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Karolina Sieraczek

Attorney at law (Poland)
Senior Associate
Phone: +48 71 60 60 415
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If your business partner declares bankruptcy, you may find it useful to review your legal transactions with him. This will let you see if the transactions may be challenged and identify the risk of returning assets to the bankruptcy estate. There are various grounds for making legal transactions ineffective and we will discuss them below.

Ineffectiveness by law

The Polish Bankruptcy Act contains a list of legal transactions which are ineffective towards the bankruptcy estate by law. According to Article 127 of that statute, transactions disposing of the bankrupt’s property, concluded for a fee or free of charge within a year preceding the filing for bankruptcy, in which the value of a supply made by the bankrupt grossly exceeds the value of a supply received by him or reserved for him or a third party in return, are ineffective with regard to the bankruptcy estate. The same assessment criteria apply to court settlements, acknowledgments of lawsuits and waivers of claims.

Also ineffective is security or payment of undue debt made by the debtor within six months preceding the date of the bankruptcy petition, unless they are declared effective due to the lack of knowledge about the grounds for declaration of bankruptcy.

Ineffectiveness by order of a judge commissioner

A legal transaction may also become invalid by order of a judge commissioner. This applies to legal transactions made by the bankrupt within six months before the bankruptcy petition with a spouse, a lineal relative by consanguinity or affinity, a collateral relative by consanguinity or affinity up to the second degree, a bankrupt’s partner who runs a household with him, or with a adopter or adoptee. That list of people is broad. More importantly, the same rules apply to transactions with a company in which the bankrupt is a management board member, the sole shareholder or in which the people listed above are board members or sole shareholders. The above rules apply also to transactions with shareholders in the bankrupt company, their representatives or their spouses, as well as legal transactions with associated enterprises, including parent entities, their shareholders, representatives or spouses of those people.

The mere association with the bankrupt is enough here to challenge the legal transactions made with him. The only exception that lets such transactions be declared effective is by showing that creditors have not been harmed.

Ineffectiveness by court order

If a transaction does not fit into any of the above categories, it may still be declared invalid by a court order on the basis of Article 527 of the Polish Civil Code. This so-called Paulian Action may be taken if a third party achieves a financial gain as a result of a debtor’s legal transaction to the detriment of creditors. The Polish Civil Code says that a transaction is detrimental to creditors if it makes a debtor insolvent or more insolvent than before the transaction. This is a very broad definition and there is extensive case law on this subject. 

Consequences of declaring a transaction ineffective

If a legal transaction is ineffective towards the bankruptcy estate, whatever has been lost or excluded from the bankruptcy estate has to be returned. If the return in kind is not possible, the cash equivalent has to be paid to the bankruptcy estate. It is also possible to pay the difference between the market value of the debtor’s supply as of the contract date, and the value of the supply received by the debtor.

The above-described conditions for declaring a transaction ineffective should encourage those who transact with a bankrupt to scrutinise the existing associations and the arm’s length nature of the price to rule out the need to return assets to the bankruptcy estate. We would be glad to support you in such situations and examine and assess your facts and circumstances. Our advisers are available to you in our offices in Cracow, Gdansk, Gliwice, Poznan, Warsaw and Wroclaw.

Karolina Sieraczek

05.06.2019