POLAND: An Introduction to Restructuring/Insolvency

Polish law offers a number of proceedings for businesses and individuals in distress. They span business insolvency proceedings and consumer bankruptcy, as well as four restructuring proceedings. These solutions aid debtors but also create either opportunities or risks for creditors. Please note that opportunities will arise as a rule for active creditors.

Restructuring proceedings are as follows:

• arrangement approval proceedings (including a track with an announcement in the National Debtors Register (Krajowy Rejestr Zadłużonych, or KRZ) and a more private track, without an announcement);

• accelerated arrangement proceedings;

• arrangement proceedings; and 

• remedial proceedings.

As regards insolvency proceedings, in Poland there are regular insolvency proceedings, which are regulated under the Insolvency Law, as well as consumer bankruptcy, which sometimes can be a useful tool for highly indebted former entrepreneurs or members of the management boards. Insolvency proceedings may be accompanied by a pre-pack sale application.

Legal Grounds for Opening Proceedings 

Legal grounds for opening restructuring proceedings is the fact of insolvency or threat of insolvency. Insolvency is defined under the Insolvency Law as a state whereby the debtor lost its ability to satisfy the mature pecuniary liabilities.

Another basis (legal grounds, as specified in the Insolvency Law) for insolvency is over-indebtedness. This situation occurs when the assets are higher than liabilities and this state has lasted for more than 24 months.

Statistics 

In 2023, the authors observed 408 companies declared insolvent, whereas 611 bankruptcy petitions were dismissed – mainly because of insufficient funds to conduct the proceedings. The numbers in respect of restructuring proceedings are as follows:

• 3919 arrangement approval proceedings;

• 158 accelerated arrangement proceedings;

• 54 arrangement proceedings; and

• 101 remedial proceedings.

Most Popular Types of Proceedings 

In Poland, as numbers are growing, arrangement approval proceedings are most popular, accounting for up to more than 92% of all restructuring proceedings. This popularity is because of the mainly out-of-court nature and simplicity thereof.

Electronic Proceedings 

The KRZ has been in operation in Poland since December 2021. All kinds of proceedings must be conducted and carried out within the system – at least with regard to companies.

Unfortunately, the KRZ system is only in the Polish language version – although it is currently under expansion to incorporate other elements. These aim to enhance and facilitate the method of conducting the proceedings, which slows it down considerably.

Future Developments 

Poland is ahead of important changes in the restructuring and insolvency framework.

The EU Restructuring Directive (also known as the “Second Chance Directive”) is still in the pipeline. Issues that need to be addressed in this regard include automatic stay of enforcement, cross-class cram-down issues, and the treatment of secured creditors.

Moreover, in December 2022, the European Commission published its Proposal for a Directive of the European Parliament and of the Council harmonising certain aspects of insolvency law, together with the remarks and positions towards the proposal. This opened up discussions on some of the potential changes to national laws. As part of this legislative process, 49 entities issued their positions. The European Commission is now analysing these documents, aiming to propose a Directive soon.

The proposal covers, according to Article 1.1, the following areas:

• avoidance actions;

• the tracing of assets belonging to the insolvency estate;

• pre-pack proceedings;

• the duty of directors to submit a request for the opening of insolvency proceedings;

• simplified winding-up proceedings for microenterprises;

• creditors’ committees; and

• the drawing-up of a key information factsheet by member states on certain elements of their national law on insolvency proceedings.

Within the whole EU, the level of coherence of the above-mentioned issues is relatively low. As a result, many member states are now facing the need to assess what changes are required and what amendments to the law are necessary. The proposed amendments regarding prepared liquidation (pre-pack) merit special attention.

In the section on pre-pack, the proposal provides for – among other things – the appointment of a special independent body (the so-called monitor) to evaluate the pre-pack procedure and the benefits to creditors. It is envisaged that this body may be a bankruptcy trustee and, at the same time, a party to the pre-pack transaction concluded with the investor. In Poland, the Temporary Court Supervisor could successfully perform this function, as later on they become the trustee of the bankruptcy estate.

Best Interest of Creditors Test 

The proposal for the Directive also provides for the preparation of a best interests of creditors test, as a basis for evaluating the price proposed by the investor. Such a test is also postulated in the EU Restructuring Directive and could be standardised – for example, in the drafting process – so as to provide the broadest and most reliable knowledge for creditors as parties in insolvency proceedings.

Possible Auction 

The Directive provides for the auction procedure, both with the involvement of an IP or without it. Where the court decides to appoint an IP (insolvency practitioner), the public auction is not required. Where the court refuses to appoint an IP, however, then the public auction procedure is obligatory.

Polish insolvency law creates certain risks for an investor who decides to invest in the preparation of the pre-pack procedure, however. The investor makes a substantial financial effort as they need to carry out the required audits and due diligence reports. Once the investor loses the bid, all this financial involvement is wasted and the investor stands to recover nothing – whereas the other participant, who may have offered 1EUR more in the bidding process and then wins the auction, not only collects the assets (free from any collateral, with the execution sale effect) but also without any financial effort whatsoever on their part in connection with the preparation of the pre-pack procedure.

That is why the popularity of the pre-pack procedure in Poland has collapsed drastically after this rule was introduced in March 2020. How to remedy the situation? The solution is included in the proposed Directive, as it envisages the possibility to get the investor’s ancillary costs of preparing the pre-pack reimbursed.

This is an excellent example of how EU law can enormously improve national law. The proposal for the Directive emphasises the efficiency of the procedure, but also mentions the need to ensure its transparency. These values must always be properly balanced, as must the often conflicting interests of different categories of participants in the proceedings.

Preserving Value for Creditors 

It is expedient to emphasise that the pre-pack significantly increases the preservation of the value of the debtor’s enterprise from the point of view of its creditors. It is also of considerable importance from the point of view of preserving the enterprise itself, as well as jobs and the principle of a smooth transition between ownership entities.

Changes to Contracts and Pre-emptive Rights 

The proposal provides for changes to contracts entered into by the debtor by allowing them to pass to a new buyer and even without the consent of the other party. It would also be desirable to clarify what happens to the right of first refusal in the case of a sale in a pre-pack liquidation proceedings.