Directors' duties during Covid-19 - what steps should directors be taking now?

What are my duties as a chief executive officer and how these duties change in a time of economic crisis?
 
For many entrepreneurs, it has been a tough few weeks with the pandemic. They experienced a sudden collapse in demand, a cash flow crisis and financial difficulties in making payments.
 
In such circumstances, a serious question arises - whether the motion for bankruptcy should be filed or not. The answer to this question under Polish law is not easy. On the one hand, it is hard to say whether the financial difficulties and problems with cash flow have a permanent or temporary nature, and on the other hand - preparing such a motion in these circumstances is not easy from the technical point of view.
 
It is always necessary to bear in mind that under Polish law, the failure to apply for bankruptcy in the right time is a criminal offence and it can lead to personal liability of directors for the company’s debts.
 
According to Art. 21 of the Polish Bankruptcy Law, a motion for bankruptcy should be filed not later than within 30 days from the moment a company becomes insolvent. It is generally accepted that the company is insolvent if the delay in making payments exceeds three months.
 
The anti-crisis package (The Shield 2.0) introduced by the Polish government in April 2020 brought a new regulation which says that the 30-day period for filing for bankruptcy does not start to run (or gets suspended) if the state of insolvency has emerged during the epidemic and the reason for insolvency has been Covid-19. After epidemic, the 30-day period will run again. If the state of insolvency emerged during the epidemic, it is assumed that it was caused by the epidemic.
 
The suspension of the 30-day period for filing a motion during the epidemic is generally considered as a good thing but it does not solve all problems. The biggest problem (as always with the bankruptcy issues) is establishing the exact moment of reaching the state of technical insolvency and the reasons for insolvency. This is often the issue of debate.
 
The chief executive officer and the members of the executive board in a Polish company are responsible for the day-to-day operations of the company. They are subject to a wide range of statutory duties. The key obligation is the duty to promote the success of the company for the benefit of its shareholders. If the company has problems with making payments and it is moving towards insolvency, the chief execution officer and the members of the executive board should first of all have a frank discussion with the shareholders. The shareholders are in charge of the situation from the business point of view. They can decide to give the company extra money (either through equity or through a loan), they can help the company with the falling demand and they can also decide to close the company down if they think the problems have permanent nature.
 
If the shareholders are not involved in any sense in the running of the business, the chief executive officer and the members of the executive board in a Polish company would have to take their own decision.
 
Should I rely on the new rules suspending the 30-day period for filing the motion for bankruptcy?
 
As explained above, a motion for bankruptcy does not have to be filed within 30 days from the moment of company becoming technically insolvent, if the state of insolvency has emerged during the epidemic and the reason for insolvency has been Covid-19.
 
However, the deadlines for filing the motions for bankruptcy are not suspended if the state of insolvency had emerged before the epidemic started or if the reason for the state of insolvency was not Covid-19. So, if the company was in a bad financial situation already before March 2020 (i.e. when Covid-19 epidemic started in Poland), the new rules will not apply and the deadline for filing the motion for bankruptcy is still 30 days.
 
The chief executive officer and the members of the executive board would have to take their own decision on what to do. Depending on how they assess the situation and what are the facts in their case, they can either rely on the new rules and wait with the motion for bankruptcy until the end of epidemic or they can file for bankruptcy under the old rules. Whatever is their decision, they should start collecting and safekeeping the evidence confirming their line of thinking and their argumentation. The creditors will do the same.
 
Do I face personal liability as a director in this situation?
 
The director of a Polish limited liability company, who did not file for bankruptcy within 30 days from the moment of company becoming insolvent, in addition to his criminal liability, can be held personally liable for the company’s debts, if the enforcement against the company turns out to be ineffective. So, if the bailiff during the enforcement proceedings against the company cannot find any assets and closes the enforcement process as ineffective, then each creditor of the company can sue the director individually or all of them jointly and severally for the unpaid debt together with interests and the costs of enforcement proceedings.
 
The director will not be held liable for the company’s debts if he can prove that he filed a motion for bankruptcy in the right time which means not later than within 30 days from the moment of company reaching the state of insolvency. The director also will not be held liable for the company’s debts if he relied on the new rules suspending the 30-day period for filing the motion for bankruptcy, unless the creditor proves in the court of law, that the state of insolvency had emerged before the epidemic started or that the reason for the state of insolvency was not Covid-19.
 
Another solution for the director to avoid the liability for the company’s debts is to file a motion to open the restructuring proceedings. Directors are not liable if the court opens the restructuring proceedings in accordance with The Polish Restructuring Law within 30 days from the moment of company becoming insolvent.

To sum up, the best strategy for directors is to act fairly in the best interests of company, while at the same time considering their own position and reducing the risk of incurring personal liability for the company’s debts.