Consequences of withholding information materially affecting pending consumer insolvency proceedings - Part 2

This article continues the thread of misinformation in consumer insolvency proceedings and the effects this can have.

Most acts contain a catalogue of entities to which their provisions may be applied. The Bankruptcy Law is no exception to this, as it contains provisions that regulate the range of entities entitled to use the bankruptcy procedure. The main division of the bankruptcy institution includes bankruptcy proceedings conducted against entrepreneurs and bankruptcy proceedings conducted against individuals who do not conduct business activity.

By their very nature, the two types of proceedings are conducted differently and the rationale is also different, which must be met in order to benefit from these procedures. An important difference consists, inter alia, in the necessity to have assets to cover the costs of the bankruptcy proceedings and partial satisfaction of creditors, in the case of proceedings conducted against business entities. In contrast, in the case of consumer proceedings, this prerequisite does not exist at all, hence such proceedings may be conducted even if the debtor does not have any assets.

This is a great advantage and may lead those interested in declaring bankruptcy to prefer this type of procedure, a dodatkowo kreować zachętę do zuchwałego wyzbycia się, tudzież ukrycia majątku przed złożeniem wniosku o ogłoszenie upadłości. Co się jednak stanie, gdy przedsiębiorca złoży wniosek o ogłoszenie consumer bankruptcy? Well, such an application should be dismissed, as it was submitted by an unauthorised person. However, what will be the consequences if the trader conceals information that he conducts business activity?

From PMR Restructuring practice

Such an event occurred in an insolvency proceeding in which one of our colleagues was appointed to act as trustee. At the stage of hearing the consumer bankruptcy application, the Court did not find that the applicant was engaged in business activity. The order declaring bankruptcy was issued as against a non-business person. The trustee's verification activities revealed the active status of the business business on the date of the bankruptcy debtor, making it impossible to conduct consumer insolvency proceedings. For these reasons, the proceedings were discontinued.

Let us not forget that the trustee has extensive powers and duties in which he examines the debtor's situation and verifies the veracity of the information provided by the debtor. Also, the public administrative authorities are obliged to provide the trustee with the information necessary to fulfil the purpose of the insolvency proceedings. The statement of the Greek poet Menander, 'Sometimes the truth comes out, although no one was looking for it', is also not infrequently very apt, and much can be gleaned from the documents that come to the insolvency practitioner.

In our proceedings We most frequently encounter situations in which debtors conceal information about the disposal of their assets shortly before declaring bankruptcy. Such actions aim to conceal or dispose of valuable assets in order to prevent their sale to the trustee.

From PMR Restructuring practice

In one of the proceedings, the debtor declared in her bankruptcy petition that she had no assets. Also at the stage of the relevant bankruptcy proceedings, she duplicated this declaration and, in addition, declared that she had not made any legal acts involving the disposal of her property in the last 12 months before the date of the bankruptcy petition. As part of the obligation of the Polish Postal Service in these proceedings to send to the trustee all correspondence addressed to the bankrupt, the trustee came into possession of a summons from the Tax Office to complete the Information on Premises.

Further activities revealed, that, not long before the filing of the bankruptcy petition, the debtor had gifted a valuable asset to a close relative. This would have had far-reaching consequences aiming, among other things, at the disposal of this asset in the course of the insolvency proceedings, but the bankrupt nevertheless filed for the discontinuation of the insolvency proceedings, thus nullifying her chance of becoming indebted.

At this point it is worth noting, that the question of performing legal acts affecting the shape of the assets of a person intending to file for bankruptcy is an extremely interesting issue which, in its breadth, is an excellent topic for a separate article.

The bankrupt's obligations to provide truthful and accurate information do not end when the bankruptcy petition is filed, nor during the course of the insolvency proceedings, and even if a plan order is issued repayment or a conditional order decommitment. During the implementation period of the plan repayments The insolvency practitioner is then under an additional obligation to submit a report to the Court, in which the insolvency practitioner is obliged to inform the Court, among other things, of the current financial situation by indicating the income generated and the assets acquired of a certain value.

Providing false information in the report, or making a legal act that could worsen the bankrupt's financial situation without the court's approval or the lack of the court's approval of such an act, concealing assets or making a legal act by the bankrupt that has been validly declared as made to the detriment of the creditors may lead to the annulment of the decision on the repayment plan or the decision on conditional discontinuance of liabilities. This is tantamount to the bankrupt failing to obtain debt relief and continuing to be obliged to pay its debts.

The consequences of concealing or falsifying facts can therefore be very severe, but their catalogue is not yet exhausted. I will cite more below, this time from the field of compensatory and criminal liability.

Dłużnik składając wniosek o ogłoszenie upadłości ma obowiązek złożenia oświadczenia w zakresie tego, że dane podane we wniosku są zgodne z prawdą. At the same time, the debtor is liable for the damage caused as a result of providing false data in the bankruptcy petition. This damage may, for example, consist in charging the debtor with the costs of suspended and discontinued enforcement proceedings. The basis for calculating the amount of the damage may be, in particular, the losses and lost profits related thereto. However, the fundamental problem is to demonstrate that the court - knowing the falsity of certain information from the debtor - would not have declared bankruptcy. Indeed, the only condition for dismissing a bankruptcy petition is the solvency of the debtor. Therefore, the actual holding of the bankrupt to this liability appears to be unlikely.

However, a more significant sanction is provided for in Article 522 of the Insolvency Law. Zgodnie z ust. 1, kto będąc dłużnikiem podaje we wniosku o ogłoszenie upadłości nieprawdziwe dane – podlega karze pozbawienia wolności od 3 miesięcy do lat 5. Dalej czytamy, że tej samej karze podlega, ten kto będąc dłużnikiem, w postępowaniu w przedmiocie ogłoszenia upadłości podaje sądowi nieprawdziwe informacje co do stanu majątku dłużnika. I z taką samą sankcją mamy do czynienie w przypadku, gdy upadły nie wydaje syndykowi całego majątku wchodzącego do masy upadłości, ksiąg rachunkowych lub innych dokumentów dotyczących jego majątku, czy też nie udziela syndykowi lub sędziemu-komisarzowi informacji dotyczących tego majątku. Przestępstwa opisane powyżej mają charakter umyślny i są ścigane z urzędu.

It is also worth being aware that there are many more regulations, which relate to the making of e.g. false statements, falsification of documents, etc., which may lead to criminal liability, the application of which is in no way excluded by the insolvency proceedings. Also the trustee is under the responsibility and compulsion to act in accordance with the law, and thus under the obligation to signal to the relevant authorities that the bankrupt has committed an offence prosecuted ex officio, on pain of being charged with exceeding or failing to fulfil his duties as a public official.

Taking into account the considerations made above, it should be clearly stated, that a debtor who conceals important information in the context of insolvency proceedings risks not only the discontinuation of insolvency proceedings, but also the denial of debt relief and even imprisonment. Anyone contemplating a misrepresentation in insolvency proceedings should make an internal calculation between the hypothetical gain from the untruth and the real risk of its detection and the related consequences. I hope, however, that the arguments cited will tip the scales in favour of truth and social justice.