Liquidation of branches of foreign undertakings—proposed amendments

Under proposed changes, the procedure for liquidation of branches of foreign undertakings would become easier and would also comply with EU law. Thus after several years of uncertainty and disagreement on this topic, Polish law should return to the position approved by the Supreme Court in 2007.

Existing discrepancy between EU and Polish law

Until 2012, Art. 92 of the Business Freedom Act, governing the liquidation of branches of undertakings, read as follows: “The provisions of the Commercial Companies Code on liquidation of a limited-liability company shall apply as relevant to the liquidation of a branch.”

In connection with doubts whether this provision should also be applied in the case of the voluntary liquidation of a branch of a foreign undertaking, the Supreme Court of Poland issued an order on 9 May 2007 (Case II CSK 25/07, OSNC no. 5/2008) in which it cited the inconsistency of Polish law in this respect with EU law. The court stated that Art. 10 and 49 of the Treaty on the Functioning of the European Union “give rise to an obligation to treat the branch of a German limited-liability company [GmbH] no worse than the same organisational unit of a Polish company.” The court also pointed out that as “the Commercial Companies Code does not regulate the liquidation procedures for a branch of a limited-liability company, then liquidation remains within the competence of the legal person.” The interpretation of Art. 92 of the Business Freedom Act “was therefore in conflict with the rule of non-discrimination against the applicant as a foreign entity. For this reason, the view recognised almost unanimously in the legal literature that this provision does not apply to the voluntary liquidation of a branch by a foreign limited-liability company with its registered office in the European Union or the European Economic Area, should be upheld.” That ruling was legally and practically sound.

Securing the interests of creditors as the main aim of the procedure for liquidating a limited-liability company

The provisions on liquidation of a limited-liability company, in particular those imposing on the company an obligation to summon the company’s creditors to assert claims against the company, prohibiting the distribution of the company’s assets until six months after announcement of the liquidation, and requiring funds to be submitted to a court deposit to secure known creditors who did not file their claims on time, are designed to secure the interests of the company’s creditors. Because the shareholders of the company are not liable for the company’s obligations, before the company is deleted from the National Court Register the company should pay its debts to third parties or deposit funds to secure them in the future.

Does simplified liquidation of a branch violate the interests of creditors?

The situation of a branch of a foreign undertaking is entirely different. When a foreign undertaking with its registered office in the EU winds up its activity conducted through a branch in Poland without conducting liquidation proceedings, the rights of potential creditors are not infringed because all claims arising during the course of the foreign undertaking’s operations through its branch in Poland are claims against the foreign undertaking. All such claims thus remain effective against the foreign undertaking even after the branch is deleted from the National Court Register. In accordance with the position adopted by the Supreme Court in the order cited above, the liquidation of a branch has no direct impact on the claims of third parties. Although a branch is segregated spatially and organisationally, generally provided with assets and its own managers and accounting, it can only perform activities lying with the subject of the business of the original entity, and operates under the direction of the headquarters and most importantly, for purposes of civil law, it does not have legal personality apart from the original undertaking. Before or after liquidation of the branch, the company remains the debtor, and the change involved in liquidating the branch does not affect the scope of the undertaking’s liability.

2012 amendment deepened inconsistency with EU law

Despite the clear holding of the Supreme Court founded on the TFEU, the Polish parliament decided to take a completely different tack from the beginning of 2012, amending Art. 92 of the Business Freedom Act to read: “The provisions of the Commercial Companies Code on liquidation of a limited-liability company shall apply as relevant to the liquidation of a branch resulting from … a decision by a foreign undertaking to liquidate the branch.”

This provision generated a lot of confusion in processes for liquidation of branches of foreign undertakings in Poland. Whenever a foreign undertaking tried to delist its Polish branch from the National Court Register without conducting a full liquidation proceeding, the applicant had to assert the non-compliance of the Polish regulations with EU law and the precedence of EU law over Polish law. In many instances (but not all) the registry courts adopted a pro-EU interpretation of the regulations and allowed deletion of branches of EU undertakings from the register without requiring the foreign undertaking to conduct lengthy, costly and essentially pointless liquidation proceedings, as would be required by a literal interpretation of Art. 92 of the Business Freedom Act.

EU rules come out on top

After more than five years since the last change to Art. 92, Polish lawmakers finally decided to tackle the existing problem of the non-compliance of the Polish regulations with EU law, as part of the bill entitled “Act on the Rules for Participation by Foreign Undertakings and Other Foreign Persons in Commerce in the Territory of the Republic of Poland,” drafted over the last several months. Entry into force of the bill submitted to the Sejm in November 2017 is planned for 1 March 2018.

According to the justification by the drafters, this bill is designed to relegate to a single, separate act all of the provisions concerning cross-border service activity, branches and representative offices of foreign undertakings, and other rules for participation in trade in Polish territory by foreign undertakings and other foreign persons. These issues are currently covered by two separate acts: the Business Freedom Act and the Act on Performance of Services in the Territory of the Republic of Poland.

Under the proposed new act, the provisions of the Commercial Companies Code on liquidation of a limited-liability company would apply to a branch only when the minister for economic affairs issues a decision prohibiting a foreign undertaking from conducting economic activity within the branch. In that case, the minister would notify the foreign undertaking of its obligation to commence liquidation proceedings for the branch within a designated period of no less than 30 days, and would forward a copy of the decision to the competent registry court.

However, the bill does not mention at all the liquidation of a branch as a result of a decision by the foreign undertaking to liquidate the branch. The justification for the bill does not explain this change, but it is clear from the justification that the change is intentional.

This proposal for addressing the problem is a step forward, and should end the disagreement in this area and eliminate the discrepancies in the positions taken by the registry courts on this issue.

Łukasz Śliwiński, legal adviser, Marta Rybacka, legal adviser, M&A and Corporate practice, Wardyński & Partners