Poland: New Bankruptcy and Corporate Recovery Law

The passage by the Sejm, Poland's Lower House of parliament, of the Bankruptcy and Corporate Law of January 8, 2003 (the ‘‘new law’’) marks one of the most fundamental steps in regulating all aspects of corporate activity (including that of banks), partnerships and individual insolvency or threatened insolvency within the context of a modern market economy.

The former Bankruptcy and Composition Law (the ‘‘old law’’) dated back to 1934 and was sorely inadequate and in many respects detrimental to the rights of creditors. Under the old law, creditors had recourse to court proceedings that were both extremely lengthy and expensive and allowed for satisfaction of creditors’ claims only to a limited extent. The legislation was also ineffective in protecting creditors from fraudulent transactions. The new law aims at ensuring that creditors’ rights are protected without necessarily forcing a company into bankruptcy. The effectiveness of this balancing of interests, however, is a subject of much controversy. The old law provided that creditors’ claims could be satisfied, not from the object of the secured assets, but from the entire property making up the estate in bankruptcy. The new law changes this and creditors are to be satisfied only from the amount obtained from the sale of the secured assets after deducting their sale costs.

In tabling the legislation, the government explained that it should guarantee the interests of creditors as far as possible, as well as allow the maintainance of the business assets and work places of firms that have become insolvent. Thus, in contrast to the old law where bankruptcy and composition proceedings were regulated separately, the new law provides for both bankruptcy and new corporate recovery proceedings under, so to speak, one roof. Under the old legislation, composition as an option was available only if there were circumstances that were exceptional and independent of the owner, which meant there was an inablity to service a firm’s liabilities. Now, even companies that are fully meeting their liabilities will be allowed to apply for corporate recovery proceedings on the grounds that they have a fear of imminent insolvency.

If it is highly likely that creditors will be satisfied to a greater extent under an agreement than they will under liquidation proceedings, then the bankruptcy court (the ‘‘court’’) may order liquidation with the possibility of a composition agreement. But this option is not available if the previous behaviour of the debtor indicates uncertainty as to whether the composition agreement will be adhered to, unless the proposal for a composition agreement anticipates a liquidation agreement. A court will order liquidation where there is a lack of any basis for the ordering of liquidation with the possibility of a composition agreement. In ordering liquidation, both the court and the trustee in bankrutcy must try to ensure that the sale or takeover of the business is accomplished as a whole, unless this is impossible. If the latter is the case, then the business should be split into organised parts constituting viable production or servicing potential.

The court is given a lot of flexibility as to a liquidation or a composition agreement. A court may order a change in the liquidation proceedings to liquidation proceedings with the possibility of a composition agreement if the basis for the latter became evident only during the course of liquidation proceedings. Similarly, a court may order that the liquidation proceedings with the possibility of a composition agreement should be changed solely to liquidation proceedings. The court has the power to call on an expert examination of the actual state of a debtor, which will serve to assess the firm’s chances of survival.

The ground for a court to declare bankruptcy is the debtor’s insolvency. This is defined as not meeting one’s obligations. Legal persons and organisational units without legal personality, which under a separate law are granted legal capacity, are also considered as insolvent where their liabilities exceed the value of their assets, even where they currently meet their obligations. A motion for a declaration of bankruptcy (the ‘‘motion’’) may be filed by the debtor and any of the creditors. Where a debtor files the motion, the court must start an assets seizure procedure without delay in order to secure the assets from being taken out. This consists of imposing temporary court supervision. During this procedure the court may suspend execution proceedings against the debtor as well as change or remove temporary supervision. The court has power to use other means for securing the assets, including the imposition of mandatory administration over the assets if there is fear that the debtor will hide them or in any other way harm the interests of his creditors, or where the debtor fails to carry out the instructions of temporary court supervision. The relevant provisions of the Code of Civil Procedure apply to all matters not regulated in the seizure proceedings.

A court may dismiss the motion if delay in the performance of the debtors’s obligations does not exceed three months and the total amount of non-performed obligations does not exceed 10 per cent of the balance sheet of the debtor. However, this provision is not applied where the non-performance is of a continuous nature or where the dismissal may cause harm to the creditors. The inadequacy of the assets of the insolvent debtor or where, for example, the property is encumbered with a mortgage or pledge to such a degree that the debtor’s remaining assets will not be sufficient to meet court costs, are the other bases for dismissing a bankruptcy motion. These last two grounds are applied unless it is very likely that encumbering the debtor’s assets would be ineffective, or if it was done to harm the creditors, or if the debtor took other legal steps that were ineffective under the new law which enabled the debtor to get rid of assets sufficient to meet court costs.

