Bankruptcy capacity of a family foundation

The Family Foundation Act explicitly allows family foundations to conduct business activities, and therefore the next question that needs to be asked is whether such an entity is capable of bankruptcy.

• Legal personality

The basic condition for declaring bankruptcy is that the entity in question has legal personality.

Pursuant to the Family Foundation Act, a family foundation has legal personality and may therefore act as an independent entity in legal transactions.

This also means that it may conduct business activities. Pursuant to Article 5 of the Family Foundation Act, the scope of permitted (privileged) activities is limited to:

• disposal of property, provided that such property was not acquired solely for the purpose of further disposal,
• renting, leasing or making property available,
• joining commercial companies, investment funds, cooperatives and similar entities, participating in such companies, funds, cooperatives and entities;
• acquiring and disposing of securities, derivatives and similar rights,
• granting loans to specific entities;
• trading in foreign means of payment belonging to the family foundation for the purpose of making payments related to the activities of the family foundation;
• agricultural production and forestry.

For clarification, it should be noted that a family foundation may undertake other types of activities beyond the above list, but in such a case, the ‘penalty’ income tax rate (25%) will apply.

• Bankruptcy capacity under bankruptcy law

A condition sine qua non for the bankruptcy capacity of a family foundation is that it obtains the status of an entrepreneur within the meaning of Article 43¹ of the Civil Code.

This follows from the provisions of the Bankruptcy Law, which define the list of entities that have bankruptcy capacity and those for which this capacity is excluded.

With the introduction of family foundations into the Polish legal system, the list of entities with bankruptcy capacity has not been amended, and therefore bankruptcy capacity is granted to:

• entrepreneurs,
• capital companies not engaged in economic activity,
• partners in commercial partnerships who are liable for the company’s obligations with all their assets;
• partners in professional partnerships.

At the same time, it should be noted that bankruptcy law has not been amended to extend the list of entities that do not have such capacity.

Thus, in order for a family foundation to be able to declare bankruptcy, it must conduct economic activity.

• Regulation contained in the Family Foundation Act

It is worth noting that the provisions do not provide for different bankruptcy proceedings for family foundations, and therefore bankruptcy proceedings against a family foundation should be conducted on the basis of the general provisions applicable to entrepreneurs.

At the same time, it should be pointed out that the Family Foundation Act contains provisions in which the legislator explicitly refers to the bankruptcy of a family foundation and regulates the related rules, in particular indicating that:

• a family foundation is dissolved after the completion of bankruptcy proceedings (Article 87(4));
• a family foundation may be removed from the register of family foundations without liquidation proceedings if the petition for bankruptcy is dismissed and if the bankruptcy court finds that the evidence gathered in the case provides grounds for removing the family foundation from the register without liquidation proceedings (Article 105(1)(1) and (2));
• in the event of bankruptcy of a family foundation conducting economic activity, its dissolution shall take place after the completion of bankruptcy proceedings, upon its removal from the register of family foundations (Article 109);
• information about the declaration of bankruptcy shall be entered in the register of family foundations (Article 117(1)(23)) and the name of the family foundation shall be changed by adding the designation ‘in bankruptcy’ (Article 117(4)).

In summary, only a family foundation that also has the status of an entrepreneur within the meaning of Article 43(1) of the Civil Code is capable of bankruptcy. Family foundations that do not conduct economic activity are not capable of bankruptcy.

Authors:

• Katarzyna Gelo, attorney-at-law
• Julia Cichowska, legal assistant