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Pandemic-Induced Changes to Restructuring Procedures in Poland

Pandemic-Induced Changes to Restructuring Procedures in Poland

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The legacy of COVID-19 looms large over the financial situation of many businesses across Poland. In order to stave off the pandemic’s impact, a new type of restructuring was introduced into the Polish legal system – the simplified restructuring procedure. Businesses affected by the crisis were quick to use this solution, particularly because of its informal nature and the possibility of getting relatively strong (though temporary) protection from creditors, as well as the time necessary to restructure their business.

November 30, 2021, marked the expiration date of the period in which the simplified restructuring procedure could be applied. However, due to the popularity of this short-lived option, the Polish lawmaker used its basic assumptions to modify one of the types of restructuring proceedings – the arrangement approval procedure.

It allows anyone facing insolvency to enter into an arrangement with the creditors with little involvement from the courts, whose function basically comes down to approving the adopted arrangement. The arrangement may entail, for example, a reduction of the value of the claims, their division into installments, or their conversion into shares.

The debtor first enters into an agreement with a supervisor of the arrangement. Then, the supervisor determines the arrangement date, i.e., the day on which the claims covered by the arrangement are separated from the claims falling outside its scope. The arrangement covers personal claims that have emerged prior to the arrangement date.

The arrangement date also sets the timeframe for the entire procedure. An application to the court for approval of the arrangement has to be filed within three months of the arrangement date, meaning that this is also the time limit for the creditors’ votes to be collected. If the required majority is reached, the arrangement is subject to approval by the supervisor and the court.

Unlike other types of restructuring proceedings, the arrangement approval procedure does not involve a ban on fulfilling the arrangement-related obligations. This means that, during the course of the procedure, the debtor can perform such obligations. In practice, this solution may substantially hinder restructuring, as the debtor cannot defend itself against creditors by claiming that it is barred from repaying the outstanding amounts covered by the arrangement, which tends to be the debtors’ typical argument in other types of restructuring proceedings.

An important novelty introduced as part of the arrangement approval procedure, effective as of December 01, 2021, is the possibility to obtain special protection for up to four months. The supervisor can publish an announcement (in a dedicated register), specifying that the arrangement date has been set. Starting from the date of such an announcement, the debtor is protected from enforcement against the debtor’s assets.

The lack of a ban on the repayment of arrangement-related debts and the broad legal protections against enforcement may practically mean that, on the one hand, the debtor can pay off the most pressing creditors, whereas, on the other hand, the remaining creditors may begin to make their attitude towards the arrangement or further cooperation dependent upon the debtor’s payment of at least some of the amounts, which are supposed to be covered by the arrangement.

Additionally, starting from the announcement date, the debtor’s business partners are prohibited from terminating any contracts that are essential for the debtor’s business, like lease agreements for premises where the debtor conducts its business operations, licenses, or credit facility agreements. This allows the debtor to embark on negotiations with creditors without the risk of losing key agreements.

Summing up, the revamped version of the arrangement approval procedure, based on temporary solutions that worked well during the pandemic, may turn out to be favorable for struggling businesses that do not require fundamental organizational changes but are finding it difficult to reach an agreement with creditors. The key advantages are speed, very limited court involvement, and protection against enforcement and termination of key contracts. On the other hand, the absence of a ban on the repayment of arrangement-related debts may render negotiations with creditors more difficult.

We are about to find out whether the solutions that proved to be hugely popular in the time of the pandemic will continue to be so in the post-pandemic era.

By Marek Miszkiel, Partner, and Mariusz Grochowski, Senior Associate, Act BSWW Legal & Tax

This Article was originally published in Issue 9.6 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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