A court may impose penal sanctions ranging from three months to five years of incarceration of a debtor, as well as his representatives, for filing false information as to a motion or declaration of corporate recovery proceedings. The debtor is liable to the same penalty for false information as to the state of his assets during such proceedings. A penal sanction of three months to five years may also be imposed on a declared bankrupt or his representative if he fails to convey to the trustee in bankruptcy the entire property that has been declared as part of the estate in bankruptcy, accounting books or other documents relating to such property. He is threatened with the same sanction if he does not provide the trustee in bankruptcy or court commissioner with information as to his property. For filing a motion in bad faith, a creditor may, in addition to paying court costs, also be required to make a public announcement of his action, and the debtor has recourse against the creditor to repair any damages thus caused. The new law provides for a 10-year ban on conducting business activity where the law’s provisions have been abused, bankruptcy proceedings hampered or where the firm was intentionally brought to a state of bankruptcy.

The court calls and chairs a preliminary meeting of creditors (the ‘‘meeting’’) if grounds exist for declaring bankruptcy, unless it is certain that further proceedings can be conducted only with the aim of an assets liquidation. This meeting will not be called if the circumstances of the case would make it too difficult or costly, as well as where the total amount of the disputed liabilities exceeds 15 per cent of the total general amount of liabilities. At such a meeting the creditors can propose a settlement that would allow the debtor a return to the market if he can meet the requirements of both competition and full future solvency. Such a meeting may pass a resolution as to further bankruptcy proceedings with the possibility of a composition agreement or liquidation of the assets or the election of a council of creditors. The meeting may also give an opinion as to the choice of a trustee-in-bankruptcy, court supervisor or administrator. The meeting may decide on a settlement if the participants number at least half of the creditors who, together, have three-quarters of the general amount of liabilities. A record of all the liabilities must be prepared before the above-mentioned resolutions can be passed or a settlement decision is taken. This is prepared under the supervision of the court judge by the temporary court supervisor or, if such a person has been appointed, the administrator. The meeting cannot be postponed unless in exceptionally justified circumstances. Resolutions may be passed even where there is a justified absence of the debtor.

The fundamental novelty of the new law is its provisions for corporate recovery proceedings. They are available to a firm (but not to persons conducting business activity under The Act on Economic Activity (Eastern European Newsletter Issue 38, p.9) for whom only debt reduction is available after a declaration of bankruptcy) which, even though currently meeting its obligations is, on the basis of a rational assessment of its economic situation, clearly threatened with imminent insolvency. The firm files a declaration with the court on the commencement of corporate recovery proceedings, together with a recovery plan. The recovery plan should demonstrate that the firm can recover its abilty to compete on the market. The court appoints a court supervisor for the firm for the duration of the corporate recovery proceedings.

Repayment of the debtor’s obligations is suspended from the date of commencing such proceedings, together with any interest payments due. Also, there can be no execution proceedings against the debtor nor proceedings for the securing of his assets. However, the corporate recovery proceedings have no effect on court proceedings against the debtor, including a creditor’s motion to declare him bankrupt or an administrative proceeding against him.

The manner of the firm’s recovery should specify the restructuring of obligations that can be covered in bankruptcy proceedings, and show the property and employment situation of the firm. The proposal for property restructuring should indicate which part of the property would be transferred, rented or leased. The proposal for employment restructuring should indicate the total number of employees, number of employees to be dismissed, and the basis for such dismissals, as well as the financial consequences of these changes. The restructuring of obligations follows a settlement reached at a meeting of debtors that is scheduled by the firm with the knowledge of the court supervisor. The meeting is chaired by the court supervisor and the debtors may propose changes to the debtor’s proposal before taking a vote on the restructuring of obligations. Corporate recovery proceedings are discontinued if such a settlement is not reached within three months of commencing such proceedings for firms classified as SME’s, and four months for others. The court may extend such time limits in justified circumstances but only to the extent of 2 months. A court will revoke the settlement if the debtor does not perform its terms or where the reasons a court would have for rejecting a settlement became apparent only during performance of its terms.

The new law comprises 544 articles, some of which will come into force on Poland’s EU accession in 2004. The law is currently completing its legislative track in the Senate and will come into force three months from the date of promulgation. The new law deals comprehensively with most aspects of insolvency, which is particularly important for an orderly economic development in conditions of high unemployment and economic recession. The legislator has been commended for drafting legislation which provides a mechanism that encourages effective restructuring of indebted businesses rather than forcing them into bankruptcy. However, there is criticism, particularly on the part of bankruptcy judges, that by including corporate recovery provisions in bankruptcy legislation the pendulum has swung too far in favour of debtors to the detriment of creditors.

First published in European Newsletter, combining Eastern European Newsletter, Issue 1, February 2003, Sweet & Maxwell, UK.