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Revision of bankruptcy law: pre-pack bankruptcy

As the coronavirus epidemic upends Polish reality, the effective date of the bankruptcy law amendment, introduced on the basis of the act of August 30, 2019, remains unaffected. New laws enter into force today (March 24, 2020). Next to personal bankruptcy, which may now be sought by almost anybody, debt release procedure regarding sole proprietors and trustees’ duties connected with proof-of-debt submissions, pre-pack bankruptcy is also up for a makeover.

Pre-pack bankruptcy – how does it work?

Pre-pack bankruptcy is one of bankruptcy strategies provided by Polish law, which is meant to enable smooth transition of an insolvent business from one owner to another soon after bankruptcy is declared. Thanks to this solution the business carries on, workers keep their jobs and contracts with clients and suppliers remain intact. A successful pre-pack bankruptcy reduces the bankruptcy process and costs involved, as well as ensures fuller satisfaction of creditors. In this type of proceedings, the petition for bankruptcy is filed along with the petition for approval of the sale terms regarding the insolvent company’s assets. Pre-pack bankruptcy may cover the entire enterprise, its business unit or a major portion of its assets. The pre-pack petition also includes a description and an appraiser’s valuation of the assets in question, the proposed price and the name of the prospective buyer (who can be almost anybody).

If the court finds that it would be more beneficial to sell the assets in the course of a pre-pack procedure than a regular bankruptcy procedure, it will approve the sale terms in addition to declaring the debtor bankrupt. Following a pre-pack sale, the whole enterprise may be handed over to the buyer on the same day the court issues its decision.

Key changes introduced by the revision:

1. The pre-pack bankruptcy petition may be filed at any stage of bankruptcy proceedings (before the amendment, the pre-pack bankruptcy petition and the regular bankruptcy petition were to be filed together).

2. All the entities involved in bankruptcy proceedings will have standing to file for pre-pack sale; so, the pre-pack bankruptcy petition may now be filed by:
– a creditor filing for debtor’s bankruptcy,
– a debtor filing for bankruptcy,
– a debtor whose bankruptcy was instigated upon a creditor’s petition, especially, in response to the creditor’s petition (also as an alternative petition filed in case the court declares the debtor bankrupt, against the debtor’s will).

3. The petition for sale terms approval may cover more than one buyer.

4. The buyer will be required to post a bond equal to 10% of the price. If the sale falls through due to reasons within the buyer’s control, the trustee keeps the bond.

5. The protection of creditors with security over the debtor’s assets will be expanded – the petitioner will be required to submit a list of securities over the debtor’s assets, with copies of the petition for all identified secured creditors. The court will notify them about pending proceedings and serve them copies of the petition. Secured creditors will have the option to report comments about the petition to the court within 14 days of being served. They should remember to check if the petitioner’s valuation of the asset backing the relevant claim is accurate.

6. A provisional court supervisor (or a court-imposed administrator) will be appointed as a matter of obligation. Their duties will include examining the debtor’s situation and preparing a report covering information relevant to the sale terms approval petition. The idea behind this change is to ensure that the pre-pack process runs smoothly and is transparent.

7. The filing of a pre-pack bankruptcy petition will be advertised in the Court and Commercial Gazette (Monitor Sądowy i Gospodarczy). Advertising the petition is meant to reach out to other prospective buyers who may want to take part in the pre-pack bankruptcy procedure as well and protect those involved in the procedure against claims of acting against creditors’ interests by selling at an undervalue and neglecting to see if any other investors may be interested in purchasing the debtor’s assets.

8. If two or more petitions for sale terms approval are filed, an auction between the prospective buyers will be held in order to select the best offer. Auction, designed to obtain the highest possible price, is surrounded by much debate. Some argue that the pre-pack process, the main advantage of which has been its speed, will be dragged out, especially since 30 days have to pass from advertising the petition for sale terms approval before it can be examined by the court. There are also concerns about the fact that the new law does not provide for a case where two pre-pack petitions cover different subject matter. How is an auction to work and what rules it should follow when one of the petitions concerns the enterprise as a whole, while the other covers only its business unit? Only by putting the new laws into practice can these and many other questions be answered.

The amendment dispelled many doubts surrounding pre-pack bankruptcy and, to some extent, legitimized the judicial practice spanning 4 years (i.e. the appointment of provisional court supervisor). The introduction of a bond, stronger secured creditor rights and increased transparency of the procedure are definitely an improvement. However, some of the new solutions have led to a new set of questions regarding the application of the revised law, with the obligatory auction in the case of two or more petitions being the most controversial of them. In the end, all the issues related to pre-pack bankruptcy will be worked out in practice by legal scholars and courts in the years to come.

Contact us in case of any questions.

Barbara Szczepkowska
barbara.szczepkowska@actlegal-bsww.com
+48 602 260 127, +48 22 420 59 59

Marek Miszkiel
marek.miszkiel@actlegal-bsww.com
+48 603 553 566, +48 22 420 59 59

24.03.2020

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