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New Restructuring Law Brings Amendments to Bankruptcy and Insolvency Regulations

New Restructuring Law Brings Amendments to Bankruptcy and Insolvency Regulations

Poland
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Poland is set to introduce a new restructuring law (the “Bill”) which should substantially change the country’s economic environment. The Bill provides for its entry into force on January 1, 2016, except for certain regulations that are to enter into force at a later stage.

Current Polish Bankruptcy and Insolvency Environment

Poland ranks 32nd in the “resolving insolvency” category in the World Bank’s June 2015 “Doing Business” rankings. The main drawbacks of the Polish bankruptcy procedures: their length, cost, and relatively low level of creditor claims satisfaction. The Bill may substantially change this situation, as it not only provides for new restructuring regulations but also amends the existing bankruptcy law. 

Restructuring First, But If It Fails, Fast Liquidation

Polish government officials have clearly stated the reasoning behind the new regulation: “Difficulties do not provide a reason to shut down business. Instead, the point is to change business.” The country’s lawmakers stress that international experience suggests that improving conditions for the effective restructuring of companies – and, if required, allowing for companies’ rapid liquidation – is essential for economic growth.

New Restructuring Procedures

The Bill offers a choice between four new restructuring procedures that have been clearly separated from the bankruptcy procedures, to avoid stigmatizing debtors who attempt to resolve temporary solvency issues. The four procedures vary both in terms of the potential benefits for debtors and the amount of control the courts and creditors have over the business. The general rule is that the greater the possible benefits for the debtors, the greater the amount of control granted to the court and creditors over the procedure and the conduct of business. The new restructuring framework is also supported by changes in the judicial system.

Amendments to Bankruptcy Law

The Bill not only provides for new restructuring regulations but also amends the existing bankruptcy law. One of the most important changes the Bill introduces would seem to be its new definition of insolvency, which constitutes a prerequisite for the declaration of bankruptcy.

According to this definition, an enterprise will be considered insolvent primarily when it loses the ability to fulfill its financial obligations (i.e., a liquidity test). Therefore, the new regulation connects the state of insolvency with a company’s economic inability to pay off its liabilities, rather than with the making of actual payments, as was the case before the new regulation.

The Bill leaves the assets vs. liabilities test in place, but amends and supplements its wording. Unlike the current rule (which states that a debtor is deemed insolvent when the sum of his obligations exceeds the value of his assets), under the Bill any future and contingent liabilities, as well as certain shareholders’ liabilities, will not be taken into account. In addition, a state of excessive indebtedness can only provide grounds for a declaration of bankruptcy if it lasts longer than 24 months. Nevertheless, even if the conditions are met, the court may still reject a bankruptcy petition, provided that there will be no threat to the debtor’s ability to perform its due and payable obligations in the short term.

Another of the Bill’s major amendments lies in the introduction of a new institution called prepared liquidation, also known as “pre-pack.” In this procedure, the bankruptcy petition may be accompanied by an application for approval of the terms of sale for a debtor’s enterprise, its organized part, or assets representing a major part of its enterprise. The application for approval of terms of sale must specify at least the sale price and potential purchaser and be accompanied by a valuation report prepared by a certified court expert.

The court will be obliged to accept the application if the offered price is higher than the estimated liquidation proceeds that could be raised in “standard” bankruptcy proceedings, less the estimated costs of the proceedings. If the offered price is lower than (but still close to) the estimated net liquidation proceeds, the court will still be in a position to approve the sale if it is supported by an “important social interest” or if it allows the distressed enterprise to be preserved.

Summary

The Bill will bring relief to distressed businesses by introducing new restructuring mechanisms and also by introducing a clear distinction between restructuring proceedings and (negatively perceived) bankruptcy proceedings. The to-date rarely-used restructuring procedures stipulated in the Polish bankruptcy law will be substituted with completely new regulations inspired by various European and US examples that have proven to be most effective, such as Chapter 11 in the USA, the English scheme of arrangements, and France’s sauvegarde.

The Bill will bring benefit to debtors and hopefully to the Polish economy as a whole. However, at the end of the day it is the creditors who will have to give a helping hand to their debtors by letting them restructure. The new regulation will require some concessions on their side, thereby creating additional risks that entrepreneurs will have to consider at every stage of their business activities.

By Pawel Halwa, Partner, and Martin Antczak, Attorney, Schoenherr Poland

This Article was originally published in Issue 2.6. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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