Natalia Kobyłka

Selective payment of creditors can be a crime

Arbitrary, selective payment of only certain debts may result in criminal liability of the debtor, including in a case where it is only threatened with insolvency, if such action exposes other creditors to a loss.

Poland’s Penal Code provides an equal measure of protection to all creditors of a debtor threatened with insolvency. Although no provision of law specifies in advance the order in which creditors must be paid, a general prohibition against arbitrary and selective payment of debts may be inferred from Penal Code Art. 302 §1, which provides that a debtor faced with the treat of insolvency or bankruptcy, who cannot satisfy all of his creditors but pays or secures only certain of them, to the detriment of the others, is subject to a fine, probation or imprisonment up to 2 years.

A response to the question of when a debtor is threatened with insolvency and what actions by a debtor may be regarded as exposing the other creditors to a loss may be found in the judgment of the Wrocław Court of Appeal of 5 November 2008 (Case No. II AKa 203/08, published at OSA/Wr. 2009 No. 3 item 140).

In this case, the court first pointed out that there is a qualitative difference between a state of insolvency and a threat of insolvency. Insolvency is defined in Art. 11 of the Bankruptcy & Rehabilitation Law of 28 February 2003, which provides that a debtor is insolvent when it has ceased to pay its due and payable monetary obligations, and, with respect to a legal person or organisational unit without legal personality which is vested with legal capacity under other laws, a debtor is also regarded as insolvent if its obligations exceed its assets, even if it is performing its obligations on a current basis. The threat of insolvency is defined in Art. 492 §2 of the Bankruptcy Law, which provides that a business entity is threatened with insolvency if, even though it is performing its obligations, based on a rational assessment of its economic situation it is obvious that within a short time it will become insolvent. In the justification for the ruling discussed above, the Wrocław court stated that by the nature of things, a state of being threatened with insolvency must precede a state of insolvency, and the court deciding on criminal liability is required to examine not only whether a state of insolvency existed, but also whether there was at least a threat of insolvency, which could be indicated by the debtor’s liquidity problems.

If a debtor is threatened with insolvency and unable to pay all of its creditors out of its assets, it may not secure or pay only certain creditors to the detriment of other creditors. Payment of a debt should be understood to mean not only transferring funds to the creditor, but also any legal act seeking to satisfy the obligation other than by payment. An example could be assignment of a receivable. In the justification for the case discussed above, the court of appeal correctly found that making an assignment of receivables to only certain creditors in a situation of a threat of insolvency meets the definition of the offence under Penal Code Art. 302, because if the debtor had not concluded the assignment agreement, the receivable would be applied toward payment of all creditors and each of them would be satisfied proportionately.

The legal literature also provides other examples of acts that are prohibited when the debtor is under a threat of insolvency. These include “dation” (datio in solutum), i.e. satisfying an obligation by providing some other consideration in its place, such as discharging a monetary obligation by turning over tangible property instead of cash, as well as actions to secure certain creditors against others, such as establishment of a pledge or mortgage.

In order to commit the offence under Penal Code Art. 302, the debtor must be aware that he is acting to the detriment of certain of his creditors. But it is a technical offence, and it is not necessary that the creditors suffer actual injury.

Thus in any situation in which the debtor is aware that his assets are insufficient to pay all his debts, he must consider that paying or securing only certain of his creditors at the expense of others may subject him to criminal liability.

Natalia Kobyłka, Difficult Receivables Recovery Practice, Wardyński & Partners