Global Judges Forum - World Banksiteresources.worldbank.org/GILD/ConferenceMaterial...Global Judges Forum Commercial Enforcement and Insolvency Systems 19-23 May 2003 Pepperdine University

The World Bank

Global Judges Forum

Commercial Enforcement and Insolvency Systems

19-23 May 2003 ▪ Pepperdine University School of Law ▪ Malibu, California

COUNTRY: POLAND

By Bozena Suleja

TABLE OF CONTENTS PAGE 1.0 Introduction and Background iii 3.0 Liquidation of Bankruptcy Estate. 29 4.0 Restructuring Proceedings in the Case of a Threat of Insolvency. 33 5.0 The Participation of the State Treasury, Securities and Exchange Commission and Other Organizations in Bankruptcy Proceedings. 36 7.0 Selected Issues Concerning Cross-Border Insolvency. 39

World Bank Global Judges Forum (Malibu, 2003)

REFORM OF

THE POLISH INSOLVENCY AND RESTRUCTURING LAW

DOMESTIC AND INTERNATIONAL LAW ISSUES


1.0 Introduction and Background This study of the Polish Insolvency and Restructuring Law dated February 28, 2003

(Journal of Laws of 2003, No. 60, item 535) (hereinafter, the “Insolvency Bill”) aims to present

the main rules, institutions and amendments to the hitherto binding legal regime which are

introduced by the Insolvency Bill, as well as issues related to international insolvency

proceedings. The Insolvency Bill, when enforced, will replace the hitherto binding legal acts

regulating bankruptcy and arrangement issues, namely: the Ordinance of the President of the

Republic of Poland dated October 24, 1934 – Bankruptcy Act (hereinafter the “Bankruptcy

Act”) and the Ordinance of the President of the Republic of Poland dated October 24, 1934 -

Arrangement Act (hereinafter the “Arrangement Act”).

The Insolvency Bill shall come into force as of October 1, 2003, provided that the

provisions of the Insolvency Bill came into force on April 23, 2003 with respect to entrepreneurs

who filed their petitions for restructuring on the basis of the Act on Public Help for

Entrepreneurs with Special Significance on the Labor Market dated October 30, 2002 (Journal

of Laws of 2002, No. 213, item 1800) and with respect to debtors who are liable on a joint and

several basis with such entrepreneurs and who are a party to the restructuring proceedings.

Chapter I contains an overview of the Insolvency Bill, listing new regulations and

amendments in comparison to the provisions of the Bankruptcy and Arrangement Acts.

Chapter II describes the special role of the State Treasury and other organizations in

insolvency proceedings with respect to debtors with different characteristics.

The final Chapter of the study deals with the international aspects of the insolvency bill

by presenting the provisions of the Insolvency Bill concerning international insolvency

proceedings in the context of the legal framework of the European Union, US Bankruptcy Code

and UNCITRAL Mode Code.


Polish Insolvency and Restructuring Law – Overview

1. General Provisions.

Introductory Provisions.

The introductory provisions of the Insolvency Bill specify the scope of circumstances and entities to which the law applies, and indicate that the bill regulates the principles of the joint vindication of creditors’ claims from insolvent corporate debtors and the effects of a declaration of bankruptcy, as well as the principles of proceedings in restructuring towards entrepreneurs threatened with insolvency.

Article 2 of the Insolvency Bill sets out the main principles of the new law, namely that proceedings regulated by the bill should be conducted in such a way that the claims of creditors can be satisfied to the highest possible degree, and, if reasonable considerations allow, the hitherto existing enterprise of the debtor may be preserved. This provision reflects the principles adopted by the authors of the Insolvency Bill, i.e., the principle of the best use of the bankrupt’s assets for the purposes of satisfying the creditors (the principle of maximization) and the priority principle of the group interest of creditors. The specification of the main principles governing bankruptcy proceedings is a novelty which shows in which direction bankruptcy proceedings should be aimed.

Proceedings may only be instituted by a petition presented by the authorized entities defined in Article 20 of the Insolvency Bill.

Entities to which the Insolvency Bill Applies.

The Insolvency Bill contains a general principle that bankruptcy proceedings will concern debtors that are entrepreneurs, unless the Insolvency Bill provides otherwise. For the avoidance of doubt, the Insolvency Bill defines an entrepreneur as an individual, a legal entity or an organizational unit without a legal personality which has been granted legal capacity under a separate act, conducting in its own name economic or professional activity. Notwithstanding such a broad definition, the Insolvency Bill further enumerates concrete entities to which the provisions thereof also apply, i.e., (i) limited liability companies and joint stock companies which do not conduct business activity; (ii) partners of commercial partnerships, liable for the obligations of such company with all their property without limitation; (iii) partners in partnership companies; and, (iv) branches of foreign banks in the meaning of the banking law.

Art. 6 of the Insolvency Bill provides that certain entities cannot be declared bankrupt. These include the State Treasury, local government units, autonomous public health care establishments, institutions and legal persons formed by a legal act or formed in performance of an obligation imposed by a legal act, as well as individuals who are running a farm or tertiary education institutions.

A declaration of bankruptcy in the case of the death of an entrepreneur has been regulated in a similar manner to the existing Bankruptcy Act, the difference being that entities authorized to file a bankruptcy petition have been specified more precisely in the Insolvency Bill

(creditor, heir, as well as spouse and each child or parent of the deceased, even if they do not inherit the estate).

Art. 8 of the Insolvency Bill also provides that a declaration of bankruptcy may be demanded with respect to an individual who had once been an entrepreneur however after such person has discontinued business activity if less than one year has passed from the date such entrepreneur was deregistered from the National Court Register or other relevant register. Bankruptcy proceedings may also be commenced against an individual who has in fact conducted business activity although without being registered.

Grounds for a Declaration of Bankruptcy.

Pursuant to the Insolvency Bill, a debtor’s insolvency constitutes grounds for a declaration of bankruptcy. The Insolvency Bill waived the terms used in the old Bankruptcy Act, i.e., “cessation to pay debts” or “transitory cessation”. Insolvency is understood as the debtor’s failure to fulfill its due and payable obligations.

Other grounds for a declaration of bankruptcy may be created by excessive debt. This is when a debtor who is a legal entity or organizational unit without a legal personality to whom another act grants legal capacity is deemed insolvent when its obligations exceed the value of its property, even when it fulfills its obligations on a current basis.

The regulations concerning “transitory cessation to pay debts” was replaced in the Insolvency Bill with a provision that a court may dismiss a bankruptcy petition when the delay in the fulfillment of obligations does not exceed three months and the sum of unfulfilled obligations does not exceed 10% of the balance value of the debtor's enterprise. For the avoidance of doubt, the Insolvency Bill makes this provision inapplicable when any failure to fulfill obligations is continuous, or when the dismissal of the petition may be detrimental to creditors. The above provision is intended to eliminate doubts concerning the interpretation of the term “transitory cessation to pay debts.” It is worth noting that the courts have been given the discretion to dismiss a petition which is aimed at ensuring the adequate protection of creditors.

As with the Bankruptcy Law, the Insolvency Bill provides for the dismissal of a bankruptcy petition when the property of the debtor is not sufficient to cover the costs of the proceedings and an optional dismissal of the bankruptcy petition when the debtor’s property is subject to a mortgage, lien, registered pledge, fiscal lien or mortgage of ships to such a degree that its remaining property is not sufficient to cover the costs of proceedings. However, the foregoing does not apply if it is evidenced that the encumbrances of the debtor's property are ineffective in accordance with the provisions of the Insolvency Bill, or if they have been made deliberately to the detriment of creditors, as well as if it is evidenced that the debtor performed other actions which are ineffective under the provisions of the Insolvency Bill, whereby it disposed of assets sufficient to satisfy the costs of the proceedings.

In order to implement the principle of maximization, certain regulations have been introduced to enable the declaration of the debtor’s bankruptcy with the option of concluding an arrangement. This is when it is made plausible that by arrangement the creditors will be satisfied to a higher degree than they would be satisfied after conducting bankruptcy proceedings with liquidation of the debtor's property. Alternatively, in the absence of any prerequisites necessary to declare bankruptcy with the option of concluding an arrangement, bankruptcy with the liquidation of the debtor’s assets will be declared. Despite the existence

World Bank Global Judges Forum (Malibu, 2003) 5

of grounds therefore, bankruptcy proceedings with the option of concluding an arrangement will not be conducted when, due to the past conduct of the debtor, there is no certainty that the arrangement will be carried out, unless the arrangement proposals envisage a liquidation arrangement.

The Insolvency Bill provides the possibility to change the manner in which bankruptcy proceedings are carried out after the decision to declare bankruptcy is issued if the grounds for conducting another type of proceedings develop during the course of the proceedings.

A complaint may be lodged against the decision to change the decision on a declaration of bankruptcy with the option of concluding an arrangement into a decision on the declaration of bankruptcy with the liquidation of the debtor’s assets, unless the obligation to change any such decision arises from the Insolvency Bill.

2. Proceedings for a Declaration of Bankruptcy.

The Insolvency Bill upholds the hitherto regulations by stating that a district court or commercial court will have jurisdiction to deal with proceedings for declarations of bankruptcy. However, the Insolvency Bill regulates the issue of the venue in more detail. Petitions for a declaration of bankruptcy are reviewed by the bankruptcy court composed of three professional judges. Proceedings are instituted on the motion of either a debtor or any of its creditors. The Insolvency Bill also contains a list of other entities authorized to file a petition for a declaration of bankruptcy with respect to specific companies (Art. 20 par. 2 of the Insolvency Bill). Article 22 of the Insolvency Bill sets out a number of formal conditions to be met by the petition. The purpose of this regulation is to provide the court with the fullest possible set of information that will allow it to establish whether there are grounds for declaring bankruptcy. When a debtor files the petition, such debtor is obliged to indicate whether it petitions for a declaration of bankruptcy with the option of concluding an arrangement (non-liquidating insolvency) or a declaration of bankruptcy with the liquidation of its assets (liquidating insolvency). The petition filed by a debtor should be accompanied by a number of additional attachments. When a creditor files the petition, such creditor should make its claim plausible and, furthermore, when a creditor petitions for a declaration of bankruptcy with the option of concluding an arrangement, it should attach preliminary arrangement proposals to its petition. The petition of a debtor for a declaration of bankruptcy that does not meet the requirements defined in the Insolvency Bill, or that has been not duly paid for, shall be returned without the debtor being called to supplement or pay for the petition.

