Following Centros

Mirosław Wójcik

Following Centros

The costs of establishing a limited liability company in Poland are relatively high in comparison with such countries as England, Spain, or Portugal.

This is due to high initial capital costs, amounting to as much as PLN 50.000, which have to be borne in order for the company to be entered in the Register of Entrepreneurs (Art.150.§1 Commercial Company Code). In other words, to start business activity in Poland in the form of a limited liability company you need to have at least PLN 50.000 (plus registration costs, etc.).

In England, for example, setting up the so-called private limited company (Ltd) does not involve any initial capital costs (business activity in the form of such a company may be started with the capital amounting to Ł50). In Portugal, on the other hand, minimal initial capital equals PLN 8.000.

Now that Poland is to join the EU, maybe it's worth considering if setting up a company here will be a good idea at all. Perhaps it would be better to choose some other solutions instead which, after all, might turn out to produce analogous effects to the direct establishment of a limited liability company in Poland. The advantage of choosing such solutions is that they require much lower capital expenditure. So, why not establish a private limited company (Ltd) in England and then register its branch in Poland, taking advantage of the foreign entrepreneur's status (the doctrine underlying the Community law refers to such practice as the so-called secondary establishment)? It can be done quite cheaply, and there are no legal obstacles that would prevent focusing all business activities on the Polish branch, without the necessity to start up the company in England.

Prima facie the idea seems rather impracticable.
First of all, the proposed solution obviously aims at evading the Commercial Company Code regulations specifying the minimal initial capital of a limited liability company, which will certainly be taken into account by Polish registration courts while considering our application for registration of a foreign entrepreneur's branch.
Second of all, a Polish registration court considering application, being aware of intentions, will refuse to grant company the status of a foreign entrepreneur.

According to Polish International Private Law, each legal entity must have its personal status evaluated (i.e., its legal capacity, principles of functioning, or representation) on the basis of the law that is binding in the country where actual head office, main branch of the company is located - the so-called theory of head office (Art.9 §2 of the act dated 12 July 1965, International Private Law). In accordance with our assumption, business activity is to be conducted only in Poland. Thus, the law on which the evaluation of personal status of company would be based (formally, an English law company) is Polish law. Consequently, we should assume that a Polish registration court would probably refuse to register our company as a legal entity (Polish law does not define any legal entities whose structure corresponds with the structure of such a company). On such basis an application would be rejected as unacceptable.

The solution can be perceived in quite a different light if we take into account the judgement made by The European Court of Justice (hereinafter referred to as ECJ) on 9 March 1999 concerning the case Centros Ltd versus Erhvervs-og Selskabsstyrelesen - case reference number C-212/97 (published on: http://curia.eu.int/en/index.htm).

The situation looked as follows: a Danish married couple established in England a private limited company named Centros Ltd. The initial capital of Centros Ltd amounted to Ł 100 (according to Danish law the minimal initial capital of a limited liability company amounts to DKr 200.000). Then, without starting any business activity in England, Centros Ltd. applied for the registration of its branch in Denmark. Danish registration body rejected the application. Therefore, the situation seems analogous to the proposed solution mentioned earlier. The decision made by the Danish registration body was questioned, however, by The European Court of Justice.

First of all, ECJ assumed that the charge of evading initial capital regulations was groundless. The institution of minimal initial capital is to assure the company's creditors that the company's assets equal at least the amount of the minimal initial capital (guarantee function). If only Centros Ltd. had started some business activity in England before applying for registration in Denmark, the charge of evading initial capital regulations would be invalid. Rejection of application for branch registration is a measure which does aim at protecting company's creditors.

Second of all, ECJ assumed that if a company is re-established (secondary establishment), bodies examining the applications for branch registration should evaluate the company's personal status on the basis of the law binding in the country of registration (the so-called theory of establishment). In all other cases, the principle of freedom of business activity, as prescribed in Art. 43 (52) and Art. 48 (58) of The Treaty Establishing the European Community, is infringed.

So all we can do is hope that after Poland's accession to the EU, Polish registration courts will respect the judgement made by ECJ in the Centros Case. Polish legislators should also consider introducing an amendment to the Commercial Company Code that would decrease the amount of minimal initial capital of limited liability companies. This is the only way of increasing the competitiveness of Polish company law.

[16-05-2003]

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