareholders and managers are, generally, not liable for the entity's liabilities). Accordingly, the legislator adopted a stance that the value of liabilities of an entity may not exceed the value of its assets as otherwise some of the creditors could not be satisfied. From a practical point of view, the approach is obviously wishful thinking since, even despite the regulation being in force, it rarely happens that all creditors are satisfied in full in insolvency/bankruptcy proceedings.

In any case, members of the management board of a technically insolvent entity are obliged to file for its bankruptcy within two weeks after the entity has become so insolvent, or otherwise be exposed to civil and criminal liability.

The contemplated regulations of the Polish Bankruptcy Law most often come into play when a Polish entity is to provide a guarantee for the obligations of its parent/sister company, in particular in a multijurisdictional transaction, where obligations at stake count in millions of euros. In most cases, the Polish guarantor would become technically insolvent immediately upon issuing the relevant guarantee since the value of the guaranteed obligations usually exceeds by far the value of its own assets.

To prevent the technical insolvency of Polish guarantors but at the same time allow them to participate in such multi-jurisdictional transactions and provide guarantees thereunder, a concept of a guarantee limitation language has been developed. Under the concept, the liability of a Polish guarantor pursuant to a guarantee being issued thereby is usually limited up to the positive difference between the aggregate value of the assets of such Polish guarantor and the aggregate value of its (other) liabilities. Because the value of assets and liabilities of each going concern fluctuates on a daily basis, proper structuring of the relevant guarantee limitation language requires in-depth understanding of the issue and a certain level of experience.

Borys D Sawicki

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