The petition for a declaration of bankruptcy shall also be returned when, as a result of the absence of or indication of an incorrect address of the debtor or the non-fulfillment of other orders, the case cannot be continued.

Much the same as it has been thus far, a debtor is obliged to file an appropriate petition with the court within two weeks from the date on which the grounds for the declaration of bankruptcy occurred, provided that in connection with the elimination of independent arrangement proceedings, there is no recourse from bankruptcy through the opening of arrangement proceedings. To ensure the enforcement of this provision, the Insolvency Bill provides liability for damage incurred as a result of a failure to file a petition within the prescribed period.


To ensure that the data the court are supplied with by the debtor are true, the debtor is obliged to submit a written statement as to the truthfulness of the particulars included in the petition. The Insolvency Bill provides liability for damage incurred as a result of giving untrue particulars in a petition for the declaration of bankruptcy. The submission of such a statement is a sine qua non condition, and any failure to fulfill it will result in the petition being returned without the debtor being called to supplement it.

2.1 Provisions Concerning Proceedings for a Declaration of Bankruptcy.

The relevant provisions of Book One, Part I of the Code of Civil Procedure apply to matters not regulated in the Insolvency Bill (excluding the provisions on suspension and stay of the proceedings).

The Insolvency Bill contains separate provisions concerning proceedings for a declaration of bankruptcy, which are of a distinctive nature. The group of participants of the proceeding for a declaration of bankruptcy is limited to any person who has submitted a petition for the declaration of bankruptcy and the debtor. Further, with respect to a petition for the declaration of bankruptcy of a state owned enterprise or a single-shareholder company of the State Treasury, the founding body or the minister competent for matters concerning the State Treasury may submit an opinion in this matter to the court upon being notified by the court about the pending proceedings.

In substance, the court will examine the case in a closed session, however, the court may fix a hearing if it deems necessary. It is possible also to hear the participants of the proceedings as well as the founding body or the minister competent for matters concerning the State Treasury.

In accordance with the Insolvency Bill, the court issues a decision on a declaration of bankruptcy within two months of the date of the petition being filed.

The court may admit evidence from the opinion of an expert for the purpose of examining the condition of the debtor's enterprise and observing the two-month time limit for issuing the decision on a declaration of bankruptcy.

An appeal may be filed against the court’s decision concluding the proceedings and in the cases specified in the Insolvency Bill. There will be no cassation against a decision of a court of second instance.

The Insolvency Bill provides the possibility to impose sanctions on a creditor who files a petition in bad faith through charging the costs of the proceedings, and, optionally, ordering that the creditor make a public statement of appropriate content matter and in an appropriate form. The debtor as well as any third party may file a claim against such creditor to restructure damage so caused.

Proceedings to Secure Claims.

The Insolvency Bill introduces an obligation to secure the debtor’s property immediately upon the debtor filing the petition for declaring bankruptcy. If the petition for declaring


bankruptcy is filed by a creditor, the court may make the establishment of security dependant on the grounds for the declaration of bankruptcy being made plausible by such a creditor.

The debtor’s assets are secured through the appointment of an interim court supervisor and as far as is necessary through other actions such as the stay of pending enforcement proceedings against the debtor, as well as the amendment or revocation of interim orders issued to secure monetary claims, in particular by revoking effected seizures.

The court may apply other means of securing claims, where there is reasonable grounds to suspect that the debtor will hide its assets or act in another manner to the detriment of the creditors, and also when the debtor does not carry out the instructions of the interim court supervisor.

The court may apply other means of securing claims, including securing a claim through the establishment of a bankruptcy trusteeship on the debtor’s assets, by way of appointing a bankruptcy trustee and determining the scope and the method of exercising such bankruptcy trusteeship (the debtor shall retain its right to undertake actions as part of ordinary management and to use its property). Any of the debtor's actions beyond the scope of ordinary management shall be invalid.

A complaint may be filed against the decision concerning the means of securing claims.

Upon declaration of bankruptcy, security in the form of the establishment of an interim court supervisor or bankruptcy trusteeship shall abate from the moment that the assets of the bankrupt are taken into bankruptcy trusteeship by the bankruptcy trustee or administrator or should the court supervisor take over supervision. Other security applied by the court shall abate from the date of the declaration of bankruptcy

2.3 Preliminary Meeting of Creditors.

The Insolvency Bill allows creditors to make a quick decision as to the future of the bankrupt as part of the preliminary meeting of creditors when there are grounds for declaring bankruptcy but it is not obvious whether the proceedings may only be conducted to liquidate the debtor’s assets. The preliminary meeting of creditors shall not be convened if from the circumstances of the case it is evident that conducting it would entail excessive costs, as well as when the sum of litigious liabilities exceeds 15 per cent of the total sum of liabilities.

The preliminary meeting of creditors is called by the court and it may pass resolutions concerning the method of conducting further bankruptcy proceedings (i.e., either liquidating or non-liquidating insolvency proceedings) and select the council of creditors; it may also express an opinion as to the selection of the bankruptcy trustee, court supervisor or administrator.

Under the Insolvency Bill, an arrangement may also be concluded at a preliminary meeting of creditors (provided that it is attended by at least half of the creditors jointly holding three quarters of the aggregate sum of liabilities confirmed by enforcement titles or indisputable or substantiated). This is to facilitate the completion of the insolvency proceedings in circumstances where there are no doubts as to the manner of completing such proceedings. As a result of the conclusion of such an arrangement, a decision declaring bankruptcy with the option of concluding an arrangement is issued together with a decision approving an arrangement. Within two weeks from the date on which an announcement on approving the


arrangement is published in Monitor Sądowy i Gospodarczy, those creditors of the bankrupt who were not notified of the preliminary meeting of creditors, as well as those creditors who voted against the arrangement, may file a complaint against the decision approving the arrangement.

Before passing resolutions referred to above and before concluding an arrangement, if any, a list of liabilities shall be drawn up by the interim court supervisor or the administrator (under the supervision of a judge), in accordance with the rules governing the making of lists of liabilities as set forth in the Insolvency Bill.

The court will revoke a decision approving an arrangement if the arrangement is in contravention of the law or if it is obvious that the arrangement will not be executed, as well as if it is flagrantly detrimental to the creditors who filed a complaint. In such a case the court will conduct proceedings for the declaration of bankruptcy without reconvening a preliminary meeting of creditors.

2.4 Decision on a Declaration of Bankruptcy.

The Insolvency Bill regulates this issue in a substantially different way than the Bankruptcy Act, most importantly as it distinguishes between a liquidating and non-liquidating insolvency.

When acknowledging a petition for the declaration of bankruptcy, the court shall issue a decision on the declaration of bankruptcy in which, inter alia, (i) it defines the manner of conducting such proceedings; (ii) it defines whether and to what extent the bankrupt will perform the management of its assets if such proceedings are to be conducted with the option of concluding an arrangement; (iii) it calls the creditors of the bankrupt to report the liabilities within a designated time (no less than one month and not longer than three months); (iv) it calls persons entitled to rights and personal rights and claims over immovable property owned by the bankrupt, if these have not been disclosed by an entry in the land and mortgage register, to report them within the designated time (no less than one month and not longer than three months), else losing the right to refer to them in the bankruptcy proceedings; (v) it designates a judge-commissioner and bankruptcy trustee or court supervisor, or an administrator. Such a decision shall be effective and enforceable as of the date of the issuance thereof, unless specific provisions provide otherwise.

The day of issuing a court decision on the declaration of bankruptcy will be the date of the bankruptcy. The decision on the declaration of bankruptcy shall be immediately made publicly known by an announcement in Monitor Sądowy i Gospodarczy (the Court and Economic Gazette) and by publication in a local daily newspaper and shall be delivered to the bankruptcy trustee, the court supervisor or receiver, the bankrupt or their heir and the creditor who requested the declaration of bankruptcy. The decision will be made known publicly and delivered to the participants of the proceedings. If the bankrupt is a participant of a system of payment or a securities clearing system, the decision on the declaration of bankruptcy shall also be delivered to the President of the National Bank of Poland. If the bankrupt is a public company, such bankrupt is subject to an additional requirement, namely, that the decision on the declaration of bankruptcy be delivered to the Chairman of the Securities and Exchange Commission. The decision on the declaration of bankruptcy of a state owned enterprise or a single-shareholder company of the State Treasury shall also be delivered to the founding body or minister competent for matters concerning the State Treasury, respectively.


Further, a declaration of bankruptcy shall be reported to the Securities and Exchange Commission (on the date of declaration of bankruptcy) and the relevant fiscal chamber as well as the relevant branch of the Social Insurance Agency.

In view of the need to facilitate and simplify proceedings, the Insolvency Bill limits the option to file complaints against a decision on the declaration of bankruptcy.

A complaint may be filed against a decision on declaration of bankruptcy only by the bankrupt, and against a decision dismissing a petition for declaration of bankruptcy only by the petitioner. A rule was also introduced that the court of second instance may not rule on a declaration of bankruptcy. The admissibility of cassation has also been abolished.

