The Restructuring Review: Poland
I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY
Restructuring activity has been gaining in popularity in Poland recently, due to the covid-19 outbreak in particular. Insolvency activity, with regard to entrepreneurs, remains at a stable level, but consumer bankruptcy is growing constantly.
The financial markets are quite stable in general, but some negative factors can also be observed, owing to the lockdown.
The economy will undoubtedly be affected by the covid-19 outbreak, particularly in the hotel, restaurant and café sector, despite the actions undertaken to prevent a crisis. The current outbreak will be one of the greatest crises since the Second World War.2 Moreover, the financial liquidity of a large number of companies is under great pressure. The precise impact of the covid-19 pandemic is currently hard to estimate, but it is obvious that it will be significant.3
In 2019, approximately 586 commercial bankruptcies were declared and 465 formal restructurings were opened.4
Regarding trends in the market, more and more restructurings are being opened, but because of some inconsistencies in the law, a bankruptcy petition usually follows a restructuring application. This practice results from legal regulations on the exemption from individual personal liability of members of the board, which applies not only when filing a bankruptcy petition, but also once restructuring proceedings have been opened – not simply filed with the court. This inconsistency requires legislative changes.
Also, extrajudicial restructuring proceedings governed by the Restructuring Law (unified text O.J. 2020, item 814, as amended, of 15 May 2015), known as arrangement approval proceedings, are growing in popularity. These proceedings are carried out by the debtor, who enters into an agreement with an insolvency practitioner, who in turn supervises the course of proceedings. The debtor provides creditors with ballot papers and collects creditors' votes on the arrangement. It is also possible to include only certain creditors in the arrangement under the Restructuring Law (while entering into a partial arrangement). Subsequently, an application for approval of the arrangement is filed with the court, and the court issues a decision on approval of the arrangement.
With regard to restructuring trends, prepared liquidation – a pre-packaged sale, or pre-pack – is an increasingly popular type of distressed assets sale.
A pre-pack seems to be one of the most beneficial proceedings for all parties involved, because it is a quick way of purchasing a debtor's enterprise, a part thereof or the assets forming a substantial part of the enterprise. The court's involvement within pre-pack proceedings is limited, and thus the duration of pre-pack proceedings is also shorter. Recent amendments to pre-pack arrangements in Poland have, however, created more opportunities for the courts to become involved, but pre-pack proceedings have also gained greater transparency.
II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK
With regard to formal possible options for bankruptcy or restructuring in Poland, there is currently one type of bankruptcy proceedings, with the option of filing application for approval of the terms of sale (pre-pack) under the Bankruptcy Law (unified text O.J. 2019, item 498, as amended, of 28 February 2003), and four formal restructuring proceedings under the Restructuring Law.
Bankruptcy – in the traditional way – consists of two main parts: proceedings to declare bankruptcy and proceedings that follow the declaration of bankruptcy by the court.
In the first phase, the court usually appoints a temporary court supervisor, whose role is to prepare a detailed report on the debtor's financial and economic situation and organisational potential supporting the court's decision. The report should also help to answer the question of whether there is a basis for declaring bankruptcy.
If the debtor is insolvent, and has enough assets (especially cash) to carry on proceedings, bankruptcy is declared and the debtor enters the second phase, in which the debtor's assets constitute the bankruptcy estate and are liquidated in order to satisfy creditors.
It is also possible to file a pre-pack application within the bankruptcy petition. In pre-pack proceedings the court examines the application supported by a temporary court supervisor, and – within the bankruptcy declaration – approves (or not) the sale and purchase conditions, including the name of the acquirer and the price. The court's decision is appealable, and the final transaction is concluded after the court's decision becomes final.
Pre-packs, regulated by the Bankruptcy Law, are a particularly interesting restructuring mechanism. They are yet not as popular as, for example, in the United States or the United Kingdom, where around 25 per cent of all administrations are pre-packs and the highest value acquisitions are made within pre-packaged liquidation procedures. However, there are solid grounds to predict that pre-packs will gain popularity in Poland, since investors enjoy the execution sale effect while making a pre-pack acquisition, which means that they are not liable for the liabilities and commitments of the debtor. The transaction is quick and the investor acquires an enterprise that is already a functioning company, ready to continue conducting business.
