Restructuring possibilities in Poland currently and planned reforms
The law currently in force in Poland (i.e., the Bankruptcy and Reorganization Act dated 2003, further the “Bankruptcy and Reorganization Law”) allows for the restructuring of an entity facing financial crisis only to a very limited extent. In practice, the available legal institutions are perceived as either unachievable or not fit for their purpose. Entrepreneurs wishing to improve their position with creditors generally do not have the legal means to reach quick compromises, facilitate proper economic actions, or adjust business activity in a dynamic manner.
1. Current possibilities
The basic procedure set out in the Bankruptcy and Reorganization Law, which was supposed to enable entrepreneurs to carry out a restructuring, was the reorganization proceedings (“postępowanie naprawcze”). They can be initiated only by entities threatened with insolvency, namely those which despite discharging their liabilities will soon become insolvent. When the Bankruptcy and Reorganization Law came into force in 2003, the Polish legislature assumed that the reorganization and bankruptcy proceedings should be separated, i.e., that an entrepreneur can either be an entity threatened with insolvency (in which case, the debtor may institute the reorganization proceedings) or already insolvent (in which case the debtor should file a petition in bankruptcy).
For the purpose of commencing the reorganization proceedings the debtor needs to file with the court a statement on the commencement of the reorganization proceedings, as specified in the Bankruptcy and Reorganization Law, together with − among other items − a restructuring plan. The debtor may commence reorganization proceedings unless the court objects to the commencement of such proceedings within 14 days from the filing of the debtor’s statement on the commencement of the reorganization proceedings.
As of the day of initiating the reorganization proceedings:
- Repayment obligations of the debtor’s liabilities are suspended;
- Accrual of interest due from the debtor is suspended;
- Set-offs by creditors with respect to the debtor’s liabilities may be made only on the terms and conditions specified in the Bankruptcy and Reorganization Law; and
- No court enforcement proceedings or proceedings to secure the creditors’ claims can be initiated against the debtor, and those initiated previously are suspended by law.
The reorganization of the debtor’s business is implemented through an arrangement with the creditors. Possible restructuring scenarios are the same as in the case of bankruptcy proceedings aimed at an arrangement, described below. Creditors whose claims are included in the list of claims, as well as creditors who are not included in that list but who have claims in amounts not denied by the debtor, may participate in the creditors’ meeting and in voting on the arrangement.
The arrangement is adopted if the majority of creditors participating in the meeting and having at least two-thirds of the total value of claims vote in favour of the arrangement. Once approved by the court, the arrangement binds all creditors that were notified of the creditors’ meeting at which an arrangement was adopted, and those who notified the court supervisor of their participation and whose claims were not denied by the debtor.
The reorganization proceedings are discontinued by virtue of law if the arrangement has not been concluded within three months (with respect to “small” and “medium” debtors) or within four months (with respect to other companies) from the date of initiating the proceedings.
Practical significance of the reorganization proceedings
The practice of the past ten years during which the Bankruptcy and Reorganization Law has been in force, has shown that the significance of reorganization proceedings in business transactions has proven to be less than symbolic.
The Bankruptcy and Reorganization Law clearly states that the debtor is considered insolvent if he does not pay his debts as they become due and payable. Therefore, according to the current legal status, an entity is insolvent if it does not discharge its liabilities owed to two creditors. As a result, it should be stated that the meaning given to the “insolvency” in the Bankruptcy and Reorganization Law is very different from the common understanding of that term. The Legislature defined insolvency in such broad terms that it applies to a great number of business entities. Having this legal structure in place, the courts usually will not allow entrepreneurs to conduct a reorganization, indicating that the entity is already insolvent and should therefore file the petition for bankruptcy announcement instead.
Another obstacle to institution of reorganization proceedings are formal requirements concerning the statement declaring commencement of such proceedings and the high complexity of documents and declarations filed together with the petition in bankruptcy. In practical terms, filing a petition without formal defects (the condition for the institution of the proceedings) is only possible with the help of an experienced professional attorney.
Bankruptcy aimed at arrangement with creditors
Another restructuring option provided by the Bankruptcy and Restructuring Law, is the arrangement with creditors within the bankruptcy proceedings.
The Bankruptcy and Restructuring Law provides for two types of bankruptcy: liquidation and bankruptcy aimed at an arrangement with creditors. A court will declare bankruptcy aimed at an arrangement when it is probable that creditors would be satisfied to a greater extent through the arrangement than through the liquidation of the estate. Further, if during the course of liquidation proceedings, grounds for bankruptcy for the purpose of an arrangement arise (i.e., it is credibly established that creditors will obtain more relief under an arrangement than they would through conducting bankruptcy proceedings including liquidation of the debtor’s asset), the court may change its ruling and allow bankruptcy proceedings aimed at an arrangement.