3. Effects of a Declaration of Bankruptcy.

3.1 Effects of a Declaration of Bankruptcy on the Bankrupt.

Much the same as in the hitherto binding provisions of the Bankruptcy Act and Arrangement Act when bankruptcy with liquidation of the bankrupt’s assets has been declared, the bankrupt is obliged to indicate and release to the bankruptcy trustee all its assets and to release all documents concerning its activity, assets and settlements. The Insolvency Bill provides that the fulfillment of this obligation should be confirmed by the bankrupt in writing, such confirmation being submitted to the judge-commissioner. The bankrupt is obliged to provide to the judge-commissioner and bankruptcy trustee all necessary explanations concerning its assets. The judge-commissioner may decide that a bankrupt who is an individual (or a member of the bankrupt’s governing body) is not allowed to leave Poland without the permission of the judge-commissioner. To ensure the fulfillment of the above obligations, the Insolvency Bill provides that the judge-commissioner may apply coercive measures to a bankrupt who defaults on their duties. When bankruptcy with the option of concluding an arrangement is declared, the foregoing applies when a bankrupt has been deprived of the right to manage its property.

When bankruptcy with the option of concluding an arrangement is declared, the bankrupt is obliged, unless the court imposes any further obligations, to provide to the judge-commissioner and court supervisor the required explanations concerning all of its assets encompassed by the decision, as well as to allow the court supervisor to review the documentation of its enterprise.

3.2 Effects of a Declaration of Bankruptcy on a Bankrupt's Assets.

Notwithstanding the type of the insolvency proceeding, as of the date of a declaration of bankruptcy, the bankrupt's assets shall become the bankruptcy estate serving to satisfy the creditors. The bankruptcy estate shall consist of assets belonging to the bankrupt as of the date of the declaration of bankruptcy, subject to certain reservations provided for in the Insolvency Bill. The Insolvency Bill provides, among others, that the bankruptcy estate will not encompass assets excluded by a resolution of the meeting of creditors.

Under the Insolvency Bill, the composition of the bankruptcy estate is established by an inventory and assessment of the assets being drawn up by the bankruptcy estate, court supervisor or administrator on the basis of entries in the bankrupt’s registers and uncontestable documents. The composition of the bankruptcy estate may also be established by the debtor under the supervision of the court supervisor (regarding a declaration of


bankruptcy with the option of concluding an arrangement). The Insolvency Bill contains a presumption that things held by the bankrupt on the day of the declaration of bankruptcy belong to assets of the bankrupt.

With regard to exclusion from the bankruptcy estate, the Insolvency Bill largely repeats the hitherto binding regulations. The application for exclusion from the bankruptcy estate should include all statements, objections and evidence in support thereof otherwise the right to refer thereto in the course of further proceedings shall be forfeit, unless such reference in the application was impossible. In the case of the dismissal of an application for the exclusion of assets, the applicant may demand the exclusion of assets from the bankruptcy estate by filing a suit with the bankruptcy court within one month from the date on which the decision of the judge-commission refusing exclusion is delivered. Such a suit may be based only on the statements and arguments included in the application for exclusion from the bankruptcy estate (unless their prior submission was impossible).

3.3 Actions of a Bankrupt Concerning Assets Included in the Bankruptcy Estate.

The Insolvency Bill provides various regulations in this respect depending on the nature of the proceedings:

(i) bankruptcy with the liquidation of the debtor's assets:

- the bankrupt shall forfeit the right to manage and the possibility of using and administering assets included in the bankruptcy estate;

(ii) declaration of bankruptcy with the option of concluding an arrangement:

- it is possible to establish a management structure to be performed by the bankrupt (debtor-in-possession) with respect to the whole or part of its assets if under the circumstances of the case it follows that the bankrupt warrants the appropriate performance of such management and its insolvency occurred as a result of exceptional circumstances beyond its control;

- it is also possible to deprive a bankrupt of the right to manage the whole or part of its assets included in the bankruptcy estate (the administrator shall manage the assets included in the bankruptcy estate).

A debtor-in-possession shall be authorized to take actions in the ordinary course of business, and upon the consent of the court supervisor, as well as actions exceeding the scope of ordinary business. The court shall recall ex officio the debtor-in-possession and shall appoint an administrator when the bankrupt has violated the law in performing management functions, even if unintentionally, or when the manner of the debtor-in-possession performing the management does not guarantee the execution of the arrangement.

The Insolvency Bill provides that acts in law by a debtor-in-possession concerning assets included in the bankruptcy estate to which the debtor-in-possession has forfeited the right of management shall be invalid.

3.4 Prohibition to Burden the Bankruptcy Estate.

The Insolvency Bill forbids a bankruptcy estate’s components from being burdened. After the declaration of bankruptcy, the components of a bankruptcy estate cannot be burdened


with any lien, registered pledge or fiscal lien, or an entry concerning such components in a land and mortgage register or other register to secure a liability, even if such liability was incurred before the grounds for bankruptcy existed (this prohibition will not apply if an application for a mortgage entry was filed with the court during the six months prior to the submission of a petition for the declaration of bankruptcy).

To enable the best results to be achieved, the Insolvency Bill also provides that a bankrupt may encumber the bankruptcy estate if such bankrupt has been left with the right to manage its assets and the court supervisor has consented to such encumbrance, and that the administrator may do so when the council of creditors has consented to such encumbrance.

3.5 Effects of a Declaration of Bankruptcy on the Obligations of the Bankrupt.

Unlike the hitherto binding regulations in this respect, which were not entirely clear, the Insolvency Bill presumes that the provisions of an agreement reserving the right to alter or terminate, in the event of bankruptcy, a legal relationship to which the bankrupt is a party will be null and void. The modification of such legal relationship is only possible in accordance with the provisions of the Insolvency Bill. It provides further that an act in law performed in violation of the Insolvency Bill shall be ineffective with respect to the bankruptcy estate even if an agreement between the parties envisages a different effect. The Insolvency Bill distinguishes various effects of a declaration of bankruptcy on the bankrupt’s obligations depending on the type of insolvency and the type of obligation.

The Insolvency Bill provides that if a framework agreement to which the bankrupt is a party provides that particular specific agreements concerning financial futures or the sale of securities with the repurchase obligation are to be executed in the performance of the framework agreement, and that the termination of such framework agreement shall result in the termination of all the specific agreements executed in the performance thereof, then: (i) the receivables due under particular specific agreements executed in the performance of such framework agreement will not be subject to the arrangement; and (ii) the bankruptcy trustee will not be entitled to withdraw from the framework agreement. The Insolvency Bill also contains a definition of financial futures. Further, the Insolvency Bill provides that each party may terminate the framework agreement, subject to the observance of the settlement procedures between the parties as stipulated in such agreement, to be applied in the event of termination. The receivables arising from the parties’ settlements may be subject to a mutual set-off.

(i) Declaration of bankruptcy with the option of concluding an arrangement

For the purposes of retaining the assets included in the bankruptcy estate until an arrangement is concluded, the Insolvency Bill provides for the non-repayment of debts. This refers to performances which are encompassed by the arrangement under the Insolvency Bill. In accordance with the principle of maximization and the priority of creditor interest, the Insolvency Bill states that with the consent of the judge-commissioner, performances resulting from post-bankruptcy obligations and those of pre-bankruptcy obligations that are encompassed by the arrangement upon the creditor’s consent, may be fulfilled if this is necessary to conduct business activity or raise the efficiency of the bankrupt enterprise.

The Insolvency Bill also contains certain restrictions as to the admissibility of the set-off of mutual liabilities between the bankrupt and the creditor during the bankruptcy proceedings with the option of concluding an arrangement if the creditor: (i) has become a debtor of the


bankrupt after the declaration of bankruptcy; (ii) is also a debtor of the bankrupt, and after the declaration of bankruptcy has become its creditor through the acquisition of a liability through the transfer or endorsement of a debt which arose before the declaration of bankruptcy. However, the set-off of mutual liabilities will be admissible when a liability has been acquired as a result of a payment for a debt for which the buyer was liable personally or with certain proprietary objects and when the liability of the buyer for the debt occurred before the day of the petition for the declaration of bankruptcy being represented. A creditor that wishes to avail itself of any such set-off shall submit a statement thereon not later than when the liability is reported.

The Insolvency Bill introduces certain restrictions as to the termination of a lease or tenancy contract for premises or immovable property where the enterprise of the bankrupt is being operated. Any such agreement may be terminated by a creditor only upon the consent of the creditors’ council. Further, an arrangement may establish an injunction preventing such contracts being terminated pending execution of the arrangement. This restriction will also apply to leasing, property insurance, bank accounts, surety agreements, bank guarantees and letters of credit, as well as agreements concerning licenses granted to the bankrupt.

(ii) Declaration of bankruptcy with the liquidation of the debtor’s assets

Pursuant to the Insolvency Bill, a bankrupt’s cash obligations the payment deadline of which has not yet occurred shall become due from the date of the declaration of bankruptcy. Further, non-cash property obligations shall be transformed into cash obligations from the date of the declaration of bankruptcy and on that date shall become payable, even when their performance deadline has not yet occurred.

Interest on liabilities due from the bankrupt for the period until the date of the declaration of bankruptcy may be satisfied from the bankruptcy estate. This shall not concern interest on debts secured by mortgage, an entry in a register, lien, registered lien, fiscal lien or mortgage of ships. This interest may be satisfied only out of the object of the security.

The Insolvency Bill provides that the set-off of the bankrupt's debt against the creditor's debt will be admissible if both of these debts existed on the date of the declaration of bankruptcy, even if payment of one of them is not yet due. For the purposes of any such set-off, the aggregate amount of the bankrupt's debt will be presented and the creditor's debt will be presented only in the amount of the principal debt together with interest accrued until the date of the declaration of bankruptcy. A set-off shall be inadmissible if the bankrupt's debtor has bought the debt by transfer or endorsement after the declaration of bankruptcy, or bought the same within the year preceding the date of the declaration of bankruptcy, and being aware of the existence of grounds for a declaration of bankruptcy. However, a set-off shall be admissible if the transferee has become the bankrupt's creditor by having repaid its debt which it had been liable for personally or by certain proprietary objects, and if the transferee, when taking on liability for the bankrupt's debt, was unaware of the existence of grounds for a declaration of bankruptcy. Further, a set-off shall always be admissible if the assumption of liability occurred one year before the date of the declaration of bankruptcy. However, a set-off shall not be admissible if the creditor has become the bankrupt's debtor after the date of the declaration of bankruptcy. A creditor who wishes to exercise the right of set-off will submit a statement on this not later than when reporting the liability.

