Poland: Restructuring & Insolvency

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This country-specific Q&A provides an overview of the legal framework and key issues surrounding restructuring and insolvency in Poland.

This Q&A is part of the global guide to Restructuring & Insolvency.

For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/restructuring-insolvency/

  1. What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?

    The most common form of security over immovable property is a mortgage. The establishment of a valid mortgage requires its execution by the owner of the property in the form of a notarial deed (however, if the mortgage is established in favour of a bank, simple written form would be sufficient) and registration in the land and mortgage register.

    The most common form of security over movable property is a registered pledge. The establishment of a valid registered pledge requires a written agreement between the pledgor and the pledgee and registration in the pledge register.

    Often, the pledge agreement also contemplates the establishment of an ordinary pledge over the same asset (such security merely functions as bridge security protecting the pledgee until registration of the registered pledge). However, the valid establishment of such ordinary pledge generally requires the hand-over of the pledged asset to a creditor or an agreed third party. Further, a pledge agreement will be effective towards the pledgor’s creditors if it is executed in writing with a date certified by a notary.

  2. What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?

    In general, security interests are to be enforced by way of court enforcement proceedings. However, with regard to certain security interests, like registered or financial pledges, out-of-court enforcement methods are also available.

    Secured creditors may face various practical issues in enforcing their security including, in particular, the timing.

    The typical timeframe for obtaining a court judgment with respect to a claim against a debtor (which is generally a prerequisite to enforcement) varies from a few to 12 months (depending on the complexity of the case) for the first instance proceedings, plus another 10 to 12 months for possible appeal proceedings and an additional 12 to 24 months in the event that a cassation appeal is filed with the Supreme Court. The risks and timing issues related to the conduct of court proceedings may to some extent be mitigated if the security provider has voluntarily submitted itself to enforcement by executing an instrument to that effect in the form of a Polish notarial deed. Such instrument is typically signed at the same time as the principal security. In such case, the adjudication of the merits of the claim by the court may be skipped and only the obtainment of an enforcement clause on the submission to enforcement is needed to initiate court enforcement proceedings against the security provider.

    The procedure for furnishing a judgment or a submission to enforcement with a final and binding enforcement clause usually takes from 1 to 2 weeks up to 3 months.

    Based on a document with a final and binding enforcement clause, a bailiff initiates court enforcement proceedings which typically take from 8 months to 1 year, depending on how pro-active the creditor is. However, further delays may arise due to possible complaints against the bailiff’s actions or due to the filing of counter-enforcement actions by the debtor.

  3. What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?

    A bankruptcy is declared with regard to a debtor which has become insolvent.

    A debtor is insolvent if it has lost its ability to pay its due and payable pecuniary obligations. A debtor is presumed to have lost such ability if the delay in payment of its debts exceeds 3 months. A debtor is also insolvent if the value of its assets is lower than the value of its pecuniary obligations and this state of affairs persists for more than 24 months.

    A bankruptcy motion must be filed by each person who is authorised to represent a debtor either individually or jointly with other persons (i.e. in practice, each management board member) no later than within 30 days from the day when the grounds for the declaration of bankruptcy described above arose.

    The persons who are responsible for making the timely bankruptcy filing are also responsible for any damage caused to the creditors as a result of their failure to do so in time. However, such a person may be discharged from such liability if they are not at fault including, in particular, if they prove that restructuring proceedings were initiated or approval in proceedings for approval of an arrangement was given within the 30-day time frame.

    Also, the management board members of a limited liability company are jointly and severally liable with the company for the company’s liabilities if enforcement proceedings against the company prove ineffective. However, such a person may be discharged from such liability if it is proven that either: (i) a motion for a declaration of bankruptcy or initiation of applicable restructuring proceedings was timely filed; (ii) the failure to make the bankruptcy filing occurred through no fault on the part of such person; or (iii) despite the failure to make the bankruptcy filing, the creditor suffered no damage. Similarly, management board members of a limited liability company are jointly and severally liable with the company for tax arrears, subject to certain exclusions and limitations.

