Restructuring and insolvency law in Poland

Restructuring

The primary legislation governing restructuring proceedings is the Restructuring Law of 15 May 2015 (the “Restructuring Law”) which governs four types of restructuring proceedings:

• Arrangement approval proceedings (postępowanie o zatwierdzenie układu)
• Accelerated arrangement proceedings (przyspieszone postępowanie układowe)
• Ordinary arrangement proceedings (postępowanie układowe)

Remedial proceedings (postępowanie sanacyjne).

Restructuring proceedings aim to avoid bankruptcy by entering into an arrangement with creditors at a pre-insolvency stage, although it is also possible to initiate restructuring proceedings once insolvency has occurred.

The opening of restructuring proceedings requires the debtor to be either insolvent or threatened with insolvency. Under Polish Bankruptcy Law, a company is deemed insolvent if either of the following applies:

• illiquidity test – the debtor is unable to pay its overdue debts: met if the debtor loses the ability to meet its due pecuniary obligations. In this case, insolvency is presumed if the delay in payment exceeds 3 months
• over-indebtedness or balance sheet test – the debtor becomes over-indebted: met if the debtor’s pecuniary obligations, excluding
  • future and contingent liabilities
  • certain liabilities towards shareholders arising under loans and similar transactions
• exceed the value of the debtor’s assets, and if this continues for more than 24 months.

A debtor is threatened with insolvency if its economic situation suggests that it may shortly become insolvent.

The manner of commencement of proceedings varies depending on the type of restructuring proceedings.

Accelerated arrangement and Ordinary arrangement proceedings

A restructuring petition to open accelerated arrangement proceedings and ordinary arrangement proceedings has to be filed by the debtor itself with the dedicated electronic insolvency system of KRZ (Krajowy Rejestr Zadłużonych), and must then be recognised by the court which decides on whether to open the restructuring proceedings or not.

Remedial proceedings

A remedial petition of the company may be filed by the debtor itself or by any of its personal creditors. As in the case of a restructuring petition to open accelerated arrangement proceedings and ordinary arrangement proceedings, the remedial petition must be filed electronically with KRZ, and must then be recognised by the court which decides on whether to open the remedial proceedings or not.

Arrangement approval proceedings

Arrangement approval proceedings require the debtor to enter into a restructuring agreement with a restructuring advisor, who may publicly announce in KRZ on the “arrangement day” (obwieszczenie o dniu układowym) falling not earlier than 3 months and not later than 1 day before filing the application for the arrangement approval with the restructuring court; then such public announcement produces the effect of opening the restructuring proceedings.

Arrangement approval proceedings and accelerated arrangement proceedings may be initiated if the total amount of disputed claims giving the right to vote on the arrangement does not exceed 15% of the total amount of claims giving the right to vote on the arrangement.

See Q1 above for the four types of restructuring proceedings.

Restructuring proceedings are designed to facilitate the reaching of an arrangement with creditors not only by offering debtors restructuring tools, but also by placing them on relatively safe ground for the distressed period in order to let them work out a solution and agree the arrangement with creditors. In order to further facilitate the chances for a successful restructuring, each of the restructuring proceedings has priority over the bankruptcy. This means that the court shall not declare bankruptcy as long as the restructuring proceedings are pending and should decide on the restructuring petition first, unless it is harmful for creditors.

Arrangement approval proceedings

Arrangement approval proceedings are available to either insolvent debtors or debtors threatened with insolvency when the total sum of disputed liabilities does not exceed 15% of all the receivables of the creditors entitled to vote on the arrangement. The arrangement approval proceedings are mainly an out-of-court procedure initiated by the debtor entering into an agreement with the licensed restructuring advisor. Preparation of the arrangement proposals and voting on the arrangement are run without the court’s involvement.

In the out-of-court phase of arrangement approval proceedings, the debtor may benefit from general protection against the enforcement if it decides to publicly announce the arrangement day. Starting from the date of the announcement on the arrangement day, the debtor is protected against any enforcement and termination of the material contracts. Such protection ends if the debtor fails to file the petition for the arrangement approval with the restructuring court within 4 months from the announcement on the arrangement day.