Affiliated entities may also acquire an enterprise (either part of the organisation or certain assets) within the pre-pack procedure, but the price cannot be less than that stated by the court's appraiser. The decision on whether or not to approve the sale and purchase conditions is made by the Bankruptcy Court, along with the decision regarding declaring bankruptcy. The main feature of a pre-pack is the possibility of selling an insolvent debtor's assets to investors within bankruptcy proceedings, without auction or tender. A pre-pack is intended for selling an enterprise as an ongoing business.
The four kinds of restructuring proceedings in Poland are:
- arrangement approval proceedings;
- accelerated arrangement proceedings;
- arrangement proceedings; and
- remedial proceedings.
Arrangement approval proceedings are predominantly of extrajudicial character. The debtor itself enters into an agreement with a licensed insolvency practitioner and collects votes from creditors supporting the proposed arrangement. If the required majority level is met, and the proposed arrangement does not violate the law, the court approves the arrangement. The Court's decision on approval of the arrangement is appealable, but on limited grounds.
Accelerated arrangement proceedings are meant to be quick in-court proceedings during which the list of creditors is created and there is formal voting on the arrangement conducted by the judge-commissioner. Once the arrangement is adopted by creditors, the court issues a decision on approval of the arrangement, with the possibility of appeal. Accelerated arrangement proceedings can be opened if the total amount of disputed receivable debts giving the right to vote on arrangement does not exceed 15 per cent of the total amount of receivable debts giving the right to vote on an arrangement.
In general, with both arrangement approval proceedings and accelerated arrangement proceedings, the debtor may proceed with a partial arrangement limited to certain creditors – mainly those who are crucial for the debtor's existence and its financial condition.
Arrangement proceedings resemble bankruptcy, but differ in many aspects. The list of creditors is prepared within arrangement proceedings, and creditors have the right to file an objection to the list. Subsequently, a creditors' meeting is held during which the arrangement may be adopted, which is furthermore subject to the court's approval.
Remedial proceedings are the most complex and time-consuming restructuring proceedings. They allow the cancellation of a mutual contract that has not been carried out in full or in part before the day of opening of the remedial proceedings, with the judge-commissioner's consent, if the other party's performance resulting from said contract is an indivisible performance. Regulation of remedial proceedings also provides for the possibility of challenging any debtor's acts made to the detriment of creditors and constitutes a ground for declaring the acts ineffective.
With regard to arrangement proceedings and remedial proceedings, it is important that the debtor should have the ability to pay for the current costs of the proceedings and obligations incurred thereafter.
In remedial proceedings, usually the court – upon opening – appoints a receiver, who carries out almost all the operations of the debtor.
In all restructuring proceedings there is a possibility to restructure liabilities in various forms, including debt cancellation, extension of the payment deadline, fixing the repayment schedule in instalments and a debt-for-equity swap. Also, however, as an exception, in bankruptcy proceedings there is a possibility to vote on and adopt the arrangement.
For each restructuring proceeding the debtor may file either upon insolvency itself or the threat of insolvency. There is an additional condition for arrangement approval proceedings and accelerated arrangement proceedings, which may be conducted provided that total amount of disputed claims giving the right to vote on the arrangement does not exceed 15 per cent of the total amount of claims giving the right to vote on the arrangement.
In arrangement approval proceedings the debtor enters into a contract for exercise of supervision over the course of proceedings with a person (chosen by the debtor) who serves as the arrangement supervisor. The arrangement supervisor files an opinion with regard to collecting votes by the debtor and compliance of the arrangement with legal requirements. The court's involvement in principle is limited to issuing a decision on approval of the arrangement.
