Member Article

The Supreme Court of Poland has held that recognition in Poland of French sauvegarde proceedings, which are covered by the EU’s Insolvency Regulation (1346/2000), is consistent with Polish public policy. The ruling was issued in cases involving a Polish company that sought protection against insolvency in France. The Supreme Court upheld the debtor’s argument that there was no basis for the lower courts in Poland to refuse to
recognise the French proceedings.

Commencement of sauvegarde proceedings

In 2008, a Polish company sought protection from creditors in the French commercial court through the procédure de sauvegarde—a form of reorganisation proceeding provided for in the French Code de commerce (modelled on Chapter 11 of the US Bankruptcy Code) and one of the proceedings covered by the Insolvency Regulation, which governs jurisdiction and other issues related to insolvency proceedings with cross-border effects within the EU (apart from Denmark). Although the debtor had its registered office and a production plant in Poland, it belonged to a capital group made up of companies registered in different EU member states, headed by a French company. The French commercial court held that it had jurisdiction under the Insolvency Regulation because, the court found, the centre of the company’s main interests was in France.

The sauvegarde proceeding was initiated by the company when it faced insurmountable difficulties which were likely to cause it to cease meeting its financial obligations. The purpose of the sauvegarde proceeding was to restructure the debtor’s business and allow the company to remain in business and repay its debts.

Automatic recognition of sauvegarde proceedings

Under the Insolvency Regulation, the commencement of sauvegarde proceedings with respect to the company resulted in automatic recognition of the proceedings in Poland and essentially exerted the same consequences as under French law, as the law of the country where the proceedings were opened, without further formalities before the Polish courts. Under the Code de
commerce, the company was prohibited from satisfying creditors whose claims arose before the sauvegarde proceedings commenced, and such creditors had no right to pursue their claims for payment before the courts.

Certain of the company’s creditors did not accept these consequences; among them were the three creditors who were claimants in the cases before the Polish Supreme Court discussed here. They filed lawsuits against the company in the Polish courts. The crux of the dispute between the creditors and the company concerned recognition of the sauvegarde proceedings and their consequences in Poland.

Refusal to recognise the sauvegarde proceedings

The creditors claimed under Art. 26 of the Insolvency Regulation that the Polish courts should refuse to recognize the sauvegarde proceedings. They argued that recognition would lead to a result that is clearly inconsistent with Polish public policy, in particular the basic principles of Polish bankruptcy law and constitutionally protected property rights. In the creditors’ view, the basis for instituting sauvegarde proceedings was the financial difficulties of the company’s capital group and the French company heading the group. Meanwhile, the rule under Polish bankruptcy law is that insolvency proceedings are instituted against an insolvent debtor, and reorganisation proceedings against a debtor threatened with insolvency, but not for reasons attributable to a third party or a group of third parties. In the opinion of the creditors, the company was not in a financial situation that warranted its submission to sauvegarde proceedings, and the creditors would have to suffer the negative consequences of financial difficulties that concerned the debtor’s capital group (including having their claims satisfied in instalments over a ten-year period, while the Polish company remained in good financial health). In particular, the creditors maintained that having their claims paid in instalments violated their constitutionally guaranteed property rights.

The debtor argued that a Polish court had no authority to re-examine on the merits its application for sauvegarde protection or the French court’s decision to open sauvegarde proceedings. In particular, a Polish court was not authorised to reconsider whether the company met all the conditions for it to be subject to the sauvegarde proceedings on the date the proceedings were instituted (including whether or not it had financial difficulties). This follows from the Community principle of mutual trust between the courts of different EU member states. This principle is crucial to achievement of the aims of the Insolvency Regulation. A merits appraisal of the French court’s decision to institute sauvegarde proceedings was permissible only within the framework of appellate review by higher French courts. The creditors failed to avail themselves of the opportunity for appellate review in France and thus waived the right to challenge the decision
on its merits. The company argued that the standards of sauvegarde proceedings, when isolated from a specific case, comply with the standards of Polish bankruptcy law, particularly in relation to the limitations imposed on creditors’ rights (e.g. spreading out the payment of claims owed by the debtor over time or restricting a creditor’s ability to appeal against a declaration of bankruptcy) and the limitations on the grounds for instituting proceedings due to reasons involving a third party (which is prohibited in both the Code de commerce and the Polish Bankruptcy & Rehabilitation Law). 

In the company’s view, the appearance of inconsistencies with Polish law does not provide sufficient cause to refuse to recognise the sauvegarde proceedings and their consequences under Art. 26 of the Insolvency Regulation. Such inconsistencies would have to strike at the foundations of Polish public policy and be obvious in nature (Supreme Court of Poland order of 21 April 1978, Case No. IV CR 65/78, published at OSNCP 1979, No. 1 item 12). A Polish court also cannot refuse to acknowledge sauvegarde proceedings on the basis of a potential violation by a French court of the Code de commerce or the Insolvency Regulation, since such examination is beyond
the jurisdiction of the Polish courts. In the company’s view, the Code de commerce and the Insolvency Regulation gave no grounds to institute sauvegarde proceedings for reasons concerning a third party or a group of third parties. If the company had sought sauvegarde protection due to the financial difficulties of its capital group or the company heading the group,
the French court would have had to dismiss the application as unjustified. The legal structure for sauvegarde proceedings is identical in this respect to the structure of Polish insolvency  proceedings, which are regulated by the Bankruptcy & Rehabilitation Law of 28 February 2003.

The company also argued that the ruling by the French court to spread out the payments due to creditors in instalments is not a violation of their property rights. Under the Polish Constitution, property rights may be limited by law. Furthermore, the Polish Bankruptcy & Rehabilitation Law, Civil Code and Civil Procedure Code all provide for the possibility of a judgment ordering payments to be made in instalments. 

Position of the Polish lower courts and the Supreme Court

The courts of first instance took divergent positions in the three cases mentioned here. The courts of appeal concurred with the position presented by the creditors and, on the basis of the public policy clause in Art. 26 of the Insolvency Regulation, refused to recognise the sauvegarde
proceedings and their effects in Poland. The company filed cassation appeals with the Supreme Court of Poland against the decisions by the courts of appeal.

In judgments dated 16 February 2011 (Case Nos. II CSK 326/10, II CSK 541/10 and II CSK 425/10), the Supreme Court upheld the company’s position and agreed in essence with the company’s reasoning raised during the proceedings. The court concluded that there was no basis to refuse to recognise in Poland the sauvegarde proceedings opened in relation to the company in France.

 

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