Poland 2016 provisions for the pre-packaged sale of insolvent debtors’ assets were amended in 2020 to enhance transparency and competitiveness. Pre-pack sales are a highly regulated form of distressed M&A, which have been used for some time across several jurisdictions, including the US and many Western European countries.

This article overviews Poland’s pre-pack laws, presenting key practical considerations for investors, debtors, and their shareholders.

Key Characteristics

A pre-pack petition must be filed before insolvency proceedings are opened. Once sanctioned, the buyer and insolvency administrator make a sale agreement, based on terms pre-agreed with the debtor.

Key features of Polish pre-pack sales are:

  • Distressed M&A transactions involving business assets only
  • Sales requiring insolvency court’s prior consent
  • Sale agreements between the buyer/investor and the insolvency administrator
  • Investors acquire assets free from pre-existing debts and security instruments e.g. mortgages
  • All business concessions, permits, licences or reliefs pass to the investor with the assets

Pre-Pack Process

Both debtor and creditor can file the pre-pack sale petition (though, in practice, it is usually the debtor), either within the insolvency filing, or later, before proceedings are opened.

The process divides into four phases:

1. Pre-Filing Issues

The debtor's management identifies insolvency, finds a buyer, and agrees key sale terms. Before filing the petition, they must confirm:

  1. Assets being sold (e.g., the whole business, or a business line),
  2. The buyer,
  3. The price
  4. The assets’ value.

Parties can include a draft sale agreement within the pre-pack petition for court approval, but bear in mind, this will then become binding. A better solution may be to specify material terms within the petition itself.

A valuation report must be prepared by a court-certified expert and lodged with the pre-pack petition.

In most cases, the court approves any price exceeding the difference between the theoretical bankruptcy price, and bankruptcy costs saved, based on the report’s findings. This gives the buyer a “pre-pack discount”, as assets are being sold below their market value.

For buyers related to the debtor, the court appoints an independent expert to prepare an independent valuation, and will only approve a price which, at least, matches this.

Buyers also pay a 10% deposit on the proposed price. If, following court approval, they pull out of the deal without a legitimate reason, the sum will be forfeited.

2. Court Review

Once the petition is filed, the court considers whether to open insolvency proceedings, and approve the pre-pack.

The debtor continues to manage the business, under the insolvency practitioner’s supervision, during the review. The insolvency practitioner assists the court by giving their opinion on the pre-pack and preparing a financial report. The petition is also announced publicly and opened up to third-parties, who can make competing offers.

3. Pre-Pack Approval and Opening Insolvency Proceedings

When the court opens insolvency proceedings and approves the pre-pack, the debtor’s assets are passed to insolvency administrator, who manages the business until the sale is completed. Creditors and debtors have two weeks to challenge the decision, before approval is finalised. Parties then have 30 days to complete the sale agreement, subject to either insolvency administrator or buyer requesting to amend or cancel the deal altogether.

4. Executing the Pre-Pack Transaction

Once the buyer pays the full purchase price and signs the sale agreement, they obtain the assets free from debt and most encumbrances. Employment contracts, and most licences and permits usually transfer over automatically with the assets. Commercial contracts are not included, however, and must be negotiated separately.

Pre-Pack Process

Both debtor and creditor can file the pre-pack sale petition (though, in practice, it is usually the debtor), either within the insolvency filing, or later, before proceedings are opened.

The process divides into four phases:

1. Pre-Filing Issues

The debtor's management identifies insolvency, finds a buyer, and agrees key sale terms. Before filing the petition, they must confirm:

  1. Assets being sold (e.g., the whole business, or a business line),
  2. The buyer,
  3. The price
  4. The assets’ value.

Parties can include a draft sale agreement within the pre-pack petition for court approval, but bear in mind, this will then become binding. A better solution may be to specify material terms within the petition itself.

A valuation report must be prepared by a court-certified expert and lodged with the pre-pack petition.

In most cases, the court approves any price exceeding the difference between the theoretical bankruptcy price, and bankruptcy costs saved, based on the report’s findings. This gives the buyer a “pre-pack discount”, as assets are being sold below their market value.

For buyers related to the debtor, the court appoints an independent expert to prepare an independent valuation, and will only approve a price which, at least, matches this.

Buyers also pay a 10% deposit on the proposed price. If, following court approval, they pull out of the deal without a legitimate reason, the sum will be forfeited.

2. Court Review

Once the petition is filed, the court considers whether to open insolvency proceedings, and approve the pre-pack.

The debtor continues to manage the business, under the insolvency practitioner’s supervision, during the review. The insolvency practitioner assists the court by giving their opinion on the pre-pack and preparing a financial report. The petition is also announced publicly and opened up to third-parties, who can make competing offers.

3. Pre-Pack Approval and Opening Insolvency Proceedings

When the court opens insolvency proceedings and approves the pre-pack, the debtor’s assets are passed to insolvency administrator, who manages the business until the sale is completed. Creditors and debtors have two weeks to challenge the decision, before approval is finalised. Parties then have 30 days to complete the sale agreement, subject to either insolvency administrator or buyer requesting to amend or cancel the deal altogether.

4. Executing the Pre-Pack Transaction

Once the buyer pays the full purchase price and signs the sale agreement, they obtain the assets free from debt and most encumbrances. Employment contracts, and most licences and permits usually transfer over automatically with the assets. Commercial contracts are not included, however, and must be negotiated separately.

Summary

Pre-pack transactions are a game changer in Poland’s investment landscape, enabling the purchase of viable distressed businesses, free from excessive debt. From 2016-19, approximately two-thirds of the 127 pre-pack petitions filed were approved. Pre-packs are not an easy option, however – they are highly regulated and formalised transactions, which require planning and commitment.

Weronika Kapica
Attornery at Law, Schoenherr Poland

Weronika is part of the banking & finance practice in Schoenherr's Warsaw office. With four years of professional experience her practice covers banking & finance, capital markets, insolvency & restructuring and M&A transactions. She advises banks, medium-size and large corporations, and private equity and venture capital firms, and has participated in various cross-border loan transactions, including project and acquisition finance transactions, secured and unsecured lending (structuring and drafting loan and security documentation), bridge loans and bonds. She has also advised on insolvency and restructuring matters regarding Polish entities.

Daniel Radwański
Counsel, Schoenherr Poland

Daniel is an attorney at law and a certified restructuring practitioner admitted in Poland who heads the restructuring and insolvency practice at Schoenherr Poland (Warsaw office). His practice covers all aspects of financial restructuring and insolvency. He regularly advises and represents debtors and creditors in re-structuring and insolvency proceedings in Poland. In addition, he acts as counsel to distressed assets investors and insolvency administrators. Daniel has advised on many challenging and precedent-setting restructuring matters in Poland.