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Dividing Companies by Separation – Divided Company Now Held Liable in Poland

The liability of divided companies for the obligations of acquiring or newly incorporated companies under division by separation has given rise to controversy and debate within the legal doctrine in Poland. The legislation in force before March 1, 2019, did not provide the creditors of dividing companies with much protection.

Since March 1, 2019, under amended Article 546(1) of the Code of Commercial Companies (CCC), it has been possible to attribute joint liability to the acquiring or newly incorporated companies as well as the divided company – a milestone for the legal transactions practice. It now provides sufficient protection for the divided company’s creditors, who previously had limited effective means to control asset shifts under division by separation, which caused creditors to doubt that the transactions were secure.

The ratio legis of the amended regulation was, according to the rationale for the bill, to guarantee that the interests of the divided company’s creditors are adequately protected. The previous wording of Article 546 of the CCC did not expressly provide for any liability on the part of the divided company for the acquiring companies’ obligations. Therefore, the dividing company could shift its liabilities (or debts) to less solvent entities, while leaving the assets with the dividing company. Given the absence of express joint liability on the part of the divided company for the debts transferred to the acquiring company, the so-called profit and loss centers could have materialized, thus rendering it impossible for creditors to satisfy their claims. As stipulated in the CCC, creditors have only limited participation in the company division procedure. In the legislator’s assessment, it was necessary to lay express legal foundations for joint liability on the part of the divided company for the obligations shifted to the acquiring companies, which will better protect creditors’ interests.

The Legislator’s Involvement Was Needed

Unlike the regulations regarding the division of companies by separation where all the assets of the dividing company are split to new companies and the dividing company ceases to exist, those related to division by separation where parts of the assets of the dividing company are transferred to new companies have been negligible. The discrepancy, both within the judicature and the doctrine, was the previous wording of Article 546(1) of the CCC.

According to this provision, joint liability for the obligations attributed in the division plan to the acquiring or newly incorporated company rested with the companies to which the divided company’s assets were transferred. In so far as it was reasonable for division by separation, because the dividing company ceases to exist legally, in the case of division by separation, the dividing company continues to exist, because only parts of its assets are separated. The literal wording of Article 546(1) of the CCC, however, failed to refer to liability on the part of the dividing company. Within the doctrine, it was pointed out that such liability might also be attributed to the dividing company if Article 529(2) of the CCC was applied accordingly. This view, however, did not have a strong foothold within the doctrine and the body of court rulings.

It was indicated that, under Article 529(2) of the CCC, division by separation ought to be governed by “the provisions pertaining to the division of companies applicable to the acquiring or the newly incorporated company, respectively”, it being understood that the dividing company is neither the acquiring nor the newly incorporated company. Attempts at referring to the teleological interpretation when applying Article 546(1) of the CCC to division by separation and, thus, at attributing joint liability to the dividing company have been deemed an objectionable interference in the literal wording of the provision and as interfering in the legislator’s competences.

The History of Contradictory Interpretations

Even though Article 546(1) of the CCC has been a part of the Polish legal framework for many years, it has yet to be unequivocally interpreted. To the contrary, while analyzing the existing body of rulings and literature, two radically different positions regarding the interpretation of this provision have materialized.

On the one hand, advocates of the literal interpretation indicated that joint liability must not be attributed to the dividing company because the jointly liable entities have been clearly enumerated in the provision of the law and any attempt to expand its application onto the dividing company would be stepping into the legislator’s competences, and such broad interpretation is objectionable.

On the other hand, proponents of the functional interpretation raised that Article 546(1) of the CCC includes the dividing company, because such a conclusion can not only be drawn from the logical interpretation, but also from the necessity to protect creditors. Advocates of this position claim that, while interpreting this controversial provision, the purpose of the legal norm of protecting the dividing company’s creditors ought to be considered.

The body of rulings previously issued also failed to provide a coherent interpretation. The Supreme Court, in a judgment issued on April 21, 2010 (case file no. V CSK 318/09), ruled that Article 546(1) of the CCC should also apply to the dividing company, reasoning that the dividing company, which continues to exist, is held liable for the entirety of its assets, without limitation, while liability on the part of the separated company is limited in terms of both duration and value. A similar position was expressed in a judgment issued on October 16, 2013 (case file no. I Aca 416/13), by the Court of Appeals in Lublin. However, in a judgment issued on October 24, 2012 (case file no. III CSK 18/12), the Supreme Court took a contradictory position. It ruled that the construction of Article 546(1) of the CCC does not allow to extend the scope of liability for the obligations attributed to the acquiring or the newly incorporated company onto the dividing company, because recognizing a divided company as being covered by that provision would be an inadmissible interpretation of the law.

Given the lack of adequate protection of the dividing company’s creditors, such creditor having only very limited influence during the division process, and the history of contradictory court rulings and voices of the legal profession, the legislator made a decisive move amending Article 546 of the CCC. Since March 1, 2019, the dividing company and the companies that took over parts of the assets of the dividing company are jointly and severally liable for any debts – regardless of whether such debt is retained by the dividing company or transferred to the other companies participating in the division. Even though the liability of each company is limited by the net value of the assets allocated to such company, it is a big step forward in protecting the creditors of a dividing company.

 

© Copyright 2019 Squire Patton Boggs (US) LLP

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About this Author

Marcin S. Wnukowski, Squire Patton, Warsaw, foreign investment matters lawyer, acquisition transactions attorney
Partner

Marcin Wnukowski focuses his practice on foreign investment matters and merger and acquisition transactions in Poland in a broad range of industries including pharmaceuticals, automotive, financial services, hotel and hospitality, and real estate. His clients include private equity firms and multinational investors. State aid and competition law approvals are among his core practice areas. He also serves as de facto outside general counsel to various clients in different industries.

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