The debtor or creditors may initiate these proceedings by formally filing a bankruptcy motion and presenting the restructuring proposals. In the course of the proceedings, i.e., when the bankruptcy aimed at an arrangement with creditors is announced, the debtor remains a debtor-in-possession, and manages and administers its property, supervised, however, by a court-supervisor (“nadzorca sądowy”). In some cases, the management and administration of the debtor’s estate may be vested in a receiver (“zarządca”) appointed by a court and the debtor may be deprived of its management rights.
As a general rule, an arrangement covers all debts due before the date of declaration of bankruptcy, apart from secured creditors’ claims and claims arising under an employment relationship, if the creditors did not consent to cover their claims by the arrangement. These claims must be satisfied notwithstanding an arrangement.
The arrangement may provide certain ways of reorganization and changes to the contractual obligations of the bankrupt, such as: (i) postponing payments; (ii) dividing payments into instalments; (iii) reducing the total amount of the claims; (iv) debt-for-equity swaps; and (v) amending, exchanging, or cancelling the right which secures a specific claim. However, reorganization may be conducted in any manner permissible by law. The arrangement may also provide for satisfying the creditors through liquidation of the bankruptcy estate (a “liquidation arrangement”).
In general, an arrangement is adopted if it is supported by a majority of the voting creditors allowed to participate in the meeting from each category of interest. Such majority must also hold at least two-thirds of the total value of claims. The concluded arrangement is subject to court approval.
An arrangement is binding on all the creditors whose claims, pursuant to statutory law, are covered by the arrangement, even if they have not been placed on the list of claims.
Practical significance of the bankruptcy aimed at arrangement with creditors
This type of bankruptcy is, in practice, the only way to achieve a court restructuring of the debtor’s indebtedness. However, successful reorganizations are rare − even in cases when this type of bankruptcy is announced by the court (i.e., the court may see the chances of satisfying the creditors through an arrangement as more appropriate than a liquidation). The primary reason is that in order to restructure, a bankruptcy motion needs to be filed, since this type of restructuring is applicable to insolvent companies only. Entrepreneurs are not enthusiastic about filing such motions, as bankruptcy has a negative common perception. This has led to the situation where debtors file bankruptcy motions only when they are forced to do so (e.g., when enforcement proceedings are initiated against a debtor), which usually rules out effective restructuring. Confidence in an entity in bankruptcy falls massively − as a consequence, bankrupts themselves often file for the change of ongoing proceedings to the liquidation proceedings, even before the vote on the arrangement takes place.
2. Objectives of the planned reforms
The above described restructuring options and their rather low practical significance and usage revealed the need for a reform of the Bankruptcy and Reorganization Law in order to create a flexible legal framework for entrepreneurs and businesses in crises to allow them to choose from a number of instruments enabling an effective and quick restructuring without the risk of negative consequences associated with current regulations. Therefore, the Polish Ministry of Justice has appointed a group of experts in insolvency and restructuring (further “Ministry of Justice Group of Experts”). The group has prepared and published its recommendations, which will be the starting point of a planned reform of the Bankruptcy and Restructuring Law, which is expected to be introduced in the coming months. The reform is intended to:
- Deformalize, namely, by limiting barriers to filing petitions;
- Provide choice, namely, by enabling the entrepreneurs to choose a form of restructuring that is proper for them;
- Shorten the time necessary to make an arrangement with creditors;
- Rehabilitate, by creating a framework for carrying out a real economic restructuring (and not only debt restructuring) under protection of a court.
However, the achievement of the above objectives must take place with the maximum safeguard for the creditors’ rights.
According to Ministry of Justice Group of Experts, rehabilitating elements of the proposed law should dominate the functioning of the undertaking and prevail over destructive actions (e.g., compulsory enforcement, liquidation, and bankruptcy), and similarly conciliatory elements (e.g., arrangement with creditors, settlements) over forced actions.
In order to achieve the above mentioned objectives, the Ministry of Justice Group of Experts has found it necessary to separate restructuring proceedings from bankruptcy.
3. Recommended proceedings
It is recommended that four restructuring proceedings aimed at making an arrangement with creditors be introduced to Polish law. These are:
- Proceedings regarding the approval of an arrangement;
- Proceedings regarding making an arrangement at the preliminary meeting of creditors (together with the proceedings regarding the approval of an arrangement − further the “Simplified Arrangement Proceedings”);
- Arrangement proceedings (ordinary);
- Reorganization proceedings.
All restructuring proceedings will be directed at both insolvent entrepreneurs and those threatened with insolvency. Thus, businesses capable of paying their debts and not at risk of losing this liquidity will not be able to unjustly gain the benefits of the restructuring procedures.
