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01 February 2014

Second Chance Policy: Proposed Amendments to Polish Bankruptcy and Insolvency Regulations

The Polish parliament is working on a new restructuring law that could substantially change Poland’s economic environment.

Current Polish bankruptcy and insolvency environment

For bankruptcy proceedings, Poland is currently in 37th place in the Doing Business ranking of the World Bank. The main drawbacks of the Polish bankruptcy procedures are their length, high costs, and relatively low level of creditors’ claims satisfaction.

Companies in fear of restructuring

The above is a result of various factors. For instance, Polish distressed companies fear using any legal restructuring tools as it could harm them even more by sending a message to the public of their difficulties. Such message might result in termination of financing, worsening contract terms, and even quicker deterioration of the debtor’s financial standing.

Procedures started too late

So it is not surprising that most restructuring proceedings in Poland start much too late to be effective. In such an environment, even liquidation procedures are often initiated too late to give the creditors a decent level of claims satisfaction.

Liquidation bias

Additionally, the current Polish bankruptcy regulations and practice prefer liquidation to available restructuring procedures. The general rule of the law is different, but when it comes to details and statistics it becomes clear. According to the Polish Ministry of Justice, in 2012 about 80% of all bankruptcy court rulings were in favour of liquidation of the debtor’s enterprise. That bias results in enterprises being split into small parts that, sold separately, do not match the commercial value of the running business.

But there may be a light at the end of the tunnel as the Polish lawmakers seem determined to change the situation.

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 — economic growth

In the comments to the proposed amendments to the bankruptcy and insolvency regulations, Polish lawmakers emphasise that international experience seems to suggest the improvement of conditions for effective restructuring of companies and, if required, fast liquidation are essential for economic growth. The law reform is also based on the other key foundations: securing the economic value of enterprise and respect for the rights of creditors.

How to achieve that

The goal of effective restructuring and fast liquidation is to be achieved by, among others:

  • 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 of information distribution and court filings;
  • introducing so-called new or second chance policies for entrepreneurs that failed as a result of an adverse change in economic conditions;
  • increasing the liability of unreliable debtors and bankrupts.

New types of restructuring procedures

The amendment provides for three new types of restructuring procedures: (i) simplified composition proceedings (uproszczone postępowanie układowe), (ii) composition proceedings (postępowanie układowe), and (iii) reformatory procedure (postępowanie sanacyjne). Each varies significantly, generally in relation to the scope of autonomy left to the debtor. Multiplicity of the introduced proceedings should allow the debtors and creditors to choose what best suits their needs and the financial conditions of debtors. Importantly, the above procedures could be used not only by insolvent debtors but also by debtors that would likely soon become insolvent.

Status of the law

Work on the new restructuring law, which would also amend the bankruptcy and insolvency law, started in May 2012. The draft regulation has been prepared by a team of highly respected practitioners and is currently in public consultation. The draft should be on the parliament voting agenda in 2014.

Difficulties are not a reason to shut down the business. The point is to change the business.

author: Marcin Antczak