Michał Barłowski, Karol Czepukojć

Compliance of the French procédure de sauvegarde with Polish public policy

The Supreme Court of Poland held that recognition of French procédure de sauvegarde in Poland – one of the proceedings to which Regulation No. 1346/2000 applies – leads to a result that is consistent with Polish public policy.

This view was expressed in cases involving a Polish incorporated company that was subject to procédure de sauvegarde to protect it from insolvency. The Supreme Court accepted the company’s arguments, which had argued that there was no basis for the Polish first and second instance courts to refuse to recognise the procédure de sauvegarde and their results. The company was represented and advised by lawyers from Wardyński & Partners.

The procédure de sauvegarde is a procedure envisaged by the French Code de commerce, the current text of which is available at: www.legifrance.gouv.fr.

The commencement of procédure de sauvegarde

In 2008, the French commercial court commenced a procédure de sauvegarde (hereafter sauvegarde proceedings) in relation to a company with its registered office and a production plant in Poland. The company belonged to a capital group made up of companies registered in different EU member states, with a French incorporated company at their head. The French commercial court acknowledged its jurisdiction to institute the sauvegarde proceedings based on EC Regulation No. 1346/2000 of 29 May 2000 on insolvency proceedings, since in its view the centre of the company’s main interests was in France.

The sauvegarde proceedings were initiated at the company’s request when it got into difficulties that it was unable to overcome and which were likely to cause it to cease meeting its financial obligations. The purpose of the opening of sauvegarde proceedings was the restructuring of the company’s business and to allow the firm to continue commercial activity and repay its debts.

Automatic recognition of sauvegarde proceedings and its effects

Under Regulation No. 1346/2000, the commencement of sauvegarde proceedings in relation to the company led to its automatic recognition in Poland and essentially evoked the same consequences as under French law, as the law of the country where the proceedings were opened, with no further formalities before Polish courts. Under the French Code de Commerce (“FCC”) the company was prohibited from satisfying creditors whose claims arose before the sauvegarde proceedings commenced and these creditors had no right to seek their claims for payment before the courts.

Certain of the company’s creditors did not accept these consequences; among them were 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 and their effects

The company’s creditors claimed, on the basis of art. 26 of Regulation No. 1346/2000, that the Polish courts should refuse to recognise the sauvegarde proceedings instituted in relation to the company. Such recognition, they argued, leads to a result that is clearly inconsistent with Polish public policy, in particular with the basic principles of Polish insolvency and recovery law and with ownership rights that are constitutionally guaranteed. In the creditors’ view, the basis for instituting sauvegarde proceedings were the financial difficulties of the capital group to which the company belonged and of the French incorporated company heading the group. Meanwhile, the rule of Polish insolvency law is that insolvency proceedings are instituted against the insolvent debtor, and recovery proceedings against a debtor threatened with insolvency, but not for reasons attributable to a third party or a group of such parties. In the opinion of the creditors, the company was not in a financial situation that warranted it having to be subject to sauvegarde proceedings, and the creditors were having to suffer the negative consequences of financial difficulties that concerned the capital group to which the company belonged (including having their claims satisfied in instalments over a ten-year period, while the company remained in good financial health). In particular, the creditors maintained that having these payments spread over instalments was a violation of their constitutionally guaranteed ownership rights.

In turn, the company held that a Polish court had no authority to re-examine on merit the company’s application for sauvegarde protection and the French court’s decision to open sauvegarde proceedings. In particular a Polish court was unable to re-verify whether the company met all the conditions for it to be subject to the sauvegarde proceedings on the date these proceedings were instituted (including whether or not it had financial difficulties). This is an effect of the Community principle of mutual trust, whereby the courts of every EU member state should trust the courts of other EU member states. This principle has preferential significance in terms of the fulfilment of the aims of Regulation No. 1346/2000. A meritorical appraisal of the French court’s decision to institute sauvegarde proceedings was permissible only within the framework of an instance review carried out by the French courts of higher instance. The creditors, however, failed to make use of this possibility and thereby deprived themselves of the right to challenge the decision on its merits. The company held that the standards of sauvegarde proceedings, when isolated from a specific case, comply with the standards of Polish insolvency and recovery law, particularly in relation to the limitations it imposes on the creditors’ rights (e.g. spreading out the sums owed by the debtor over time or restricting a creditor’s ability to appeal against a declaration of bankruptcy), and limiting the grounds for instituting proceedings due to reasons involving a third party (which is prohibited in both the FCC and in Polish insolvency and recovery 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 Regulation No. 1346/2000. Such inconsistencies must affect the foundations of Polish public policy and be obvious in nature (Supreme Court of Poland decision of 21 April 1978, IV CR 65/78, OSNCP 1979, No. 1, item 12). A Polish court also cannot refuse to acknowledge sauvegarde proceedings on the basis of a potential breach by a French court of FCC provisions or Regulation No. 1346/2000, since such an examination is beyond the jurisdiction of the Polish courts.

In the company’s view, the provisions of the FCC and of Regulation No. 1346/2000 gave no grounds to institute sauvegarde proceedings for reasons concerning a third party or a group of such parties. If the company had applied for sauvegarde protection due to the financial difficulties of the capital group to which it belongs or of the company which heads it, the French court would have to dismiss such an application as unjustified. The legal structure accepted by the French legislator for the sauvegarde proceedings, as we have already mentioned, is identical in this scope to the structure of Polish insolvency and recovery proceedings, which are regulated by the Insolvency and Recovery Act of 28 February 2003.

The company also held that the ruling by the French court to spread the payments due to creditors by instalments is not a violation of their ownership rights. Under the Polish Constitution, ownership rights can be limited by way of law. Furthermore, the Polish insolvency and recovery law, the Polish civil code and the Polish civil procedure code all provide a possibility for payments to be made by instalments under a court judgment.

Position of the Polish common courts and the Supreme Court

The courts of first instance took divergent positions in the three cases mentioned here. The courts of second instance concurred with the position presented by the creditors and, on the basis of the public policy clause in art. 26 of Regulation No. 1346/2000, refused to recognise the sauvegarde proceedings and their effects in Poland. The company submitted last resort appeals to the Supreme Court against the second instance court decisions.

The Supreme Court supported 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 (Supreme Court of Poland in judgments of 16 February 2011 in cases II CSK 326/10, II CSK 541/10 and II CSK 425/10).

Michał Barłowski, Karol Czepukojć, Bankruptcy and Restructuring Group, Wardyński & Partners