Tatara & Partners Restructuring & Insolvency Law Firm

In December 2022, the European Commission presented a draft Proposal for a Directive of the European Parliament and of the Council harmonising certain aspects of insolvency law[1], opening discussions on some of the potential changes into national laws, together with the remarks and positions towards the Proposal. 49 entities issued their positions (statements) within this legislative process, and now the European Commission analyses these documents, aiming to propose a Directive by the end of 2024. Recently, in December 2024, after analysis of these positions (statements), new, amended version was published[2]. In the amended version, the Proposal covers: Avoidance actions Tracing assets Duties od directors And enhancing transparency of national insolvency proceedings through preparing factsheet with practical information on the main features of their domestic laws on insolvency proceedings The most criticized part – special regime for microenterprises practically without insolvency practitioner involvement, will not be considered in future. Unfortunately, the Proposal no longer covers also pre-pack which we hope can still be changed during Polish Presidency in the EU Council, since we believe regulating pre-packaged sale on the European level may create value and be beneficial for all insolvency stakeholders. Authors: Paweł Kuglarz; Mateusz Kaliński, LL.M. (Tatara & Partners, Krakow/Warsaw) Footnotes [1] Document Brussels, 7.12.2022, COM(2022) 702 final, 2022/0408 (COD), available at: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12592-Insolvency-laws-increasing-convergence-of-national-laws-to-encourage-cross-border-investment_en, hereinafter: the “Proposal”. [2] Document available on: https://www.consilium.europa.eu/en/press/press-releases/2024/12/13/insolvency-law-council-settles-on-position-for-core-capital-markets-union-legislation/ and https://data.consilium.europa.eu/doc/document/ST-16283-2024-INIT/en/pdf

On Friday 18th October Polish government published yet another draft of implementation of the Restructuring Directive (“Draft”). The Draft seems to be a version minimum of implementation, also bearing in mind that most of the provisions regarding restructuring & insolvency field in Poland are already compliant with the Directive. Our focus is on – what we may call – Polish version of absolute priority rule, using also cross-class cram-down mechanism. According to proposed changes in Article 119 of Polish Restructuring Law: (3) With the consent of the debtor, the arrangement is accepted, even though it did not obtain the required majority in some of the creditor groups covering the various categories of interests, if: 1) a majority of the creditor groups voted in favor of the arrangement, including at least one group of creditors referred to in Article 161(1a)(4), or creditors with a higher degree of satisfaction than the creditors whose receivables are referred to in Article 342(1)(2) of the Bankruptcy Law, and in the event of failure to meet this condition; 2) a group or groups of creditors constituting at least at least half of the groups belonging to those categories of creditors who in the event of bankruptcy proceedings would have received any satisfaction using a valuation that assumes continuation of the debtor's business. (4) The arrangement referred to in paragraph (3) shall be accepted if the creditors of the group or groups that have spoken out against the acceptance of the arrangement shall receive through the arrangement a full satisfaction in a situation where creditors from another group with a lower degree of satisfaction in the bankruptcy proceedings shall receive through the arrangement any satisfaction. (5) By the creditors with a higher degree of satisfaction referred to in paragraph (3)(1) item 1, or creditors with a lower degree of satisfaction referred to in paragraph 4, shall be understood as creditors who are satisfied to a higher or lower degree in the bankruptcy proceedings, in particular creditors with a correspondingly higher or lower satisfaction category, taking into account creditors satisfied under a separate distribution plan. This quite complicated wording can be explained in the following example: If we have 5 groups - 1 privileged group (rank (category) I in bankruptcy or collateral (security)) and 3 non-privileged groups (rank (category) II in bankruptcy) and 1 even more non-privileged group (rank (category) III in bankruptcy) - and in bankruptcy only ranks (categories) I and II (+secured) would get the funds, then in order to accept the arrangement it is necessary to support: a preferred group and 2 non-preferred (new Article 119(3)(1) or at least half of the groups that would get something in bankruptcy - e.g., 3 rank (category) II groups are “for” and the privileged group “ against” (new Article 119(3)(2)). However, if the privileged group votes against, then for the “lower” groups to get anything, they must get full satisfaction. In the old draft, this was a higher (rather than full) satisfaction. In summary, in the old draft, in order to overcome the objections of the privileged group, you had to give it more than the underprivileged. In the new draft, you have to give them 100%. In our view, this may lead to decreasing number of concluded arrangements, making them more difficult to vote and create arrangement proposals. From other interesting changes, the Draft clarifies the rules of operating when clash between restructuring and insolvency occurs, giving privilege to restructuring, but omits previously proposed enforcement sale effect of the sale within liquidation arrangement or escrow accounts for trustees in bankruptcy. From what we know, several entities filed their positions towards the Draft, including INSO Section of the Allerhand Institute, where we co-drafted the position, however these positions still has not been published on government legislation websites. Authors: Paweł Kuglarz and Mateusz Kaliński

