Jan Ciećwierz: I have yet to encounter a situation in which the creditors were without hope
An interview with Jan Ciećwierz, a partner Wardyński & Partners, on how debtors avoid paying their obligations and how the law protects creditors from such actions.
Litigation Portal: What are difficult receivables?
Jan Ciećwierz: Performance of a commercial contract and payment of the contractual fee should mark the culmination of a business-to-business relationship. Unfortunately, the reality can be different. Sometimes the contract is not performed properly, giving rise to liability in damages, and sometimes the agreed fee is not paid. Even a legally final judgment in favour of the creditor and ordering the debtor to pay a specific sum of money, with enforcement backed by the weight of the Republic of Poland, is no guarantee that the fee or damages will be paid within a reasonable time. This state of affairs is largely due to actions by the debtor, often undertaken in the period leading up to commencement of litigation, with the goal of dissipating the debtor’s assets so that they cannot be executed against in the future. The debtor’s property may be concealed, transferred to third parties, or encumbered with other obligations, often enjoying priority in satisfaction above the claims of the creditor. In a situation that like that, we are dealing with the recovery of difficult receivables.
What measures to debtors take to prevent enforcement of their obligations?
There are several measures seeking to conceal assets from creditors or dispose of assets to frustrate execution that are the most common. Sometimes debtors will set up a separate legal entity to which they then transfer all or part of their assets. The inventiveness of debtors in such cases is boundless. The debtor may, for example, use a series of legal and procedural steps to transfer its assets to a separate entity not directly owned by the debtor, but whose shares are held by another entity controlled by the debtor. The debtor may also enter into an agreement with a third party to sell specific assets without proof of payment of the purchase price, or at a price well below the market value of the assets. Another method is to transfer assets to relatives through gifts or fictitiously. The debtor may also transfer (or sell) all of its assets connected with operation of the debtor’s business to a third party. It may place encumbrances on its assets for repayment of debts created for the purpose of “watering down” its true debt. Or it may conceal assets (chiefly cash) by transferring them abroad.
These are obviously just some examples, not an exhaustive list, as it is not our intention to inspire debtors to replicate the methods for a debtor to evade its obligations which we have encountered in our practice.
What instruments do creditors have at their disposal to protect themselves against such damaging actions by debtors?
The law is not helpless in the face of actions taken by dishonest debtors. The basic instrument for negating acts by debtors detrimental to creditors is the fraudulent conveyance action, which is aimed at obtaining a judgment against a third party who knew (or with due diligence should have known) of the injury to creditors but obtained a benefit at the expense of the debtor’s assets and thus in concert with the debtor rendered the debtor insolvent, or insolvent to a greater degree than before the transaction. The effect of the ruling holding the transaction to be ineffective is that the creditor may execute its claim not only against the debtor but also against the third party, up to the amount of the benefit obtained by the third party.
If the debtor transfers its entire enterprise to a third party, the third party may be held jointly and severally liable with the debtor for obligations arising out of the operations of the enterprise, also up to the value of the enterprise acquired.
Transactions by debtors to the detriment of creditors may also be negated through a judicial ruling holding the transaction to be invalid. This results in restoring the specific assets or receivables to the debtor. Such situations result from the debtor’s conclusion of a transaction contrary to law—typically sham transactions.
An equally interesting group of cases are those in which it is not necessary to commence a separate proceeding against a third party seeking payment, because it is sufficient to extend the effectiveness of an existing judgment against the debtor for monetary relief (an executable writ) in a proceeding for issuance of an additional enforcement clause against third parties. Such an enforcement clause may be sought against the debtor’s spouse, or against the acquirer of the debtor’s enterprise if the acquisition occurred before the executable writ became legally final.
The ability to pursue a claim against the personal assets of members of the management board of a company, rather than the assets of the company itself, is a separate issue. This is possible when it is found that the management board failed to file a bankruptcy petition for the company by the statutory deadline.
Without exhausting the catalogue of measures that may be pursued against dishonest debtors, I should also mention the criminal aspects of debtor’s liability when by their actions they frustrate the just and lawful enforcement of their debts. This aspect of the measures available to creditors is discussed elsewhere in this issue of the Litigation Portal.
The examples you describe involve legal instruments that may be applied in a situation in which the creditor is aware that the debtor has shifted its assets around. But generally, when a creditor begins seeking enforcement it does not know about such manoeuvres by the debtor. How can the creditor find out?
I’m not sure that an interview in the Litigation Portal is the right place to reveal this type of information. Just as law enforcement authorities do not disclose their investigative techniques, out of concern that evidence of criminal conduct may be covered up, I need to protect the techniques developed by the law firm for pursuing information about actions by debtors designed to prevent enforcement of their debts. I can only say that any action by a debtor leaves a trail. Finding the trail requires work and inventiveness of lawyers, sometimes together with external specialists. The same thing is true when it comes to identifying the debtor’s assets. It is encouraging to note that in my professional life I have yet to encounter a situation in which the creditors were without hope. Whether the creditors have sufficient determination, often combined with a willingness to incur costs, in order to ultimately obtain due satisfaction of their claims, is another issue.
Is that all that creditors can do?
No. There is much more they can do, but at the stage when they are drafting contracts with other parties rather than at the stage of execution of a legally final judgment. There is nothing quite as effective in assuring due performance of mutual obligations as properly securing the obligations at the stage of contract negotiation and signing. But that is a topic for another conversation.