Restructuring Law and amended Bankruptcy Law: Scope and essence of changes | In Principle

The main provisions of the Restructuring Law of 15 May 2015 enter into force on 1 January 2016. It will serve one of the foundations of commercial law in Poland, enabling effective restructuring of insolvent enterprises.

The Restructuring Law sets forth the rules for the Polish courts to conduct four separate types of restructuring procedures. It also introduces a range of major changes to the Bankruptcy & Recovery Law of 2003, which from 1 January 2016 is renamed the Bankruptcy Law. Important related amendments have also been made to the Commercial Companies Code and a number of other acts.

The need to amend the Bankruptcy & Recovery Law was raised repeatedly. The legal literature drew attention to the lengthiness and inefficiency of bankruptcy proceedings, the defective construction of the recovery provisions which practically excluded effective use of this procedure, the overly rigorous wording of provisions on insolvency of businesses, and the inability to ensure creditors that they could obtain a resolution of material issues concerning the enterprise conducted by an insolvent debtor.

The dysfunctionality of bankruptcy proceedings in Poland was also demonstrated by statistics from the Ministry of Justice and studies conducted in this area.¹ According to the findings, in 2004–2012 over 36,000 applications to open liquidating or arrangement bankruptcy proceedings were filed in Poland, and nearly half of those were finally rejected. There were 6,519 businesses declared bankrupt, 1,164 in arrangement bankruptcies. In 2004–2010 arrangements were confirmed in only 21 cases. On top of that, bankruptcy proceedings led to satisfaction of a little over 10% of the claims filed, while on average a third of the funds of the bankruptcy estate were absorbed by the costs of conducting the proceedings.²

Thus the goal of the amendment was to overcome the problems perceived in the functioning of the existing law.

Below we present the main areas where changes have been made.

Four separate types of restructuring proceedings

The new Restructuring Law introduces four new types of proceedings: proceedings for approval of an arrangement (postępowanie o zatwierdzenie układu), expedited arrangement proceedings (przyspieszone postępowanie układowe), arrangement proceedings (postępowanie układowe), and reorganisation proceedings (postępowanie sanacyjne). The act also provides for a new institution in the form of a partial arrangement, which can be concluded in restructuring proceedings with a selected group or groups of creditors.

The idea of spinning off the restructuring regulations into a separate act and submitting restructuring proceedings to the jurisdiction of restructuring courts rather than bankruptcy courts is part of a consistent approach by lawmakers seeking to separate restructuring from bankruptcy. The goal is for restructuring to avoid the stigma associated with bankruptcy. Restructuring proceedings also take precedence over bankruptcy proceedings, which should be conducted only if restructuring fails. The point is that the debtor’s insolvency does not have to inevitably lead to the disintegration of the debtor’s’ enterprise—and that is in the vital interests of the Polish economy.

• Proceedings for approval of an arrangement

Under proceedings for approval of an arrangement, creditors will be able to reach agreement with the debtor without the need to open judicial proceedings. The restructuring of the debtor’s enterprise will be conducted out of court until the application is filed for approval of the arrangement which has already been agreed. Proceedings for approval of an arrangement should allow for restructuring of the debtor’s enterprise without exposing it to the risk that information about the debtor’s becoming insolvent will interrupt the cycles of supplies, production and sales. If the rights of suppliers and customers are not infringed, they will learn of the debtor’s insolvency only after the arrangement is approved. This will make it easier to conduct large restructuring processes covering only restructuring of financial claims and other major claims, without affecting trade claims, which are often held by such a numerous group of creditors that it is not practically feasible to reach an arrangement with all of them.

• Arrangement proceedings and expedited arrangement proceedings

Expedited arrangement proceedings will make it possible to conduct simplified restructuring proceedings excluding the stage of creditors’ objections to the list of claims (if the sum of disputed claims does not exceed 15% of all claims entitled to vote on the arrangement). It is estimated that expedited arrangement proceedings will last 2–3 months. Equally important, non-expedited arrangement proceedings will be commenced only when there is a significant amount of disputed claims.

• Reorganisation proceedings

Reorganisation proceedings, a new feature of Polish law, combine the features of arrangement proceedings and bankruptcy proceedings. They can be commenced despite the failure of a previous arrangement between the debtor and the creditors. This is an important change, because previously when an arrangement failed it always led to opening of a liquidating bankruptcy. Significantly, commencement of reorganisation proceedings will result in depriving the debtor of management of its enterprise. The goal of reorganisation proceedings is to restructure the enterprise of an insolvent debtor before taking up the first or subsequent attempt to reach an arrangement between the debtor and the creditors.

• Partial arrangement

The possibility of concluding partial arrangements should simplify the process of reaching an arrangement when only a select group (or groups) of creditors will be covered by the arrangement.