    Moreover, a court may ban a person from conducting an economic activity or holding the position of a member of a management or supervisory board or being a representative or a proxy of a company for a period from one to ten years if such person failed to make a timely bankruptcy filing.

  4. What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?

    Starting from 1 January 2016, only one type of insolvency procedure has been available i.e. bankruptcy involving the liquidation of the debtor’s assets (although, within such new procedure, so-called “pre-packaged liquidation sale” is now available to facilitate the sale of the enterprise of the bankrupt or an organized part of such enterprise to a specified buyer on pre-agreed terms).

    Upon a declaration of bankruptcy, the bankrupt is deprived of the right to manage and dispose of the assets included in the bankruptcy estate, and those rights are solely vested with a bankruptcy trustee (syndyk).

    A judge-commissioner (sędzia-komisarz) directs the course of bankruptcy proceedings by way of supervising the actions of the bankruptcy trustee and the resolutions of the creditors’ committee (save for certain actions for which a bankruptcy court shall be competent.

    The duration of the proceedings depends on various factors including, in particular, the number of creditors, the security interests established over the bankrupt’s assets, how active the creditors are during the course of the proceedings, as well as the timing of actions undertaken by the bankruptcy trustee and the judge-commissioner. However, “standard” bankruptcy proceedings might last from at least one year to several years. Having said that, while the use of “pre-packaged liquidation sale” is still rather limited, the few examples to date indicate that the process could be finalised within a couple of months from the declaration of bankruptcy).

  5. How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?

    As a rule, creditors’ receivables are divided into four categories, and receivables in lower categories may not be satisfied from the general funds of the bankruptcy estate before all receivables in a higher category are fully satisfied. Within each category, each receivable is satisfied pro rata to the total value of receivables in that category. Preferential “first ranking” debts include, among other things, the costs of the bankruptcy proceedings, debts created by the bankruptcy trustee, social security claims and unpaid remuneration owed to employees. The most important change to the ranking of creditors’ debts starting from 1 January 2016 was to remove the preference for tax debts i.e. they are now in the same category as other non-preferred debts.

    Claims secured with certain in rem security interests are satisfied within a separate class from the proceeds of the liquidation of the encumbered assets.

    The relationships between various classes of creditors are often governed by intercreditor agreements. However, practice shows that Polish bankruptcy courts and relevant bankruptcy officers are rather reluctant to give effect to contractual subordination under such arrangements.

    Receivables owed under loans or other similar transactions granted to the bankrupt entity by equity holders who have 10% or more of the votes within five years from the date of declaration of bankruptcy are to be satisfied in the last category of claims.

  6. Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?

    Pre-insolvency transactions are ineffective or would/could be declared ineffective towards the bankruptcy estate in certain situations, including the following:

    1. any transaction made by a bankrupt within one year prior to filing a bankruptcy motion which concerns the disposal of its assets if performed gratuitously or for consideration given or promised on the part of the bankrupt that is glaringly in excess of the consideration in return;
    2. the payment of obligations which are not yet due and payable or the establishment of security with regard to such obligations made by a bankrupt within six months prior to filing a bankruptcy motion are ineffective towards the bankruptcy estate (however, a beneficiary may apply for the recognition of the relevant action as effective if it was not aware of the grounds for the declaration of bankruptcy at the moment when the payment was received or when the security interest was established);
    3. any legal action in relation to which the bankrupt paid consideration within six months prior to filing a bankruptcy motion if such action was made with certain entities/persons connected with the bankrupt through various corporate/personal chains, unless the other party to the relevant action proves that creditors have not been harmed; and
    4. certain in rem securities established over the bankrupt’s assets if established to secure the obligations of a third party within one year prior to filing a bankruptcy motion and provided that the bankrupt did not receive consideration for establishing such security or the consideration was significantly lower than the value of the security so established (however, irrespective of the value of the consideration, the judge-commissioner will decide that the security is ineffective towards the bankruptcy estate if it secures obligations of entities/persons referred to in paragraph (iii) above, unless the beneficiary of the security proves that there was no detriment to other creditors).