In accelerated arrangement proceedings and arrangement proceedings the court supervisor is appointed. The court supervisor exercises control over certain acts in law to be performed by the debtor. Under certain conditions, the court supervisor proposed by the debtor or majority of creditors is appointed by the court. The court's involvement within said proceedings is considerably wider compared with arrangement approval proceedings; in particular, the court takes several decisions in the course of the proceedings.
In remedial proceedings the court appoints a receiver who administers the remedial estate. The court may also permit the debtor to administer all or part of the business enterprise within the scope of ordinary management. The court's scope of action is similar to its involvement in bankruptcy proceedings.
With regard to informal methods of restructuring, the most important are standstill agreements and other arrangements made between the debtor and creditors, without the need to approve. While implementing informal methods of restructuring, parties do not benefit from statutory enforcement regulations. Those scenarios are intended rather for debtors in good financial condition, but who are predicting a potential threat of insolvency in the future.
In Poland, the most popular securities are registered pledges and mortgages.
- A registered pledge can be established on movable property and transferable property rights. It is governed by the act on registered pledges and the Register of Pledges. The pledge agreement itself and entry of the pledge into the Register of Pledges are both required in order to successfully establish a registered pledge. The pledge agreement should be made in writing.
- A mortgage can be established on immovable property. It is governed by the Act on Land and Mortgage Registers and Mortgage. There are two main types of mortgage regulated under this act: contractual mortgages and compulsory mortgages. The mortgage is established provided that the relevant entry has been made in the Land and Mortgage Register. It is also necessary to comply with requirements as to the document that constitutes the basis for entering the mortgage into the Land and Mortgage Register (e.g., notarial deed, a court's decision in the case of a compulsory mortgage), as well as requirements as to the form of the document (drawn up in writing with a signature certified by a notary, or in the form of a notarial deed).
Mortgages and registered pledges become valid provided that a competent court makes the relevant entry into the Land and Mortgage Register or the Register of Pledges, respectively.
In order to satisfy claims from the asset encumbered with a registered pledge or mortgage, the creditor must obtain an enforceable title and initiate enforcement proceedings; hence, the procedure may last for a long time. In the case of a registered pledge, it is possible to stipulate in the agreement that the creditor will be entitled to take over the ownership of the object of the pledge or to sell it by public auction, which allows the creditor to avoid the court procedure.
Collateral in kind (including, among others, a registered pledge and a mortgage) results in a privileged position for a creditor in the course of restructuring or bankruptcy proceedings. In restructuring proceedings, as a rule, a claim secured in kind, to the extent covered by the value of the object of collateral, may be included in the agreement only with the creditors' consent (although there are exceptions to this rule). In bankruptcy proceedings, funds obtained by the trustee from the sale of the encumbered asset are earmarked – after covering the costs of the sale and part of the costs of bankruptcy proceedings – to satisfy the creditors holding collateral in kind on the sold asset, with priority over unsecured creditors.
Directors (members of the board) have a statutory obligation to file a bankruptcy petition when certain conditions are met. Under Article 299 of the Commercial Companies Code (concerning limited liability companies), as well as Article 21 Paragraph 3 of the Bankruptcy Law (concerning limited liability companies and joint-stock companies), members of the board may be sued and personally liable to creditors if they fail to file a bankruptcy petition (or open restructuring proceedings) in a timely manner.
The time limit for filing a bankruptcy petition is 30 days from the date when insolvency occurred; that is, when the debtor lost the ability to fulfil its matured pecuniary liabilities, or the pecuniary obligations of the debtor were in excess of the value of its assets, and this state persists for a period exceeding 24 months.
There also exist grounds for criminal liability for the non-filing of a bankruptcy petition in timely manner, as well as the possibility to ban members of the board (including shadow directors) from economic activity, including managing the enterprise, for a period of one to 10 years.
III RECENT LEGAL DEVELOPMENTS
With regard to recent legislative developments, some important changes have been introduced in response to the covid-19 outbreak, and also – aside from any other developments – wider access to consumer bankruptcy was introduced in the act of 30 August 2019 changing the Bankruptcy Law. This act also changes the pre-pack procedure and makes some other less significant amendments.
