Abuse of legal personality to the detriment of creditors
Dishonest debtors display great ingenuity in evading their obligations. They may also turn to advisers who, for a hefty fee, provide “sophisticated” ideas to lead creditors astray. Often such ideas involve the creation of legal entities (sometimes a whole group or “chain”) to hide components of the debtor’s business from creditors. Such actions constitute abuse of legal personality for the purpose of harming creditors. Can dishonest debtors and their supporters (including advisers) who knowingly use such methods really rest easy?
Evasion of obligations increasingly takes the form of a debtor transferring essential parts of its business to companies or foundations (either newly established or acquired from third parties for this purpose). In the new entity, the debtor continues its existing business, and creditors are left with a shell of the debtor’s former business. Attempts to enforce a claim against such a shell are virtually doomed to failure.
Such practices must be resolutely opposed, as they are highly detrimental to commerce. Hence the call for creditors not to give up their rights too easily, and the demand for broader administration of justice, to ensure maximum protection to duped creditors.
Rescue in criminal law…
In the Polish legal system, there is a legal institution explicitly aimed at combating the economic pathology of evading satisfaction of creditors by creating new business entities and transferring the debtor’s assets to them. As stated in Art. 301 §1 of the Criminal Code: “Anyone who, as a debtor of several creditors, frustrates or limits their satisfaction by legally establishing a new business entity and transferring his assets to it, shall be liable to imprisonment for a term of three months to five years.”
A person accused of committing an offence under Art. 301 §1 may be called upon in the criminal trial to compensate for the harm (Criminal Code Art. 46). Additionally, anyone who, on the basis of a legal provision, a decision of a competent authority, a contract or actual performance, administers the affairs of another legal person, a natural person, a group of persons or an entity with legal personality, can also be held liable (including for damages) for such an offence. In addition to such persons, anyone who incited or assisted in commission of the offence, e.g. by advising the direct perpetrator, may also be held liable in criminal proceedings (Criminal Code Art. 18).
However, creditors cannot rely solely on Criminal Code Art. 301 §1 when planning a counterattack against fraudulent activities related to abuse of legal personality (in conjunction with Criminal Code Art. 308 and 18). An analysis of the judgments of the criminal courts assessing the validity of prosecution for this offence demands a high degree of caution.
It is not that the criminal courts do not see a need to protect injured creditors. We fervently believe the courts do perceive such a need! The problem with the effectiveness of this approach stems from rule-of-law principles for applying criminal law. This is because of the principle of strict and narrow interpretation of criminal provisions (nullum crimen sine lege) and the obligation to resolve all doubts of fact or law to the advantage of the defendant (in dubio pro reo). Thus, if a criminal provision does not clearly indicate that certain conduct is punishable, or if the proven facts do not conform precisely to the legal definition of the offence, the perpetrator (or accessory) cannot be held liable, including for damages, in criminal proceedings, even if the conduct is unethical, immoral, or highly destructive to the security of commercial dealings.
…and in civil law
In this situation, creditors affected by debtors’ fraudulent actions involving abuse of legal personality should seek protection of their rights using, among other things, provisions on liability for damages for prohibited acts, i.e. tort (Civil Code Art. 415 and following). It is a well-established legal view that conduct that is expressly prohibited by law and contrary to unwritten principles of equity and fairness (public policy) is considered wrongful (tortious).
The literature on the subject indicates three primary reasons for abuse of legal personality:
- Acting to the detriment of creditors
- Desire to circumvent the law
- Intent to circumvent contractual provisions
(S. Soltysiński, “The invention of a legal person: One step from eternity,” in Reflections on criminal law: Commemorative volume on the 70th birthday of Prof. A. Ratajczak (Poznań 1999), pp. 257 ff.; R. Szczepaniak, “The role of courts in the process of counteracting abuse of legal personality,” Studia Prawnoustrojowe 2015 no. 30, p. 15).
It cannot be deemed right and fair that a debtor may evade performance of an obligation if the debtor only displays enough “cleverness” or “finesse” in creating or employing new legal entities. In this situation, it can and should be suspected that all the debtor’s actions using separate legal entities, giving rise to the creditors’ inability to enforce obligations against the debtor, constitute tortious acts within the meaning of Civil Code Art. 415.
In our opinion, as long as it can be proven that a legal entity has been created or used to evade performance of an obligation, and the creditor has been injured as a result, the creditor may claim damages from the perpetrator of the act. The perpetrator need not be the debtor itself. Such a perpetrator may be any person who, for example, is involved in the business affairs of the debtor (e.g. a management board member, commercial proxy, or holder of an ordinary power of attorney).
Moreover, pursuant to Civil Code Art. 422, a person who encouraged a tort, assisted in commission of the tort and knowingly profited from the injury caused by the tort may also be held jointly and severally liable for damages along with the immediate perpetrator. Therefore, potentially there are a wide range of persons from whom compensation may be sought for injury arising from the creditor’s inability to enforce its claim against the debtor as a result of abuse of legal personality.
We should not be discouraged by the sceptics’ claims that the Polish courts are unable to understand and counteract the grey area of creating and using legal entities to the detriment of creditors. The common-law notion of “piercing the corporate veil” is not entirely alien to the Polish courts. The Supreme Court of Poland more and more strongly asserts the view that civil-law relations should be assessed taking into account the possibility of abuse of legal personality by one of the parties (judgments of 18 September 2014, case no. III PK 136/13, and 17 March 2015, case no. I PK 179/14). There is no practical impediment to employing this view to evaluate the actions of those engaging in creation and use of legal entities to evade obligations. Nor, in principle, is there any obstacle to consideration by Polish courts of holdings from German courts firmly combatting all forms of abuse of legal personality (as discussed for example in Szczepaniak, supra, at 21–25).
We have great respect for the stress by courts and commentators in common-law jurisdictions that every legal person is, after all, a legal fiction. Like other legal fictions, this one was invented and is accepted for broad commercial convenience (e.g. to expedite transactions or enable individuals to work together to achieve a business purpose). But a legal fiction has no value on its own. If practical considerations, including considerations of equity, support rejection of the legal fiction, this should be done without regret (Szczepaniak at 19). There is much to suggest that Polish courts are now also prepared to question the integrity of a separate legal entity used by a debtor to evade performance, if that helps to protect the interests of an injured creditor.
Therefore we believe that in the Polish legal system, creditors have effective instruments to override the consequences of unfair actions of debtors involving abuse of legal personality. The perpetrators of such actions, and their accessories, should not rest easy.
Jan Ciećwierz, adwokat, Adam Studziński, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners
