The statistics are clear that the number of restructuring proceedings in Poland is on rise.

Among all types of restructuring proceedings available in Poland, the procedure which is of most interest is the approval of an arrangement, primarily because it is the least formal and it offers special protection against enforcement.

However, with the increase in the number of restructuring proceedings, the instances of misuse are also increasing. The main motivation for initiating proceedings is often to avoid enforcement during the protection period or to cut down debts, even when there is no chance of the arrangement being approved or performed. In this blog we consider how creditors can defend themselves against such situations.

Overview of Insolvency Proceedings in Poland

In the Polish legal system, there are two types of insolvency proceedings: 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 formalities, the level of protection the debtor has against execution and the degree in which the debtor is limited in the management of their assets.

Increasing restructurings

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 (according to the presentation made by MGW Consulting Group on INSO Conference organized by Instytut Allerhanda, 8 December 2023). Of all types of restructuring proceedings, the procedure for approval of an arrangement is the least formal. In 2023, the approval procedure accounted for 93% of all open procedures (according to the presentation made by MGW Consulting Group on INSO Conference organized by Instytut Allerhanda, 8 December 2023). The procedure for the approval of an arrangement is achieved as a result of the votes of creditors collected by the arrangement supervisor who in turn is chosen by the debtor.  There is minimal court participation. 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. The court is involved only at the stage of approving the arrangement.

Simplified Restructuring Proceedings (Proceedings for approval of an Arrangement 2.0)

In ordinary proceedings for approval of an 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 the simplified restructuring procedure (devised in course of the COVID-19 pandemic, often called “proceedings for approval of an arrangement 2.0”).

Effect on Enforcement

In proceedings for approval of an arrangement 2.0. the supervisor, after drawing up the list of claims, the list of disputed claims and the preliminary restructuring plan, makes a formal announcement to confirm the arrangement date. The effects of the announcement are far-reaching. First of all, from the date of the announcement of the arrangement date, enforcement against the debtor’s assets is suspended and the initiation of new enforcement proceedings against the debtor’s assets is prohibited. The court, at the request of the arrangement supervisor or the debtor, may lift seizures made in on-going enforcement proceedings, if this is necessary for the continued operation of the debtor’s business. Sums obtained in suspended enforcement proceedings not yet handed over to a creditor are transferred back to the debtor. Importantly, the prohibition against enforcement also applies to secured creditors.

Effect on Contracts

The effects of the announcement of arrangement date also affect contracts. It is not possible to terminate a lease in respect of the debtor’s business premises in which the debtor’s business is conducted without the permission of the creditors’ council. The prohibition on termination also applies to credit agreements in respect of funds made available to the debtor before the arrangement date, leasing, non-life insurance, bank account agreements, surety agreements, 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.

Effect on the Debtor

Although the debtor is limited in the management of their assets and the consent of the supervisor is required for them to perform activities outside of the ordinary management of the business, given the protection against enforcement combined with the lack of formalities to this procedure these types of proceedings are highly attractive.

Ability to Misuse

Given the protection an arrangement offers to a debtor this has led to misuse.

Often the proceedings are initiated by debtors who are not threatened with insolvency at all, or by a debtor who is not in financial difficulties but simply wishes to reduce its debt.

The procedure has been used to protect against pending enforcement, with the debtor not taking any real action to agree an arrangement with its creditors – it simply wanting to obtain the protection against enforcement. In the extreme debtors have initiated this procedure at a time when its 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.

Safeguards for creditors

The law offers certain safeguards for the creditors. One needs to remember that the purpose of the procedure for the approval of an arrangement is to avoid bankruptcy of the debtor, while safeguarding the legitimate interests of the creditors.

Firstly, the easiest way to protect a creditor’s interests is for the creditor to submit their objections regarding the proposed arrangement to the arrangement supervisor. A creditor can then 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, although the arrangement may continue the special protections against the enforcement and termination of contracts do not.

Secondly, a debtor cannot initiate arrangement approval proceedings if during the last ten years, they have already conducted such proceedings or the restructuring proceedings against the debtor were discontinued (unless it was made upon the consent of the creditors’ board). If they do, then this should be brought to 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 approval results in a material detriment to creditors or it is obvious that the arrangement will not be performed. The latter premise can be brought to court’s attention where the arrangement is unlikely to succeed – this is most commonly done where the arrangement is not a real restructuring or there is no credible financing to support a restructuring.

Creditors may be able to show that the arrangement is materially detrimental when the debtor initiates proceedings for approval of the arrangement without taking any steps to agree the terms of the arrangement at the same time. A creditor may also be able to show detriment if the proceedings were opened in the final stages of an ongoing enforcement. Ultimately a creditor will need to submit a brief to the court raising these matters and requesting that the approval of the arrangement is denied.

The clear message to creditors is that they should actively participate in the restructuring proceedings initiated by a debtor and if they believe that a debtor is mis-using the process for its own advantage to make use of the measures noted above which are aimed at protecting their rights.