The Insolvency Bill also regulates the consequences of a declaration of bankruptcy on mutual contracts. Namely, if on the day of a declaration of bankruptcy obligations from a mutual


contract have not been performed in whole or in part, the bankruptcy trustee may renounce the contract or perform the bankrupt's obligation and demand from the other party the fulfillment of a counter-performance.

At the request of the other party submitted in writing with a certified date, the bankruptcy trustee will declare in writing within three months whether it renounces the contract or demands its performance. The non-submission of a statement by the bankruptcy trustee within this time limit shall be deemed to be the renunciation of such contract. The other party, earlier obliged to fulfill a performance, may suspend the fulfillment of such performance until a counter-performance is secured or fulfilled. This right shall not be vested in the other party if at the conclusion of the contract such party was aware or should have been aware of the existence of the grounds for a declaration of bankruptcy.

If the bankruptcy trustee renounces a contract, the other party shall have no right to the return of a fulfilled performance, even if the performance is included in the bankruptcy estate. This party may vindicate its dues from the fulfillment of the performance and incurred losses in insolvency proceedings by submitting a list of such dues to the judge-commissioner.

The Insolvency Bill provides for a number of new regulations applicable to the liquidating insolvency, concerning inter alia lease and tenancy contracts, securities account agreements and agreements to make safe deposits available, as well as leasing, property insurance and loan agreements.

Further, an ownership right reserved in a sale contract for the seller will not expire due to the declaration of bankruptcy of the buyer if it is effective towards its creditors in accordance with the provisions of the Civil Code. Also, a contract on the transfer of ownership of an object, liability or other right, concluded for the purposes of securing a liability, shall be effective towards the bankruptcy estate if it has been concluded in written form with a certified date.

In the event of a change of the decision on the declaration of bankruptcy with the liquidation of the bankrupt's assets into a decision on the declaration with the option of concluding an arrangement, the legal effects of the declaration of bankruptcy and the parties’ exercising powers defined in the Insolvency Bill shall remain in force. However, with the consent of both parties they may be repealed.

In the case of a change of a decision on declaration of bankruptcy with the option of concluding an arrangement into a decision on declaration of bankruptcy with liquidation of the bankrupt's assets, the effects of declaration of bankruptcy specified for the liquidating insolvency will occur from the date of issuing the decision on its change.

3.6 Ineffectiveness and Complaints against Actions of the Bankrupt.

The Insolvency Bill largely adopts the regulations of the hitherto binding Bankruptcy Act with respect to a bankrupt’s legal actions being ineffective by operation of law, and those concerning complaints against actions of the bankrupt, adjusting however, the legal terminology to that presently used in legal transactions. These regulations refer to both types of insolvency, i.e., “liquidating” and “non-liquidating”.

Under the Insolvency Bill, acts in law performed by a bankrupt with which the bankrupt had administered its assets shall be ineffective on the bankruptcy estate when they are performed


without payment or against payment, but the value of the bankrupt's performance glaringly exceeds the value of the performance received by the bankrupt or reserved for the bankrupt or for a third party (this provision applies accordingly to court settlements, the acknowledgement of a court action and the renunciation of a claim).

Furthermore, security and payment of a non-matured debt made by the bankrupt within two months before the day of filing the petition for the declaration of bankruptcy shall be ineffective. However, a person who has received payment or security may demand, by a suit or objection, that these acts be deemed effective if during their performance it had not been aware of the existence of grounds for the declaration of bankruptcy.

The foregoing does not apply to security instruments given before the date of the declaration of bankruptcy in connection with financial futures or the sale of securities with a repurchase obligation.

Acts in law performed against payment by the bankrupt within six months before submitting the petition for the declaration of bankruptcy with a spouse, relative or relation by direct line, collateral relative or relation up to the second degree inclusive, or with an adopted or adopting person, shall be ineffective on the bankruptcy estate. This provision of the Insolvency Bill will apply accordingly to acts by a bankrupt which is a company or legal person, performed with its associates, their representatives or their spouses, as well as with associated companies, their associates, representatives or spouses of these persons, as well as to acts by a bankrupt which is a company that were performed with another company when one of these was the dominant company.

In relation to the hitherto Bankruptcy Act, the Insolvency Bill expands the scope of legal actions that may be deemed ineffective. If the remuneration of any person managing the bankrupt's enterprise or the remuneration of any person rendering services related to the management of the bankrupt’s enterprise, is glaringly higher than the remuneration for this type of work or services and is not justified by the work input, the judge-commissioner, at the request of the bankruptcy trustee, court supervisor, administrator or ex officio, may acknowledge that a specific part of the contractual remuneration is ineffective regarding the bankruptcy estate. Further, the judge-commissioner shall acknowledge any material encumbrance as ineffective, when the bankrupt is not a personal debtor, if this encumbrance had been established one year before the day of filing a petition for the declaration of bankruptcy without payment or exchange for a performance which is incommensurably low compared to the value of the provided security.

The bankruptcy trustee, court supervisor or administrator are authorized to institute an action to deem the bankrupt’s actions ineffective, provided that a demand to deem an act ineffective cannot be made after two years from the date of the declaration of bankruptcy.

Under the Insolvency Bill, it is not possible to deem acts in law ineffective performed by the bankrupt with respect to compensation paid by the bankrupt prior to the declaration of bankruptcy in connection with its participation in a system of payment or in a securities clearing system.


3.7 Effect of a Declaration of Bankruptcy on Court and Administrative Proceedings.

The Insolvency Bill distinguishes between various effects of a declaration of bankruptcy with respect to court and administrative proceedings, depending on the type of bankruptcy proceedings:

(i) bankruptcy with the option of concluding an arrangement:

a) investigation proceedings

As with the hitherto binding Bankruptcy Act, in the case of debtor-in-possession the court supervisor shall join by law any court and administrative proceedings concerning the bankruptcy estate conducted for or against the bankrupt.

If, however, the bankrupt has been divested of the right to manage the bankruptcy estate, court and administrative proceedings concerning the bankruptcy estate may be instituted and conducted only by the administrator (on behalf of the bankrupt, but in the administrator’s own name).

b) proceedings to secure a claim and enforcement proceedings

Such proceedings conducted against a bankrupt to satisfy liabilities that are included in an arrangement are stayed by law. Sums obtained in such stayed proceedings, either court or administrative, are ex officio transferred to the bankruptcy estate. If in the period from the date of the declaration of bankruptcy to the date of announcing the decision on the declaration of bankruptcy in Monitor Sądowy i Gospodarczy, creditors have already been paid amounts as part of such proceedings, the received amounts shall be counted towards dues arising from the arrangement (and if the arrangement is not concluded, such amounts shall be counted towards sums obtained from the division of funds of the bankruptcy estate).

The Insolvency Bill provides the possibility to stay proceedings conducted against the bankrupt with respect to dues not included in the arrangement for no longer than three months (it is not possible to stay any proceedings with respect to child support, alimony and pensions, nor dues for work up to the amount of the minimum remuneration for work, which guarantees the protection of the bankrupt’s employees).

c) arbitration agreement

Any arbitration agreement executed by the bankrupt shall become null and void from the date of the declaration of bankruptcy and proceedings already pending before arbitration courts shall be discontinued.

(ii) bankruptcy with the liquidation of the debtor’s assets:

a) investigation proceedings

Proceedings concerning the bankruptcy estate may be instituted and continued only by the bankruptcy trustee or against it (such bankruptcy trustee acting in its own name and for the bankrupt). Proceedings in a case instituted against a bankrupt prior to the date of the declaration of bankruptcy for a liability or other dues subject to satisfaction from the bankruptcy estate may be instituted against the bankruptcy trustee, but only when in the


bankruptcy proceedings, upon exhaustion of the procedure defined by the Act, these liabilities were not placed on the list of liabilities.

b) proceedings to secure a claim and enforcement proceedings

Under the Insolvency Bill, it is not possible to carry out enforcement against a bankruptcy estate as enforcement proceedings instituted against a bankrupt before the declaration of bankruptcy shall be stayed by law from the date of the declaration of bankruptcy. Enforcement proceedings shall be discontinued by law after the decision on the declaration of bankruptcy becomes final and non-appealable. Amounts obtained in the stayed enforcement proceedings and not spent shall be transferred to the bankruptcy estate, and creditors who had conducted enforcement will be satisfied in accordance with the provisions of the Insolvency Bill. Further, in the course of bankruptcy proceedings it shall be inadmissible to institute enforcement proceedings against the bankrupt from the bankruptcy estate.

c) arbitration agreement

Any arbitration agreement executed by the bankrupt shall become null and void from the date of the declaration of bankruptcy and proceedings already pending before arbitration courts shall be discontinued.

4. Provisions on Bankruptcy Proceedings Conducted after the Declaration of Bankruptcy.

4.1 The Court and Judge-Commissioner.

As with the hitherto regulations, the Insolvency Bill provides that bankruptcy proceedings shall take place in the bankruptcy court that declared the bankruptcy, i.e., the district court. The novelty is that the bankruptcy court will be composed of one judge, subject to certain cases specified in the Insolvency Bill.