    In addition, in the case of remedial proceedings (discussed in paragraph (iv) of the response to question no. 7 below), certain transactions of the debtor that are substantially less favourable than arm’s-length terms, as well as certain security interests established by the debtor, both within one year prior to filing a motion for the opening of remedial proceedings, are ineffective towards the remedial estate.

    If an action of a bankrupt or debtor is or is declared ineffective:

    1. the performance made by the bankrupt/debtor or the performance which did not enrich the bankruptcy or remedial estate as a result of such action needs to be returned to the bankruptcy or remedial estate; and
    2. the mutual performance made by a third party needs to be returned to such third party if such performance is separated in the bankruptcy or remedial estate or if the bankruptcy or remedial estate is enriched by it.
  7. What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?

    Starting from 1 January 2016, the following restructuring proceedings have been available with respect to a debtor which is insolvent or is threatened to be insolvent:

    (i) proceedings for approval of an arrangement (postępowanie o zatwierdzenie układu):

    • the debtor may appoint a restructuring advisor as the supervisor of an arrangement (nadzorca układu), but such appointment does not generally affect the debtor’s right to manage its assets;
    • the debtor collects the required number of votes of its creditors to approve the arrangement and then files a motion with the court for the opening of a restructuring and seeking approval of the arrangement within 14 days following the motion;
    • the proceedings for approval of an arrangement may not be conducted if, based on the lists of liabilities prepared by the restructuring advisor, the sum of disputed claims exceeds 15% of the sum of all the debtor’s liabilities; and
    • the process is almost entirely conducted out of court by the debtor, and supported by the restructuring advisor;

    (ii) accelerated arrangement proceedings (przyśpieszone postępowanie układowe):

    • the debtor and creditors may enter into an arrangement during a creditors’ meeting scheduled by the court (within a relatively short time after the motion is filed with the court by the debtor);
    • the formal procedures are relatively simple i.e. the debtor prepares a list of its liabilities without the court’s involvement and without a procedure for verification of such list (however, if a creditor opposes the correctness of the list, its claim shall be considered as a “disputed claim”);
    • again, the proceedings may not be conducted if the sum of disputed claims exceeds 15% of the sum of all the debtor’s liabilities;
    • the debtor may perform actions within the ordinary course of business, but the court supervisor’s (nadzorca sądowy) consent is required for the performance of actions exceeding such scope;
    • the establishment of in rem securities in respect of claims that arose before the opening of proceedings is not allowed;
    • enforcement proceedings concerning claims that are subject to the arrangement are suspended; and
    • enforcement of existing security can be postponed for up to three months if such enforcement concerns collateral that is needed to run the business activity of the debtor;

    (iii) arrangement proceedings (postępowanie układowe):

    • apart from remedial proceedings, these are the most court-driven and formalized proceedings among the available restructuring proceedings;
    • the list of creditors is prepared by way of a procedure conducted by a court in cooperation with a court-appointed officer, and creditors are entitled to file their objections as to the correctness of the list;
    • proceedings may go ahead irrespective of the amount/proportion of the disputed claims;
    • the debtor may perform actions within the ordinary course of business, but the court supervisor’s consent is required for the performance of actions exceeding such scope; and
    • the rules for establishment and enforcement of securities and other enforcement proceedings are the same as for accelerated arrangement proceedings;

    (iv) remedial proceedings (postępowanie sanacyjne):

    • the key new restructuring tool in which a receiver (zarządca) appointed by the court generally takes over the management of the debtor’s estate (in specific circumstances, the debtor may be permitted to manage its affairs within the ordinary course of business), and any enforcement including enforcement of security against the assets included in the remedial estate is prohibited following the opening of the remedial proceedings;
    • the receiver may use certain institutions, such as the right to terminate certain contracts or to sell the debtor’s assets (but not the entire business) free and clear from encumbrances; and
    • the receiver prepares the list of creditors entitled to vote on the arrangement proposals and prepares and realises the restructuring plan.

    In all these restructuring procedures, a restructuring plan is prepared by a court supervisor and approved by the judge commissioner. A debtor having the support of creditors holding more than 30% of the debts can cause the court to appoint a specific court supervisor. A group of creditors holding more than 40% of the debts can cause the judge commissioner to appoint one member of the creditors’ committee for every 20% of the debts. The creditors’ committee can cause the court to change the court supervisor if four out of five members of the committee vote in favour of such change.

