Debtor hiding real estate from a foreign creditor in bankruptcy proceedings in Poland – legal solutions to help creditors

Publication date: January 10, 2024

Polish judicial protection tools for the sale of real estate in international bankruptcy – case study and suggested solutions

In the Polish legal system, it is possible to extend bankruptcy declared abroad to Polish jurisdiction. In accordance with the amendment to the Polish Bankruptcy Law, which came into force on January 1, 2016, the provisions of the Act update the possibility of recognizing judgments initiating foreign bankruptcy proceedings. This is related, among other things, to increased emphasis on the universality of bankruptcy proceedings, especially in European Union countries. Pursuant to Article 19 of Regulation 2015/848 of the European Parliament and of the Council, “a judgment opening insolvency proceedings issued by a court of a Member State having jurisdiction in accordance with Art. 3 shall be recognized in all other Member States (…).” The phrase “having jurisdiction in accordance with Art. 3” – art. 3 of the Regulation reads: “1. The courts of the Member State in whose territory the debtor’s center of main interests is situated have jurisdiction to open insolvency proceedings – the main insolvency proceedings. The main bankruptcy proceedings are considered to be proceedings initiated in the country where the principal center of the debtor’s main activities is located (Article 3(1) of the Regulation)[1].

However, “the main center of basic activity is the place where the debtor regularly manages its economic activities and which, as such, is recognizable to third parties” – the quoted fragment directly describes the concept of COMI[2] and clearly defines the scope of the courts’ jurisdiction in this respect. Moreover, this provision primarily introduces the principle according to which judgments issued outside Poland also have effects within the territory of Poland, which makes it possible to satisfy the debtor’s creditors from assets also located within the territory of the Republic of Poland. Because pursuant to Art. 382(2) of the Polish Bankruptcy Law, Polish courts also have jurisdiction if the debtor runs a business in the Republic of Poland or has his place of residence or registered office or assets. Regulation 2015/848 also demarcates the territorial scope of application of the regulations of individual jurisdictions[3]. Recognition by a Polish court of a judgment to initiate foreign bankruptcy proceedings has ex tunc effects in the Polish legal order in relation to the judgment of a foreign court[4]. Consequently, the opening of foreign proceedings abroad has simultaneous effects in Poland when they become final. This mechanism effectively secures the legal interests of both domestic creditors and those located outside Poland. Initiation of such proceedings in accordance with Art. 386(1) of the Polish Bankruptcy Law takes place at the request of the foreign administrator or debtor. It is also worth pointing out that in accordance with Art. 392 of the bankruptcy law, “a judgment on the initiation of foreign bankruptcy proceedings is subject to recognition if: 1) it concerns a matter that does not fall within the exclusive jurisdiction of Polish courts; 2) recognition is not contrary to the fundamental principles of the legal order in the Republic of Poland. Judgments that are contrary to the basic principles of the legal order in the Republic of Poland are those that do not correspond to the main fundamental constitutional principles and the basic principles governing individual areas of law[5]. What is also worth mentioning is Art. 403 section 1 of the Polish Bankruptcy Law, according to which the effects of declaring bankruptcy regarding the bankrupt’s assets located in Poland and obligations that arose or are to be performed in Poland are assessed in accordance with Polish law. Therefore, in order to be able to satisfy foreign creditors from assets located in Poland, the foreign equivalent of the Polish trustee is obliged to submit an application to a Polish court for the recognition of the foreign judgment and the appointment of a Polish court supervisor who will supervise the course of proceedings within the scope of Polish jurisdiction regarding the property belonging to part of the insolvency estate and located in the territory of the Republic of Poland.

