In a time of economic turmoil, company directors and owners focus on maintaining their businesses as going concerns, ensuring financial stability, and managing relationships with their creditors, contractors, and employees. When necessary, that includes considering strategic debt management options. On the other hand, creditors and contractors concentrate on properly assessing and understanding the risks associated with a dynamically changing commercial environment, evaluating their strategies toward clients, and implementing adequate safeguards and responses to emerging threats.
Polish law provides for two types of court proceedings that may be initiated when a company finds itself in crisis: (1) semi-court or court restructuring and (2) bankruptcy. Bankruptcy proceedings are initiated when a company becomes insolvent and are governed by the Bankruptcy Act 2003 (as amended). As an alternative to bankruptcy proceedings, it may be possible for the debtor to enter into one of the restructuring procedures available under the Restructuring Act 2015 (as amended). This act provides for four types of restructuring proceedings: (1) proceedings for approval of an arrangement, (2) accelerated arrangement proceedings, (3) standard arrangement proceedings, and (4) remedial proceedings. Restructuring procedures are available to insolvent debtors and also to debtors threatened with insolvency. The law specifies two different criteria for establishing company insolvency: (1) insufficient liquidity and (2) over-indebtedness.
The main objective of restructuring proceedings is to save the debtor from having to declare bankruptcy by allowing it to restructure under an arrangement with its creditors. In Poland, restructuring processes are given precedence. If a restructuring application and a bankruptcy application are submitted simultaneously, in general, the court will first examine the former.
The restructuring of a company’s liabilities may provide for, in particular: postponements of payment deadlines, scheduling repayments via instalments, a reduction in the total amount, a conversion of creditors’ claims into shares, or changes, replacements, or repeals of collaterals. Arrangement proposals may also provide for the satisfaction of creditors through the sale of the debtor’s assets (referred to as a “liquidation” arrangement). The law provides for certain restrictions with regard to debt restructuring, for example with regard to the debtor’s liabilities relating to state aid, liabilities under employment contracts, or liabilities for social security contributions.
On the other hand, the purpose of bankruptcy proceedings is to ensure that creditors’ claims can be met to the fullest extent possible and that, if reasonable considerations allow, the debtor’s enterprise is preserved. Bankruptcy proceedings generally conclude with a total liquidation (sale) of the bankrupt’s assets and, in the case of entities entered in the register of entrepreneurs, the deletion of the bankrupt entity from the National Court Register. It is possible, however, on an exceptional basis, to conclude a non-liquidation agreement with the bankrupt’s creditors, providing for the restructuring of the bankrupt’s debt and continuation of the business.
The Bankruptcy Act provides that any entity entitled to file a bankruptcy petition against a debtor is also authorized to file an application for approval of the terms of a pre-packaged sale of the debtor’s assets. This includes, among others, the debtor itself or a personal creditor, including a creditor secured on the debtor’s assets. An entity planning to apply to the court for approval of a pre-packaged sale of the debtor’s assets may search for a potential buyer and negotiate therewith the terms of the sale. A pre-packaged sale to a buyer affiliated with the debtor is permissible. The applying creditor may also become the buyer. Consent of the bankrupt debtor – the owner of the assets – is not formally required. The terms of sale agreed with the potential buyer are subject to approval by the bankruptcy court along with the announcement of the debtor’s bankruptcy.
Filing a bankruptcy application is the duty of the company’s directors. The application should be filed no later than within 30 days of the date of the event of insolvency. Persons obliged to file the application for a declaration of the debtor’s bankruptcy are liable for damage caused by failure to submit the application within the prescribed time limit. Failure to file a bankruptcy application on time may also result in the director’s liability for the debts of the company, a temporary ban on conducting business activity, or criminal responsibility.
By Karol Czepukojc, Head of Restructuring and Insolvency, Baker McKenzie
This article was originally published in Issue 10.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.