  8. How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any an ability for either party to disclaim the contract?

    Parties to on-going contracts are obliged to continue performing their obligations following the opening of restructuring or bankruptcy proceedings. However, performance by the debtor, a receiver or a supervisor in respect of claims covered by an arrangement is prohibited starting from the date of opening of the restructuring proceedings until the completion or final cancellation of such proceedings.

    A bankrupt's pecuniary liabilities which have not already fallen due become due and payable upon the declaration of bankruptcy.

    Specific entitlements are vested with a receiver in remedial proceedings and a bankruptcy trustee in bankruptcy proceedings, both of which may:

    1. rescind certain mutual contracts upon meeting certain conditions; and
    2. terminate labour contracts on terms that are less generous to the employee than are otherwise required by labour law.

    Exercising a right of set-off during restructuring or bankruptcy proceedings is generally not possible unless certain conditions are met.

    Also, any contractual provisions:

    1. which purport to terminate or amend the legal relationship to which the debtor is a party in the event of a declaration of bankruptcy, a bankruptcy motion or the opening of restructuring proceedings are invalid; or
    2. which hinder or prevent the achievement of the goals of bankruptcy or restructuring proceedings are ineffective towards, respectively, the bankruptcy estate or the relevant restructuring estate.
  9. What conditions apply to the sale of assets/the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted?

    In restructuring proceedings, the sale of the entire business is quite unusual, unless the arrangement provides for the liquidation of the debtor’s assets. In general, any sale (regardless of whether it relates to the entire business or certain assets) is a sale without “free and clear” protection. However, if certain assets (but not the entire business) are sold in the course of remedial proceedings, they are acquired “free and clear” of claims and liabilities. Credit bidding is not allowed.

    In insolvency proceedings, the bankrupt’s enterprise should be sold, if possible, in its entirety as a going concern. If the sale of the bankrupt’s enterprise as a whole is impossible for any reason, an organized part of the enterprise, or individual assets, may be sold.

    The sale process in bankruptcy proceedings is strictly regulated. A valuation is to be made by a certified expert and can be challenged by creditors. The sale is to be effected through a tender procedure the results of which may again be challenged by creditors.

    In any sale of assets in the course of bankruptcy proceedings (including the sale of a going concern as the result of a “pre-packaged liquidation sale”), a purchaser acquires the assets “free and clear” of claims and liabilities, including all securities established before the sale.

    The possibility of credit bidding in bankruptcy proceedings is very limited since a creditor may apply its receivable against the purchase price only if, and to the extent, the funds of the bankruptcy estate are sufficient to satisfy all the claims of creditors from higher and equal categories.

    The holders of certain in rem securities are entitled to participate in the division of the proceeds from the sale of the encumbered assets with priority over the debtor’s unsecured creditors.

  10. What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty?

    As regards the duty of timely filing motions for bankruptcy or restructuring proceedings, the key issues were briefly described in the response to question no. 3 above.

    In addition to such duty, directors have fiduciary duties, the consequences of a breach of which by directors managing a distressed debtor are no different from those in respect of non-distressed companies, except for potential criminal responsibility for deliberate actions relating to assets of the debtor which decrease the value of the distressed business to the detriment of creditors.

  11. Is there any scope for other parties (e.g. director, partner, parent entity, lender) to incur liability for the debts of an insolvent debtor?

    The management board members have joint and several liability with the company for the payment of the company’s liabilities and tax arrears, as briefly described in the response to question no. 3 above.

    Also, partners in a partnership (except for shareholders in a limited joint-stock partnership) may be held liable for the partnership’s liabilities if enforcement proceedings against the partnership prove ineffective.

    Apart from the above situations, generally there is no piercing of the corporate veil in Poland.

  12. Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?

    No, restructuring or bankruptcy proceedings do not have such effect. As far as limited liability and joint-stock companies are concerned, a management board member shall be liable towards the company for any damage inflicted through an act or omission contrary to the provisions of law or the articles of association, unless no fault is attributable to such member.