Simplification of the course of judicial proceedings commenced in the face of the debtor’s insolvency

There are other changes designed to speed up the proceedings brought in the face of the debtor’s insolvency. The Restructuring Law simplifies the judicial procedure connected with the debtor’s insolvency and reduces the number of stages necessary to complete the essential part of the judicial proceedings. To this end, the amendment introduces numerous short (instructive) time limits which the court, the judge-commissioner, the judicial supervisor and the administrator should meet.

In restructuring proceedings, the list of claims will generally be established on the basis of the debtor’s documentation, without the need to file claims. Thus the meeting of creditors to vote on the arrangement can be scheduled even though objections to the list of claims have not been resolved yet, if the objections involve less than 15% of the total amount of claims covered by the restructuring proceeding. There will be numerous evidentiary restrictions in the proceedings on objections to the list of claims.

The stage of creditors’ filing of objections to the list of claims will be skipped entirely in proceedings for approval of an arrangement and expedited arrangement proceedings. In expedited arrangement proceedings, creditors not included in the list of claims will be admitted to participate in the meeting of creditors convened to adopt the arrangement on the basis of rulings made by the judge-commissioner at the meeting. In proceedings for approval of an arrangement, creditors not allowed to vote on the arrangement will only be entitled to file an interlocutory appeal against approval of the arrangement.

A fundamental change greatly increasing debtors’ ability to conclude arrangements with creditors is that acceptance of the arrangement will occur when it is voted for by a majority of the creditors, representing at least two-thirds of the total value of claims participating in the voting. The prior rules were much more rigorous in this respect, requiring a two-thirds majority of all claims entitled to vote for the arrangement, including creditors who did not participate in the voting.

Equally fundamental, considering the previous lengthiness of bankruptcy proceedings, in the updated bankruptcy procedure the trustee will be required to act so that the liquidation can be completed within 6 months after bankruptcy is declared. The inventory and valuation are to be prepared within one month after declaration of bankruptcy.

The judge-commissioner and the judicial supervisor or administrator will be able to agree on matters concerning the proceedings directly or by telecommunications.

Expedited arrangement proceedings should be expected to last about 2 months. If support from public authorities is required, this period may be extended by another 1–2 months.

New balance of rights between the debtor, creditors and other stakeholders in judicial proceedings commenced in the face of the debtor’s insolvency

The Restructuring Law contains a number of provisions increasing the creditors’ influence over the course of the judicial proceedings connected with the debtor’s solvency, while limiting the role of the court and the judge-commissioner.

Creditors will be able to demand appointment of a council of creditors, and their application will obligate the judge-commissioner to take appropriate action. Additionally, the judge-commissioner will be required to appoint as a member of the council of creditors any creditor designated by the creditors holding 20% of the claims entitled to participate in the proceeding commenced in the face of the debtor’s insolvency. The judge-commissioner will also be required to change the membership of the council of creditors under the same rules. Creditors holding 30% of the claims will be able to file an application along with the debtor to appoint or change the judicial supervisor or administrator, indicating a specific person to perform these key functions. The same entitlements are vested in the council of creditors, but it must act in conjunction with the debtor.

The increased influence of the creditors or the council of creditors over the course of proceedings connected with the debtor’s insolvency will also be combined with a limitation on the right of the bankruptcy court or the judge-commissioner to make independent and binding rulings on material matters.

Although the Restructuring Law is founded on the principle of strengthening the position of the creditors in proceedings commenced in the face of the debtor’s insolvency, some rights of creditors have been restricted. This applies primarily to a certain limitation on the rights of secured creditors, whose privileged position often prevents effective restructuring of the debtor’s enterprise.

Opening of restructuring proceedings will not prevent secured creditors from conducting execution against the debtor, but they will be able to execute only with respect to their collateral. Opening of reorganisation proceedings will have more far-reaching consequences, staying all execution proceedings, including those conducted against collateral.

Under prior law, fully secured creditors often refused to negotiate restructuring of the debtor’s enterprise. The new provisions of the Restructuring Law may eliminate this barrier. They allow a secured creditor’s rights to be covered by a partial arrangement even without the creditor’s consent if the debtor presents an arrangement proposal to the secured creditor providing for full satisfaction or satisfaction to a degree no lower than what the creditor could expect if it enforced its claims against the collateral (pursuant to a mortgage, pledge or registered pledge).

Changes in rules for distribution of funds of the bankruptcy estate

Under the amended Bankruptcy Law, the highest priority for satisfaction will be given to claims arising in the restructuring proceeding from the actions of the administrator, or claims arising out of the actions of the debtor following opening of the restructuring proceeding. This will privilege claims by banks under new financing which may be granted to the debtor during the period from opening of the restructuring proceeding until approval of the arrangement, as well as other restructuring claims.

