Structure of restructuring proceedings
Insolvency law in Poland has undergone a significant reform over recent years intended to improve the efficiency of proceedings as well as to provide better opportunities for creditors and debtors threatened with insolvency (or already insolvent) to conclude an arrangement. The reform introduced a clear separation between restructuring law, currently regulated by the Restructuring Law dated 15 May 2015 and effective as of January 2016 (the “Restructuring Law”), and bankruptcy law regulated by the Bankruptcy Law dated 28 February 2003 (the “Bankruptcy Law”).
The Restructuring Law provides for four types of restructuring proceedings, all designed to facilitate reaching an arrangement with creditors, and most not only offering debtors restructuring tools, but placing them on relatively safe ground for the distressed period in order to let them work out a solution and conduct the arrangement process:
- arrangement approval proceedings (postępowanie o zatwierdzenie układu);
- fast-track arrangement proceedings (przyspieszone postępowanie układowe);
- ordinary arrangement proceedings (postępowanie układowe); and
- remedial (“sanation”) proceedings (postępowanie sanacyjne).
The structure of these proceedings is designed to reflect the rule of “gradation”, where the scope of protection given to the debtor and restructuring instruments available in the relevant proceedings correspond with the scope of managerial powers that the debtor needs to give up, as further described below.
In principle, restructuring proceeding can only be initiated by an eligible debtor (except for remedial proceedings where the creditors are also entitled to file such petition regarding an insolvent entity), namely, a debtor that is insolvent (niewypłacalny) or threatened with insolvency, i.e. a debtor that despite discharging its liabilities will soon become insolvent. An entity will be considered insolvent if it meets any of the following criteria: (i) it is unable to pay its overdue debts (liquidity test), in which case insolvency will be presumed if the delay in payment exceeds three months; and (ii) over-indebtedness (balance sheet test), which test determines if the debtor’s pecuniary obligations, excluding future liabilities and liabilities towards affiliates, exceed the value of its assets and if this continues for longer than 24 months.
There are two key requirements for most restructuring petitions; specifically, the attachment of a provisional restructuring plan as well as a specification of the choice of method for restructuring the debtor’s liabilities. Despite the original application, the restructuring method can be changed to an alternative arrangement proposal at a later stage by a motion submitted by an eligible applicant.
The Restructuring Law has been prioritised over the Bankruptcy Law, which is reflected in the general rule that the bankruptcy court should suspend consideration of the bankruptcy petition until the restructuring petition is finally resolved. A further notable difference between bankruptcy proceedings and restructuring proceedings is that the latter does not provide a debt notification procedure. The list of creditors is determined by the court supervisor (nadzorca sądowy) or administrator (zarządca) based on the accounts of the debtor; in some circumstances, creditors have the right to appeal against the decision to place or omit their claims.
All restructuring proceedings focus on leading to an arrangement with the creditors that should cover all debt (including interest) which arose before the opening of given proceedings, subject to some exceptions provided by mandatory provisions of law. The arrangement is concluded by a voting procedure, which leads to a determination of whether the majority of creditors required by law supports the proposed arrangement. The arrangement, adopted by a suitable majority of the creditors, is subject to final approval by the court. The ultimate arrangement is binding on all of the creditors, both those who voted in favour of the agreement and those who opposed it, as well as those who did not take part in the procedure. The creditors are protected against the dismissal of restructuring proceedings or rejecting of the arrangement by enabling them in such circumstances to file a simplified bankruptcy application.
Protections available to the debtors
In all new proceedings, except for arrangement approval proceedings, a debtor can be granted protection against its creditors. All enforcement proceedings concerning claims covered by the arrangement will be stayed by operation of law on the commencement of fast-track or ordinary arrangement proceedings. Such protection against enforcement goes even further in remedial proceedings, where a stay of all pending enforcement proceedings and a prohibition on commencing any new proceedings may also encompass creditors holding in rem security interests on the assets of the distressed entity, which, as a rule, are not covered by the arrangement. Furthermore, the scope of sanctions regarding the ineffectiveness of a debtor establishing security interests or disposing of its assets at the “pre-bankruptcy” stage has been extended to cover “pre-remedial” stage.