In theory, the debtor might not make an announcement and thus resign from the protections. In practice, protection against enforcement is often required and thus such arrangement approval proceedings with no public announcement hardly ever occurs.

In principle, the arrangement is adopted if supported by the majority of voting creditors, holding jointly at least two-thirds of the sum of receivables to which voting creditors are entitled, while quorum is one-fifth of the creditors covered by the arrangement. The arrangement may provide different restructuring proposals for different groups of creditors. In such case, the arrangement should be adopted in each group by the majority of voting creditors, holding jointly at least two-thirds of the sum of receivables within the respective group. Cross-class cramdown is allowed if the arrangement is backed by the creditors holding at least two-thirds of all claims and if satisfaction of the groups voting against the arrangement will be no less favourable than their expected satisfaction in bankruptcy.

Once the arrangement is approved by the creditors, the debtor needs to apply to the restructuring court for arrangement approval. Such application is accompanied by a restructuring plan and the restructuring advisor’s assessment on the debtor’s prospects of performing the arrangement.

The arrangement approval proceedings may be limited only to a specific class of creditors (e.g. the debtor may limit the arrangement only to financial creditors without involving any trade creditors).

Accelerated arrangement proceedings

Similar to arrangement approval proceedings, accelerated arrangement proceedings can be initiated by either insolvent debtors or debtors threatened with insolvency when the total sum of disputed liabilities does not exceed 15% of all the receivables of the creditors entitled to vote on the arrangement.

Accelerated arrangement proceedings are in-court proceedings opened upon the debtor’s restructuring petition. The petition is accompanied with an arrangement proposal which is to be approved by the creditors. Filing a restructuring petition itself does not automatically protect the debtor from enforcement. A court decision on the opening of the proceedings is needed for the proceedings to be formally started and protection to be given. The restructuring court verifies whether the restructuring petition meets formal requirements. While deciding on opening the restructuring proceedings, the court should also verify substantive grounds of the restructuring, i.e. whether:

• the debtor is either insolvent or threatened with insolvency
• the restructuring will not be harmful to the creditors.

Once opened, accelerated arrangement proceedings give the debtor protection against court enforcement aiming to satisfy the claims covered by the arrangement. In principle, the secured creditors are free to carry on the enforcement to satisfy the claims not covered by the arrangement from collaterals, unless the judge-commissioners suspend it on the debtor’s petition. Such suspension may be for no longer than 3 months.

When opening accelerated arrangement proceedings, the restructuring court appoints a court supervisor (nadzorca sądowy) and a judge-commissioner (sędzia komisarz) who runs the case on a daily basis and oversees the proceedings. Both the judge-commissioner and court supervisor are independent of the debtor and creditors. If so requested by the creditors or decided by the judge-commissioner, a creditors’ council is appointed. The creditors’ council controls the court supervisor and consents to some of its decisions.

Immediately following appointment, the court supervisor prepares and submits a restructuring plan, a list of receivables and a list of disputed receivables to the judge-commissioner. Once the documents have been submitted, the judge-commissioner indicates the date on which the creditors’ meeting will be held and the creditors will vote on the arrangement.

The arrangement needs to be supported by the majority of voting creditors, holding jointly at least two-thirds of the sum of receivables to which voting creditors are entitled, while quorum is one-fifth of the creditors covered by the arrangement. Group voting and cross-class cramdown are also available. Once adopted by the creditors, the arrangement needs to be further approved by the restructuring court.

Ordinary arrangement proceedings

Ordinary arrangement proceedings can be initiated by either insolvent debtors or debtors threatened with insolvency when the sum of their disputed liabilities exceeds 15% of all the receivables of the creditors entitled to vote on the arrangement.

Similarly to accelerated arrangement proceedings, ordinary arrangement proceedings are opened by the restructuring court upon the debtor’s petition. Rules regarding the filing of a restructuring application and the court decision are the same as the rules on accelerated arrangement proceedings.

Unlike in the case of accelerated arrangement proceedings, at the time when the court is considering the restructuring petition, the debtor’s assets may be subject to certain protection, i.e.:

• the restructuring court may appoint an interim court supervisor (tymczasowy nadzorca sądowy), which limits the debtor’s powers to perform certain actions exceeding the scope of ordinary course of business (in practice, disposal of significant assets)
• at the request of the debtor or the interim court supervisor, the court may suspend enforcement proceedings conducted against the debtor and revoke seizures of its bank accounts if the enforcement concerns debt covered by the arrangement.

