Good changes at registry courts

Some of the main points of the mooted amendments have already been presented in these pages on 30 November 2016 in the article by Jarosław Kamiński, “National Court Register Headed for Better Days”. We now propose to comment upon the imminent changes concerning compulsory proceedings and the activities of court-appointed trustees.

The proposed amendments provide for interesting solutions for safeguarding certainty and safety of legal dealings absent a body competent to represent the legal entity, which would be quite welcome in practice. As intended by the legislature, the proposed changes ought to preclude situations where debtor entities dismiss their Management Boards or the Management Board members tender their resignations (oftentimes becoming independent commercial proxies) with a view to obstructing enforcement by creditors.

Compulsory proceedings

The underlying idea of compulsory proceedings is to provide courts with the possibility of enforcing compliance with the law by entities which have been entered in the National Court Register. Alternatively, if enforcing such compliance is impossible, the courts should be able to strike the offending entity from the register. Compulsory proceedings may be resorted to with respect to “obligated parties”, meaning partners and shareholders as well as Management Board members. As matters stand at the moment, it is safe to venture that compulsory proceedings are largely a dead letter.

Practice has demonstrated that unscrupulous companies resort to having all their Management Board members tender their resignations or to their removal by another corporate body, with the net effect that the company is left without effective representation, and its creditors – without the possibility of pursuing their claims. A company without a sitting Management Board cannot be taken to court and cannot become the object of enforcement proceedings – never mind negotiating with its debtors with a view to reaching some form of settlement. In like spirit, a company which lacks a Management Board cannot be compelled by the registry courts to fulfil duties such as submission of annual financial reports. Art. 25a of the legislative Act regarding the National Court Register, as introduced in early 2014, was intended to address some of these problems; under this statutory provision, the courts received the power to strike out entities once compulsory proceedings with respect to their Management Boards or shareholders have been concluded without effect. Yet the numbers do not paint a happy picture. According to data from September 2016, 11 registry divisions of courts in Warsaw, Gdansk, Bydgoszcz, Wroclaw, Poznan, Bialystok, Lublin, and Rzeszow initiated 3,382 cases geared at striking recalcitrant entities from the National Court Register under this special procedure, of which 569 actually resulted in striking out – not much.

Apart from that, it would appear that practical application of this statutory provision is limited to Warsaw, a city in which three National Court Register divisions launched a total of 2,381 proceedings (no less than 70.4% of the nationwide total), of which 546 (95.95% of all the entities struck from the register nationwide) culminated in deletion from the register.

Of course, the cause of this state of affairs lies not only in the applicable laws, but also in insufficient resources and staffing.

The amendments to art. 24.la of the legislative Act regarding the National Court Register now provide that, if it is established that a legal entity does not have a representative body or that its representative body is afflicted by defects in composition which prevent its operation (the proverbial rump board), the registry court may call upon the persons on whom it is incumbent to appoint or elect such a body (e.g. the shareholders in a limited liability company or the members of the Supervisory Board, but also such other persons as are vested with the requisite authority in light of the relevant corporate documents) to demonstrate that the body has been duly constituted or that the defects in its composition have been rectified. Persons who fail to comply with this call face a succession of fines, as was hereuntil the case. In order to facilitate enforcement of these rules, the amendments to the statute require that applications for entry in the register of persons representing the entity be accompanied by their addresses for delivery of documents (and, in the case of capital companies – as opposed to partnerships – also by a list setting out, among other details, the addresses or seats of the shareholders in a limited liability company and of the members of supervisory bodies or of other persons obligated to appoint or elect the management body).

New solutions for court trustees

As regards appointment of court trustees and performance of their duties, the new rules provide for added order and precision as regards the mutual relationships, powers, and duties of the substantive trustee (art. 42 of the Polish Civil Code), the registry trustee (art. 26 of the legislative Act regarding the National Court Register), and the trustee in proceedings (art. 69 of the Polish Civil Process Code). Such changes are very much called for; at the moment, the legal institution of trustee remains a neglected one, and many problematic situations oft encountered in practice are not addressed in the applicable rules.

The substantive trustee shall promptly take measures geared at appointment or, as the case may be, supplementing of the representative body of a legal entity. At the same time, the new rules provide for what is a novel solution: the substantive trustee will also be vested with authority to actually represent the legal entity and to manage its affairs ! In his work, the trustee will be subject to supervision by the court. The latter must give permission for specific acts in law of material bearing for the business enterprise and/or an organised part thereof as well as ones involving real properties, perpetual usufruct in real properties, and shares in real properties. Such actions undertaken without requisite approval by the court shall be null and void. Who knows, perhaps the practical effects of these new powers for substantive trustees, who will now be empowered to actually act on behalf of the legal entity, might encourage decision makers to ensure that the entity is not left without an operational Management Board in the first place. Appointment of a substantive trustee shall be associated with expiration of any commercial proxies, so that only the trustee will be competent to represent the entity in question.

A registry trustee, meanwhile, shall be appointed only where a legal entity does have a body empowered to represent it, but that body fails to discharge its duties with respect to filing the applications for entry or documents mandated by law with the registry court. A classic example would be that already referred to above, where a company does not present its annual financial reports.

This delineation of the respective responsibilities of the registry trustee and the substantive trustee indicates that appointment of the former will be associated with outright lack of a body empowered to represent the company, or existence of such a body in defective composition. The registry trustee shall only be empowered to promptly submit an application for entry in the register and/or of documents on behalf of the legal entity. If this is impossible, the registry trustee may take steps geared at dismissal of the current body and appointment of a new one. Significantly enough, the costs associated with such trusteeship shall be borne jointly and severally by the legal entity and by the members of its Management Board.

A trustee in the course of proceedings, finally, may be appointed at the request of a counterparty to court proceedings where the party in question does not have a statutory representative or its representative body is tainted by defects. Such a trustee shall be empowered to perform any and all actions associated with the pending case.

The company pays

The amendments include new rules concerning remuneration of the trustee and reimbursement of his justified expenses incurred in connection with his duties. The party applying for appointment of the trustee shall be obligated to cover costs commensurate with the matters referred to in such application; the remaining costs shall be borne on an interim basis by the State Treasury, subject to final covering – on a joint and several basis – by the legal entity and by the persons empowered to appoint its representative body (unless these persons had endeavoured with due care and skill to appoint or elect the representative body).

The legislative changes now proposed mark a step in the right direction as regards streamlining the operations of trustees and ensuring safety of legal dealings. Creditors certainly have cause to rejoice, in that they shall now receive new instruments for countering dishonest debtors who obstruct legal proceedings. Alas, even the best solutions do not provide a silver bullet in and of themselves. The rules are one thing, but their practical application is another…

Michał Boryczka and Maciej Boryczko are managing associates at GESSEL Attorneys at Law.