According to article 11 of Poland’s Bankruptcy and reorganisation law as of 28 Feb-ruary 2003 (Journal of laws 2009, No. 175, position 1361, as amended), a debtor who is a legal person (including, in particular, a limited liability company) is considered to be insolvent when the value of its liabilities exceeds the value of its assets, even if the debtor continues to pay its liabilities (balance sheet insolvency). A limited liability company’s directors are obliged to file a bankruptcy motion with a court no later than within two weeks from the day on which a basis for declaring bankruptcy arose. Failure to file a bankruptcy motion in a due time may result in di-rectors incurring both civil and criminal liability, including their being banned from conducting of business activities.

Optimal amount of share capital

The amount of share capital plays a key role with regard to the risk of balance sheet insolvency. The Polish commercial companies’ code provides for a minimum thre-shold for a limited liability company in this context, namely PLN 5,000 (EUR 1,100). However, there is no one “optimal” amount of the share capital for each and every company. Long-term planning at the stage of a limited liability company’s incorpora-tion and continuous monitoring of its balance sheet will allow directors and share-holders to respond quickly to the company’s changing business situation and to mi-nimize the risk of balance sheet insolvency by considering the company’s recapitali-zation if necessary.  

Penalties and liability

In cases of criminal liability, directors may be subject to a fine of up to approx-imately PLN 1,000,000, to restricted freedom or imprisonment of up to one year, depending on the gravity of the committed offence. Contrary to civil liability, dam-age does not have to occur in order for directors to be charged with an offence of not declaring a limited liability company’s bankruptcy despite circumstances duly justifying its bankruptcy.  

A specific sanction in limited liability companies is the director’s personal liability for failing to file a bankruptcy motion. Directors are jointly and liable for the liabilities of a limited liability company, if the enforcement procedure against such a company fails to be effective. Under certain circumstances, directors can be relieved from such liability.  

Irrespective of a director’s personal liability, the company itself may act against di-rectors for compensation. Certain premises must be jointly fulfilled in order to hold directors liable for damage suffered by a company. In this case, the burden of proof is on directors, who must provide evidence that they maintained the required pro-fessional level of due diligence care.  

Additionally, directors may also be liable for tort-like liability. To be successful, the claimant must prove in particular that: (i) he has suffered damage, and (ii) that this damage is due to the culpable acts of a director, which may be difficult in practice. Therefore, claims based on this general provision are very rare.  

Directors may be also deprived of the right to conduct business activities if they will-fully failed to file motion on bankruptcy within two weeks from the existence of grounds to submit such a motion. This penalty includes the deprivation of the right run business on one’s own account and to act as member of supervisory board, representative or plenipotentiary of any commercial company, state enterprise, co-operative, foundation or association. It may be imposed for a period of three to ten years.  

Possible solutions

In order to remove the grounds for a limited liability company’s balance sheet insol-vency and, in consequence, for declaring such a company bankrupt, certain possible scenarios may be implemented: increasing the limited liability company’s share cap-ital, imposing additional payments on the shareholders, and converting debt into equity. Under the last scenario, no real flow of cash occurs; instead, the company and its shareholders would set-off their mutual claims.  

In case of an increase in share capital, the shareholders’ contributions increase the company's assets. To further recapitalize the company, shareholders may take up shares at a value higher than the nominal. The increase of share capital may also provide an excellent opportunity to restructure the existing composition of the shareholders, allowing the admission as shareholders of persons with adequate capital. It should be noted that the increase of share capital is only effective upon entry in the register maintained by Poland’s National Court Register.  

An alternative solution would be to impose on a limited liability company’s share-holders an obligation to make additional payments to the company’s share capital on the basis of a shareholders’ resolution, provided that such a possibility is set out in the company’s articles of association. In practise, this construction is often used in order to recapitalize a limited liability company, as a substitute for a loan or share capital increase. While additional payments do not increase the share capital, they increase the company’s total equity. In addition, they have no impact on the com-pany’s financial result and, thus, the income tax payable.  

A third way to avoid balance sheet insolvency involves the conversion of debt into equity, which may be carried out in the particular case when the limited liability company is a debtor against its shareholders or third parties with respect to loans granted to them. The conversion of debt into equity is carried out through contrac-tual set-off of mutual claims between the company and the creditor, up to the amount of the lower receivable. The company’s claim may be derived from two sources: from the obligation to pay contributions and take up shares in the in-creased share capital, or from the imposition of the duty to make additional pay-ments to shareholders. Conversion of debt into equity makes it possible to reduce the company’s debt without actually forcing shareholders to dispose of capital.  

Current balance

Notwithstanding the abovementioned solutions, the directors of a limited liability company should continuously monitor the company's balance sheet. Also, pursuant to article 233 of Poland’s Commercial Companies Code, if the balance shows a loss in excess of the sum total of the supplementary and reserve capital and half of the share capital, the directors should convene a shareholders’ meeting to decide on the company’s continued existence. Such a resolution should involve the appropriate remedial program, including cost reductions and the recapitalization of the compa-ny. It should be noted that the directors’ decision to recapitalize a company does not exempt them from the legal requirement to file a bankruptcy motion.