A Court of Justice of the European Union Ruling Declared That Provisions of the Commercial Companies Code Restrict the Freedom of Economic Activity

December 2017

The provisions of the Commercial Companies Code (Commercial Companies Code Act of September 15, 2000, Code of Commercial Companies, uniform text in Journal of Laws of 2017, item 1577, hereinafter referred to as: “CCC”) do not specifically regulate the mode of cross-border transformation of capital companies. Only Article 270 item 2) and 459 item 2) of the CCC refer to such model, which, respectively, in relation to a limited liability company and joint-stock company, stipulate that dissolution of a company is effected, i.e. by way of a resolution of shareholders or a general meeting on the transfer of the registered office of a company abroad. The transfer of the registered office of a company abroad is therefore connected with the dissolution of the company and its liquidation. However, this is a time consuming process, generating additional costs. In the doctrine, there have appeared opinions that such restriction in the transformation of companies within EU states may be incompatible with EU freedom of economic activity. The cross-border transfer of the registered office of a company is also regulated by art. 19 of the Private International Law of February 4, 2011 (Journal of Laws of 2015, item 1792, hereinafter referred to as "PIL") allowing continuation of the legal personality of a company whose registered office is transferred to another EEA State.

The issue of transfer of a registered office abroad was dealt by the Polish courts adjudicating in the Polbud-Wykonawstwo case, which on the basis of a shareholders resolution transferred its registered office to Luxembourg. The Company subsequently requested that it be removed from the commercial register of the National Court Register directly on the basis of the transfer of its registered office, i.e. without liquidation. Deletion was impossible due to the aforementioned provisions of the CCC. A doubt whether the Polish law requirement to effect liquidation for the purpose of deleting a company from the commercial register, which, on the basis of a resolution of shareholders transferred its registered officer to another EU member state, is a permissible restriction on the freedom of economic activity, made the Supreme Court raise prejudicial questions to the Court of Justice of the European Union as regards interpretation of Articles 49 and 54 of the TFEU in the context of restrictions on the transfer of the registered office of a company beyond the borders of the country in which the existing registered office is located.

In its judgment of October 25, 2017 (C-106/16), the Court declared that national legislation providing for the obligation to carry out liquidation for the purpose of cross-border transformation of a Polish company may impede or even prevent such conversion, which constitutes a restriction on the freedom of economic activity, disproportionate to the purpose of its establishment, i.e. protection of creditors, minority shareholders and employees of the transferred company. The CJEU has indicated the member states’ admissibility of implementing restrictions on the ability to transfer registered offices by the companies governed by its laws if such restriction is justified by overriding reasons in the general interest and meets the requirement of proportionality. At the same time; however, it emphasized that the establishment or change of a company's statutory or actual registered office in order to submit it to the legislation of member state whose laws would be more beneficial for the company, would not constitute an abusive practice in itself. Furthermore, the Court stated that the scope of freedom of economic activity covers a situation in which a company incorporated under the legislation of one member state intends to transform itself into a company subject to another law even if the transfer of the registered office is not accompanied by the transfer of the actual seat. The state to which a company migrates may not impose conditions on cross-border transformation that are more restrictive than those applicable to the national transformation of the company.

It should be noted that by asking the prejudicial questions the Supreme Court confirmed the possibility mentioned earlier in the doctrine to apply respectively the current provisions of the CCC regarding domestic transformation of companies to their cross-border transformation. This general statement of the Supreme Court, without comment on the practical aspects of the proper application of these provisions, did not, however, clarify the doubts arising from the application of this provision.
Although the judgment was passed in the case regarding a limited liability company, it is also applicable to the rules governing dissolution of a limited liability company. It must be expected that the provisions of the CCC, which the Court considered as contrary to the freedom of economic activity, will change in the near future. Until the Polish legislator settles the issue of the transfer of the registered offices of Polish companies abroad, the solution is to use a cross-border merger through the takeover by a company based outside Poland. This however requires analysis of the law of the host country in terms of formal requirements and the legal consequences of such merger.

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