After the declaration of bankruptcy, the acts of bankruptcy proceedings will be performed by the judge-commissioner, with the exception of acts for which the court is competent (the court shall adjudicate: on the management of assets by a debtor-in-possession; on a change of the decision on the declaration of bankruptcy and the related dismissal of the bankruptcy trustee, administrator and court supervisor; on the remuneration of the bankruptcy trustee, court supervisory or administrator; on the approval, change or revocation of an arrangement; on discontinuing and/or completing the proceedings; on suspending the right to conduct business activity; and, on acknowledging foreign insolvency proceedings).

Under the Insolvency Bill, the judge-commissioner shall, in particular, head the course of the proceedings, supervise the acts of the bankruptcy trustee, court supervisor and administrator, specify acts that cannot be performed by the bankruptcy trustee, court supervisor or administrator without their permission or without the consent of the council of creditors, and further highlight their shortcomings. The judge-commissioner further reviews complaints against the actions of the court enforcement officer. Unlike the hitherto binding Bankruptcy Act, the Insolvency Bill does not provide for the possibility to appoint any other district court to act as the judge-commissioner.

4.2 The Bankruptcy Trustee.


A bankruptcy trustee is appointed in the case of the declaration of bankruptcy with the liquidation of the debtor's assets, and the scope of their duties is determined by the judge-commissioner. Under the Insolvency Bill, the bankruptcy trustee may be a natural person holding a license to perform these functions. The bankruptcy trustee may appoint their deputy and may grant powers of attorney, including powers of attorney ad litem. The Insolvency Bill regulates the bankruptcy trustee’s remuneration (such that the bankruptcy trustee may, in particularly justified cases, receive additional remuneration of up to 10% of the attained annual profit of the enterprise), as well as reporting obligations and liability for a damage. The bankruptcy trustee undertakes actions on behalf of the bankrupt but in their own name. The Insolvency Bill introduces an interim administrator who will perform the duties of the bankruptcy trustee in the event that the bankruptcy trustee is recalled until the decision recalling such bankruptcy trustee becomes final and non-appealable.

The Insolvency Bill adopts similar regulations concerning the role of the bankruptcy trustee who will immediately take over all of the bankrupt's assets, manage and secure them against destruction, damage or seizure by outsiders and shall commence the liquidation of assets. The Insolvency Bill provides that if the bankruptcy trustee encounters obstacles when taking over the bankrupt's assets, they may ask a court enforcement officer for assistance. The costs of the bankruptcy trustee taking possession of the bankrupt’s assets shall be covered by the persons who had obstructed the taking possession of such assets. The bankruptcy trustee has additional obligations envisaged by regulations on the protection of employee claims in the event of the insolvency of an employer. If necessary, with the permission of the judge-commissioner, the bankruptcy trustee may hire other persons or delegate the performance of functions to other persons. The judge-commissioner’s permission shall not be required if the hiring of such other persons has been envisaged in the estimate of expenses.

4.3 The Court Supervisor.

The court supervisor is appointed in the case of the declaration of bankruptcy with the option of concluding an arrangement. The scope of the court supervisor’s duties is determined by the judge-commissioner. Under the Insolvency Bill, the court supervisor may be a person holding a license to perform these functions. The court supervisor may appoint their deputy and may grant powers of attorney, including powers of attorney ad litem. As with the existing binding provisions of the Bankruptcy Act, the Insolvency Bill regulates the court supervisor’s remuneration, reporting obligations and liability for damage. The court supervisor undertakes actions on behalf of the bankrupt but in their own name. The Insolvency Bill also introduces an interim administrator who will perform the duties of court supervisor in the event that the court supervisor is recalled until the decision recalling such court supervisor becomes final and non-appealable.

The functions of the court supervisor are similar to those provided for in the hitherto binding Arrangement Act. The court supervisor will undertake supervisory functions (in particular, they may inspect the bankrupt's actions as well as the bankrupt's enterprise at any time) and draw up a financial statement as of the date preceding the declaration of bankruptcy. The court supervisor shall perform their duties pending legal approval of the arrangement or pending completion of the proceedings in another manner unless a court decision stipulates otherwise.


4.4 The Administrator.

The administrator is appointed in the case of the declaration of bankruptcy with the option of concluding an arrangement, if the bankrupt has been deprived of the right to manage its assets. If the court has established management performed by the bankrupt with respect to a part of the bankrupt’s assets, the administrator performs the duties reserved for the court supervisor with respect to such part of the assets as is managed by the debtor-in-possession. The scope of the administrator’s duties is determined by the judge-commissioner. Under the Insolvency Bill, the administrator may be a person holding a license to perform these functions. The administrator may appoint their deputy and may grant powers of attorney, including powers of attorney ad litem. The administrator undertakes actions on behalf of the bankrupt but in their own name. The Insolvency Bill introduces an interim administrator who will perform the duties of the administrator in the event that the administrator is recalled until the decision recalling such administrator becomes final and non-appealable.

As with the bankruptcy trustee, immediately after being appointed, the administrator shall take over management of the bankruptcy estate, secure it against destruction, damage or seizure by outsiders and shall draw up an inventory and a financial statement as of the date preceding the declaration of bankruptcy if such has not yet been drawn up in the course of such proceedings. If the administrator encounters obstacles when taking over management, he may ask a court enforcement officer for assistance.

The Insolvency Bill regulates the issue of the administrator’s remuneration. If the administrator is running the bankrupt's enterprise, in cases justified by special work input, such administrator may receive additional remuneration not exceeding 10% of the attained annual profit.

The administrator shall be obliged to perform management in accordance with the principles of proper economy. The administrator shall perform all management functions related to the ongoing operation of the bankrupt's enterprise and the preservation of the bankruptcy estate in a non-deteriorated state.

The Insolvency Bill provides the requirement to obtain the consent of the council of creditors to dispose of a part of the assets not related to the business activity of the bankrupt's enterprise, as well as to burden property components with limited rights in rem.

4.5 Participants of Proceedings.

4.5.1 The Bankrupt.

Under the Insolvency Bill, the bankrupt shall be the person towards whom a decision on the declaration of bankruptcy has been issued. The declaration of bankruptcy shall have no effect on the bankrupt's legal capacity and capacity to enter into legal transactions. The Insolvency Bill provides the possibility to transform the bankrupt after the declaration of bankruptcy. The declaration of bankruptcy shall have no effect on the organizational powers that the bankrupt has in other companies, cooperatives, foundations and other organizations, unless such powers may affect the bankrupt’s assets.

The Insolvency Bill introduces the institution of a guardian, who in certain circumstances acts for the bankrupt in bankruptcy proceedings. A guardian is appointed if the bankrupt has no capacity to be a party to a civil case and a statutory representative is not acting for it, and


when the governing bodies of the bankrupt have shortages that disable their functioning. Such guardian will act until the shortages that constituted the reason for its appointment are corrected. No coercive measures may be applied with respect to the guardian, and its liability will be the same as that of the bankruptcy trustee.

4.5.2 Creditors.

The Insolvency Bill defines the term creditor as follows: a creditor is any person entitled to satisfaction from the bankruptcy estate, even if such liability does not require reporting.

As in the case of the bankrupt, the judge-commissioner may appoint a guardian for a creditor if the creditor has no capacity to be a party to a civil case and a statutory representative is not acting for it, and when the governing bodies of the creditor have shortages that disable their functioning. Such guardian will act until the shortages that constituted the reason for its appointment are corrected. No coercive measures may be applied with respect to the guardian, and its liability will be the same as that of the bankruptcy trustee.

4.5.2.1 Meeting of Creditors.

The composition and operation principles set forth for the meeting of creditors in the Insolvency Bill are substantially the same as the hitherto binding provisions. The meeting of creditors is called by the judge-commissioner: (i) when the Insolvency Bill requires a resolution of the meeting; (ii) at the request of at least two creditors holding together not less than one third of the aggregate value of the acknowledged liabilities; (iii) in other cases, when the judge-commissioner deems it necessary. The judge-commissioner will preside over the meeting of creditors. The meeting of creditors will be attended by creditors whose liabilities have been acknowledged. The judge-commissioner may admit a creditor to the meeting whose liability is dependent on a condition precedent or is made plausible.

Creditors who have a joint and several or indivisible liability shall vote through a joint attorney. An attorney may also be one of the creditors. If the creditors do not appoint an attorney, the administrator established in accordance with the provisions of the Code of Civil Procedure concerning management related to joint ownership shall vote on behalf of such creditors. The creditors’ failure to appoint an attorney or administrator will not be an obstacle to the designation of a date for the meeting of creditors.

A creditor shall have no right to vote on the basis of a liability that it acquired by transfer or endorsement after the declaration of bankruptcy, unless the transfer of such liability took place as a result of such creditor’s repayment of a debt for which it had been liable personally or with specific proprietary objects from a pre-bankruptcy legal relationship.

In cases concerning an arrangement, the right to vote cannot be vested in the bankrupt's spouse, relative or relation by direct line, collateral relative or relation up to the second degree inclusive, or an adopted or adopting person, nor when the bankrupt is a commercial partnership, an associate liable for the company's obligations with all its assets, being its creditor, as well as persons authorized to represent the company. Other creditors also cannot vote if they acquired liability from these persons after the declaration of bankruptcy. In cases concerning an arrangement, if the bankrupt is a commercial company, the right to vote is not vested in creditors which are a company associated with the bankrupt or persons authorized to represent it, or a creditor which is a company or persons authorized to represent it, if these have become bankrupt or such company is the dominant company.


Voting at a meeting of creditors will take place orally and the course and outcome of the voting shall be entered in the minutes. Abstention from voting will be considered as non-participation in the voting. If an arrangement is concluded at the meeting of creditors, the arrangement essentials are entered in the minutes.

Participants of the proceedings may also vote at the meeting of creditors through their attorneys.

If the judge-commissioner so decides, voting at the meeting of creditors may take place in writing. In such a case voting will take place in writing with a signature certified by a notary. A signature does not require certification by a notary when the vote is cast by an attorney who is a lawyer or legal advisor. If the judge-commissioner decides on the option of voting in writing, the subject of the voting shall be stated in the announcement regarding the meeting of creditors.