  13. Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition?

    The initiation of restructuring or insolvency proceedings in any EU member state, to the extent such proceedings are covered by the EU Insolvency Regulation, and to the extent the member state in question did not opt-out will have the same effect in Poland as it has under the domestic law of that member state (unless and until secondary proceedings are opened in Poland), without the need to take any additional action in Poland.

    If such proceedings are opened outside the EU, then a separate motion needs to be filed with a Polish court to recognize the foreign judgment. In principle, a judgment regarding the opening of proceedings will be recognized if: (i) there is no exclusive jurisdiction of the Polish courts (which is the case if a debtor’s centre of main interests (COMI) is located in Poland); and (ii) such recognition is not contrary to the basic principles of Polish legal order. Once the decision regarding the opening of proceedings is recognized, the legal landscape is more or less the same as for proceedings initiated in an EU member state as described above.

  14. Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?

    A debtor which is incorporated outside Poland may enter into restructuring or insolvency proceedings in Poland provided that it has its COMI in Poland.

    Also, if the main proceedings with regard to a debtor the COMI of which is located outside Poland are conducted outside Poland, secondary proceedings can be initiated before Polish bankruptcy courts with respect to the assets of such debtor located in Poland.

  15. How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?

    Polish law does not recognize the application of single restructuring or insolvency proceedings in respect of a group of companies. Consequently, the legal consequences in Poland arising out of restructuring or insolvency proceedings conducted with regard to entities from the same capital group located in different countries should be assessed separately in light of the applicable provisions of the relevant local restructuring/insolvency laws in each such country unless the EU Insolvency Regulation concerning group insolvency applies.

    However, Polish bankruptcy courts can decide to combine cases for joint examination and to appoint one judge-commissioner and one creditors’ council for a group of companies.

  16. Is it a debtor or creditor friendly jurisdiction?

    We believe that, starting from 1 January 2016 when a fundamental reform of the Polish bankruptcy and restructuring law took place, Poland is a more debtor friendly jurisdiction than it used to be, principally because:

    1. new restructuring tools became available for debtors including, in particular, remedial proceedings in which certain legal instruments exist that may significantly weaken the creditors’ position;
    2. restructuring proceedings are now generally initiated only on a motion of the debtor (prior to the reform, such proceedings could be initiated either on a motion of the debtor or its creditors); and
    3. currently, the scope of the rights of creditors in restructurings/bankruptcies seems to have become strongly influenced by the extent to which the creditors take a pro-active approach.
  17. Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?

    We are of the opinion that generally no such factors exist in Poland unless the distress is faced by parts of an industry which are significant and sensitive from the political point of view (e.g. shipyards, coal mines, etc.), where separate pieces of legislation may be used in an effort to solve problems despite the insolvency and restructuring regime.

    The placement of certain receivables such as social security claims or unpaid remuneration owed to employees in higher categories of satisfaction can be seen as the outcome of sociopolitically driven values incorporated into the insolvency regime. On the other hand, one of the most important recent changes to the system was the removal of preferential treatment for public creditors, whose debts are now satisfied on the same basis as those of private creditors.

    State aid is available in restructuring proceedings subject to the fulfilment of certain strict conditions based on EU regulations and separate provisions of the bankruptcy and restructuring legislation.

  18. What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?

    Market players waited with great interest to see how the new restructuring and bankruptcy regime, which came into effect on 1 January 2016, would work in practice. Many were of the view that management teams of some companies might seek to use the new hybrid insolvency/restructuring remedial proceedings tool for business restructuring to reach agreement with creditors after selling unnecessary assets, “clean up” contracts which do not fit with the business restructuring or adjust employment levels to current needs, instead of declaring bankruptcy. Also, the practicalities of “pre-packaged liquidation sale” are being examined with great attention by distressed assets-oriented funds.

    However, in practice, there are still various barriers to efficient and effective restructurings and insolvencies, including the lack of experienced judges and the shortage of bankruptcy/restructuring officers with an adequate understanding of business. Further, a modern IT platform on which the details of restructurings/insolvencies could be widely disclosed to the public has not yet been set up.