Once opened, ordinary arrangement proceedings:

• give the debtor protection against court enforcement (like with accelerated arrangement proceedings)
• ensure that the debtor’s capacity to manage its assets is subject to the same rules as for accelerated arrangement proceedings.

Similarly to arrangement approval proceedings and accelerated arrangement proceedings, the arrangement needs to be supported by the majority of voting creditors, holding jointly at least two-thirds of the sum of receivables to which voting creditors are entitled, while quorum is one-fifth of the creditors covered by the arrangement. Group voting and cross-class cramdown are also available. Once adopted by the creditors, the arrangement needs to be further approved by the restructuring court.

Since ordinary arrangement proceedings do not offer any special tools other than accelerated restructuring proceedings, they are a less popular type of in-court restructuring in Poland and in practice hardly ever occur. The practical difference is limited to the value of the disputed claims. If there are numerous disputes to which the debtor is a party and the debtor is not willing to surrender the management to the court appointed administrator (as would be the case in remedial proceedings), it may opt for ordinary arrangement proceedings.

Remedial proceedings

Remedial proceedings may be initiated by a petition filed by the debtor (if it is either insolvent or threatened with insolvency) or by its creditor (if the debtor is insolvent). Rules regarding the filing of a restructuring application and the court decision are the same as the rules on accelerated arrangement proceedings.

Remedial proceedings are intended to enable a deep economic restructuring of the debtor’s assets and obligations. Remedial proceedings are characterised by:

• the availability of multiple restructuring options having a significant impact on the achievement of the restructuring objectives. These include an option to terminate employment contracts with limited employees’ rights protections and the possibility to withdraw from certain onerous contracts (the “cherry-picking right” of the administrator), even if such withdrawal was not possible under the terms of such contract
• the general protection of the debtor’s assets against enforcement
• expiration of powers of attorney and commercial proxies (prokura) by operation of law
• appointment of an administrator (the debtor is typically deprived of its management rights)
• ineffectiveness of the debtor’s acts (claw-back) carried out within 1 year prior to the filing of the application for the opening of proceedings and regarding the debtor’s assets (remedial estate), e.g. certain undervalued disposals and security interests established by the debtor without consideration
• the administrator’s option to dispose of the assets free of encumbrances (fire-sale).

All these remedial powers are exercised by the restructuring administrator under the supervision of the judge-commissioner and the creditors’ council, if appointed.

After the commencement of proceedings, the debtor is, in principle, deprived of its managerial powers. Even if the court decides that the debtor should retain the powers to manage its assets (which may happen in exceptional cases, e.g. when the debtor’s involvement in management is necessary for the business), the debtor is only entitled to do so within the scope of the ordinary course of business (ordinary management).

Similarly to the other types of restructuring proceedings, the arrangement needs to be supported by the majority of voting creditors, holding jointly at least two-thirds of the sum of receivables to which voting creditors are entitled, while quorum is one-fifth of the creditors covered by the arrangement. Group voting and cross-class cramdown are also available. Once adopted by the creditors, the arrangement needs to be further approved by the restructuring court.

During remedial proceedings, the debtor is allowed to enter into a partial arrangement with creditors not involved in the remedial proceedings arrangement, but in practice this rarely occurs.

In practice, the main difference between the different types of creditors in each type of restructuring proceedings is whether they benefit from a security interest or not.

In restructuring proceedings, secured creditors are not usually bound by the arrangement to the extent their claim can be satisfied from the proceeds of the collateral. However, they may consent to be bound by the arrangement or be compulsorily crammed down if they are offered full repayment or repayment not less than their expected recovery from the collateral.

It should also be noted that certain affiliated creditors are excluded from voting on an arrangement in restructuring proceedings.

The arrangement may divide the creditors and claims into separate groups, where each group can be offered different restructuring measures. No discrimination is allowed among creditors in the same group.

All representatives of the company have an obligation (under threat of personal liability, including criminal liability) to file a bankruptcy petition within 30 days from the company becoming insolvent.

