Directive 2026/799 harmonises aspects of insolvency law and reshapes the Polish pre-pack regime

Background: the pre-pack in theory

Polish law promotes keeping a troubled debtor’s business alive and provides four restructuring procedures aimed at agreement with creditors, but these do not always work, and sometimes the scale of the problems means the only solution is a declaration of bankruptcy. An insolvent debtor, whether on a liquidity or a balance sheet basis, must file for bankruptcy within 30 days of the grounds arising, and failure to do so exposes its representatives to liability in damages, liability for the company’s tax arrears and even criminal liability. Bankruptcy comprises two main stages: establishing and realising the debtor’s assets, and identifying those entitled and paying them. Because of the far reaching formalisation of the proceedings, instead of quickly removing an insolvent entity from economic life and passing the proceeds of liquidation to creditors, the bankruptcy process drags on for years. It therefore happens that, before it concludes, the accumulated costs grow to enormous proportions. Before creditors receive any payment, the business itself usually deteriorates and never regains its former position, if only for want of working capital and investment. 

The legislature recognised this problem as early as 2015, and the answer was to be prepared liquidation (pre-pack), allowing the first stage of bankruptcy, the establishment and realisation of assets by the trustee, to be dispensed with in favour of a process run by the debtor before the declaration of bankruptcy. Under the design of the rules, on the declaration of bankruptcy the assets were to be sold immediately to the interested buyer, and the trustee was to deal with identifying those entitled to payment and paying them. A pre-pack works by the debtor itself finding a buyer for its assets, filing for bankruptcy and, at the same time, applying for approval of the sale to that buyer. The application may concern the sale of the business, an organised part of it or significant components of the debtor’s assets, in practice both an entire plant and a single property or production line, and it must identify the proposed buyer and the price. A draft sale agreement may be attached, which makes it easier for the trustee to conclude it later. The application is announced so as to alert other buyers to the possibility of acquiring assets free of debts and encumbrances, which in theory increases the competitiveness of the process, and if others come forward an auction is held to identify the highest bidder. The court approves the pre-pack where the price offered exceeds the amount obtainable in ordinary bankruptcy, taking into account savings in costs and liabilities. To prevent abuse involving entities related to the debtor, special conditions apply: a mandatory valuation by a court appointed expert and a price no lower than that obtainable in bankruptcy, less the costs and liabilities saved. If the conditions for bankruptcy and for granting the application are met, the court declares bankruptcy and simultaneously approves the terms of the prepared liquidation. 

Pre-pack reborn: Directive 2026/799 and the revival of Polish distressed M&A

Correct implementation of Directive 2026/799 on the harmonisation of certain aspects of insolvency law could bring about a revival of Polish distressed M&A. The directive introduces changes that speak directly to the problems of the Polish prepared liquidation, or “pre-pack”, which, with few exceptions, works poorly today. The coming months will show the direction of the legislative work and whether the main problems will be solved or the legislature will adopt only a minimum implementation package. 

Why the Polish pre-pack does not work

Pre-packs are used less often in Poland than ordinary restructuring, which enjoys greater recognition because it rescues the company and gives the debtor and creditors more influence over the process, whereas prepared liquidation ends the company’s activity and another entity takes over the business. Although in many cases, where no majority supporting an arrangement can be built, a pre-pack would be a good alternative to ordinary bankruptcy, it is not popular. Some experienced advisers openly advise against it, suggesting ordinary bankruptcy and acquisition of assets from the trustee, or restructuring and an arrangement with creditors, even where the chances of agreement are low. There are several reasons:

• No protection. Prepared liquidation gives the debtor no protection while the application is being considered. Once the announcement is made, everyone knows the company is in distress, and counterparties begin to aggressively collect their debts or cut back new orders. Public authorities are particularly active, efficiently seizing accounts and enforcing public law dues. The absence of a universal moratorium, which currently depends on a court decision, combined with the long time taken to consider applications, means that a business which could have been sold as a “going concern” disintegrates before the pre-pack is approved, and attempts to limit this are largely ineffective and carry additional costs.
   
• The process is not competitive. Although the law provides for an auction, the pre-pack rests on a valuation, the rules do not prescribe valuation methods, and specialists combining valuation expertise with restructuring experience are hard to find. After the application is announced, other buyers can in theory join the process, but no provision obliges the debtor to allow them to examine the assets or the company’s books. A significant information asymmetry arises: the buyer who helped prepare the application has full knowledge, while the others have only a theoretical opportunity to bid. Standard M&A solutions – a VDR (virtual data room, a platform for sharing documents), confidentiality agreements and competitor access to confidential information – do not exist in insolvency law and depend on the debtor’s ingenuity. Competing offers are most likely for simple assets such as real estate and machinery, and rare for large businesses.
   
• Duration. Considering an application takes at least four months in simple cases, and in complex ones, particularly where there are appeals or competing offers, it drags on for years. Courts approach pre-packs cautiously, fearing abuse in the form of debt relief for the business followed by a sale to a related entity, all the more so because the effects are irreversible: the buyer acquires assets free of encumbrances and is not liable for the predecessor’s debts. Where the debtor and the buyer organise the process, the only guarantor of fairness is often the opinion of an expert engaged by the debtor, which is why a temporary supervisor who additionally verifies that data is essential.
   
• Financing. Entities on the brink of insolvency do not pay their current liabilities, and counterparties may suspend supplies or services or demand prepayment, so maintaining a “going concern” is very difficult. There are also no provisions protecting bridge financing granted in a pre-pack, with only limited protection for financing in restructuring, which effectively discourages anyone from financing an entity on the edge of insolvency.
   
