Vol 14 (2017) - Issue 5

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Polish Restructuring Law: The Right Approach to Rescue Procedures?

It is over 18 months since the coming into force – as of 1 January 2016 – of a new Polish Restructuring Law (hereafter: RL) and amended Bankruptcy Law (hereafter: BL) and some initial comments on available legal instruments and their practical implementation are due.

Background
Many legal concepts and ideas standing behind the RL and BL can be traced back to the pre-war laws of 1934 where an arrangement/settlement procedure (Prawo układowe) and bankruptcy (liquidation insolvency) procedure (Prawo upadłos´ciowe) were covered by separate legal acts. A return to the separation of arrangement proceedings from liquidation insolvency after a period of 12 years (the Bankruptcy and Recovery law (BRL) has been in force between 2003-2015) has its justification, namely that preventive restructuring proceedings need to be accepted by the business world as a legal instrument, which may be used for rescue, in order to combat a common and often true perception that bankruptcy proceedings imply a total loss of value, have negative economic and social effects on society in general and often cause a domino effect of bankruptcies of the bankrupt debtor’s major counterparties. Although the BRL contained a rescue procedure (Poste ̨powanie naprawcze) for various reasons, it did not work in practice even if it contained some of the basic elements present in rescue proceedings – a stay of creditors enforcement actions or the required speed of process, since the proceedings could not last longer than 3 to 4 months depending on the type of business covered by the procedure.

Work on the RL commenced at least back in 2011, and experiences of the US chapter 11 and many laws of EU member states in existence at the time of rescue proceedings were reviewed and considered during its drafting.

Today, the unanimous stand among practitioners is that the end result is positive even if some issues could have been covered differently by law.

Current statistics show that the number of business insolvency liquidation (i.e. bankruptcy) proceedings has decreased. According to the Coface Report (www. coface.pl), during the first quarter of 2017, courts in Poland issued 189 rulings on bankruptcy and restructuring of Polish entrepreneurs. In the first quarter, 77 rulings related to the opening of restructuring proceedings where for the same period last year there were only 6. During the period between January and March 2017, 122 rulings were issued on the opening of bankruptcy proceedings – this is at least 5 less than in the same period for the previous year. The Coface forecast is that in the subsequent months of 2017 restructuring proceedings will gain in popularity and the number of bankruptcies will decrease.

Leaving aside whether this may be attributed solely to the new laws, from a practical perspective it is clear that the RL has filled a loophole in regulating an area of business activity, which previously had to be managed by out of court settlements (a tendency to avoid formal procedures was attributed to loss of control over the process, loss of value and the actual length of the proceedings), which were usually commenced by 'standstill agreements', which required creditors’ consensus. This was always difficult to reach and stretched the resources of debtors and their directors, who instead of focusing on business rescue were spending a lot of time and money on negotiating with creditors.