No termination of credit agreements by banks
Furthermore, in principle a bank must not terminate a credit agreement entered into with a company in restructuring in reference to the events arising before the commencement of restructuring proceedings. The Restructuring Law also provides an express prohibition on the termination of tenancy and lease agreements concerning real property where the entity undergoing restructuring conducts its business (debtor’s premises). These prohibitions apply respectively to lease and insurance agreements, bank account agreements, sureties, guarantees and letters of credit issued before the institution of restructuring proceedings.
Arrangement with some creditors
The Restructuring Law introduces a possibility to enter into an arrangement with only some creditors. This legal instrument is mainly dedicated to large and very large enterprises, where the most effective method of restructuring is an arrangement with a specific group of creditors, singled out on the basis of objective, unambiguous and economically reasonable criteria (e.g. with banks). In such a situation, an arrangement with all of the creditors could be pointless, particularly if the debtor may reasonably assume that as a result of entering into an arrangement with some groups of creditors, it will be possible to satisfy 100% of the claims of the rest of them.
Computerisation of restructuring and bankruptcy proceedings
Poland is in the process of implementing Directive (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on restructuring by establishing an electronic National Debt Register (Krajowy Rejestr Zadłużonych) (the “NDR”). The NDR will contain all of the decisions and rulings issued in proceedings as well as documents and other communications concerning each respective restructuring and bankruptcy case. The participants in proceedings should be able to file the required motions and documents through the register. It is intended also to operate as a “case-law” portal. The NDR is expected to be fully operational from 1 December 2020.
General overview of the Bankruptcy proceedings
Bankruptcy proceedings can only be initiated in relation to a debtor who has become “insolvent”. The debtor is deemed insolvent if the “insolvency test” (described in more details above) conditions are met. A claim can be filed either by the debtor or by its creditors (independently or jointly). If the debtor's assets are not sufficient to meet the costs of the proceedings or are sufficient to meet solely those costs, the court shall dismiss the application for a declaration of bankruptcy. The court may also dismiss the application if the debtor's assets are encumbered with collateral in rem (e.g. mortgage, pledge, registered pledge) to the extent that the remaining assets are insufficient to meet the costs of the proceedings.
In bankruptcy proceedings, the basic right of creditors is the right to submit claims in the course of proceedings. After the list of claims has been drawn up, creditors may object to the recognition or refusal of the claim. Objections shall be heard by a judge-commissioner at a hearing. An institution of the creditors' council is also available in such proceedings, regulated in the same way as in restructuring proceedings.
Following submission of the insolvency petition, the debtor's assets may be secured by a court decision or upon request. The security of the debtor's assets may consist in particular in the appointment of an interim court supervisor (tymczasowy nadzorca sądowy). In such a situation, after its establishment, the debtor is entitled only to perform ordinary management activities. Activities exceeding the scope of ordinary management require the consent of the interim court supervisor under pain of nullity. Moreover, at the request of the applicant, debtor or temporary court supervisor, enforcement proceedings may be suspended and the seizure of the bank account may be revoked. In certain situations it is also possible to apply other methods of security, including the establishment of forced administration over the debtor's assets.
The main effect of declaring bankruptcy is the fact that all monetary liabilities of the bankrupt, which have not yet been paid, become due on the date of declaring bankruptcy. On the other hand, non-monetary property liabilities are transformed into monetary liabilities and also become due and payable on the date of announcing bankruptcy. The assets of the bankrupt becomes a bankruptcy estate, which serves to satisfy the creditors of the bankrupt. The composition of the bankruptcy estate is determined by making an inventory and a list of receivables. On the date of declaring bankruptcy, the bankrupt loses the right of management and the possibility to use and dispose of the property included in the bankruptcy estate. The legal actions of the bankrupt regarding the property entering the bankruptcy estate are invalid. It is worth mentioning that after the declaration of bankruptcy, the debtor cannot be encumbered with any security interest (e.g. mortgage, pledge, registered pledge) to secure the claim arising before the declaration of bankruptcy.
Submission of a petition for bankruptcy may also results in the ineffectiveness of some of the legal transactions of debtor in relation to the bankruptcy estate, for example, legal transactions executed by the bankrupt within one year before the day of submission of a petition for bankruptcy disposing of the bankrupt's assets, if they were performed gratuitously or non-gratuitously but the value of the benefit provided by the bankrupt grossly exceeds the value of the benefit received by the bankrupt or reserved for the bankrupt or a third person.
