In the Polish legal order the family foundation is regarded as a relatively resilient construction. From the business owner’s perspective this feature is one of the main arguments in favour of choosing it as a tool of asset protection. This does not mean, however, that the family foundation is entirely untouchable. There are situations in which its existence or particular actions may be challenged. PLA.partners helps private clients design family foundations so as to be resilient to typical challenge risks, and also conducts disputes concerning family foundations where the situation requires.
Can a family foundation be challenged? Short answer
In practice, challenging a family foundation is significantly more difficult than in the case of many other legal entities. The legal construction of the family foundation is stable, and the catalogue of situations in which its action may be questioned is relatively narrow. They do occur in reality, but require specific circumstances and usually the initiative of specific parties, beneficiaries, creditors or the founder.
Maciej Pilarek, attorney and partner at PLA.partners, points out that the durability of the family foundation does not result from its formal untouchability, but from a well designed statute, properly functioning bodies and consistent practice of foundation operation over a multi-year horizon.
The registry court as the basic control body
The registry court plays the role of the basic control system over the family foundation. It may decide to dissolve a family foundation if its activity is at variance with the purpose for which it was established, or violates the interests of beneficiaries. This is, however, an exceptional solution, occurring rather in extreme cases.
In the practice of the PLA.partners team, this mechanism is taken into account mainly at the stage of designing the statute and distribution policy. A well designed family foundation that operates in line with the purpose recorded in the statute and does not violate the interests of beneficiaries is, in practice, not exposed to ex officio dissolution.
Setting aside or declaring invalid resolutions of the foundation’s bodies
Internal paths for challenging actions of a family foundation concern primarily resolutions of its bodies. The founder or beneficiaries may apply to the court for setting aside or for declaring invalid resolutions of the foundation’s bodies if they were adopted in breach of law or of the provisions of the statute.
This is an important internal control tool. From the private client’s perspective it means that the foundation’s bodies do not operate in a vacuum. Their decisions must be in line with the law and with the statutory regime set by the founder. PLA.partners experts design statutes so that the decision-making rules are precise enough to minimise the risk of internal foundation disputes.
Protection of creditors, paulian action against the family foundation
The family foundation does not protect assets against all of the founder’s creditors. If the founder transferred assets to the family foundation with the intent of harming creditors, those creditors may reach for the classical instruments of civil law, including the paulian action, demanding satisfaction of their claims from the foundation’s assets.
In the practice of the PLA.partners team, this area requires particular care, a family foundation should be set up in a period when the founder has no unsatisfied obligations creating a risk of a paulian action. Attempting to use the family foundation to avoid liability toward creditors may end with effective interference with the foundation’s assets.
Formal situations in which a family foundation will not remain in legal circulation
The legislator has provided for formal situations in which a family foundation will not survive in legal circulation. The most important concern procedural failures:
- missing the six month deadline for filing the foundation in organisation for registration,
- failure to contribute the founding fund within two years from entry of the foundation into the register of family foundations, in the case of establishing a family foundation in a will.
In these cases the family foundation does not remain in circulation for formal reasons, irrespective of the quality of its statute or the founder’s intentions. PLA.partners experts guide the client through these deadlines with care, treating them as part of the implementation plan.
Legal and business consequences for the client
From the decision-making perspective in a private company, the durability of a family foundation means:
- a high level of resilience of the legal construction to challenge attempts,
- the risk of registry court intervention only in extreme situations,
- the need for precise design of the statute, the competences of the bodies and the distribution policy,
- the need to avoid situations in which the family foundation could be perceived as a tool for harming creditors,
- the need to meet formal deadlines when setting up and funding the foundation,
- the need for ongoing corporate servicing of the foundation over a multi-year horizon.
Possible actions, a plan for the business owner
In the practice of the PLA.partners team, the resilience of a family foundation to challenge is built through:
- design of the statute as a document coherent with the foundation’s purpose and the law,
- design of the foundation’s bodies and decision-making rules,
- establishment of a distribution policy that takes beneficiaries’ interests into account,
- verification of the founder’s creditor situation before contributing assets,
- monitoring formal deadlines, including registration filing and contributing the founding fund,
- ongoing corporate and reporting servicing of the foundation.
Contact PLA.partners Law Firm
Do you need legal support or an individual analysis of your matter? Visit PLA.partners and contact our team, we will help assess the situation and propose specific solutions.
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