On 9 October 2009, a three-judge panel of the Supreme Court issued a judgment (file no. IV CSK 145/09), in which it ruled that the Polish legal system provides for the possibility to secure claims under a parallel debt (created under foreign law).
Facts of the case
The case in question concerned two Polish limited liability companies which concluded a facility agreement and a trust deed with a foreign bank, pursuant to which the said companies abstractly concluded that the lender would be entitled to demand from them the payment of amounts equal to, at any time, amounts payable to the lender by any borrower under the facility agreement (parallel debt). The reasons for the judgment do not state which country’s laws governed the trust deed; however it can reasonably be assumed that the said deed was not governed by the laws of Poland.
Nearly a month after the conclusion of the facility agreement and the trust deed, the companies concluded a title transfer agreement with the lender to secure the bank’s claims under the parallel debt. Before the lapse of two months from the date of the title transfer agreements the companies submitted motions for bankruptcy which were later accepted by the court.
When analysing the facts of the case, the Supreme Court found that the security interests created in order to secure the bank’s claims under the trust deed are ineffective, as they were created during the two months preceding the submission date of the bankruptcy motion. Pursuant to Article 127 clause 3 of the Polish Bankruptcy and Reorganisation Law, security interests created and payments of unmatured debt made during the two months preceding the submission date of a bankruptcy motion are ineffective.
The Supreme Court’s findings as to when a bank’s receivables under parallel debt originate were of fundamental importance for the ruling. In the Supreme Court’s opinion, the bankrupt companies became the bank’s debtors upon the conclusion of the trust deed, despite the fact that the underlying facility had not yet been disbursed and hence the receivables under the facility agreement were of a future nature. Despite the functional correlation between the parallel debt and the bank’s receivables under the facility agreement, the Supreme Court found that receivables under a trust deed originate upon the conclusion of such deed, irrespective of the disbursement date of the underlying facility. In the Supreme Court’s opinion, the trust deed created an “abstract debt under which the companies were obliged to repay future liabilities under the facility agreement”. As stated in the reasons for the judgment “the debt, which was secured with the security interests, existed already from the date of the trust deed; however it was not due and payable by the bankrupt companies at that point in time”.
Therefore, the Supreme Court found that the title transfer agreements are ineffective against the bankruptcy estate, since the bankruptcy motion was submitted in respect of the bankrupt companies before the lapse of two month period referred to in Article 127 clause 3 of the Bankruptcy and Reorganisation Law lapsed.
The most relevant aspect of this case however was that the Supreme Court did not question the legal concept of parallel debt (under foreign law) and therefore that it acknowledged the ability to create security for such debt under Polish law.
The Supreme Court’s judgment is of vital importance to commercial transactions. Firstly, the judgment confirms that parallel debt can be created under foreign law, despite that fact that the Polish legal system does not provide for such a legal concept. The issue of securing receivables arising under parallel debt was thus far associated with certain doubts. Secondly, the practice of concluding agreements intended to secure parallel debt over the assets of Polish entities on the conclusion date of the parallel debt creating document must be recommended (irrespective of whether such parallel debt is created under a facility agreement or a separate document). Otherwise, the lender must take into account the risk that security interests created for parallel debt may be found ineffective in bankruptcy proceedings, if a bankruptcy motion is filed in respect of such Polish entity during the two months following the date of creation of a given security interest.