In general, amendments related to consumer bankruptcy have led to more accessible consumer bankruptcy and have resulted in procedural changes that to some extent place the burden of carrying on bankruptcy proceedings on insolvency practitioners. For instance, responsibility for the process of lodging claims from now on lies with trustees.
The latest amendments to the Bankruptcy Law have also introduced new solutions for debtors who are natural persons other than sole traders (consumer debtors) by implementing an option to conclude an arrangement between the debtor and his or her creditors. Moreover, consumer bankruptcy proceedings provide for the institution of residual debt release. Once the debtor's obligations have been fulfilled under and in accordance with the creditors' repayment plan, the debtor may be released from the rest of its liabilities.
Furthermore, the latest amendments to the Bankruptcy Law have reorganised the pre-pack procedure and introduced auction-like instruments. If at least two applications for approval of the terms of sale have been filed, an auction should be conducted between acquirers to select the most favourable terms of sale. The submission of the application for approval of the terms of sale shall be announced to inform creditors and potential acquirers of the possibility of attaching their application to their own bid for the acquisition of the business in a pre-pack procedure. A pre-pack is intended for selling an enterprise as an ongoing business, with the significant benefit of execution sale effect, meaning that the investor is not liable for the liabilities and commitments of the debtor. An application for approval of terms of sale may refer to more than one acquirer.
In general, the recent amendments to the Bankruptcy Law in the scope of pre-pack regulation should be regarded as favourable, but much depends on how efficiently the bankruptcy courts will operate, especially with regard to time issues.
The insolvency framework system is subject to important digitalisation: the National Debtors' Register is planned to enter into force in December 2020.
IV SIGNIFICANT TRANSACTIONS, KEY DEVELOPMENTS AND MOST ACTIVE INDUSTRIES
In our view, one of the most significant transactions concerns Ruch S.A., a press distributor and logistics company. This is planned as the result of successfully concluded proceedings within a partial arrangement in two parallel accelerated arrangement proceedings, covering the most important group of creditors – press publishers. The details are now subject to negotiations, but the estimated value will amount to approximately 420 million złoty.
This transaction is crucial for the market, as it has been planned and is being conducted in atypical surroundings, given that the Warsaw Restructuring Court did not follow the legislative possibility to divide creditors in partial arrangement into groups. Hence, to comply with this requirement (separate proceedings), Ruch S.A. conducted two separate accelerated arrangement proceedings in parallel with two separate voting processes and approvals. To make the story more complex, although creditors at first voted for the arrangements, the Restructuring Court did not approve the arrangements and it was necessary to file an appeal, which resulted in the previous judgment being overturned.
The Vistal Gdynia restructuring proceedings were conducted within remedial proceedings.
Taking into consideration the international aspects of restructuring and insolvency in Poland, as in other EU countries concurrent proceedings are automatically recognised and there is also the possibility to commence secondary insolvency proceedings limited to assets located on Polish territory.
With regard to other countries, recognition of ongoing restructuring and insolvency proceedings is usually regulated in bilateral agreements, most commonly in accordance with UNCITRAL.
VI FUTURE DEVELOPMENTS
There is draft legislation amending arrangement approval proceedings. However, at the time of writing no direct proposals have been made public, so it is too early to comment in detail.
1 Karol Tatara is CEO, Adam Królik and Anna Czarnota are senior associates, and Sandra Bartkowska-Michalska and Mateusz Kaliński are associates at Tatara & Partners.
2 International Monetary Fund blog: https://blogs.imf.org/2020/04/14/covid-19-crisis-poses-threat-
to-financial-stability/ as well as https://www.bbc.com/news/world-52114829.
3 As described by Polish economist Elżbieta Mączyńska: https://biznes.gazetaprawna.pl/artykuly/1475567,elzbieta-maczynska-koronawirus-gleboka-recesja.html.