When Should the Bankruptcy of a Limited Liability Company Be Declared?

In the business world, companies often face difficult challenges that can lead to liquidity problems and, as a result, make it necessary to have bankruptcy declared. In this article we analyse the conditions for declaring the bankruptcy of a limited liability company (sp. z o.o.) and look at the key signals that may suggest a company is in a difficult financial situation requiring such a step.

Summary:

• Bankruptcy is declared in respect of a debtor that has lost the ability to perform its due monetary obligations (has become insolvent). The state of insolvency is the ground for declaring a company bankrupt.
• The ground for declaring bankruptcy is, in principle, the debtor's insolvency shown by its ceasing to pay its debts, but insolvency cannot be found where the debtor does not settle a certain, even substantial, unenforceable claim because it considers that the amount is not owed (Supreme Court decision of 29 February 1936, C.II. 2907/35, OSN 1936, No. 9, item 366).
• Within 30 days of the date on which the ground for declaring bankruptcy arose, the management board should file the company's bankruptcy petition with the bankruptcy court. A number of documents specified by law, which show the legal and financial situation of the insolvent company, are attached to the petition.

Who Is Obliged to File a Bankruptcy Petition?

Wondering how to declare the bankruptcy of a company? The Bankruptcy Law obliges the debtor to file a bankruptcy petition within 30 days of the date on which the ground for declaring bankruptcy arose. In a limited liability company, the management board is the body obliged to represent the company and manage its affairs. Each management board member of a limited liability company is therefore obliged to file such a petition when the company becomes insolvent. The holder of the company's commercial power of attorney (prokura) has no obligation to file a bankruptcy petition.

Insolvency as the Ground for Declaring Bankruptcy

The Bankruptcy Law names the debtor's insolvency as the condition for declaring its bankruptcy. This is a key concept from the perspective of bankruptcy law and of the possibility of opening proceedings for the declaration of bankruptcy. A company is to be regarded as insolvent if it has lost the ability to perform its due monetary obligations.

See also: Legal Services for Companies

The concept of insolvency under bankruptcy law should be interpreted narrowly. The ground for declaring bankruptcy is, in principle, the debtor's insolvency shown by its ceasing to pay its debts, but insolvency cannot be found where the debtor does not settle a certain, even substantial, unenforceable claim because it considers that the amount is not owed (Supreme Court decision of 29 February 1936, C.II. 2907/35, OSN 1936, No. 9, item 366).

The conditions of insolvency are the company's loss of the ability to pay and its falling into a state of excessive indebtedness. When assessing the grounds for bankruptcy, it is not enough to find that an entity's financial situation is bad or that it has lost financial liquidity. It is necessary to indicate the moment at which the company became insolvent in the sense used in the provisions of bankruptcy law. It is necessary to determine when the company stopped settling its obligations, or when the amount of its obligations exceeded the value of its assets (judgment of the Voivodeship Administrative Court in Łódź of 10 November 2011, III SA/Łd 589/11, LEX No. 1600558).

Insolvency: When Does It Occur?

The legislator has introduced two presumptions that make it easier to establish the moment at which the condition for bankruptcy arises. The ability to perform due monetary obligations is lost when the company's delay in performing those obligations exceeds three months. It is further presumed that a company is also insolvent where its monetary obligations exceed the value of its assets and this state has continued for more than twenty-four months.

See also: Legal Services for Businesses

Filing the Company's Bankruptcy Petition

The management board opens proceedings for the declaration of bankruptcy by filing a bankruptcy petition with the bankruptcy court having jurisdiction by reference to the company's registered office, within 30 days of the date on which the grounds for declaring bankruptcy arose. The petition should meet all statutory requirements, which will be discussed in more detail in a separate article. The provisions of bankruptcy law state that the management board is liable, on a fault basis, for damage caused by failing to file the petition on time when the conditions for filing were met.

Liability of Management Board Members

Under Article 299 of the Commercial Companies Code (CCC), if enforcement against the company proves ineffective, the management board members are jointly and severally liable for its obligations. A management board member may be released from liability for the company's obligations if he or she shows that a bankruptcy petition was filed at the proper time, or that within the same time a decision was issued opening restructuring proceedings or approving an arrangement in arrangement approval proceedings, or that the failure to file the bankruptcy petition was not his or her fault, or that, despite the failure to file the bankruptcy petition and the absence of a decision opening restructuring proceedings or approving an arrangement in arrangement approval proceedings, the creditor suffered no damage.

See also: Legal Audit of a Company

If the bankruptcy petition is not filed on time, the company's management board bears liability in tort, on a fault basis, for the damage caused. Where compensation is claimed by an insolvent debtor, the damage is presumed to cover the amount of the claim not satisfied in the bankruptcy proceedings.

A management board member's lack of knowledge of the actual amount of the company's obligations does not exclude his or her fault for the late filing of the bankruptcy petition. For this reason it is extremely important that the management board meets the statutory 30-day time limit, counted from the moment insolvency occurs, for filing the company's bankruptcy petition.

If you need support in bankruptcy law, you can use the services of a professional law firm specialising in this field. Such support may include comprehensive advice and the preparation of the company's bankruptcy petition. With the law firm's experience and legal knowledge, it is possible to obtain full support and protection against possible consequences for management board members.