Implementation of the restructuring and bankruptcy directive

On February 7, 2022, the assumptions for the draft act amending the act of May 15, 2015, Restructuring Law (Journal of Laws of 2021, item 1588, as amended) and the Bankruptcy Law of February 28, 2003 (Journal of Laws of 2020, item 1228, as amended) were published in the list of legislative and program works of the Council of Ministers. These assumptions were made in connection with the need to implement Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on a framework for preventive restructuring, debt relief and business prohibitions and on measures to increase the effectiveness of restructuring, insolvency and insolvency proceedings debt relief, and amending Directive (EU) 2017/1132 (hereinafter: "Restructuring and Insolvency Directive", "Directive"). The Directive entered into force on July 16, 2019. Due to the fact that Poland took advantage of the possibility of extending the deadline for its implementation by an additional year, the deadline for amending the above-mentioned acts is July 17, 2022.

The discussed Directive applies to enterprises and entrepreneurs with the exception of, inter alia, insurance companies, reinsurance companies, credit institutions within the meaning of Art. 4 sec. 1 point 1 of Regulation (EU) No 575/2013, investment firms or natural persons who are not entrepreneurs.

Basic assumptions and objectives of the Directive

The Restructuring and Insolvency Directive aims to ensure the proper functioning of the internal market and to eliminate obstacles to the exercise of fundamental freedoms such as the free movement of capital and the freedom of establishment. These obstacles are mainly due to differences between national laws and procedures relating to preventive restructuring, insolvency, debt relief and business prohibition. They are to be removed by unifying the regulations on restructuring proceedings.

The objectives of the Directive are to be achieved by ensuring that (recital (1) of the Directive):

• viable businesses and entrepreneurs in financial difficulties have had access to an effective national preventive restructuring framework that will enable them to stay in business;
• honest insolvent or over-indebted entrepreneurs could benefit from full debt relief after a reasonable period of time, thus giving them a second chance; and
• the efficiency of restructuring, insolvency and debt relief procedures has been improved, in particular with a view to shortening the duration of these procedures.

Restructuring proceedings should provide entrepreneurs who find themselves in a difficult situation with the possibility of continuing their activities and counteracting the liquidation of jobs. The directive also provides for the need to precisely define the prerequisites for taking actions as soon as possible to identify the entrepreneur's difficulties related to financial liquidity and, if possible, initiate appropriate remedial measures.

The Restructuring and Insolvency Directive obliges EU countries to provide access to the so-called early warning tools. These tools should take the form of alarm signalling mechanisms that detect circumstances which could lead to a possible insolvency and which may signal the debtor to take immediate action. By way of example, these tools could be used in the event of non-payment of taxes or social security contributions. Early warning tools may include:

• alert mechanisms in cases where the debtor has failed to make certain types of payments;
• advisory services provided by public or private organizations;
• incentives under national law for third parties with relevant information about the debtor, such as accountants, tax authorities or social security authorities, to signal adverse developments to the debtor.

Preventive restructuring

The most important element of the Directive is to define the framework for preventive restructuring, i.e., the procedure available to debtors in financial difficulties, i.e., when there is a probability of insolvency. Preventive restructuring frameworks should, in particular, enable debtors to restructure efficiently at an early stage and avoid insolvency, thus limiting the destruction of viable businesses or jobs. We present its key elements below:

• the debtor retains full or partial control of his assets and the day-to-day operations of his enterprise. However, if necessary, a judicial or administrative authority may decide to appoint a restructuring supervisor, e.g., in the event that the debtor is already insolvent;
• Member States are required to provide for the stay of individual enforcement actions to facilitate the negotiation of a restructuring plan under preventive restructuring. The term stay of individual enforcement activities should be understood as a temporary suspension of the creditor's right to enforce a claim against the debtor's property, granted by a judicial or administrative authority or applied by operation of law. The period of suspension should last a maximum of four months, renewable at the request of the debtor, creditor or, where applicable, the restructuring supervisor, for a total of no more than 12 months. The implementing law may provide that the stay of individual enforcement actions may be general (i.e. covering all creditors) or limited to one or more individual creditors or a specific category of them. The suspension is to apply to all claims, including secured claims and priority claims;
• if the above-mentioned procedure is used and the obligation of the debtor to file a petition to initiate bankruptcy proceedings arose during the stay of individual enforcement activities, the obligation to submit the petition is suspended for the period of stay of individual enforcement activities;
• defining the content of compulsory restructuring plans. In addition, EU countries are required to provide an online comprehensive checklist for restructuring plans, which will provide practical guidance on how to develop a restructuring plan in accordance with national law. The plan is to be submitted - as a rule - by the debtor, but the creditor or the restructuring supervisor will also be able to do so;

