Restructuring and bankruptcy
Bankruptcy & Recovery Law
The Polish Bankruptcy & Recovery Law provides for a number of procedures in the event that a corporate debtor becomes insolvent or is threatened with insolvency. Insolvency means that a business is either unable to pay its debts as they become due or its total liabilities exceed the total value of its assets, even if current obligations are being met.
Two types of bankruptcy proceedings are possible if the debtor is already insolvent: a reorganisation bankruptcy, if it is possible to maintain the operation of the debtor’s enterprise and reach an arrangement with its creditors; or a liquidation bankruptcy, which assumes the sale of all the debtor’s assets to satisfy the creditors, and the liquidation of the debtor’s enterprise.
Debtors who have not yet become insolvent, or have become insolvent to a minimal degree, may initiate recovery proceedings with the goal of restructuring their liabilities, restoring the profitability of their enterprise, and overcoming financial difficulties.
A reorganisation bankruptcy and a recovery proceeding both assume the active participation of the debtor in the process of restructuring liabilities and negotiating with creditors, and also, in principle, allow the debtor some discretion in conducting its ongoing operations. A liquidation bankruptcy, by contrast, results in the debtor being deprived of management of its assets and appointment of a bankruptcy trustee.
A debtor should file a bankruptcy petition within 14 days after becoming insolvent. Any creditor is also entitled to file an involuntary bankruptcy petition if the debtor has become insolvent but has not filed a voluntary petition. Recovery proceedings are initiated solely upon application of the debtor.
Bankruptcy proceedings are a form of collective enforcement of claims by numerous creditors against a single debtor. Although in principle bankruptcy seeks to satisfy all creditors to the fullest extent, in practice they recover only a portion of their claims. In the case of a liquidation bankruptcy, creditors are divided into several categories of priority in satisfaction of their claims. Creditors that have timely secured payment of their claims through encumbrances such as a registered pledge or mortgage find themselves in a more favourable situation when bankruptcy is declared (whether a reorganisation bankruptcy or a liquidation bankruptcy).
Failure to file a timely bankruptcy petition can have serious consequences for the debtor’s management board members or other persons authorised to represent the debtor. They may be personally liable for losses arising as a result of failure to file a bankruptcy petition by the statutory deadline.
The quest to improve the effectiveness of business operations often leads to a decision to make changes in the way assets are organised or in the ownership structure of the enterprise. Changes may also involve the management, whose skills contribute greatly to the market value of the enterprise. Restructuring may be preceded by a sale of all or part of certain enterprises or business lines, often in order to find an out-of-court path to avert insolvency. Thus the concept of restructuring refers to a wide array of actions, such as:
- Renegotiation and modification of the terms for repayment of financing
- Establishing new security instruments or modifying the priority of existing security
- Raising new financing
- Setoff of claims or conversion of debt to equity
- Division of the enterprise or conversion of the legal form in which it operates
- Sale of tangible or financial assets (in transactions involving individual assets or an entire enterprise or business line)
- Assumption of liabilities.
The procedures for restructuring of enterprises and assets in Poland are subject to regulation under numerous legal acts from various fields of law, such as the Civil Code, the Commercial Companies Code, the Labour Code, accounting regulations and tax laws.
Effective legal support for restructuring requires skilful application of interdisciplinary legal expertise, and, equally, an understanding of the underlying economic mechanisms that play a role in the commercial operations of the enterprises undergoing the restructuring process.