The past several years has brought extraordinary challenges to the Polish economy. The COVID-19 pandemic, inflation, high energy prices and the tense geopolitical situation have each had a huge impact on many sectors and industries, leading to the increasing popularity of restructuring procedures.
Data suggests that there is growing popularity for the use of Polish restructuring proceedings. While the number of these cases has been rising since the restructuring regime was implemented in January 2016, the biggest rise took place between 2020 and 2023. This was primarily due to the availability of the so called “simplified restructuring proceedings” (legal predecessors of proceedings for an approval of arrangement), which were introduced by Polish legislation in response to the pandemic.
This article provides a brief overview of key features of Polish restructuring, along with a brief presentation with respect to the use of restructuring tools in practice in the jurisdiction.
There are two ways to address financial crisis under Polish law:
Restructuring
The aim of which is to keep the debtor alive by allowing a restructuring of its debts through adoption of an arrangement with its creditors (such restructuring can be in the form of a haircut on debt, extended maturities, portioning debt into installments, or converting debt into equity. Additionally, a restructuring under Polish law can involve liquidation of a debtor’s assets).
Bankruptcy
The aim of which is to satisfy creditors’ claims to the maximum extent possible, generally through a sale of all the bankrupt party’s assets and their liquidation.
Poland has not implemented the EU Restructuring Directive 2019/1023, but even if it were implemented, this would not bring major changes to the Polish restructuring regime.
There are two ways to address financial crisis under Polish law:
Restructuring
The aim of which is to keep the debtor alive by allowing a restructuring of its debts through adoption of an arrangement with its creditors (such restructuring can be in the form of a haircut on debt, extended maturities, portioning debt into installments, or converting debt into equity. Additionally, a restructuring under Polish law can involve liquidation of a debtor’s assets).
Bankruptcy
The aim of which is to satisfy creditors’ claims to the maximum extent possible, generally through a sale of all the bankrupt party’s assets and their liquidation.
Poland has not implemented the EU Restructuring Directive 2019/1023, but even if it were implemented, this would not bring major changes to the Polish restructuring regime.
Out-of-court restructurings are conducted outside court and outside the Polish formal statutory restructuring regime.
In Poland, these restructurings involve negotiations of debt restructuring between a debtor and its creditor(s) and tend to involve the major creditor(s). If successful, the process culminates with a restructuring agreement which is quite often preceded by the execution of a standstill agreement providing for an interim contractual enforcement moratorium/protection in favor of the debtor.
Polish banks still prefer out-of-court restructurings over in-court restructurings primarily due to the flexibility of the former, a shorter timeline in comparison to in-court procedures, and the fact that out-of-court restructurings are usually confidential (whereas the opening of an in-court restructuring proceeding is visible in the Polish public registers). This allows the debtor to conduct restructuring without any potential stigma associated with commencing a restructuring/bankruptcy.
Restructuring proceedings may be opened (generally only at the debtor’s request) both with regard to:
An Insolvent Debtor
(i.e., the debtor which has lost its ability to pay its debts when due), and there are two Polish bankruptcy tests (i.e., a liquidity test and a balance-sheet test); or
A Debtor Threatened with Insolvency
(i.e., the economic situation indicates the debtor may soon become insolvent).
There are four available Polish restructuring proceedings, the choice of which normally depends on the particularities of the situation of a given debtor.
Proceeding for Approval of an Arrangement:
Simple and quick out-of-court procedure: A proceeding for approval of an arrangement is largely an out-of-court driven procedure (it is opened immediately upon a public announcement made outside the court by an arrangement supervisor) and has the most simplified and the shortest procedure among the available Polish restructuring proceedings.
Debtor-in-possession collects creditors’ votes: The debtor is responsible for collecting the necessary votes from creditors to adopt the arrangement. The debtor is assisted by the arrangement supervisor (appointed by the debtor) and such an appointment generally does not impact the debtor’s ability to manage its assets.
Disputed claims threshold: The proceeding may be conducted only if the sum of disputed claims entitled to vote with respect to the arrangement does not exceed 15% of the sum of all the debtor’s claims entitled to vote with respect to the arrangement.
Very popular in practice: A proceeding for approval of an arrangement is currently the most popular Polish restructuring procedure. However, its use is popular mainly among small and medium-sized enterprises1 and certain debtors have abused the procedure in practice by seeking to solely receive short-term enforcement protection via opening the procedure without any real intention or chance of a successful restructuring.
Accelerated Arrangement Proceedings:
A court driven, but relatively quick and simplified procedure: The accelerated arrangement proceeding may be adopted through a simplified procedure in a relatively short time after the opening of the restructuring. The debtor prepares a list of creditors without the court’s involvement, and without a procedure for verification of such a list. However, if a creditor raises an objection to the list prepared by the debtor, the creditor’s claim will be considered a disputed claim. The maximum threshold of 15% of disputed claims, in relation to the procedures for approval of an arrangement, also applies to the accelerated arrangement procedure.