If the bankruptcy petition is not filed in due time, the company’s representative may be held:

• personally liable for damages, unless not being at fault
• criminally liable under threat of fine, a penalty of restriction of liberty or imprisonment for up to 1 year.

Restructuring proceedings may be initiated if the debtor is insolvent or threatened with insolvency, but unlike bankruptcy, there is no obligation to initiate restructuring proceedings.

As a rule, most restructuring proceedings are debtor-in-possession, except for remedial proceedings where an administrator is generally appointed (under certain conditions, the restructuring court may allow the debtor to retain the right to manage its assets but, in this case, the debtor must generally obtain the approval of a court-appointed supervisor to perform certain actions falling out of the scope of day-to-day management (so-called ordinary management)). In accelerated and ordinary arrangement proceedings, if the debtor does not fulfil its obligations related to the restructuring proceedings, the debtor can be deprived of the right to manage the assets (in which case the court will appoint an administrator (zarządca)).

The debtor’s management board represents the company in any of its procedural actions within the restructuring proceedings. The debtor must comply with its procedural duties. Should the debtor fail to comply with the orders of the judge-commissioner, the restructuring proceedings may be terminated upon the consent of the creditors’ council.

Generally, shareholders have no specific duties within restructuring proceedings. If they have any receivables against the debtor, their claims may be covered by the arrangement. However, the shareholders are deprived of voting rights with regard to the arrangement (subject to some exceptions).

Insolvency

Bankruptcy proceedings, i.e. proceedings aimed at liquidating the assets of an insolvent debtor, are governed by the Bankruptcy Law of 28 February 2003 (the “Bankruptcy Law”). The Bankruptcy Law also includes the provisions regulating pre-pack insolvency sales.

The EU Regulation on Insolvency Proceedings (Regulation no. 848/2015, the “EIR”) is also applicable.

A bankruptcy petition may be filed by the debtor itself or by any of its personal creditors. It should be filed electronically with the dedicated electronic insolvency system of KRZ. A bankruptcy petition needs to be recognised by the court and it is a court’s decision whether to declare the company bankrupt or not. While deciding on bankruptcy petition, the restructuring court verifies whether formal requirements met, as well as the substantive grounds of procedure, i.e. whether the debtor is insolvent. Even though a debtor is insolvent, the bankruptcy court shall dismiss a bankruptcy petition in case of lack of funds to cover the costs of the proceedings, or the funds are enough to cover the costs of proceedings but there are no prospects to satisfy unsecured creditors.

Under Polish Bankruptcy Law, a company is deemed insolvent if either of the following is met:

• illiquidity test
• over-indebtedness or balance sheet test.

See Q2 under Restructuring for more details.

Standard bankruptcy proceedings aim at liquidating the insolvent company’s assets and distributing the liquidation’s proceeds to repay its creditors.

A pre-pack insolvency sale is to sell the insolvent debtor’s business as a going concern, or the debtor’s assets with significant value on the terms pre-agreed before the declaration of the bankruptcy.

Polish Bankruptcy Law specifies different rules of satisfaction for unsecured and secured creditors. Generally, secured creditors enjoy priority in satisfaction from the amounts recovered from the sale of encumbered assets, subject to minor statutory exceptions. 

Unsecured creditors are satisfied following a specified bankruptcy waterfall, including four classes/categories of creditors:

• super-senior claims: including social security payments, certain remuneration of employees, farmers, alimonies, certain costs of restructuring proceedings preceding bankruptcy, etc
• the principal amounts of debts not included in other categories
• interest from the first and second category debts above
• intra-group receivables (principal amounts and interest) from a loan or other intra-group transaction with similar effect made within 5 years prior to the bankruptcy declaration, granted by a shareholder with at least 10% of votes in the bankrupt’s general meeting.

Yes, solvent liquidation aims to liquidate the company’s assets, provide the amounts recovered from liquidation to the company’s creditors and wind the company up. However, if a company is insolvent, filing for bankruptcy is obligatory. Should it transpire that the company is insolvent within the course of liquidation proceedings, the liquidator is obliged to file a bankruptcy petition pursuant to the general rules as a management board member. In some cases, the bankruptcy court may decide not to open bankruptcy proceedings, allowing it to be automatically dissolved. 