The ultimate objective of these proceeding is the liquidation of the debtor’s assets. The management of the enterprise is taken over by the trustee (syndyk), who should aim to sell the whole enterprise. If this is not possible, individual assets are sold. Once all of the assets have been sold and the amounts recovered, the trustee will distribute such amounts to the creditors in the order of preference determined by the mandatory provisions of law. A creditor of a registered pledge may be satisfied by taking over or disposing of the pledged asset if the agreement on the establishment of the pledge provides for such satisfaction of the pledgee and if such right is exercised within a time limit set out by the court.
The legal institutions provided in the Restructuring law often intermingle with the provisions of the Bankruptcy law. An example is the simplified bankruptcy petition, regulated in the Restructuring Law (as mentioned above), even though it initiates the procedure provided for in the Bankruptcy Law. On the other hand, the Bankruptcy Law leaves the institution of an arrangement in bankruptcy, to which the provisions of the Restructuring Law apply accordingly.
The reform introduced major changes to bankruptcy proceedings in Poland by limiting bankruptcy provisions to a single regular bankruptcy liquidation and bringing to the Polish legal system the institution of “pre-packaged sale” (“pre-pack”). The essence of a pre-pack is that all of a bankrupt’s enterprise, or an organised part of it, or assets constituting a substantial part of its enterprise, is/are sold on terms negotiated with a potential buyer before formal proceedings commence. The court will consider a motion to accept the terms and conditions of the sale simultaneously with a bankruptcy petition. An approved sale will operate as an enforced sale (i.e. free of encumbrances) and the buyer will not be held liable for the debtor’s obligations (including tax duties). In this solution, the sale is effective on the declaration of bankruptcy rather than after months or years of bankruptcy proceedings. On 24 March 2020, further changes to the pre-pack institution entered into force, which are aimed at increasing the protection of creditors and potential buyers. It should be stressed that the procedure will thus be extended in relation to the previous regulation. The following list underlines the major changes to the procedure:
- additional protection of creditors' rights through an obligation to attach a list security interest (known to such applicant) to the pre-pack application;
- each participant of the proceedings will be entitled to file a pre-pack application (also a debtor who did not file for bankruptcy);
- the possibility of selling components of the enterprise to more than one buyer;
- the purchaser will be able to file an application to repeal or amend the decision on the approval of the terms and conditions of sale (e.g. in the case of a significant change in the value of the enterprise disclosed after the decision on the approval of the sale);
- each submitted application for a pre-pack will be disclosed and in the case of several applications for a pre-pack, an auction will be held between the interested parties;
- the appointment of a temporary court supervisor or forced administrator mandatory if a pre-pack application is filed; and
- impose an obligation on the prospective buyer to pay a deposit of one tenth of the offered price.
The amendments to the insolvency law envisaged in order to tackle the negative effects of the state of epidemic threat on the entrepreneurs has recently been implemented. Pursuant to the new rules, the obligation of board members to file for the bankruptcy of the company with liquidity problems which arose during an epidemic is postponed to three months after the official date of cancellation of state of epidemic threat. Additionally, the restructuring cases are further prioritised by the court at the time of the epidemic in order to save companies from liquidation. The additional changes aiming to facilitate and speed up the restructuring cases are currently considered.
Arrangement approval proceedings (postępowanie o zatwierdzenie układu)
Conditions for opening
The proceedings for the approval of an arrangement are considered the least formal type of restructuring proceedings. The minimum participation by the court ensures that the burden of carrying out these proceedings lies firmly with the debtor. These proceedings are available to debtors threatened with insolvency who can reach an agreement with the required majority of creditors. The condition for initiating these proceedings is to prove that the total sum of disputed liabilities does not exceed 15% of all receivables whose holders are entitled to vote on the arrangement.
Course of proceedings
The debtor remains in the possession of its business, however the due maintenance of the assets is overseen by a licensed supervisor (nadzorca układu) appointed by the debtor. The supervisor acts as an economic and legal advisor to the debtor, assisting the debtor in preparing restructuring plans, arrangement proposals and other actions, e.g. collecting the creditors’ votes. The debtor and licensed supervisor enter into a civil law agreement whose provisions cannot in any way prejudice the debtor’s right to manage the assets. Once the parties reach an agreement on the arrangement, the debtor will file a motion with the court seeking judicial approval of the arrangement. The only decision on merits issued by the court is on the acceptance or rejection of the motion.