In 2024 we observed two growing trends in Poland. Namely, there was a rapidly growing number of two insolvency proceedings: restructuring proceedings, mainly arrangement approval proceedings, and consumer bankruptcy proceedings. With regard to consumer bankruptcy, the number of more than 20,000 consumer bankruptcies was reached in 2024 – and precisely 21,187 bankruptcies have been declared by the court. This number has been steadily growing in the first months of 2025 and this may be the trend for Poland for this year, too. It seems that Polish citizens are no longer afraid of a fresh start and they eagerly apply for consumer bankruptcy. In our opinion, this is surely good news, but one factor needs consideration. Due to this trend Polish Bankruptcy and Restructuring Courts are overloaded. The insolvency law requires that each case must be treated individually and AI so far does not help to improve the situation. As a rule, judges have in their files on top of regular non-restructuring cases, a significant number of very complex consumer bankruptcy cases, which are even more absorbing, because consumers demand speed and an instantaneous resolution of their matter, which obviously is not a viable option for an overburdened court. Although the legislator hoped to alleviate this burden by transferring part of the administrative obligations and case management duties onto insolvency practitioners in 2020, it has not been enough. Apparently, the main reason why this reform did not work as planned was the unfortunate ‘overnight’ introduction of the KRZ system (the Central Insolvency Register; an ICT system dedicated to managing digital insolvency cases), which affected significantly the speed and effectiveness of the proceedings. Poland failed to duly prepare for the digital revolution in its insolvency courts, giving them merely a few months to implement it. Other member states took the time to run pilot schemes and prepare the court officers and judges to use the ICT systems. Currently in Poland this is the only avenue for communication with the court for the debtors. Even though the consumer may decide to file a paper petition personally with the court, still they must use the malfunctioning ICT system for any further communication or exchange with the court in the proceedings. Please note that it was the Allerhand Institute and the Association of Insolvency Judges that applied to the Ministry of Justice to order an interim measure to alleviate the problem and allow for the possibility to conduct the proceedings in the traditional paper version. This application has so far been ignored. With regard to arrangement approval proceedings, 4003 proceedings were opened in Poland in 2024, accounting for over 90% of all restructuring proceedings. In total, 1794 corporate insolvency petitions were submitted and 554 insolvencies were declared. Petitions dismissed account for 347 cases whereas pre-pack applications account for 73 cases, with 21 court-approved sale conditions. Within other restructuring proceedings, 3296 arrangement approval applications were submitted and 3786 arrangements were approved, with only 318 dismissed applications. Comment: The growing number of arrangement approval proceedings clearly demonstrate that this restructuring option is so popular for a number of reasons. To name but two, the proceedings are mainly out-of-court (the court is involved at the stage of approval of the arrangement concluded between the debtor and the creditors) and the enforcement of debts is suspended (stay of enforcement). To date we have proposed a serious reform to change the structure of insolvency courts. Its main objective is to separate business insolvency cases from consumer bankruptcy cases and to transfer business insolvency departments from the district level (lower court) to the regional level (higher court). The consumer bankruptcy departments would remain at the district level (lower court). Please find the details of this proposal at:  https://chambers.com/legal-trends/legal-developments-in-polish-restructuring-and-insolvency-law Summing-up, the Polish insolvency market is growing in numbers and the arrangement approval proceedings remain the most popular, accounting for more than 90% of all cases. We hope to have the Second Chance Directive implemented soon, but in our view more reforms are needed, as outlined above.