Meanwhile, the great majority of public charges will lose their privileged character. This privilege will be narrowed to social insurance contributions for the last three years prior to declaration of bankruptcy, and the privilege for all other public charges, including taxes, has been eliminated entirely.

Change in definition of insolvency of an enterprise and rules of responsibility for timely filing of bankruptcy petition

The Restructuring Law introduces a more flexible concept of the insolvency of an enterprise.

The prior regulations linked the state of insolvency of an enterprise with the debtor’s failure to perform monetary obligations when they fell due, or with the debtor’s obligations exceeding the value of its assets even though the debtor was performing its obligations on time. Practice showed that the prior regulations defined the grounds of insolvency too rigorously, as enterprises became insolvent if they were just a day late paying two creditors, or if because of intensive investments or changes in the market value of their assets they experienced slight short-term negative equity. This meant that a large number of enterprises continuing to conduct business unimpaired were, according to the law, insolvent.

The Restructuring Law links the state of insolvency with the inability for the enterprise to perform its monetary obligations or an ongoing state in which its obligations exceed the value of its enterprise for longer than 24 months. The act introduces presumptions specifying the periods of non-payment of obligations or a continuing unfavourable balance-sheet ratio of obligations to assets which will result in the enterprise being deemed to have become insolvent. The presumptions can be rebutted. It seems that this definition of insolvency should be capable of distinguishing between temporary difficulties and serious problems, giving time to an enterprise in need of restructuring to develop a careful recovery plan.

Liability for the obligations of an insolvent debtor, which previously was imposed on management board members who failed to file a timely bankruptcy petition, will be extended to cover all persons who are entitled by law or by the company’s articles of association or statute to conduct the debtor’s affairs and represent the debtor, independently or jointly with other persons, if they breach their obligation to file a bankruptcy petition for the debtor.

The courts and non-judicial restructuring and bankruptcy authorities

Restructuring proceedings will be heard by restructuring courts, which will be district commercial courts ruling through one professional judge. Bankruptcy cases will be heard by bankruptcy courts, which will be district commercial courts ruling in a panel of three professional judges.

If restructuring proceedings are opened, the bankruptcy court cannot declare the debtor’s bankruptcy until the restructuring has been completed or dismissed with legal finality. If an application to open restructuring proceedings and a bankruptcy petition are both filed, the application to open restructuring proceedings will be considered first.

The Restructuring Law establishes the new licensed profession of “restructuring adviser.” From 1 January 2016, persons licensed as restructuring advisers will act under the Bankruptcy Law as bankruptcy trustees. Under the Restructuring Law, restructuring advisers will serve as advisers on arrangements, overseeing the proper gathering of votes in proceedings for approval of an arrangement; they will also provide opinions for the needs of the restructuring courts on whether the debtor will be capable of performing the arrangement. In restructuring proceedings they will also serve as supervisors and administrators, whether supervising the management board or (in the case of reorganisation proceedings) exercising management over the enterprise of an insolvent debtor. The existing licences of bankruptcy trustees will automatically become licences of restructuring advisers.

Significantly, the Restructuring Law redefines the existing rules for establishing the fees of the bankruptcy trustee so that the fees encourage smooth and effective conduct of restructuring and bankruptcy proceedings involving restructuring advisers. These rules seek to eliminate barriers that have prevented bankruptcy trustees from becoming a fully fledged profession.

Central Restructuring and Bankruptcy Register

Notices issued in connection with restructuring proceedings and bankruptcy proceedings, as well as all other essential information about the proceedings, will be published electronically in the Central Restructuring and Bankruptcy Register to be established on 1 February 2018.

Resolutions of creditors’ councils, lists of claims in restructuring proceedings, all orders issued by the restructuring court or bankruptcy court, and orders issued by the judge-commissioner will be published in the register. It will also be possible to file claims in bankruptcy proceedings via the register. Consequently, information about the course of proceedings related to the debtor’s insolvency will be available centrally and it will no longer be necessary to seek out such information at bankruptcy courts around the country.

The provisions of the Restructuring Law discussed above (apart from those involving the Central Restructuring and Bankruptcy Register) enter into force on 1 January 2016.

The provisions of the Restructuring Law and the amended Bankruptcy Law concerning the effects of commencement of proceedings on person, property and obligations of the debtor will apply also to legal events that occurred before the effective date of the amending act.

The prior regulations will continue to apply in cases where a bankruptcy petition was filed before the Restructuring Law entered into force.

Krzysztof Libiszewski, Corporate and M&A Practice, Wardyński & Partners