“Subsidiary Liability of Shareholders and Management: Ukrainian and Polish Perspectives”: EU Project Pravo-Justice Held a Round Table

On May 22, the EU Project Pravo-Justice together with the Institute for Bankruptcy and Restructuring Law and Insolvency Studies (Poland) held the online round table: “Subsidiary Liability of Shareholders and Management: Ukrainian and Polish Perspectives”.

The event was attended by representatives of the Ministry of Justice of Ukraine, judges, BTs, representatives of the banking community, and top-management of the Institute for Bankruptcy and Restructuring Law and Insolvency Studies, Poland.

In her welcome speech, Iryna Zharonkina, Property Rights and Enforcement Component Lead, EU Project Pravo-Justice, noted that the Project actively contributed to the improvement of Ukrainian legislation regulating issues of restructuring and bankruptcy in order to bring it in compliance with European legal rules and best practices.

“At this round table, the participants will not only have the opportunity to get familiar with legal regulation of bankruptcy procedures, in particular, subsidiary liability of companies’ managers in Poland, but also to analyze interesting cases of application of subsidiary liability to CEOs of two Ukrainian-Polish companies, in respect of which bankruptcy procedures were launched both in Poland and in Ukraine,” said Iryna Zharonkina.

Director of the Institute for Bankruptcy and Restructuring Law and Insolvency Studies (Poland) Anna Hrycaj presented case studies of the companies, one of which was registered in Poland and had an office in Ukraine, while the other one was registered in Ukraine and had an office in Poland. She also noted that, taking into account today’s realities (significant migration due to the war, complicated economic situation), bankruptcy cases in respect of companies in which the shareholders are citizens of various countries will happen more and more often, thus, one need to get prepared. “Subsidiary liability of company managers depends on the type of a company. It is typical for Poland to conduct business in the form of partnerships and companies,” added Anna Hrycaj.

Bartosz Sierakowski, Deputy Director of the Institute for Bankruptcy and Restructuring Law and Insolvency Studies (Poland), outlined the general legal framework governing insolvency in Poland and analyzed in detail which regulatory acts had to be applied to address the insolvency of the mentioned Ukrainian-Polish companies and which legal loopholes and features shuld be taken into when raising the issue of applying subsidiary liability towards managers of these businesses.

“According to Polish law, shareholders shall not be liable for obligations of the company. The obligations rest only with the directors (board members). Each creditor has the right to sue the directors only. The defendant (director) has to prove that he or she filed for bankruptcy in time (no later than 30 days after the threat of insolvency), or that the creditor did not suffer losses despite the bankruptcy being filed late. If the creditor wins the civil action, the director will have to pay the funds directly to the creditor,” explained Bartosz Sierakowski through pointing out the intricacies of the Polish regulation of subsidiary liability in bankruptcy cases.

In addition, Anna Hrycaj reported on the procedural features of subsidiary liability of company board members. She developed on the international jurisdiction of such cases, i.e. the courts of which country should consider such cases – Poland or Ukraine, as well as the issue of territorial jurisdiction.

“Regulations No. 2015/848 and No. 1215/2012 may apply to cases that exist within the EU. They include cases of companies whose COMI, that is, the place where they carry out their main activities and are recognized by third parties, is located in the EU,” explained Ms. Hrycaj. She added that if the case has international jurisdiction within the EU, the territorial jurisdiction of the case will be determined based on the location of the company’s head office. If the case has international jurisdiction outside the EU, then one need to refer to the Civil Procedure Code of Poland or to a treaty agreement between two states.

Oleksandr Banasko, Justice of the bankruptcy panel of the Cassation Eсonomic Court of the Supreme Court, spoke about recent judicial practice on subsidiary liability in bankruptcy cases.

"The legislator defined satisfying the demands of the debtor`s creditors to the greatest extent possible as the main goal of instruments related to bankruptcy of legal entities. It is through the lens of this goal that we, being justices of the Supreme Court, apply the relevant norms” said Oleksandr Banasko. According to him, the Ukrainian instrument of subsidiary liability is based on the doctrine of perceiving the corporate veil.

He noted that a preliminary analysis of court practice shows that four years after the Bankruptcy Procedures Code came into effect and the Supreme Court started its work, the number of such cases has increased significantly. Oleksandr Banasko described court cases, under which company managers were charged with subsidiary liability in the amount of 95,000 euros to more than 2 million euros.

The Supreme Court Justice also focused on national legal issues relating to the application of subsidiary liability. “The key problematic issue is determining the scope of liability and the possibility of reducing it, depending on the behavior of the manager; his/her share in the company; possibility to influence on the adoption of negative managerial decisions, in particular, on the part of the founders,” added Oleksandr Banasko.

Olena Volianska, member of the Council of UNITA, Expert of the EU Project Pravo-Justice, emphasized, while intervening, that Ukrainian legislation on the application of subsidiary liability in bankruptcy procedures was quite strict, but at the same time, some of its norms needed to be clarified and improved.

“It is quite frequent that the ownership rights to a business and the management rights are clandestinely merged. It may happen that the directors are only nominally appointed, while all managerial decisions are made by persons who are owners, so-called “shadow directors”. Therefore, it is extremely important to shape a clear legal regulation of judicial practice to hold liable those persons who are really guilty of bringing the enterprise to bankruptcy and causing losses to creditors,” said Olena Volyanska.

She also noted that although Ukraine is trying to get closer to European management standards, it often happens in bankruptcy procedures that BTs act in the interests of certain creditors, rather than objectively protect all parties to the proceedings.

“Granting the creditors with the right to file an application on subsidiary liability will encourage the debtor and the persons, who are responsible for bringing the company to bankruptcy, to behave in good faith,” shared her opinion Olena Volianska.

Video recording of the online roundtable is available here