Despite the simplified and debtor-friendly procedure, the market responded positively to these arrangement approval proceedings, which seems to be due to the lack of protection of the debtor against enforcement by its creditors at the pre-litigation stage. The success rate of arrangement approval proceedings is estimated at 87.5% for the period from 2016 to Q1 of 2019, however the number of such proceedings in comparison with other types is marginal.
Pros and cons
Pros: The proceedings are formally less complicated and more flexible for the creditors and the debtor. From the legal perspective, these proceedings should move quickly as many of the actions should happen within a specific timeframe, e.g. the filing of the arrangement should happen within three months of the appointment of the supervisor and the court should make a decision within two weeks from the date of application. Consequently, given the confidentiality of the arrangements between the parties at the pre-litigation stage and promptly advancing the process of restructuring, this option is also attractive to debtors to avoid damage to the debtor’s corporate reputation deriving from its financial difficulties.
Cons: From the debtor’s point of view, the major disadvantage is the lack of protection of its assets against enforcement, i.e. until the arrangement is approved, enforcement proceedings are not suspended and any seizure of bank accounts is not revoked. The debtor’s commercial agreements may also be terminated during the pre-litigation stage, e.g. lease agreements or financing agreements. Despite the appointment of the supervisor, the management of the debtor may be liable for damages. If the claims are widely dispersed, it may be difficult to meet short deadlines for conducting certain actions.
Fast-track arrangement proceedings (przyspieszone postępowanie układowe)
Conditions for opening
Fast-track arrangement proceedings can be initiated if the sum of contested liabilities does not exceed 15% of the total sum of liabilities. This type of restructuring procedure is characterised by several simplifications, compared to ordinary arrangement proceedings, that aim at reaching an agreement in the shortest possible time of around two to three months. The proceedings are carried out by the court and commence with the filing of a petition.
Course of proceedings
An application to open fast-track arrangement proceedings is examined by the court based solely on the documents attached to the application. A positive decision leads to the court appointing a supervisor (nadzorca sądowy). The supervisor prepares and submits a restructuring plan, a list of receivables, and a list of disputed receivables (no list of inventories is made) to the judge-commissioner within two weeks from the date proceedings are opened. The debtor will continue to manage its enterprise; however, the debtor must obtain the supervisor’s approval to conduct any activities exceeding the scope of ordinary management (exceptionally, an administrator (zarządca) may be appointed to take over full management). In this procedure, unlike in arrangement approval proceedings, enforcement proceedings carried out against the debtor regarding the debt which constitutes a part of the arrangement, are in principal suspended. The regulations enable a judge-commissioner to revoke seizures made in enforcement proceedings that commenced before the date of restructuring proceedings were opened.
The success rate in fast-track arrangement proceedings is average and has fluctuated around 53% since the Restructuring Law became effective. However, the number of initiated proceedings vastly exceeds the figure of other types of restructuring proceedings combined together.
Pros and cons
Pros: The debtor’s assets are protected by the suspension of enforcement proceedings concerning the claims covered by the arrangement (stay of enforcement relating to claims not covered by the arrangement may be ordered for up to three months if the asset is necessary for running of the enterprise), and their initiation after the opening of the proceedings is inadmissible. Fast-track arrangement proceedings are available to bond issuers. Any decision by the debtor which exceeds the scope of ordinary management must be validated by the supervisor before or within 30 days from the day when it was performed. This regulation eliminates the risk of decision blockages in current operations and delays in making larger payments under contracts. A decision on the adoption and approval of the arrangement is made quickly and can therefore benefit the creditors.
Cons: The inability to object to the list of receivables, i.e. the creditor cannot challenge the amounts of claims determined in the list or any omissions of claims. There is also time pressure due to the relatively short duration of the proceedings.
Ordinary arrangement proceedings (postępowanie układowe)
Conditions for opening
Ordinary arrangement proceedings are for debtors whose sum of disputable claims exceeds 15% of their total debt. The model of ordinary arrangement proceeding adopted by the Restructuring Law is broadly equivalent to one of the restructuring options available before the reform, i.e. bankruptcy proceedings aimed at an arrangement with creditors.
