On January 1, 2016, Poland revamped its legal framework related to the restructuring of financially distressed businesses with a brand-new Restructuring Law and significantly-amended Bankruptcy Law. The Polish restructuring (and broadly speaking insolvency) framework is now governed by two separate legal acts: the Restructuring Law, which deals with the financial restructuring of indebted companies and businesses, and the Bankruptcy Law, which focuses on the orderly liquidation of the assets of companies and businesses without feasible options to restructure their debts and continue their operations.
The Restructuring Law is the Polish equivalent of chapter 11 bankruptcy in the US. It aims to facilitate the restructuring of liabilities and operations of financially distressed businesses by allowing them to enter into a restructuring plan with their creditors. Since its inception, the Restructuring Law has increasingly been used by debtors of all shapes and sizes, including publicly traded companies, to restructure their debts and seek a fresh start.
The Restructuring Law offers debtors four different legal options: (1) arrangement sanctioning proceedings; (2) accelerated arrangement proceedings; (3) arrangement proceedings; and (4) rehabilitation proceedings. These procedures differ in the complexity, length, and level of protection they afford to debtors and in the intensity of court super-vision.
An arrangement sanctioning proceeding is a predominantly out-of-court procedure that resembles the UK scheme of arrangement proceedings. The debtor retains control over its assets and business affairs, drafts and proposes restructuring plans, and negotiates those plans with creditors, and it is responsible for collecting votes cast by the creditors. A restructuring court will step in only when votes have been cast and the creditors have adopted the arrangement. The sole function of the court is to either sanction or reject the arrangement. However, the court can refuse to approve the arrangement only in certain circumstances (e.g., when the arrangement is illegal). But this flexibility comes at a cost. The procedure offers virtually no protection against enforcement actions and requires a higher majority of votes to have the arrangement adopted than in case of other restructuring procedures.
Other restructuring procedures are “proper” court proceedings in that they are supervised by a restructuring court and a court-appointed restructuring practitioner. But they are predominantly debtor-in-possession procedures with the debtor in charge of its business and assets. To engage in actions and transactions exceeding the ordinary course of business, debtors are required to obtain the consent of the restructuring practitioner or – in the case of a specifically defined transaction – the creditors’ committee. In rehabilitation proceedings the default scenario is that the debtor is deprived of the right to manage its business and assets and an administrator is appointed. However, the court may decide that rehabilitation proceedings will also be carried out in debtor-in-possession mode.
Each of the “proper” court restructuring procedures provides debtors with some degree of protection against creditors, including an automatic stay of enforcement proceedings. Public law debts (including taxes) may also be restructured. The arrangement is adopted if it is supported by most voting creditors (majority in number) provided they jointly hold at least two-thirds of all arrangement debts (majority in value).
Another important feature of the Restructuring Law is group voting. Debtors have significant leeway in dividing creditors into groups, which allows them to offer different proposals to different classes of creditors and leaves them room for strategic maneuvering when building creditors’ support for the arrangement. Also, it is relatively easy for debt-ors to override the opposition of dissenting groups of creditors by implementing the cross-class cram-down rules.
All these restructuring procedures are available not only to already insolvent debtors but also to debtors at risk of becoming insolvent, and are thus debtor-friendly and relatively flexible. As such, they constitute preventive restructuring frameworks pursuant to the recently-adopted EU Directive on restructuring and insolvency. Although certain changes to the Restructuring Law will be required to fully adjust it to the EU Directive, the Re-structuring Law creates a modern legal platform for distressed debtors.
By Daniel Radwanski, Head of Restructuring & Insolvency, Schoenherr Warsaw
This Article was originally published in Issue 6.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