• the restructuring plan is adopted by the interested parties provided that it obtains the support of a majority determined on the basis of the amount of their claims or the value of the shares in each group. The directive also provides for the introduction of an arrangement approval mechanism against the objection of a group of creditors. It is based on the adoption of the principle that in the absence of a majority to adopt the arrangement in each group of creditors, the arrangement may be approved by a judicial or administrative authority at the request of the debtor or with his consent, if it meets the relevant requirements and the majority of groups of creditors voted in favour of the arrangement (provided that at least one of these is a group of secured creditors or a group that is privileged over the group of ordinary unsecured creditors);
• the preventive restructuring framework is available at the request of the debtors, provided that it can also be applied at the request of creditors and employee representatives, subject to the consent of the debtor.

Cancellation of entrepreneur's debts and prohibition of conducting business activity

Pursuant to Art. 20 paragraph 1 of the Directive, Member States ensure that insolvent entrepreneurs have access to at least one type of proceeding that may lead to the complete cancellation of debts. Full debt cancellation means "preventing the enforcement from entrepreneurs of their unpaid debts subject to cancellation or cancellation of unpaid debts subject to cancellation as such, in proceedings that could include a sale of property or a creditors' repayment plan" (Article 2 (1) (10) of the Directive). Member States should ensure that the period after which insolvent entrepreneurs can obtain the full write-off of their debts is no more than three years, starting at the latest on:

• in the case of proceedings involving a creditors' repayment plan - the decision of the judicial or administrative authority approving the plan or starting the implementation of the plan; or
• in the case of any other procedure - a decision of a judicial or administrative authority to initiate proceedings or establish the entrepreneur's bankruptcy estate.

Pursuant to Article 22 of the Directive, "Member States shall ensure that, where an insolvent trader has obtained debt relief in accordance with this Directive, any prohibition on taking up or continuing a trade, business, craft or profession solely due to the fact that the trader is insolvent, have ceased to be effective at the latest at the end of the period required to obtain relief from the debts. "

Protection of new financing, interim financing and other restructuring-related transactions

Pursuant to the provisions of the Directive, the Member States ensure due protection of new financing and interim financing. In the event of any subsequent declaration of bankruptcy of the debtor, at least:

• new funding and interim funding cannot be considered ineffective, invalid or non-executable; and
• the providers of such financing do not incur civil, administrative or criminal liability on the ground that such financing harms creditors as a whole, unless there are other additional conditions provided for in national law.

Member States may, inter alia:

• provide that the above applies to new financing only if a restructuring plan has been approved by a judicial or administrative authority and to interim financing which has been subject to ex ante control;
• exclude from the above-mentioned provisions of the interim financing which was granted after the debtor became unable to pay his debts as they became due;
• provide that, in the context of subsequent insolvency proceedings, new or interim financing providers are entitled to receive payment in priority over other creditors whose claims would otherwise be the same or more privileged.

In addition, Member States are to ensure that, in the event of any subsequent declaration of bankruptcy of the debtor, transactions which are rational and immediately necessary to negotiate a restructuring plan cannot be considered ineffective, void or unenforceable on the ground that such transactions were made to the detriment of creditors as a whole, unless there are additional conditions provided for by national law. Such transactions include at least:

• payment of fees and costs for negotiating, adopting or approving a restructuring plan or professional advice on these matters;
• payment of employees' remuneration for work already performed;
• all payments and withdrawals made in the ordinary course of business other than those mentioned above.

The provisions of the Directive and Polish law

The Restructuring and Bankruptcy Directive is already largely reflected in the provisions of the Restructuring Law and the Bankruptcy Law. As you can read in the published assumptions, "it is necessary to implement some of its [Directive - own note] provisions concerning, inter alia, regulating the scope of the suspension of individual enforcement activities, approval of the restructuring plan against the objection of a group of creditors, as well as the protection of new financing, interim financing and other restructuring-related transactions”.

Downloads

• PKF Alert - Implementation of the restructuring and bankruptcy directive.pdf [PDF]