Case study

Using the experience of KIELTYKA GLADKOWSKI KG LEGAL, let us analyse a situation in which a dishonest debtor sold his real estate that formed a part of the bankruptcy estate. The facts were as follows: the Polish citizen ran his own business, the main center of which was located in the United Kingdom. It is worth noting here that the declaration of foreign bankruptcy took place before the United Kingdom left the European Union. In connection with running business activity, the debtor incurred liabilities that he did not settle, including public liabilities (tax, insurance). Therefore, due to the fact that the business was conducted in the UK, bankruptcy proceedings were initiated in this country. In the course of the activities carried out, it was shown that the debtor’s property included in the bankruptcy estate is real estate located in Poland. Therefore, in order to satisfy the creditors, there has been filed an application to the Court in Poland to recognize the opening of foreign bankruptcy proceedings and appoint a court supervisor in Poland. The bankrupt did not raise any objections about the existence of the debt, bankruptcy proceedings or the fact that the debtor owned real estate in Poland. Therefore, the debtor was aware of his obligations, and it should be noted that the debtor actively participated in both the proceedings before the British court and the Polish court in the process of recognizing the foreign judgment. At the same time, before the final recognition of the opening of foreign bankruptcy proceedings, the bankrupt sold real estate which should have been included in the bankruptcy estate. Due to the fact that the debtor lost the management of the property when bankruptcy proceedings were opened in the United Kingdom, the debtor could not legally dispose of the property because such an action would result in harm to creditors. Due to the defective action, the entire situation was further complicated by the fact that a limited property right was established against the new owners, i.e. a mortgage in favour of the bank from which the new owners took out a mortgage loan. In the light of the provisions of limited property law, the new owners submitted a declaration to which they were not entitled by operation of law, pursuant to Art. 245 of the Polish Civil Code, which states that only the owner of the property may make a declaration establishing a mortgage in the form of a notarial deed. The fact that the property was purchased invalidly should result in the invalidity of the mortgage, which proves the discrepancy between the status disclosed in the land and mortgage register and the actual legal status.

On the basis of the provisions contained in the Polish Civil Code, it could be demonstrated that the debtor’s action was ineffective, although in order to demonstrate that such an action does not produce legal effects, the creditor would have to demand this state of affairs before the court. If the bankrupt had performed an action before the court in the United Kingdom issued a judgment, the actions performed against the bankruptcy estate could be said to be ineffective, however, in the case described above, the provisions of bankruptcy law are applicable, which constitute the lex specialis, therefore they have priority over the provisions of the Civil Code. Polish Article 77 of the bankruptcy law states directly that “the bankrupt’s legal actions regarding property included in the bankruptcy estate are invalid by the operation of law”, it should be emphasized that these actions are invalid ab initio, that is, they do not produce legal effects from the moment the action is taken, and, moreover, for the invalidity to occur, it is not necessary for the parties to submit a declaration or obtain a constitutive court decision[6]. Moreover, invalidity operates erga omnes, i.e. “everyone may invoke it (that is, the parties to the invalid legal transaction, their legal successors, creditors and other persons who have a legal interest in it), and it is of a definitive nature, i.e. the legal form does not become valid when the reasons for invalidity are no longer valid, it is not subject to validation[7]. If the bankrupt sells the real estate that belongs to the bankruptcy estate after the declaration of bankruptcy, such an action is absolutely invalid, the contract of transfer of ownership does not produce legal effects, and what is more, this state of affairs does not need to be pursued in court, because invalidity results from the very force of law. It is worth emphasizing here that the provisions on the protection of persons in good faith for actions performed by a bankrupt who has lost the right of administration of assets in accordance with Art. 75 of the bankruptcy law do not apply, because otherwise it could lead to a reduction of the bankruptcy estate and infringement of the interests of creditors[8], and thus it would lead to actions contrary to the main purpose of bankruptcy proceedings, which is to satisfy creditors to the highest possible extent.

An alternative solution to protect creditors is a lawsuit to reconcile the content of land and mortgage registers with the actual legal status of a given property. The institution of such a lawsuit allows to restore the previous state disclosed in the land and mortgage register, so that a possible new buyer will no longer be able to dispose of the property belonging to the bankruptcy estate. Pursuant to Art. 10 of the Polish Land and Mortgage Register Act, in the event of a discrepancy between the legal status of the property disclosed in the land and mortgage register and the actual legal status, claims may be brought before the court to remove such discrepancy. In the standard procedure, the burden of refuting the proof of the presumption resulting from the entry in the land and mortgage register rests with the plaintiff, however, if the defendant is a buyer who acquired ownership of the real estate by way of an invalid contract, such an obligation will rest with him, and what is more, the situation of such a buyer cannot be protected under Art. 5 of the Polish Act on land and mortgage registers, the institution of the guarantee of public faith in land and mortgage registers. According to the judgment of the Polish Supreme Court[9], the warranty of public faith in land and mortgage registers does not protect the buyer if the agreement on the transfer of ownership of the real estate was invalid. It is worth pointing out here that while the institution of actio pauliana resulting from Art. 527 of the Civil Code, is subject to a deadline which, in accordance with Art. 534 of the Civil Code specifies that after 5 years from the date of an invalid act (transfer of ownership of real estate), one cannot demand that this legal act be recognized as having been performed to the detriment of creditors and as ineffective, in the case of a lawsuit under Art. 10(1) of the Polish Act on Land and Mortgage Registers, the claim for reconciliation of the legal status disclosed in the land and mortgage register with the actual legal status is not time-barred[10]. Despite the existence of such an institution, it should be concluded that bankruptcy proceedings have a wider range of possibilities in terms of eliminating incorrect decisions made by the bankrupt, because when applying Art. 77 of the Polish bankruptcy law, we do not deal with possible barriers resulting from the warranty of public faith in land and mortgage registers through the application of Art. 10 of the Polish Act on Land and Mortgage Registers, including the locus standi of the plaintiff – which states that an action to remove the inconsistency between the legal status of real estate disclosed in the land and mortgage register and the actual legal status may be brought only by an entity authorized to submit an application for an entry in the land and mortgage register (Art. 10 of the Land and Mortgage Registers Act and Article 626² § 5 of the Code of Civil Procedure).

