The role of stakeholders on rejection of bankruptcy applications in the case of “poverty” of the estate: A Polish case study

• Author: Joanna Kuczewska,Błażej Prusak,Sylwia Morawska,Przemysław Banasik
• Published date: 01 March 2019
• Date: 01 March 2019
• DOI: http://doi.org/10.1002/iir.1329

RESEARCH ARTICLE

The role of stakeholders on rejection of

bankruptcy applications in the case of “poverty”

of the estate: A Polish case study

Błażej Prusak

1

| Sylwia Morawska

2

| Joanna Kuczewska

3

|

Przemysław Banasik

1

1

Faculty of Management and Economics,

Gdańsk University of Technology,

Gdańsk, Poland

2

Collegium of Business Administration,

SGH Warsaw School of Economics,

Warsaw, Poland

3

Faculty of Economics, University of

Gdańsk, Gdańsk, Poland

Correspondence

Błażej Prusak, Associate Professor,

Faculty of Management and Economics,

Gdańsk University of Technology,

Gdańsk, Poland.

Email: blaprusa@pg.edu.pl

Abstract

The aim of this article is to supplement the Law and

Economics area of science with regard to the scope of

the ex ante effectiveness of bankruptcy law using the

example of Poland. Bankruptcy law is effective in the

ex ante stage when it eliminates from the market insol-

vent entrepreneurs who cannot even afford to cover the

costs of bankruptcy proceedings. In these cases, the

bankruptcy court should dismiss the petition for bank-

ruptcy because of “poverty”of the insolvent estate. As a

result, the insolvent debtor should be liquidated and

deleted from the register of companies. This paper

investigates entities whose bankruptcy petition has

been rejected due to “poverty”of the insolvent estate.

The study shows that, after the filing has been

dismissed, the majority of these entities are not liqui-

dated. To determine who is responsible for this state

of affairs, the article identifies the stakeholders at the

time that applications are filed for bankruptcy proceed-

ings and also after the bankruptcy petition has been

rejected. The article highlights stakeholders' diverging

interests, strengths, and weaknesses to assess their

potential impact on bankruptcy procedures that should

be dismissed due to “poverty”of the insolvent estate.

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© 2019 INSOL International and John Wiley & Sons, Ltd

Received: 16 December 2017 Revised: 5 July 2018 Accepted: 5 February 2019

DOI: 10.1002/iir.1329

Int Insolv Rev. 2019;28:63–85. wileyonlinelibrary.com/journal/iir 63

1|INTRODUCTION

Business bankruptcy

1

is an institution that is a permanent part of a free market economy and

that affects many stakeholders. It is important for the bankruptcy system to enable entrepre-

neurs who are in financial difficulties to either restructure their businesses (if they are still via-

ble) and stimulate entrepreneurship

2

or quickly liquidate themselves.

3

When the debtor's

economic situation shows no signs of improvement, the company should be removed from

the register of companies shortly after the end of the liquidation procedure. Clearing the market

of business entities that are not able to meet their obligations is one of the basic functions of the

bankruptcy system. Maintaining such “survivors”

4

can have negative consequences in the form

of domino effects: parties maintaining a relationship with insolvent companies (stakeholders)

are condemned to potential losses, and this may also have a negative impact on the finances

of their contractors.

5

Therefore, one of the main problems concerning the operation of the bankruptcy system is

the regulation and the effectiveness of the actions of courts with regard to companies for which

the General Court has dismissed a bankruptcy petition because of “poverty”of the insolvent

estate. Such entities can be called “economic bankrupts,”although legally they have not under-

gone any bankruptcy proceedings. It can also be presumed that their chance of improving their

financial standing is negligible because their assets are not sufficient to cover the costs of bank-

ruptcy proceedings, not to mention the repayment of any meaningful portion of their

commitments.

From the statistical data available in Poland, it is difficult to determine how many companies

are active and how many have taken the form of “zombies,”that is, entities that are not deleted

but do not carry out any business activities. It is a requirement under the Act on the National

Court Register (KRS) [1997, para 44(1)(5) and 45(1)] that entities involved in formal bankruptcy

proceedings have the commencement of these proceedings noted in the register of companies.

In the case of entities whose bankruptcy petition has been rejected because of “poverty”of

1

In common language, the words bankruptcy and insolvency are often used interchangeably. However, in the profes-

sional literature on the subject, there are differences between them. Insolvency has a financial basis and means that

the debtor is unable to repay his liabilities in due time. Bankruptcy is a typical term used in law and refers to legal pro-

cedures for dealing with insolvent entrepreneurs.

2

See Seung‐Hyun Lee, Mike Peng, and Jay Barney, “Bankruptcy Law and Entrepreneurship Development: A Real

Options Perspective”(2007) 32(1) Academy of Management Review 257–72; Seung‐Hyun Lee et al., “How do Bankruptcy

Laws affect Entrepreneurship Development around the World?”(2011) 26 Journal of Business Venturing 505–20; John

Armour and Douglas Cumming, “Bankruptcy Law and Entrepreneurship”(2008) 10(2) American Law and Economics

Review 303–50.

3

See Philippe Aghion, Oliver Hart, and John Moore, “The Economics of Bankruptcy Reform”(1992) 8(3) Journal of Law,

Economics, and Organization 523–46; Stijn Claessens and Leora Klapper, “Bankruptcy around the World: Explanations

of Its Relative Use”(2005) 7(1) American Law and Economics Review 253–83; Elena Cirmizi, Leora Klapper and Mahesh

Uttamchandani, “The Challenges of Bankruptcy Reform”(2010) 5448 The World Bank Policy Research Working Paper,

copy available at .

4

In this article, by “survivors”we refer to companies for which a bankruptcy petition has been rejected but they are still

running a business.

5

See Stefano Battiston et al., “Credit Chains and Bankruptcy Propagation in Production Networks”(2007) 31(6) Journal

of Economic Dynamics and Control 2063–64; Joseph Stiglitz, “Bankruptcy Laws: Some Basic Economic Principles”in

Stijn Claessens, Simeon Djankov and Ashoka Mody (eds), Resolution of Financial Distress (World Bank Institute

2001), 1–23.

64 PRUSAK ET AL.