• No transfer of key contracts. Because a buyer of assets in bankruptcy is not liable for the bankrupt’s debts, the contracts concluded by the debtor do not pass to the buyer, from large supply contracts to simple utilities or telecommunications agreements. Taking over the business therefore requires individual agreement and a separate contract with every counterparty, and in practice negotiations must begin long before the application, or the offer must be made on assumptions about the fate of those contracts. 

What the directive will change

The directive splits the pre-pack into two stages: a preparation stage, in which a bidder is selected in a competitive and transparent procedure, and a liquidation stage, in which the assets are sold and creditors are satisfied; mechanisms ensuring effectiveness are provided for both. 

Protection against enforcement

At the preparation stage the debtor is to benefit from a stay of individual enforcement actions on the basis of art. 6 and 7 of Directive (EU) 2019/1023, which are designed for proceedings in which the debtor retains control of its assets. Directive (EU) 2019/1023 was implemented in Poland in the arrangement approval procedure, which gives broad protection from the announcement setting the arrangement date: commencing enforcement is then generally prohibited for four months or until the proceedings end. If this standard of protection is adopted for the Polish pre-pack, it will give the debtor universal protection, independent of a court decision and limited in time, enabling a competitive and transparent process without degradation of the assets. 

The process is to be competitive

A significant weakness of pre-packs is the lack of transparency: the bidder is rarely chosen at auction, and the price rests on a valuation and is not market tested. Courts therefore fear dishonest debtors who, through informally related entities, would regain control of the assets at the creditors’ expense. The directive introduces a mandatory supervisor independent of the debtor, who oversees the transparency, competitiveness and fairness of the process and must confirm and document that it was conducted correctly, giving creditors proof that the process was fair and the price the highest obtainable. At present the temporary supervisor is appointed only halfway through the preparation stage, after the application, the valuation and the first offer, so the role amounts to control rather than securing the competitiveness the directive requires. Achieving the directive’s aims calls for a more active supervisor who verifies buyer interest and secures access to data. 

Competitiveness rules out relying on a single entity’s offer. Market interest will have to be tested and bidders allowed to examine the business and submit offers. An announcement of the pre-pack alone will not be enough - the rules will need to be supplemented with information on when the business can be inspected and data obtained, and on the conditions of participation, and only then will the auction genuinely bring the process to market. The legislature should draw on the experience of other jurisdictions and on the active Polish M&A market, resolving equal access to information, the conduct of the auction, competitor access to confidential information and safeguards against withdrawal from the transaction. A process in which one bidder has the full data set and months to analyse it, while the others are invited merely to confirm the valuation, is not competitive and will not attract investors. Merger control clearances also need to be addressed, since without this the list of buyers will be limited. Financial investors are unlikely to have difficulty with clearances but rely on leveraged financing, such as credit or loans, which is difficult in a pre-pack, whereas trade investors buying with their own funds must reckon with the need to obtain clearance. 

Interim financing will make it possible to protect value

The current rules do not protect interim financing, and the directive may change that, but only in part. The protection of new financing proposed in the directive against later challenge in bankruptcy will not, on its own, be a breakthrough. Polish restructuring law already protects new financing and allows it to be repaid in a higher category, yet this has not increased interest. The reason is twofold: the absence of secure in rem collateral, for example a mortgage not registered before the declaration of bankruptcy is lost, and the caution of banks towards entities without creditworthiness. Only full protection of bridge financing collateral will bring change. 

The possibility of securing financing on the sale proceeds, and of granting bridge financing credited against the price, will be of interest, as it will allow financing to be provided to potential buyers without the constraints that bind banks today. It is also worth using the rules on appealing against a pre-pack decision to make debt financing easier for investors. Today a bidder has little chance of obtaining credit. The financing offer is time limited, while pre-packs, particularly where there are appeals, run beyond that limit. What remains is acquisition with own funds followed by refinancing, which raises the cost and removes many buyers (e.g. private equity funds) from the distressed M&A market. 

Secured creditors – credit bidding

The directive also introduces a mechanism strengthening the position of secured creditors. An offer crediting the claim against the price, known as credit bidding. The mechanism, well known in the USA, allows a secured creditor to acquire the assets constituting its security by offering the amount of its claim instead of cash. The directive requires an equitable element to be taken into account: the mechanism should not give creditors an undue advantage, for example where the sum of their claims exceeds the market value of the business. The legislature will have to define the rules precisely so that a secured creditor does not block the participation of other bidders. Permitting credit bidding may also facilitate trading in claims secured on the bankrupt’s assets, although this will depend on releasing banks from banking secrecy constraints when selling claims. 

Transfer of key contracts

Mutual contracts necessary to continue the business will survive the takeover of the business in a pre-pack. This is crucial, because acquiring a business in bankruptcy today amounts to acquiring a collection of assets rather than commercial relationships or licence agreements, which leads to value erosion. The directive will allow the buyer to take over mutual contracts, while introducing limitations, for example where a competitor is the acquirer, and leaving member states the option of allowing counterparties to terminate contracts on three months’ notice. A novelty will be the buyer’s ability to assume liability for the business’s debts, which may be a persuasive argument for key counterparties to support the pre-pack and maintain continuity of supply. No such possibility exists today, and the parties must look for intermediate solutions enabling value to be transferred. This does raise the problem of unequal treatment of creditors, since those important to the buyer may be repaid to a greater extent than would follow from the distribution of funds in bankruptcy. 

Conclusion

The absence of protection, the length of proceedings, an ineffective auction, and the lack of contract transfer and interim financing mean that the pre-pack is rarely used in Poland. With few exceptions the pre-pack essentially works poorly, and correct implementation of the directive could bring about a revival of Polish distressed M&A. The coming months will show the direction of the legislative work and whether the main problems will be solved or the legislature will adopt only a minimum implementation package. 

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