Unless the provisions of the Insolvency Bill stipulate otherwise, resolutions of the meeting of creditors are passed irrespective of the number of persons attending, by a majority of votes of creditors holding at least one fifth of the aggregate sum of liabilities of creditors authorized to participate in this meeting. Resolutions on excluding any assets from the bankruptcy estate shall be passed by a majority of votes of creditors holding at least two thirds of the aggregate sum of acknowledged liabilities.

The judge-commissioner may repeal a resolution of the meeting of creditors if it contravenes the law or violates good customs or glaringly violates the interest of a creditor who have voted against the resolution.

4.5.2.2 The Council of Creditors.

The Insolvency Bill adopts the regulations of the hitherto binding Bankruptcy Act, subject to the following changes:

(i) composition of the council of creditors

The council of creditors appointed at the preliminary meeting of creditors or by the judge-commissioner will be composed of three or five members and one or two deputies (which are the bankrupt's creditors whose liabilities have been acknowledged or made plausible), provided that the judge-commissioner may recall members of the council of creditors and deputies who do not properly perform duties and appoint others. Creditors holding at least one fifth of the aggregate sum of liabilities that have been acknowledged or made plausible may request that the composition of the council of creditors be changed. If the judge-commissioner does not acquiesce to such request, he shall present it to the meeting of creditors at which creditors with at least half of the aggregate amount of liabilities acknowledged or made plausible may make an appropriate change.

(ii) acting through an attorney

In essence, members of the council of creditors perform their duties personally or through their bodies, and with the consent of the judge-commissioner a member of the council of creditors may also act through an attorney (and, when a member of the council of creditors is a public administration body, also through a person designated by this body).

(iii) remuneration


A member of the council of creditors is entitled to reimbursement of essential expenses related to their participation in the meeting of the creditors’ council. The judge-commissioner may allocate appropriate remuneration to a member of the council for their participation in the meeting if this is justified by the type and complexity of the case and the scope of performed work.

(iv) revocation of the council of creditors’ resolutions

Within three days from the day of receiving a copy of the minutes, the judge-commissioner may revoke a resolution of the council of creditors if the resolution contravenes the law or violates good customs or the interests of the creditors.

5. Reporting and Establishing a List of Liabilities.

As opposed to the hitherto binding rule, not all liabilities must be reported. The Insolvency Bill provides that each personal creditor of the bankrupt who wishes to participate in bankruptcy proceedings, if it is necessary to establish their liability, should report the same to the judge-commissioner within the time limit prescribed in the decision on the declaration of bankruptcy.

The following liabilities shall be placed on the list of liabilities ex officio:

(i) a liability secured by a mortgage, lien, registered pledge, fiscal lien, mortgage of ships or through another entry in the land and mortgage register or in the register of ships;

(ii) liabilities of the bankrupt's employees and creditors to whom payment is due under indemnity for evoking an illness, incapacity for work, invalidity or death, if the bankrupt's documents contain enforcement titles or other uncontestable documents from which the obligation to pay them results, as well as to creditors whose liability has been determined by a legally valid court decision or final administrative decision issued after declaration of bankruptcy;

(iii) claims from the Guaranteed Employee Benefits Fund for the return of performances of the Fund paid to the bankrupt's employees from the bankruptcy estate.

The form and content of the notification of liability complies with the hitherto binding provisions in this respect.

As opposed to the Arrangement Act but generally in keeping with the Bankruptcy Act, the Insolvency Bill provides that the bankruptcy trustee, court supervisor or administrator will check a reported liability. When the existence of a reported liability gives rise to justified doubts, or the bankrupt denies its existence, the bankruptcy trustee, court supervisor or administrator will ask the judge-commissioner to conduct a hearing of evidence concerning the reported liability. The Insolvency Bill toughens the consequences of a failure to meet certain formal requirements concerning the reporting of a liability if a creditor is represented by a lawyer or legal advisor. Namely, such a notification to report a liability shall be returned without any request to supplement it.

The bankruptcy trustee, court supervisor or administrator shall establish a list of liabilities, which is finally made and approved by the judge-commissioner.


A new regulation concerns the replacement of a creditor. Under the Insolvency Bill, the replacement of a creditor, after a liability has been reported, is placed on the list of liabilities only when it has been determined by an official document or an unquestionable private document with an officially certified signature and when the replacement of such creditor has been reported to the bankruptcy trustee, court supervisor or administrator before forwarding the list of liabilities to the judge-commissioner. The judge-commissioner may acknowledge the replacement of such creditor reported after the list of liabilities has been forwarded to them and before its final approval if this does not cause a delay in the proceedings. A lack of acknowledgement of the replacement will not deprive the liability acquirer of the possibility to exercise their rights on the basis of the provisions of the Insolvency Bill in the course of further proceedings.

The list of liabilities will be made known by an announcement and publication in Monitor Sądowy i Gospodarczy. Within two weeks from the date of such announcement and publication, each creditor placed on the list may submit to the judge-commissioner an objection to the acknowledgement of the liability. An objection may also be lodged by the bankrupt if the draft list of liabilities does not conform to their requests or statements. If the bankrupt has not submitted statements, even though they had been called to do so, they may report an objection only when they show that they have not submitted statements for reasons beyond their control. Such an objection will be reviewed by the judge-commissioner in a trial, and a decision in this respect may be appealed.

Upon completion of the procedure to review the objection, the judge-commissioner may makes necessary changes to the list of liabilities and subsequently approve such list. The novelty is that the judge-commissioner may enter changes on the list of liabilities if they determine that the list includes liabilities that do not exist in whole or in part, or it does not include liabilities subject to inclusion on the list ex officio. Further, the judge-commissioner may supplement the list of liabilities by including in the supplementary list a liability that has been reported after the prescribed time limit, or a liability that does not require reporting has been disclosed after this time limit, or an event has occurred that justifies the list to be changed.

After the completion or discontinuance of bankruptcy proceedings, an extract from the list of liabilities approved by the judge-commissioner containing the marking of the liability and the amount received towards such liability by a personal creditor of the debtor, will constitute an enforcement title against the bankrupt. The bankrupt may demand that it be established that a liability included on the list of liabilities does not exist or exists to a lesser extent, if it has not acknowledged the liability reported in bankruptcy proceedings and a legally valid court decision has not been made for it yet (the one-year period to bring an action for such establishment has been abolished). After the extract from the list of liabilities has been appended an enforcement clause, an allegation that a liability included on the list of liabilities does not exist or exists to a lesser extent may be raised by the bankrupt through a court action or writ of enforcement.

6. The Arrangement under the Insolvency Bill.

The arrangement provided for by the Insolvency Bill is substantially different from the legal institutions set out in the Bankruptcy Act and Arrangement Act. The difference between an arrangement concluded in the context of bankruptcy and an arrangement concluded in arrangement proceedings has been abolished. The conclusion of an arrangement is one of the methods of completing bankruptcy proceedings.


6.1 General Provisions.

An arrangement may be concluded with creditors only when the court has declared bankruptcy with the option of concluding an arrangement or, in the course of such proceedings, has changed the decision on the declaration of bankruptcy with the liquidation of the bankrupt's assets into a decision on the declaration of bankruptcy with the option of concluding an arrangement.

Unlike the hitherto binding Arrangement Act, the Insolvency Bill does not provide that an arrangement may be concluded only by such debtors who “in exceptional circumstances beyond their control” ceased to pay their debts or envisage that they will cease to do so. Also, there are no limitations with respect to entities which have earlier undertaken attempts to conclude an arrangement.

An application to open arrangement proceedings has been replaced with a petition for the declaration of bankruptcy. An arrangement may also be concluded as a result of a declaration of bankruptcy with the liquidation of the debtor’s assets, as it is possible to change the type of bankruptcy proceedings in the course of such proceedings. Much the same as it was under the hitherto binding provisions, the petition will have to be accompanied by arrangement proposals and a cash flow statement for the last 12 months (instead of the balance sheet and profit and loss account). Further, a number of additional formal requirements need to be fulfilled.

Arrangement proposals may be presented by the debtor and the court supervisor or administrator, as well as a creditor who filed a petition for declaration of bankruptcy with the option of concluding an arrangement. Arrangement proposals should be submitted within one month (for important reasons the court may extend such deadline to three months) from the date of the declaration of bankruptcy with the option of concluding an arrangement. In the event of the failure to submit an arrangement proposal within such time limit, the bankrupt will forfeit the right to manage the bankruptcy estate, as well as the right to submit arrangement proposals. Together with the arrangement proposals, a cash flow account for the period of the last twelve months must be submitted.

The Insolvency Bill also provides that arrangement proposals may be submitted by the bankrupt, bankruptcy trustee or council of creditors during the bankruptcy proceeding with the liquidation of the bankrupt’s assets, as a result of which the court changes the decision on declaration of bankruptcy with the liquidation of the bankrupt's assets into a decision on the declaration of bankruptcy with the option of concluding an arrangement if there are grounds for such change.

Much the same as the hitherto binding provisions of the Arrangement Act, under the Insolvency Bill arrangement proposals should consist of two parts: a description of the manner of restructuring the bankrupt's obligations and a substantiation.

The Insolvency Bill presents the following restructuring methods: (i) deferment of the fulfillment of obligations; (ii) spreading debt repayments into installments; (iii) a reduction of the debt amount; (iv) the conversion of liabilities into shares or holdings; (v) a change, exchange or revocation of a right securing a specific liability. The list of methods presented in the Insolvency Bill is open and a person submitting arrangement proposals may indicate one or more ways of restructuring which may be carried out in any manner permitted by law. This is a significant change in comparison with the hitherto legislation, where the ways of


restructuring are enumerated. This change will eliminate the hitherto existing doubts whether it is possible to conclude an arrangement on the basis of any method of restructuring other than statutory ones.

