Poland's parliament recently adopted a new restructuring law (the “Bill”) which will substantially change the country’s economic environment.

After lengthy works, the draft of new restructuring law was finally adopted by the Polish parliament on 9 April 2015. The Bill now requires only the signature of the President.

The Bill provides for its entering into force on 1 June 2015, except for certain regulations that are to enter into force on 1 September 2015.

Current Polish bankruptcy and insolvency environment

For bankruptcy proceedings, Poland is currently in 32nd place in the World Bank's Doing Business rankings[1]. The main drawbacks of the Polish bankruptcy procedures are their length, their high costs, and the relatively low level of creditors’ claims satisfaction. The Bill might substantially change the situation, as it not only provides for new restructuring regulations, but also amends the existing bankruptcy law.

Proposed changes – restructuring first, but if failed, fast liquidation

The Polish Vice Minister of Economy clearly stated the reasoning behind the new regulation: "Difficulties are not a reason to shut down the business. The point is to change the business".

The ultimate goal

Polish lawmakers emphasise that international experience seems to suggest that improving conditions for the effective restructuring of companies and, if required, allowing for their rapid liquidation are essential for economic growth.

How to achieve that

The goal of effective restructuring and rapid liquidation is to be achieved by, amongst other measures:

  • providing debtors and creditors with new legal tools facilitating restructuring procedures and incentives to start the procedures at an early stage;
  • introducing new types of restructuring procedures, autonomous from the stigmatising bankruptcy procedures;
  • emphasising the rule that states that, in general, liquidation should be preceded by restructuring attempts;
  • strengthening the position of active creditors;
  • simplifying the legal procedure and providing new electronic platforms for information distribution and court filings;
  • introducing so-called new or second chance policies for entrepreneurs who failed as a result of an adverse change in economic conditions;
  • increasing the liability of unreliable debtors and bankrupt entities.

Amendments to the bankruptcy law

The Bill not only provides for new restructuring regulations, but also amends the existing bankruptcy law. Among many others changes, its new definition of insolvency, which constitutes a prerequisite for the declaration of bankruptcy, seems to be one of the most important in practice.

Liquidity

An enterprise will be considered insolvent primarily when it loses the ability to fulfil its financial obligations (liquidity test). Therefore, the new regulation connects the state of insolvency with lack of economic ability to pay off the liabilities rather than with the fact of making the actual payments, as was the case before the new regulation.

Technical test

The assets vs. liabilities test remains in place, but its wording has been amended and supplemented. Contrary to current regulation, any future and contingent liabilities, as well as certain shareholders' liabilities, will not be taken into account. In addition, the state of excessive indebtedness could be a ground to declare bankruptcy only when it lasts longer than 24 months.

Summary

The Bill will bring relief to distressed businesses by introducing new restructuring mechanisms and also by introducing a clear distinction between restructuring proceedings and (negatively perceived) bankruptcy proceedings. The rarely-used restructuring procedures stipulated in the Polish Bankruptcy Law are to be substituted with completely new regulation, inspired by various European and US examples that have proven to be most effective, e.g. US Chapter 11, the English scheme of arrangements, or the French sauvegarde.

The Bill will bring benefit to debtors and hopefully to the entire economy; however, it should be kept in mind that at the end of the day, it is the creditors who will have to give a helping hand to their debtors to let them restructure. The new regulation will require concessions on their side, creating additional risks that entrepreneurs will have to consider at every stage of their business activity.