IPBA Journal No 115 | Bankruptcy, Liquidation and Insolvency | Restructuring, Insolvency and Liquidation in Poland

September 2024

Author: JAROSŁAW KRUK - Attorney at law, managing partner

Introduction

Due to the changing economic situation in the world economy, one can notice a significant increase in interest in issues related to bankruptcy, restructuring and also liquidation. Entrepreneurs struggling with the various financial problems of their companies very often have to make a difficult decision related to the initiation of restructuring or bankruptcy or liquidation proceedings. Restructuring, Bankruptcy and Liquidation It should be noted here that restructuring proceedings and bankruptcy proceedings are significantly different from each other and which one to choose depends on the individual situation of a specific enterprise, in particular its financial situation. It should be emphasised that in the Polish legal system there are various legal Acts regulating the above-mentioned issues. First of all, it should be noted that bankruptcy proceedings are regulated by the Act of 28 February 2003 (‘Bankruptcy Law’), while restructuring is regulated by the Act of 15 May 2015 (‘Restructuring Law’). In this author’s opinion, it is worth presenting a brief description of the above-mentioned proceedings, taking into account the differences between them.

Restructuring, Insolvency and Liquidation in Poland

Restructuring

It should be emphasised that restructuring is a process aimed at avoiding bankruptcy. It aims primarily to reach an agreement between the debtor and creditors; that is, this is a process that allows you to settle financial arrears and prevent bankruptcy. As part of an arrangement with creditors, the institution of the division of the debt into installments is very often used and it frequently happens that the debtor undertakes to repay the debt after the creditor has previously written off part of the arrears. Restructuring is therefore intended to enable the company to continue operating and improve its financial situation. It is also worth pointing out that Polish law distinguishes between four types of restructuring proceedings, such as rehabilitation proceedings, arrangement proceedings, proceedings for approval of the arrangement and accelerated arrangement proceedings.

Bankruptcy

An important difference between restructuring and bankruptcy proceedings is that restructuring is addressed to both entrepreneurs at risk of insolvency and those already insolvent, while bankruptcy is intended for insolvent entrepreneurs. Bankruptcy may therefore be declared only when the conditions provided for in the Bankruptcy Law are met, and in accordance with Article 10 of the abovementioned Act, bankruptcy is declared in relation to a debtor who has become insolvent. Bankruptcy therefore concerns situations in which an agreement between the debtor and creditors is not possible. As a rule, the initiation of bankruptcy proceedings results in the termination of the business activity of a given entrepreneur and is associated with the sale of the debtor’s assets, which then enables the satisfaction of his creditors. Another important rule is that bankruptcy cannot be declared in the period from the opening of restructuring proceedings to its completion. In the event of a conflict between the bankruptcy application and the restructuring application, the restructuring application will be considered first.

Liquidation

Due to the subject of this article, it is also necessary to briefly refer to the Polish legal regulation regarding the liquidation of enterprises. Proceedings aimed at the liquidation of an entrepreneur are conducted based on the provisions of the Commercial Companies Code, taking into account the rules applicable to a given type of company. Liquidation is a procedure leading to the closure of the company’s affairs, to its actual immobilisation. A company that goes into liquidation will operate only to a limited extent until it is removed from the register of entrepreneurs. An important difference between liquidation and declaring bankruptcy is that liquidation is an entrepreneur’s decision, which he can make even when the enterprise is operating properly and when the company has no financial problems, unlike bankruptcy, the basic condition of which, as already indicated above, is the entrepreneur’s insolvency. Of course, the vast majority of liquidation cases are related to problems in the operation of the entrepreneur, but there are no legal obstacles for the entrepreneur to start liquidation even when the economic situation improves. It is also worth adding that the reasons for the liquidation of an entrepreneur are specified in company agreements and result from the Commercial Companies Code. The grounds for liquidation may vary, including: relating to an internal conflict between partners, inability to achieve the purpose for which a given company was run, loss of a licence or business permit, or financial issues.

Amendments to Restructuring and Bankruptcy Laws

In terms of the issue discussed in this article, it is also worth paying attention to the planned amendment to the Restructuring Law and Bankruptcy Law. The proposed changes in the law result from the need to implement into the national legal order Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on the framework for preventive restructuring; debt relief and business bans and on measures to increase the effectiveness of proceedings regarding restructuring, insolvency and debt relief; and amending Directive (EU) 2017/1132 (‘Restructuring and Insolvency Directive’). The primary goal of the planned changes is to protect the market and jobs, as well as to provide assistance to entrepreneurs. The above-mentioned Directive is aimed primarily at harmonising the regulations regarding restructuring proceedings in Member states of the EU in order to ensure the proper functioning of the internal market. The restructuring proceedings are intended to enable entrepreneurs in difficulty to continue their operations and to prevent job losses. The proposed changes are also aimed at modernising regulations in the field of restructuring and bankruptcy law and eliminating irregularities in the process of selecting restructuring advisors to act as supervisors, managers or trustees. The planned changes are to be introduced in the third quarter of 2024.

Cross-Border Bankruptcy Proceedings

In the context of the analysed issue, it is also necessary to mention cross-border bankruptcy proceedings, which are regulated by Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 regarding bankruptcy proceedings. It should be emphasised that this Regulation is binding in its entirety and is directly applicable in the Polish legal order. In accordance with the provisions of the above-mentioned Regulation, the opening of bankruptcy proceedings in one of the EU member states has effects in other member states. Pursuant to the provisions contained in the above-mentioned Regulation, the courts of the member state in whose territory the debtor’s centre of interests is situated have jurisdiction to open insolvency proceedings. The court’s jurisdiction to declare bankruptcy is determined by determining the socalled ‘COMI’—centre of main interests—the main centre of basic activity, that is, the place where the debtor mainly manages his business. In terms of the application of cross-border bankruptcy proceedings, it is also important that the above-mentioned Regulation does not introduce uniform bankruptcy proceedings in all member states, which means that the proceedings are conducted according to national regulations. The law applicable to bankruptcy proceedings and their effects is therefore the law of the member state in which the proceedings were initiated. Pursuant to the provisions of the Regulation, a judgment on the opening of bankruptcy proceedings produces in any other member state, without the need to complete any formalities, the effects resulting from the law of the state in which the proceedings are opened. Moreover, the effects of the proceedings cannot be challenged in other member states. Taking into account the above, in summary, it should be emphasised that a decision declaring bankruptcy issued by a court of one of the member states, as part of cross-border bankruptcy proceedings, will also produce legal effects in Poland. Therefore, if the court of one of the member states has jurisdiction due to the place where the entrepreneur’s main centre of activity (COMI) is located, the proceedings will be conducted in accordance with the regulations in force in that country and the effects of bankruptcy will be determined according to these regulations. In such a case, Polish authorities will be obliged to comply with the consequences of the announced bankruptcy without the need to fulfil additional formalities.