Financial restructuring from the creditors’ perspective

Polish restructuring law does not regulate the out-of-court restructuring of financial documentation. The additional reporting duties may therefore be freely agreed between the parties to the documents, subject to the parties’ consent.

The lender and the borrower may also contractually agree to involve an independent restructuring advisor to lead the restructuring process or appoint a person to monitor the borrower’s activities, holding the position of CRO (chief restructuring officer). Such person may be authorised to countersign the borrower’s undertakings, prepare a regular report on the borrower’s activities and advise how to restructure the company and its debts in order to avoid insolvency. Should such a person be appointed to the debtor’s management board, they will incur personal liability pursuant to the same rules that apply to other management board members.

In practice, lenders often expect the borrower to appoint a financial advisor with a duty of care to the lenders and that it covers the costs of the lender’s advisor.  

No creditor supporting the company at a pre-insolvency stage may benefit from any preferences in subsequent restructuring or bankruptcy proceedings. The new financing will be subject to similar avoidance actions and hardening periods as all other financings. The lenders providing financing to the debtor under the arrangement adopted in the restructuring and granted in relation to such arrangement may be classified in the super-senior (first) category of satisfaction in bankruptcy if declared upon a bankruptcy petition filed not later than 3 months after the said arrangement has been finally set aside. However, Polish commercial banks are reluctant to provide such financing given their internal policies and regulatory restrictions.  

On the part of the lender, clawback risk can be an issue if the new security interest is taken, provided certain conditions are met. Granting selected creditors new security interests may also cause criminal liability of the debtor and its representatives.

NPL

Non-performing loans (NPLs) not secured with a mortgage or registered pledge can be sold by assignment. Unless contractually restricted in the facilities agreement, the debtor’s consent is not required to perfect the assignment. However:

• notification is required to enforce the assignment because until the debtor is notified, it can still discharge the debt by paying the assignor
• when selling the loan, the bank must observe strict restrictions regarding banking secrecy, i.e. it cannot provide the potential purchaser with any information on the loan or the debtor, unless the debtor agrees.

Transfer of a loan secured with a mortgage requires the transfer of a mortgage to be effective.

Transfer of a mortgage and a registered pledge securing the loan requires registration in the relevant public register (which for a mortgage may take 12 or more months).

There are no restrictions on sub-participation agreements. If a true sale is prohibited by the credit agreement, the lender may either enter into a sub-participation agreement with sub-participants (i.e. financial institutions) who take over the underlying risks, or the lender may establish a special purpose vehicle (SPV) and transfer the non-performing loan to it.

Formally, no licence or authorisation is required for a one-off purchase or sale of NPLs. However, in Poland NPLs are acquired primarily by debt funds (until recently called securitisation funds), a special type of closed-end investment fund whose objective is to invest in receivables. Debt funds are represented by investment fund corporations, which must obtain permission to establish closed-end investment funds and their management, which is granted by the Polish Financial Supervision Authority. In practice, investment fund corporations transfer the management of the receivable portfolio of the debt fund to servicers (recovering receivables). Authorisation by the Polish Financial Supervision Authority is required for the management of the receivables, including certain receivables financed from public funds within the meaning of separate regulations, or rights to consideration attached to some specific receivables, referred to in the Polish act on Investment Funds and Management of Alternative Investment Funds. Servicers are required to obtain the indicated authorisation from the Polish Financial Supervision Authority.

The act on credit servicers and credit purchasers implementing Directive (EU) 2021/2167 of the European Parliament and of the Council of 24 November 2021 on credit servicers and credit purchasers, and amending Directives 2008/48/EC and 2014/17/EU, is currently being drafted in the Polish Parliament. This draft provides for harmonisation of regulation of the activities of credit purchasers and credit servicers in relation to NPLs originally granted by credit institutions. According to the draft, supervision of the activities of credit servicers and credit purchasers by the Polish Financial Supervision Authority will be established, whereby the Polish Financial Supervision Authority will be able to grant or refuse authorisation to a credit servicer, revoke the authorisation of a credit servicer, and dismiss or suspend a member of the management board of a credit servicer responsible for a specific breach.