Course of proceedings
Submitting a motion to initiate ordinary arrangement proceedings empowers the court to suspend enforcement proceedings conducted against the debtor and revoke seizures of its bank accounts by appointing a temporary court supervisor (tymczasowy nadzorca sądowy). The commencement of proceedings is subject to the debtor substantiating an ability to satisfy the costs of the proceedings and liabilities arising after the proceedings are initiated. For this purpose, the debtor must justifiably demonstrate that it has the means to cover these expenses or that it is or will be able to generate enough revenues. Regardless of the formalities, these proceedings are similar, in terms of the impact on the debtor’s management rights and the protection from creditors, to fast-track arrangement proceedings.
Ordinary arrangement proceedings are lengthy due to the higher percentage of disputed claims. According to publicly available statistics, ordinary arrangement proceedings are less effective compared to other types of restructuring proceedings. The final outcome of the ordinary arrangement proceedings in the form of cancellation of the whole process occurs almost twice as frequently compared to reaching an agreement on arrangement. This lack of effectiveness means that the market shows little interest.
Pros and cons
Pros: In principle, unlike remedial proceedings the debtor is not deprived of the possibility to conduct its business; creditors have a real influence on the proceedings on the creditors’ committee and can challenge the list of claims.
Cons: There is no statutory deadline to complete the proceedings.
Remedial (“sanation”) proceedings (postępowanie sanacyjne)
Conditions for opening
Remedial proceedings are intended to enable deep economic restructuring of the debtor’s assets and obligations, and may be initiated with a motion to the court filed by the debtor or its creditors. Two key factors that distinguish remedial proceedings from other restructuring proceedings are: multiple restructuring options and the broadest scope of protection of the debtor’s assets against the creditors.
Course of proceedings
After the initiation of the proceedings, the debtor’s estate becomes the “remedial mass” (masa sanacyjna) and the debtor is in principle deprived of its managerial powers. The elements of the remedial mass are determined by the administrator (zarządca) appointed by the court, however the Restructuring Law provides for the possibility of the debtor to manage its assets (under certain conditions) within the scope of the debtor’s ordinary management.
Remedial proceedings offer certain remedial options that have a significant impact on the achievement of restructuring objectives, which include: (i) the possibility to withdraw from executory contracts (“cherry picking right”), regardless of the provisions contained in them concerning their termination; (ii) the option to adjust the employment level to the needs of the reorganised undertaking; (iii) the expiration of powers of attorney and commercial proxies (prokura) by virtue of law; (iv) the ineffectiveness of the debtor’s acts regarding the remedial mass under certain circumstances, e.g. security established by the debtor in one year before the date of filing the application to open remedial proceedings which has not been established directly in connection with the receipt of the performance by the debtor; and (v) the possibility to dispose of redundant assets on principles analogous to those of bankruptcy proceedings (free of encumbrances). All of these remedial powers are under the restrictive supervision exercised by the judge-commissioner and the creditors.
Remedial proceedings should, in principle, take 12 months until the decision to approve or refuse to approve the arrangement becomes final, during which time, due to the implementation of the arrangement with the creditors, the debtor should regain the ability to fulfil its obligations and be able to bear the costs of the arrangement.
In terms of their effectiveness, remedial proceedings stand out negatively from the other types of restructuring proceedings. The outcome of the proceedings is more often the annulment of the proceedings rather than an arrangement being agreed. This is partly because remedial proceedings are chosen by companies in the most difficult situation; formalised framework of the procedure consumes enormous amount of time compared to remaining forms of restructuring proceedings.
Pros and cons
Pros: They provide the debtor with the strongest protection against enforcement of debts, e.g. preventing the enforcement of pledges or mortgage. Among other things, the court administrator is also entitled to terminate agreements which are disadvantageous to the debtor, irrespective of any provisions to the contrary. The debtor may be able to resume its business and the creditors will be adequately satisfied in accordance with the adopted arrangement.
Cons: From the perspective of the secured creditors, this method may mean that the recovery of their claims will take more time than in bankruptcy liquidation leading to debtor’s liquidation. Additionally, the inadmissibility of enforcement raises the fear of cooperation with debtors forcing prudential solutions, which may hinder the proper functioning of the debtor’s enterprise or obtaining financing.