Polish Restructuring Law – Possibilities for Debtors and Creditors

The main aim of Poland’s new Restructuring Law is to provide a functioning legal framework for financial restructuring of companies which are in temporary distress.

The earlier regulation governing restructuring processes were contained within the Bankruptcy and Reorganisation Law (“B&R Law”). These regulations proved ineffective, as in practice the B&R Law favoured liquidation bankruptcy and only a fraction of attempted restructurings were successful. In addition, even where restructurings were effective a degree of stigma attached to the debtor.

The new Restructuring Law relies to a large extent on the experience and successful models employed elsewhere in Europe and the US. It introduces four new procedures aimed at solving temporary solvency issues, varying both in terms of the potential benefits for debtors and the amount of control the courts and creditors have over the business. The general rule is that the greater the possible benefits for the debtors, the greater the amount of control granted to the court and creditors over the procedure and the conduct of business.

New procedures

Parties may choose from the following procedures described below.

Arrangement Approval Proceedings (postępowanie o zatwierdzenie układu)

This procedure is available to those debtors capable of reaching an arrangement with the majority of their creditors outside of court. In these proceedings, the debtor continues to manage its business subject to the involvement of a licensed supervisor (nadzorca układu), whose role is limited to key actions related to preparing the arrangement including:

(i) preparing a restructuring plan;

(ii) cooperating with the debtor in preparing arrangement proposals;

(iii) compiling a list of claims;

(iv) assisting in the voting on the plan; and

(v) preparing a report containing a feasibility study of the proposed arrangement;

Accelerated Arrangement Proceedings (przyspieszone postępowanie układowe)

This procedure is available to debtors where disputed claims do not exceed 15 % of total claims. All enforcement proceedings concerning claims which are to be included in the proposed arrangement are stopped by operation of law. The court is more involved in this procedure as opposed to in the previous procedure, and is obliged to organise a creditors meeting. The creditors cast their votes during the meeting (and not in writing, as in the arrangement approval proceedings). As a general rule, the debtor continues to manage its business throughout the proceedings. The procedure involves the appointment of a court supervisor (nadzorca sądowy), who is granted oversight over the management of the debtor’s business. In exceptional cases an external manager (zarządca) may be appointed, to take over the entire management of the debtor’s estate.

Arrangement Proceedings (postępowanie układowe)

This option applies in cases where disputed claims exceed 15 % of the total claims. Although more formal, this process is similar in terms of the impact on the debtor’s management rights and the protection from creditors as the accelerated arrangement proceedings.

Sanation Proceedings (postępowanie sanacyjne)

This is the most advanced restructuring procedure. It affords the debtor a relatively high level of protection against creditors and includes more tools for returning the business to stability. Typically in such proceedings the debtor’s business will be managed by an administrator (zarządca), although in exceptional cases, where the debtor’s involvement is necessary and only where the debtor guarantees proper management, the court may leave the management to the debtor in possession. This procedure corresponds to the earlier bankruptcy with the possibility of arrangement.

Pre-pack

In addition to the four procedures outlined above, the new law also provides the possibility of a pre-pack type of restructuring, where the insolvency procedure has a clear purpose of the sale of the debtor’s business to a pre-selected buyer. In such case it is crucial to prepare a clear study showing the benefit of the transaction for the creditors and the business as a whole.

Amendments to the existing bankruptcy law

The Restructuring Law also significantly amends the existing bankruptcy law, among others, in the following ways:

Liquidity

The new regulations connect the state of insolvency with the economic inability to pay off liabilities rather than with the inability to make actual payments, as was the case before. This change adds precision and reduces the risk of qualifying too many businesses as insolvent, which existed under the previous regulations.

Balance sheet test

In addition the assets vs. liabilities test has largely been changed by the Restructuring Law. Future and contingent liabilities, as well as certain shareholder liabilities, will no longer be taken into account. A state of excessive indebtedness can form the basis for a declaration of bankruptcy only when it lasts longer than 24 months.

The main aim of the new Restructuring Law is to provide a functional legal framework for financial restructuring of companies which are in temporary distress.

author: Paweł Halwa