            To sum up, the available judicial protection tools securing the interests of creditors in cross border insolvency and restructuring provide numerous solutions that can be appropriately applied depending on the complexity of the case and the specific factual situation. Nevertheless, some legal instruments are characterized by greater or lesser difficulties in their application, which may turn out to be insurmountable in the course of the case, it is important to select appropriate tools for a specific situation, so that creditors, in accordance with the main function of bankruptcy proceedings, are satisfied to the highest degree.

Bibliography:

1. Janda P. [in:] Bankruptcy law. Commentary, ed. III, Warsaw 2023.
2. Jelonek-Jarco B., 4.2.2. Invalidity of a legal act resulting from Art. 77 of bankruptcy law [in:] Warranty of public faith in land and mortgage registers, Warsaw, 2011.
3. Sierakowski B., Waberski M., Recognition of a decision to initiate foreign bankruptcy proceedings [in:] Judicial and procedural capacity of the party (natural and legal person) against whom a decision to initiate bankruptcy proceedings was issued in a country outside the European Union – scope of application of the personal and legal bankruptcy statute, Private Law, Warsaw, 2022.
4. Stelmach B., Interpretation of the concept of “invalidity” – selected issues, Palestra 5-6/2015.
5. Tim A., Consumer bankruptcy in Polish and German law and the practice of forum shopping, Internetowy Kwartalnik Antymonopolowy i Regulacyjny [Online Antitrust and Regulatory Quarterly] 2018, no. 6(7).
6. Zedler F., Recognition of foreign bankruptcy proceedings in European law, Legal, economic and sociological movement Year LXVII, issue 2, 2005.

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[1]F. Zedler, Recognition of foreign bankruptcy proceedings in European law, Legal, economic and sociological movement Year LXVII, issue 2, 2005, p. 64.

[2]Center of Main Interests – The main center of the debtor’s primary activities.

[3]A. Tim, Consumer bankruptcy in Polish and German law and the practice of forum shopping, Internetowy Kwartalnik Antymonopolowy and Regulacyjny [Online Antitrust and Regulatory Quarterly] 2018, no. 6 (7), p. 61.

[4]B. Sierakowski, M. Waberski, Recognition of the decision to initiate foreign bankruptcy proceedings [in:] Judicial and procedural capacity of the party (natural and legal person) against whom a decision to initiate bankruptcy proceedings was issued in a country outside the European Union – scope of application of the personal and legal bankruptcy statute, Private Law, Warsaw, 2022, p. 24.

[5]P. Janda [in:] Bankruptcy law. Commentary, ed. III , Warsaw 2023, art. 392.

[6]B. Stelmach, Interpretation of the concept of “invalidity” – selected issues, Palestra 5-6/2015.

[7]Judgment of the Supreme Court of January 12, 2022, II CSKP 212/22.

[8]B. Jelonek-Jarco, 4.2.2. Invalidity of a legal act resulting from Article 77 of the bankruptcy law [in:] Warranty of public faith in land and mortgage registers, Warsaw, 2011.

[9]Judgment of the Supreme Court of January 24, 2002, III CKN 405/99.

[10]Judgment of the Supreme Court judgment of June 26, 1974, II Cr 326/74.