The same regulations concerning the scope of liabilities contained in the arrangement, arrangement proposals, the making and approving of the arrangement and its consequences as well as amending and setting it aside will apply to all restructuring procedures.
Simplified Arrangement Proceedings
The Simplified Arrangement Proceedings will consist in the making and approving of the arrangement made without the institution of a separate procedure. Thus the only substantive decision issued by the court would be the confirmation of the arrangement or refusal to confirm it.
According to the Ministry of Justice Group of Experts, Simplified Arrangement Proceedings should become the primary procedures aimed only at leading to reaching an understanding between the debtor and its all creditors. As a result, the average length of reorganization bankruptcy proceedings is expected to become much shorter.
Both procedures included in the Simplified Arrangement Proceedings can be initiated by any entrepreneur, irrespectively of whether it is insolvent or not. The only negative premise, excluding the possibility of having an arrangement approved by the court, is the proportion of the debtor’s contentious liabilities towards all of the debtor’s liabilities exceeding 15%. The existence of such a negative premise is perceived as necessary since it would be unacceptable for an arrangement − which as a rule applies to all creditors − to be adopted with the votes of creditors whose receivables are dubious, or do not exist at all, or to be adopted with the exclusion of entities which are in fact creditors even if the debtor does not acknowledge its obligation to pay.
Proceedings regarding the approval of the arrangement
The proceedings regarding the approval of the arrangement, i.e., the first procedure within the Simplified Arrangement Proceedings, entail gathering votes of the creditors before the institution of the formal court proceedings.
This solution will enable the debtor to undertake individual negotiations with its creditors in an active and flexible way and present results of such talks to the court. Simultaneously, formal requirements concerning the petition itself (and, consequently, the possibility of the arrangement falling through due to formal defects) are limited to the absolute minimum by way of stating that information material to making a decision on the approval of the arrangement will be contained not in the petition itself but in the report of the arrangement supervisor. This should constitute a significant improvement compared to current proceedings particularly in the case of small businesses.
Introducing the possibility for the debtor to choose a person holding a trustee license who will act as the arrangement supervisor will constitute an additional incentive to use this procedure. The participation of a professional entity, such as the license holder, will at the same time constitute a form of consultancy and help secure interests of the creditors.
Another advantage of the proposed procedure is that the fact that the debtor is participating in the proceedings is not disclosed (made public) until the moment of filing of the petition in the court. This – undoubtedly − can have a positive effect on its market position. Yet, the period between the filing of the petition until the approval (or alternatively a refusal to approve it) will be short enough that this should not affect the functioning of the debtor. The procedure itself is expected to take less than two weeks from the moment of filing in the court a petition for the approval of the arrangement without any formal defects to the issuing of a decision in that matter by a court of the first instance.
Proceedings regarding making an arrangement at the preliminary meeting of creditors
The second procedure within the Simplified Arrangement Proceedings − that is the proceedings regarding making an arrangement at the preliminary meeting of creditors − should have analogical advantages. This solution is based on an institution of a preliminary meeting of creditors, already existing under the Bankruptcy and Restructuring Law, in which the votes concerning the proposed arrangement are not gathered by the debtor itself, but are delivered by its creditors directly to the court. However, the currently practical insignificance of that procedure is associated with the fact that it can be used in the course of bankruptcy proceedings, before the bankruptcy is formally announced. This means that in order to use that option, the debtor currently has to file a petition in bankruptcy for the purpose of concluding an arrangement at the preliminary meeting of creditors.
The need for introduction of this procedure (or the modification of the existing institution into a separate procedure) is based on important justifications. In the economic reality of a limited trust in the independent actions of the entrepreneur or actions undertaken in order to gain benefits associated with the institution of court proceedings, the entrepreneur may be interested in the situation where the creditors are required to submit their votes directly to the court.
In this procedure, unlike in the case of the proceedings regarding the approval of the arrangement, it will be possible to obtain the securing of the proceedings through the suspension of the enforcement proceedings carried out against the debtor in relation to a debt which constitutes a part of the arrangement, if such enforcement was to prevent or hinder approval of the arrangement − as it is the case in the current regulation in force. The debtor may also be interested in the quickest possible formal institution of the court proceedings which may be very important to him in a situation where the creditor intends to file or already filed a petition in bankruptcy with regard to the debtor.
Unlike in the case of the Simplified Arrangement Proceedings, in the case of the Arrangement bankruptcy proceedings and the reorganization the court − upon the debtor’s petition − would open each of those proceedings in a separate decision.