The Insolvency Bill shows also in a more detail what a substantiation of the arrangement proposals should contain, namely: (i) a description of the condition of the enterprise with a special definition of its economic, financial, legal and organizational standing; (ii) an analysis of the market sector in which the bankrupt's enterprise operates, with consideration for the market position of the competition; (iii) the methods and sources of financing the execution of the arrangement with the inclusion of the anticipated receipts and expenditures in the course of the execution of the arrangement; (iv) an analysis of the risk level and structure; (v) the persons liable for execution of the arrangement (forenames and surnames); (vi) an evaluation of an alternative manner of restructuring obligations; (vii) the method of securing the rights and interests of creditors for the time of the execution of the arrangement. In certain specified circumstances, the judge-commissioner may permit a limitation of the substantiation of the arrangement proposals.

A specific form of an arrangement that has not been provided by the hitherto regulations is a liquidating arrangement, in which creditors are satisfied by the liquidation of the bankrupt’s assets. Such liquidation is carried out on the basis of the regulations with respect to the liquidation of the bankruptcy estate, unless the arrangement provides for a take-over of the bankrupt’s assets by its creditors or any other method of liquidation.

The Insolvency Bill provides that an arrangement will include all pre-bankruptcy liabilities concerning the bankrupt, together with liabilities secured by transfer as a security of the ownership of an object, liability or other right. An arrangement shall include interest on the liabilities encompassed by such an arrangement for the time of delay in fulfilling performance. An arrangement shall also include liabilities dependent on a condition if the condition has been fulfilled in the course of the execution of the arrangement.

However, an arrangement shall not include: (i) child support or alimony dues and pensions under compensation for evoking an illness, incapacity for work, invalidity or death; (ii) liabilities on releasing property excluded from the bankruptcy estate; (iii) liabilities repaid with the consent of the judge-commissioner; (iv) liabilities for which the bankrupt is liable in connection with the acquisition of inheritance after the declaration of bankruptcy and such inheritance being entered into the bankruptcy estate; and (v) contributions for old age, disability and sickness insurance. An arrangement shall not include liability from an employment relationship and liabilities secured on the bankrupt's assets by a mortgage, lien, registered pledge, fiscal lien or mortgage of ships, unless the creditor has expressed its consent to it being included in the arrangement in an unconditional and irreversible manner, before voting on the arrangement at the latest.

In accordance with the general rule introduced by the Insolvency Bill, the court competent to approve an arrangement is the bankruptcy court, i.e., the district court or commercial court. This regulation conforms with the hitherto binding provisions of the Arrangement Act, the difference being that the Insolvency Bill regulates the issue of the venue in more detail.

Unlike the hitherto binding Arrangement Act, the Insolvency Bill provides categories of creditor’s interests to be established after the approval of the list of liabilities which the judge-commissioner shall draw up for the purpose of voting on the arrangement, lists of creditors pertaining to the individual categories of their interests, and in particular: (i)


creditors entitled to dues from employment relationships and dues of farmers under contracts for supplying products from their own farm; (ii) creditors whose liabilities are materially secured; (iii) creditors who are stakeholders or shareholders of the bankrupt; (iv) other creditors. The division of creditors for the purposes of voting on the arrangement arises from a different extent to which particular creditors are interested in the arrangement.

Much the same as under the hitherto legislation, the conditions of restructuring the bankrupt's obligations should be the same for all creditors of the same category of interests, unless particular creditors have clearly agreed to less favorable conditions. In this respect, the principle of the equal treatment of creditors has been adopted from the hitherto binding Arrangement Act, the difference being that the conditions of the arrangement may be different for particular categories of interests. However, a category of creditors who may be given more favorable conditions in the restructuring of obligations has been expanded to include, besides creditors with small liabilities, creditors who, after the declaration of bankruptcy, grant or are about to grant credit essential for the execution of the arrangement. The conditions of restructuring obligations from an employment relationship may not deprive employees of the minimum remuneration for work, established on the basis of separate provisions.

6.2 Conclusion and Approval of an Arrangement.

The provisions concerning the meeting of creditors and the course of such meeting during which the arrangement is concluded and approved are similar to the rules adopted in the hitherto binding Arrangement Act, subject to changes with respect to the following: (i) the admissibility of an arrangement despite the existence of contestable liabilities; (ii) the absence of the bankrupt’s consent for the arrangement; (iii) the system of creditors’ voting on the arrangement; and (iv) a refusal to approve the arrangement.

The judge-commissioner may also convene a meeting of creditors designated to conclude an arrangement when the sum of contestable liabilities does not exceed 15% of the aggregate amount of liabilities. The judge-commissioner shall notify the creditors of the existence and character of contestable liabilities as well as the arrangement proposals. This regulation is intended to facilitate the completion of the proceedings, as in the event of voting with a majority of 2/3 of the aggregate sum of liabilities, the creditors that have such contestable liabilities would be voted down anyway.

At the meeting of creditors, the court supervisor or administrator shall submit a report in which they rate the condition of the enterprise and opines on the feasibility of the arrangement proposals.

The Insolvency Bill provides for a possibility of submitting several arrangement proposals, in which case the judge-commissioner shall establish the sequence of voting on the arrangement proposals. The acceptance of one arrangement proposal shall exclude voting on further proposals.

The Insolvency Bill provides certain circumstances in which voting on the arrangement is contingent upon the fulfillment of certain conditions:

- if the arrangement defines security of its execution by third parties granting credit to the bankrupt or the consent of third parties for alterations to the contents of rights or legal relationships, voting on the arrangement may take place only when documents are presented


at the meeting of creditors that show that these obligations will be carried out after the conclusion of the arrangement;

- the relevant documents must also be presented if the bankrupt grants an irrevocable power of attorney to run the whole or part of the affairs of its enterprise or irrevocable power of attorney to administer the bankrupt's assets in the event of the non-execution of the arrangement, and also entrusts the management of the enterprise to the persons designated in the arrangement;

- the consent of the Chairman of the Competition and Consumer Protection Office, unless it is shown that such consent is not required when the arrangement defines the restructuring of the bankrupt's obligations through conversion of liabilities into shares or holdings.

The arrangement shall be accepted if it is supported by the majority of creditors from each of the lists of creditors pertaining to the categories of interests of creditors with jointly hold not less than two thirds of the aggregate amount of liabilities. For the purposes of implementing the principle of maximization and the priority of the group interest of creditors, the Insolvency Bill provides that even if the required majority is not obtained (if only with regard to one of the lists of creditors), the arrangement shall be accepted if the majority of creditors from each of the remaining lists have expressed consent to accept such arrangement, whereas the creditors from this list who have expressed themselves to be against the acceptance of the arrangement shall be satisfied on the basis of the arrangement to a no lesser extent than in the case of conducting bankruptcy proceedings with the liquidation of the bankrupt's assets.

If an arrangement is not concluded, the court will immediately change the decision on the declaration of bankruptcy into a decision on the declaration of bankruptcy with the liquidation of the bankrupt's assets and shall establish a bankruptcy trustee. Any repeated attempt to reach an arrangement will be inadmissible.

Under the Insolvency Bill, as with the hitherto binding Arrangement Act, an arrangement accepted by the meeting of creditors will be subject to approval by the court. The Insolvency Bill further allows for the possibility for objections to be raised indicating the inadmissibility of the conclusion of the arrangement or other procedural faults, in which case a hearing will be fixed to which those raising objections will be summoned.

The refusal to approve an arrangement may be obligatory or optional: (i) the court will refuse to approve an arrangement if it violates the law or if it is obvious that the arrangement will not be executed; and (ii) the court may refuse to approve an arrangement if its terms are glaringly detrimental to creditors who voted against the arrangement and reported objections. After such refusal to approve an arrangement, the court either discontinues proceedings or changes the decision on the declaration of bankruptcy with the option of concluding an arrangement into a decision on the declaration of bankruptcy with the liquidation of the bankrupt's assets and designates a bankruptcy trustee.

6.3 Effects of an Arrangement.

In essence, the Insolvency Bill adopts the regulations of the hitherto binding Arrangement Act, but changes the situation of secured creditors encompassed by an arrangement.


An arrangement shall bind all creditors whose liabilities are included therein, even if such liabilities are not included on the list.

An arrangement shall not infringe the rights of a creditor towards the bankrupt's surety or the bankrupt's co-debtor, or the rights resulting from certain rights in rem or the mortgage of ships if they were established over the assets of a third party.

An arrangement shall not infringe the rights resulting from certain rights in rem established on the bankrupt’s assets, unless the authorized person has expressed consent for the inclusion of the secured liability in the arrangement. Even if a consent for the inclusion of a secured liability in the arrangement has been expressed, the rights in rem shall remain in force, with the understanding that their content shall be subject to changes resulting from the conditions of an arrangement.

An important novelty is the provision stating that a validly approved arrangement envisaging the conversion of liabilities into shares or stock of a bankrupt company shall supersede actions, as specified in the Commercial Companies Code, related to the share capital increase and subscription for such shares or stock. An arrangement together with a copy of a legally valid decision approving the arrangement shall constitute grounds for registering the share capital increase of the company in the National Court Register.

Bankruptcy proceedings in which an arrangement is concluded end with a decision on ending bankruptcy proceedings, and subsequently the bankrupt regains the right to command and manage its assets within the scope that follows from the arrangement.