Generally, debtor-in-possession: Generally, the debtor is allowed to continue conducting business as usual, but any actions beyond the ordinary course of business require the consent of the court supervisor.
Fairly popular in practice: While not as widely utilized compared to proceedings for approval of an arrangement, the accelerated arrangement proceeding is still a fairly popular restructuring procedure in Polish practice.
Arrangement Proceedings:
Court driven and formalized proceedings: Apart from remedial proceedings, arrangement proceedings are the most court-driven and formalized Polish restructuring proceeding and may be opened if the sum of disputed claims entitled to vote in such an arrangement exceeds 15% of the sum of all the debtor’s claims entitled to vote in such an arrangement. Creditors are allowed to file objections to the list of creditors prepared by the court supervisor, if such creditor believes the list is incorrect.
Generally debtor-in-possession: As a rule, 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.
Lack of significant market practice: So far, this procedure has been rarely used in practice in Poland. However, the trend in recent years is that accelerated arrangement proceedings are slowly increasing in use.
Remedial Proceedings:
Eligible for debtors in deep financial crisis: A remedial proceeding is a restructuring tool in which a receiver appointed by the court generally takes over the management of the debtor’s estate to the exclusion of the debtor’s management. The court-appointed receiver enjoys certain significant powers similar to those vested with a bankruptcy trustee (e.g., an entitlement to take actions with respect to the debtor including the ability to terminate certain contracts or sell assets which are not pivotal to the debtor’s business activities).
Role of the receiver: The receiver prepares the list of creditors entitled to vote on the arrangement proposals and prepares and realizes the restructuring plan.
The most court-driven, usually the longest and the most complex proceedings: Such proceedings may last from around one year. In some cases, they can last up to 2-3 years.
Fairly popular in practice: Remedial proceedings are popular Polish restructuring procedures and the use of remedial proceedings is fairly comparable to the use of accelerated arrangement proceedings.
In each restructuring proceeding, the debtor enjoys enforcement protection (i.e., the moratorium on enforcement proceedings against the debtor) and the duration and scope of such enforcement protection depends on the particular type of proceeding.
If voting on the arrangement is carried out in groups of creditors (which is usually the case in all bigger Polish restructurings), the arrangement would be adopted if voting creditors in each group holding at least two-thirds of the sum of claims owed to voting creditors from the given group vote to approve the plan. Additionally, the arrangement shall be adopted even if the two-thirds majority threshold is not achieved for each voting group of creditors, if creditors having at least two-thirds of the sum of all the claims owed to voting creditors have voted in favor of the arrangement, and the creditor groups that voted against the adoption of the arrangement would receive greater recoveries under the arrangement option than in the bankruptcy option. The use of this backup arrangement adoption rule is often applied in Polish restructurings.
The adopted arrangement is required to be subsequently approved by the court.
A pre-packaged bankruptcy (pre-pack) is a sale of a bankrupt party’s entire enterprise or a significant part of such enterprise, in the simplified bankruptcy procedure to a pre-agreed investor for a pre-agreed price. A pre-pack motion is subject to approval of the bankruptcy court. Generally, the court will approve a pre-pack motion if it finds the sale to be beneficial to the creditors.
If everything goes well, the pre-pack sale may close within a few months from the date of declaration of bankruptcy (whereas standard Polish bankruptcy proceedings are usually very time-consuming and proceed on a longer timeline that may last up to several years). It is usually possible to sell a bankrupt party’s assets in the final stage of Polish bankruptcy proceedings, when the enterprise may be worth much less than it was worth at the beginning of the bankruptcy proceedings (this can be due to a loss of key employees, a lack of new financing, the expiration of long-term contracts, or a lack of new contracts). Consequently, the pre-pack concept is attractive for potential investors primarily because it allows creditors to preserve the value of the bankrupt party’s business and to quickly sell the business on a going concern basis to an investor.
However, use of pre-packs, which have been available in the Polish legal system since January 2016, still seems to be underutilized.
A pre-packaged bankruptcy (pre-pack) is a sale of a bankrupt party’s entire enterprise or a significant part of such enterprise, in the simplified bankruptcy procedure to a pre-agreed investor for a pre-agreed price. A pre-pack motion is subject to approval of the bankruptcy court. Generally, the court will approve a pre-pack motion if it finds the sale to be beneficial to the creditors.
If everything goes well, the pre-pack sale may close within a few months from the date of declaration of bankruptcy (whereas standard Polish bankruptcy proceedings are usually very time-consuming and proceed on a longer timeline that may last up to several years). It is usually possible to sell a bankrupt party’s assets in the final stage of Polish bankruptcy proceedings, when the enterprise may be worth much less than it was worth at the beginning of the bankruptcy proceedings (this can be due to a loss of key employees, a lack of new financing, the expiration of long-term contracts, or a lack of new contracts). Consequently, the pre-pack concept is attractive for potential investors primarily because it allows creditors to preserve the value of the bankrupt party’s business and to quickly sell the business on a going concern basis to an investor.
However, use of pre-packs, which have been available in the Polish legal system since January 2016, still seems to be underutilized.
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