The Arrangement bankruptcy proceedings will be least affected by the proposed changes. The essential change will be associated with the elimination of the fundamental fault associated with the applied terminology. The arrangement bankruptcy proceedings should not in any way refer to the bankruptcy proceedings and should not be associated with bankruptcy. It should be enough to change the name of the procedure from the bankruptcy open to an arrangement to the arrangement proceedings while leaving in place all other elements. In this respect introducing extensive changes is not appropriate. Pursuant to the Ministry of Justice Group of Experts, preservation of these widely known proceedings is justified.
The restructuring procedure with the most flexibility and the broadest options will be the reorganization proceedings. However, these will be proceedings of a completely different nature than currently. The main feature of such proceedings will be the creation of legal possibilities for carrying out a deep economic restructuring (i.e., “rehabilitation”) of the enterprise.
This should be possible due to making available powers which currently are reserved solely to the trustee in liquidation proceedings (such as termination of disadvantageous contracts). According to the Ministry of Justice Group of Experts, there are no rational grounds for maintaining a situation where socially useful legal institutions are safeguarding only the bankruptcy estate and cannot be applied in order to restore to the entrepreneur the ability to discharge his liabilities.
The broad scope of powers, their nature, and uniqueness justify the implementation of the principle saying that the debtor-in-possession management should be taken away, and an administrator should be appointed. Such legal construction associated with the necessity of obtaining the consent of the judge-commissioner will allow for the balancing of interests of a debtor against which the reorganization had been instituted and the interests of the remaining participants of business transactions (e.g., employees and business partners).
In these proceedings it should be possible to:
- Stay all enforcement proceedings during the period necessary to increase the revenue and to reduce costs of the conducted business activity or while searching for an investor;
- Rescind unfavourable contracts;
- Flexibly adjust the level of employment to current needs;
- Sell undertaking’s assets with the results of the liquidation bankruptcy sale.
The reorganization process itself will require − as a rule − a harmonious co-operation of the debtor and the administrator. Their success will depend primarily on the debtor’s activity and achieving economic results of the restructuring which, as a final result, will allow the debtor to reach agreement with creditors based on the regained ability to discharge his liabilities. It should be stressed that the reorganization will be made possibly by employing the knowledge of the economists, advisers, and specialists from particular industries.
Legal solutions recommended for the reorganization proceedings are aimed at enabling the carrying out of extensive restructuring activities limited only to the extent necessary to secure interests of the creditors. Above all, the implementation of reorganization actions will be enabled due to the temporary staying of enforcement proceedings concerning debts that are outside the scope of the arrangement.
No doubt, the success of the reorganization proceedings will greatly depend on the moment in which the debtor files the petition for the institution of the proceedings, namely the stage of the crisis in the enterprise. The sooner it’s done, the better chances there are that such reorganization will be successful. Hence, both the debtor and his creditors will be interested in the quickest possible commencement of the court reorganization proceedings which, in turn, will greatly limit unlawful actions resulting in the detriment to the creditors.
Relation between the proceedings
The above mentioned system of proceedings will open completely new diverse options of restructuring to the Polish entrepreneurs.
Giving a privileged position to the restructuring proceedings should also allow for making an arrangement despite the declaration of bankruptcy. Providing for such an option is completely justified in a situation where the bankruptcy had been declared without the prior use of restructuring options. In the case of discovering in the course of the proceedings circumstances indicating that the enterprise could be saved with the benefit to the creditors the trustee, the debtor and every creditor could submit arrangement proposals. In such a case the judge-commissioner will have the right to decide to stay the liquidation and put the submitted proposals to vote. The right to make the decision in this respect should be vested solely in the judge-commissioner because it is important for the option to submit arrangement proposals not to be used in any way to knowingly and purposefully dilate bankruptcy proceedings. One exemption should be the situation where the petition was filed by the majority of creditors or creditors holding claims in the amount greater than 50 percent of the total amount of debt. In the latter case, putting arrangement proposals to a vote should be mandatory. In the case where arrangement is made and approved in this manner, the bankruptcy proceedings would be discontinued.
The priority of restructuring proceedings will also be demonstrated by the fact that in the case of filing simultaneously a petition in bankruptcy and a petition for the institution of restructuring proceedings (reorganization bankruptcy and the out-of-court reorganization) the court would first examine the petition for the institution of restructuring proceeding, unless it would be obvious that this would cause a detriment to creditors.
According to the Ministry of Justice Group of Experts, the result of the aforesaid regulations will be:
- A significant shortening of the time necessary to make an arrangement;
- An increased utilization of restructuring procedures by entrepreneurs, which should facilitate the more effective satisfaction of creditors;
- Instituting of court proceedings at an early stage of the crisis of the enterprise;
- An earlier submission of debtor’s undertakings to court proceedings, which will cause a more comprehensive securing of their assets and limit further indebting and disposing of assets by the debtor in order to cause harm to his creditors or to satisfy their claims selectively.