The new year will bring tremendous changes to the Polish insolvency regime as significant amendments to the Bankruptcy and Recovery Law (Journal of Laws 2015, No. 233, uniform text) come into force on 1 January 2016 (New Bankruptcy Law). The aim of the New Bankruptcy Law is to make existing legal instruments more effective and to help business entities survive financial stress or distress.
The New Bankruptcy Law significantly amends not only the content of the existing Bankruptcy and Recovery Law but also its name. From 1 January 2016, the act will simply be called the Bankruptcy Law - the provisions concerning recovery matters will be regulated separately under the Restructuring Law. The rationale for the adoption of the new provisions were detailed during the legislative procedure in the written justification of the Restructuring Law.
It states that after ten years of applying the Bankruptcy and Recovery Law, the suitability of existing provisions to current business conditions can be evaluated. Reference is made to the fact that Poland is in 37th place in the World Bank’s Doing Business – Measuring Business Regulations sub-ranking concerning insolvency proceedings. According to the World Bank, this ranking is due to the time-consuming nature of existing Polish insolvency proceedings, the high costs involved and creditor dissatisfaction. The new insolvency regime attempts to address these concerns.
What is changing?
The most important changes to the Polish insolvency regime include:
Conditions for declaring bankruptcy
The New Bankruptcy Law provides a new definition of a person who is insolvent, a condition for declaring bankruptcy. The changes concern both statutory grounds for insolvency, ie financial liquidity and indebtedness:
- Lack of financial liquidity - under the new regulations, "a debtor is insolvent if it has lost its ability to perform its due financial obligations". Previously, "a debtor was deemed insolvent if it had failed to perform its financial obligations". The justification of the New Bankruptcy Law states that when determining whether a debtor is insolvent or not, only the financial aspects of its business activity are taken into consideration. This means that the debtor is not insolvent if it has lost the ability to perform its due financial obligations and that loss was caused by some non-financial reason (eg, forgetting the password to a company’s bank account). It is presumed that a debtor has lost the ability to perform its due financial obligations if it is in default for more than three months. However, the debtor may challenge this presumption of law.
- Indebtedness - apart from the insolvency test mentioned above, the new provisions also stipulate that "a debtor that is a legal person or an unincorporated organizational unit granted legal capacity by a separate law is also insolvent when the sum of its obligations exceeds the value of its assets and this state lasts for more than 24 months". This is only an additional test to the financial liquidity test, which means that a court may dismiss a petition to declare bankruptcy on this basis if there is no threat of the debtor losing the ability to perform its due financial obligations. This solution is supposed to help enterprises survive in case there is no real need of filing a petition to declare bankruptcy, because creditors are not economically threatened. The provisions concerning indebtedness do not apply to debtors that are commercial partnerships if at least one of their partners is liable without limitation (i.e. with his/her entire assets) for the obligations of the partnership.
Who can file a motion for bankruptcy?
The New Bankruptcy Law offers clarification to this question as it expressly states that only the debtor or any of its personal creditors are entitled to file a petition to declare bankruptcy. Until now it was debatable whether a real creditor (eg, a pledge/mortgage creditor) is entitled to solely file such a petition.
Deadlines for filing a petition to declare bankruptcy
The New Bankruptcy Law should be of particular interest to members of the management boards of limited liability companies, as they are liable for the debts of their insolvent company unless the petition to declare bankruptcy is filed on time (with a few exceptions).
The most significant change for members of the management boards is the new deadline for filing the petition which is now one month instead of two weeks. Legal practitioners are welcoming this change as the 14-day period was considered to be unrealistic.
Assets do not cover the costs of the insolvency proceedings
The new provisions retain the rule that the court shall dismiss a petition to declare bankruptcy if the assets of the insolvent debtor are not sufficient to cover the costs of the proceedings. However, under the New Bankruptcy Law, this condition is much more favourable to creditors: it states that the court shall also dismiss the petition if the debtor’s assets cover the costs of the proceedings but do not cover any of the debts owed to its creditors.
New type of bankruptcy procedure: pre-packaged liquidation
Perhaps the most interesting aspect of the New Bankruptcy Law is the introduction of a new kind of bankruptcy procedure in which the sale of a whole enterprise, an organized part thereof, or some of its high-value assets is agreed in advance of the debtor declaring its insolvency and the sale is completed shortly thereafter. In the petition, the petitioner has to specify the terms of the sale (price and purchaser) and attach a valuation report prepared by a court expert. The main aim of this procedure is to satisfy the creditors to the maximum extent and to speed up the bankruptcy proceedings. This solution is especially beneficial when selling the whole enterprise because it makes it possible for the insolvent enterprise to continue its business activity and sell it for a much better price (without decreasing its value, which is often a direct effect of commencing insolvency proceedings). Similar legal procedures can be found in the American and British legal systems.
Change of the court’s jurisdiction
In order to comply with Council regulation (EC) No. 1346/2000 of 29 May 2000 on insolvency proceedings (Official Journal L 160, 30/06/2000 P. 0001 - 0018), the provisions on court jurisdiction have been changed. Under the New Bankruptcy Law, a bankruptcy case will be decided by the court with jurisdiction over the main centre of the basic debtor’s activity, whereas previously it was the court with jurisdiction over the main establishment of the debtor’s enterprise.
Division into classes
Creditors are divided into classes that reflect the priority in satisfying their claims from the proceeds of the liquidation. Under the New Bankruptcy Law, tax claims will no longer have priority over private creditors’ claims and will belong to the same class. Currently, tax liabilities and other public dues are in the third class while contractors and other unsecured private creditors are in the fourth class. Under the new regulations, tax and private creditors will both belong to the second class. Interest will be satisfied in the third category instead of the fifth, and there will be a new class for shareholder loans. The aim of this new classification is to change the tax authorities’ approach to restructuring proceedings and various arrangements with debtors since they will no longer have a better position among the creditors during bankruptcy proceedings.
Introducing business-friendly amendments into Polish legislation is an important step for business entities conducting their activities in Poland. The New Bankruptcy Law implements new substantive solutions (eg, pre-packed sale), while retaining some of the current bankruptcy instruments but in a more streamlined form (eg, grounds for insolvency). Because the New Bankruptcy Law represents an overhaul of existing law, numerous new terms will need to be tested in court. It will inevitably take some time to understand how the New Bankruptcy Law will work in practice, so businesses in financial uncertainty within Poland should continue to proceed with caution and seek appropriate advice.