By Małgorzata Olech and Marcin Wnukowski (Squire Patton Boggs)
The statistics are clear that the number of restructuring proceedings in Poland is on rise. Among the types of restructuring proceedings available in Poland, the procedure for the approval of the arrangement is of the greatest interest, primarily due to it having the least formalized nature and the special protection against enforcement that the debtor may obtain. With the increase in the number of restructuring proceedings, the number of abuses is also increasing. In this article we present how creditors can defend themselves against abuse of rights by the debtor.
In the Polish legal system, there are two types of proceedings related to the insolvency of a debtor: insolvency proceedings for insolvent debtors and restructuring proceedings for debtors threatened with insolvency. Restructuring proceedings are essentially designed to prevent bankruptcy. There are several types of restructuring proceedings, which differ in the degree of formalization, the protection of the debtor against execution and the degree to which the debtor is limited in the management of his assets.
The rapid increase in the number of restructuring proceedings opened in Poland is a fact. In 2020, 780 of them were opened, 2021 - 1888, and in 2023 - 3576[1]. Of all types of restructuring proceedings, the procedure for approval of the arrangement is the least formal. In 2023, the approval procedure accounted for 93% of all open procedures[2]. The procedure for the approval of the arrangement enables the conclusion of the arrangement through the independent collection of the votes of creditors by the arrangement supervisor chosen by the debtor, with minimal participation of the court. The procedure is formally commenced once a contract for supervision of the proceedings between the debtor and the supervisor of the arrangement is concluded. Unlike in other restructuring proceedings, a court order is not required to launch the proceedings, and the proceedings are, to a large extent, out-of-court and the court is involved only at the stage of approving the arrangement.
In ordinary proceedings for approval of the arrangement, the debtor is not protected from enforcement against his assets. However, this principle has been significantly changed with the introduction into Polish restructuring law of solutions previously known as simplified restructuring procedures (devised in course of COVID-19 pandemic, often called “proceedings for approval of the arrangement 2.0” in practitioners’ parlance).
In the course of such proceedings, the supervisor draws up the list of claims, the list of disputed claims and the preliminary restructuring plan, and makes a formal notice on the establishment of the arrangement date. The effects of the announcement are far-reaching. From the date of the announcement, enforcement directed to the debtor’s assets is suspended by law and the initiation of new enforcement proceedings to the debtor’s assets is prohibited. The court, at the request of the arrangement supervisor or the debtor, may lift seizures made so far, if this is necessary for the continued operation of the debtor’s business. Sums obtained in the suspended enforcement proceedings not yet handed over to the creditor are transferred back to the debtor’s assets. The protection against enforcement also applies to secured creditors initiating enforcement from the collateral.
The announcement also affects the contracts. The termination of the lease contract with respect to premises in which the debtor’s business is conducted without the permission of the creditors’ council is inadmissible. The prohibition of termination also applies to credit agreements with respect to funds made available to the borrower before the opening of the proceedings, leasing, non-life insurance, bank account agreements, surety agreements, contracts covering licenses granted to the debtor and guarantees or letters of credit and other contracts of fundamental importance for the conduct of the debtor’s business. The prohibition does not apply if the basis for termination of the contract is the debtor’s default after the announcement of the arrangement date.
Despite the fact that at the time of the announcement of the arrangement day, the debtor is limited in the management of his assets and the consent of the supervisor is required for him to perform activities exceeding the ordinary management, such a far-reaching protection against the enforcement combined with the lack of much formalism of this procedure results in high attractiveness of proceedings for approval of the arrangement for debtors.
Given the above, this procedure offers far-reaching protection of the debtor. This is in many cases misused by debtors. Often the proceedings are initiated by debtors who are not at all threatened with insolvency and financial difficulties are simulated in order to obtain debt reduction. The procedure is often used to protect against pending enforcement, while the debtor does not take any real action to agree on the arrangement with the creditors. Sometimes this procedure is carried out at a time when the debtor’s financial condition is already so bad that it would justify opening bankruptcy proceedings and the debtor is fully aware it is not able to perform any arrangement.
The statistics show that in 2023, 31% of the proceedings ended up in arrangement (the figure was similar for 2022 – 29% and lower for 2021 – 24%). Further, in 2023, 10% of the arrangements were repealed by the court (figures for 2022 and 2021 were 13% and 17% respectively)[3]. This does not suggest a very high scale of abuse but still shows that a large number of proceedings initiated do not end up in arrangement.
The law offers certain safeguards for the creditors. The purpose of the procedure for the approval of the arrangement is to avoid bankruptcy of the debtor while safeguarding the legitimate interests of the creditors.
The general rule is that the creditor shall remain active and use all procedural measures allowed by the law.
Firstly, the easiest way to protect creditor’s interests is either to submit creditor’s objections regarding the proposed arrangement to the arrangement supervisor. Further, the creditor shall vote against the arrangement and make written objection. Under operation of law if, within four months from the announcement of the arrangement date, the debtor does not apply to the court for approval of the arrangement, the effects of the notice shall expire. In such cases, the proceedings may continue but without the special protections against the enforcement and termination of contracts.
Secondly, the law restricts the possibility of recourse to the arrangement approval proceedings. If during the last ten years, the debtor has already conducted such proceedings or the restructuring proceedings against the debtor were discontinued (unless it was made upon the consent of the creditors' board) the debtor may not resort to this measure again. Such circumstances shall be brought to the court’s attention.
Thirdly, at the request of the creditor or arrangement supervisor, the court may repeal the effects of the announcement of the arrangement date if it leads to the material detriment of the creditors or it is obvious that the arrangement will not be performed. The latter premise is an important defense measure that may be brought to court’s attention where the arrangement proposed by the debtor obviously lacks a chance for success (the most common features are lack of real restructuring or lack of credible financing for restructuring).
There may be evidence of detriment of creditors when the debtor initiates proceedings for approval of the arrangement without taking any steps to agree on the arrangement. A prerequisite for finding the creditor’s detriment may also be the opening of proceedings in the final stages of the ongoing enforcement. A limitation of the effectiveness of this instrument for creditors is the long-term examination of the application by the court. Thus, the creditor may submit the brief to the court raising these matters and request that the approval of the arrangement is denied.
*This article was originally published on Squire Patton Boggs Restructuring GlobalView blog on 22 August 2024.
[1] See: Yellow Black Monochrome University Education Event Conference Presentation Template.
[2] See Yellow Black Monochrome University Education Event Conference Presentation Template.
[3] See Yellow Black Monochrome University Education Event Conference Presentation Template.