POLAND: An Introduction to Restructuring/Insolvency

Overview

Polish law offers a number of proceedings for businesses and individuals in distress. They span business insolvency proceedings, consumer bankruptcy as well as four restructuring proceedings. These solutions aid debtors but also create opportunities and/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 version with an announcement in the National Debtors Register (Krajowy Rejestr Zadłużonych, KRZ), and a more private one without an announcement);
• accelerated arrangement proceedings;
• arrangement proceedings; and
• remedial proceedings.

Regarding insolvency proceedings, in Poland one such proceeding is regulated under the Bankruptcy Law; this is in addition to consumer bankruptcy, which can sometimes be a useful tool for over-indebted former entrepreneurs or members of management boards.

Within insolvency proceedings, an application for arrangement in bankruptcy may be filed; in such situations, certain relevant provisions of the Restructuring Law apply.

Corporate insolvency proceedings may be accompanied by a pre-pack sale application.

Statistics

In 2023, 408 companies were declared insolvent, and 611 bankruptcy petitions were dismissed, due mainly to insufficient money for conducting the proceedings. The following numbers of restructuring proceedings took place:

• 3,919 arrangement approval proceedings;
• 158 accelerated arrangement proceedings;
• 54 arrangement proceedings; and
• 101 remedial proceedings.

Most Popular Types of Proceedings

In Poland, with numbers visibly growing, the most popular proceedings are arrangement approval proceedings (AAPs), accounting for over 92% of all restructuring proceedings. This popularity is due mainly to the out-of-court nature of AAPs.

AAPs are opened based on a decision of the debtor in co-operation with the arrangement supervisor, who should hold an insolvency practitioner’s licence (regular or qualified).

The course of the AAP is shown on the following graph:

The following shows investment in distressed assets – share deal:

The following shows investment in distressed assets – asset deal.

Prepared liquidation (pre-pack):

Liquidation arrangement:

Article 323 PR sale:

Electronic Proceedings

Since December 2021, the KRZ is in operation in Poland. All kinds of proceedings are conducted and carried out within the system – at least with regard to companies.

Unfortunately, the KRZ system is only in the Polish language; it is currently undergoing expansion concerning other elements, aimed at enhancing and facilitating the methods of conducting proceedings.

Future Developments

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

In December 2022, the European Commission published a Proposal for a Directive of the European Parliament and of the Council harmonising certain aspects of insolvency law, opening discussions on some of the potential changes into national laws (together with remarks and positions towards the Proposal).

49 entities issued their positions within this legislative process, and the European Commission is now analysing these documents.

According to Article 1.1, the Proposal covers 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 micro-enterprises; and
• creditors’ committees.

Within the whole European Union (EU), coherence regarding the aforementioned issues is relatively low; thus, many member states now face assessing 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 (among other things) for 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, such a person could successfully be the temporary court supervisor, who would then become the trustee of the bankruptcy estate.

Test of Best Satisfaction of Creditors

The Proposal also provides for the preparation of a test of the best satisfaction of creditors, 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 practice of drafters, so as to serve as the broadest and most reliable knowledge for creditors – parties in bankruptcy proceedings.

Possible Auction

The Directive provides for an auction procedure, either with or without the involvement of an insolvency practitioner. Where the court decides to appoint an insolvency practitioner, a public auction is not required. Where the court refuses to appoint an insolvency practitioner, however, a public auction procedure is obligatory.

Nonetheless, Polish insolvency law creates certain risks for an investor who decides to invest in the preparation of the pre-pack procedure. The investor makes a substantial financial effort, as they need to carry out the required audits and due diligence reports. Once they lose the bid, all this financial involvement is wasted – the investor stands to recover nothing. Meanwhile, the other participant – who may have offered only EUR1 more in the bidding process and thus won the auction – collects the assets (free from any collateral, with the execution sale effect) and without any financial effort on their part whatsoever regarding the preparation of the pre-pack procedure.

As such, the popularity of the pre-pack procedure has collapsed drastically in Poland, following the introduction of this rule in March 2020.

A remedy for this situation is included in the proposed Directive, as it envisages the possibility of reimbursing the investor’s ancillary costs for preparing the pre-pack. This is an excellent example of how EU law can enormously improve national law.

The Proposal of 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 the different categories of participants in proceedings.

Preserving Value for Creditors

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

Protection From Enforcement

Interestingly, Article 23 of the Proposal also explicitly provides for the suspension of enforcement proceedings, including in the case of preliminary proceedings, in the pre-bankruptcy phase.

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 proceeding.