6.4 Alterations to an Arrangement.

The Insolvency Bill introduces a new concept of alteration to an arrangement, namely, if after approval of the arrangement an extraordinary change of commercial relations occurs that significantly contributes to sustained growth or a reduction of income of the bankrupt's enterprise, the bankrupt and each of the creditors may apply for an alteration of the arrangement. A court decision on instituting proceedings to alter an arrangement shall be announced. Another meeting of creditors is held attended by the same creditors who attended the meeting at which an arrangement was concluded, and their votes count as they did at such original meeting. The meeting may also be attended by creditors with liabilities that had been contestable at the original meeting and which, after the conclusion of the original arrangement, were acknowledged by a legally valid court decision or final administrative decision. However, the meeting may not be attended by creditors whose liabilities have been satisfied in whole. Any alterations to an arrangement other than those specified above are inadmissible

6.5 Revocation of an Arrangement.

As with the hitherto binding Arrangement Act, the Insolvency Bill provides the possibility to revoke an arrangement. The grounds for the revocation of an arrangement have been expanded. An arrangement may now be revoked by the court if the bankrupt is not carrying out the provisions of the arrangement or it is obvious that it the arrangement will not be executed. A request to revoke an arrangement may be submitted by a creditor, the bankrupt or any other person who, under the arrangement, is authorized to execute or supervise the execution of an arrangement. The court’s revocation of an arrangement will result in the decision on the declaration of bankruptcy with the option of concluding an arrangement being


changed into a decision on the declaration of bankruptcy with the liquidation of the bankrupt's assets and a judge-commissioner and bankruptcy trustee being appointed. In such case, the liabilities of the creditors encompassed by the arrangement will be vindicated in their initial amount, provided that amounts paid on the basis of the arrangement shall count towards vindicated liabilities. Also in such case, a mortgage, lien, registered lien, fiscal lien and mortgage of ships will secure a liability in the amount in which it has yet not been satisfied.

3.0 Liquidation of Bankruptcy Estate. The general principles concerning liquidation have been adopted from the hitherto binding provisions, with the effects of a sale of property within the bankruptcy proceedings being specified in more detail. The bankruptcy estate is liquidated by the bankruptcy trustee, but the judge-commissioner may stay such process until the decision on the declaration of bankruptcy becomes final and non-appealable, or a motion for the alteration of the decision on the declaration of bankruptcy with the liquidation of the bankruptcy estate into a decision on declaration of bankruptcy with the option of concluding an arrangement is reviewed. Further, in the event of insolvency, the bankrupt’s enterprise may continue if it is possible to conclude an arrangement with creditors or sell the whole or any organized part of the bankrupt’s enterprise.

Under the Insolvency Bill, any sale effected in the course of the bankruptcy proceedings has the effect of a sale as part of enforcement proceedings.

The sale of immovable property shall cause the expiry of certain rights as well as personal rights and claims disclosed by an entry in the land and mortgage register or not disclosed in this manner, but reported to the judge-commissioner within the prescribed time limit. Instead of the right which has expired, the eligible person shall acquire the right to satisfy the value of the expired right out of the price attained from the sale of the burdened immovable property. This effect shall occur from the moment of the conclusion of the relevant sale contract. The grounds for the deletion of rights that expired as a result of such sale shall be a legally valid plan of division of the amount acquired from the sale of the burdened immovable property.

The Insolvency Bills provides that in the case of the sale of an enterprise comprising objects burdened with limited rights in rem, the value of property components burdened with these rights shall be disclosed in the sale contract, and the attained price shall be divided in accordance with the relevant provisions of the Insolvency Bill.

7.1 Sale of an Enterprise or Its Organized Part and Immovable Property and Sea Vessels Entered in the Register of Ships.

As a rule, a bankrupt's enterprise should be sold as a whole. If it is not possible to sell the bankrupt's enterprise as a whole for economic or other reasons, an organized part of the enterprise may be sold. Such sale will be executed by the bankruptcy trustee through a tender of bids, to which the provisions of the Civil Code shall apply, subject to modifications under the Insolvency Bill. The bankruptcy trustee will carry out such a tender on the basis of terms determined by the judge-commissioner. The bid selected by the bankruptcy trustee will be approved by the judge-commissioner. A private sale will only be possible with the consent of the council of creditors, provided that when the council of creditors has given its consent, a company with the participation of more than one half of employees of the bankrupt that is a


commercial company with the participation of the State Treasury has the right of priority to purchase the bankrupt’s enterprise or any organized part thereof suitable for conducting business activity. The bankruptcy trustee shall first submit a sale offer to a company in which employees hold an interest.

7.2 Sale of Movable Property and Takeover by a Pledgee of Movable Property Encumbered by a Registered Pledge.

The Insolvency Bill provides that the sale of movable property will be carried out on the terms set out for the sale of immovable property. However, any private sale will be possible upon the consent of the judge-commissioner, who may further determine the conditions of such sale or define another procedure of selecting a buyer. The Insolvency Bill also provides for the sale of an object encumbered with a registered pledge, as well as the liquidation of movable property encumbered with a registered pledge by the take-over of the subject of the pledge, if the pledge agreement so allows.

If the object of a registered lien is being administered by the bankruptcy trustee, and the creditor is entitled to take over the object for ownership, the judge-commissioner will designate a time limit to the creditor to exercise this right not shorter than one month; after this time the object of the pledge will be sold. If the object encumbered with a registered pledge is being administered by the bankruptcy trustee and the agreement on the establishment of the pledge envisages the satisfaction thereof through an extra-enforcement sale, the bankruptcy trustee will sell objects in accordance with the Insolvency Bill.

7.3 Liquidation of Liabilities and Property Rights.

The Insolvency Bill follows the rule of the hitherto binding provisions that the liquidation of a bankrupt’s liabilities is carried out through their exaction (and in the event that such exaction encounters difficulties, also through enforcement). The bankrupt’s property rights are subject to liquidation through their enforcement or sale. The sale of liabilities and property rights is carried out according to the same principles as the sale of movable property (the council of creditors may give its consent to another form of seeking a buyer), and the pledgee is satisfied from property rights by way of a takeover of such rights.

8. Division of Funds of the Bankruptcy Estate and Amounts Obtained from the Sale of Encumbered Objects and Rights.

The Insolvency Bill introduces two new definitions of funds of a bankruptcy estate and amounts acquired from the sale of objects and rights encumbered with security on property. It was necessary to distinguish between the two terms in view of the rule that was introduced, namely that when liabilities secured on a property are satisfied in bankruptcy proceedings, the final division of the other funds is made after the division of the amounts obtained from the sale of the burdened objects.

Funds of the bankruptcy estate consist of amounts acquired from the liquidation of the bankruptcy estate and income obtained from running or leasing the bankrupt's enterprise, as


well as interest on these amounts deposited in a bank, unless the provisions of the Insolvency Bill stipulate otherwise.

Amounts acquired from the sale of objects and rights encumbered with a mortgage, lien, registered pledge, fiscal lien and mortgage of ships shall be used to satisfy creditors whose liabilities were secured on sold objects or rights, subject to the provisions of the Insolvency Bill. Amounts remaining after these liabilities are satisfied shall be included in the funds of the bankruptcy estate.

Personal liabilities secured on property are placed in the plan of the division of funds of the bankruptcy estate only in the amount in which they have not been satisfied out of the object of security.

The liability of a creditor of inheritance, accepted after the declaration of bankruptcy for which the bankruptcy estate is liable, shall be included in the plan of the division of funds of the bankruptcy estate up to the value of the inheritance assets.

8.1 Sequence of Satisfying Creditors.

The Insolvency Bill regulates separately the division of funds of the bankruptcy estate and the division of amounts acquired from the encumbered objects.

Liabilities and dues subject to satisfaction from funds of the bankruptcy estate shall be divided into the following categories:

(i) first category: costs of bankruptcy proceedings; dues from contributions for old age, disability and sickness insurance of employees; dues from employment relationships; dues of farmers from contracts for supplying products from their own farm for the last two years; pensions due for causing an illness, incapacity for work, invalidity or death, child support or alimony obligations burdening the bankrupt; dues occurring as a result of the actions of the bankruptcy trustee or administrator; dues from mutual contracts concluded by the bankrupt before the declaration of bankruptcy, the execution of which was demanded by the bankruptcy trustee or administrator; dues from unjust enrichment of the bankruptcy estate; and dues occurring from the bankrupt's actions performed with the consent of the court supervisor;

(ii) second category: taxes, other public levies and dues from contributions for social insurance, due for the last year before the date of the declaration of bankruptcy, not subject to satisfaction in the first category, together with interest and costs of execution due from them;


(iii) third category: other liabilities that are not subject to satisfaction in the fourth category, together with interest for the last year before the date of the declaration of bankruptcy, with contractual indemnity, costs of court action and enforcement;

(iv) fourth category: interest belonging to higher categories in the order in which the principal is subject to satisfaction, as well as court and administrative fines and dues from gifts and bequests.

However, unless specific provisions provide otherwise, liabilities secured on property are subject to satisfaction from the amount obtained from the sale of the encumbered object, reduced by the costs of such sale, in the order of priority.

For the protection of minor creditors, the Insolvency Bill provides that in the case of the sale of real property, a perpetual usufruct right, cooperative right to a housing unit or sea vessel entered in the register of ships and encumbered by mortgage, mortgage of ships or rights that expire in accordance with the provisions of the act as well as personal rights and claims respectively before the satisfaction of liabilities which had been thus secured, the liabilities satisfied will consist of liabilities from child support and alimony as well as liabilities for remuneration for work of the bankrupt’s employees who worked on the sold real property or sea vessel for the last three months before the day of their sale, but only up to the amount of three times the minimum remuneration for work, as well as pensions due for evoking an illness, incapacity for work, invalidity or death.

8.2 Proceedings in Division of Funds of the Bankruptcy Estate and Establishment of the Plan of Division.

The Insolvency Bill stipulates that the bankruptcy trustee draws up a plan of the division of funds of the bankruptcy estate plan, and a separate plan of division of amounts obtained from the sale of objects and rights. Such plans are subsequently submitted to the judge-commissioner who may make adjustments to these plans or instruct the bankruptcy trustee to make appropriate changes. The Insolvency Bill allows any such plan to be challenged, and upon completion of the procedure in this respect, the judge-commissioner approves the plan.

With respect to the execution of the plan of division, the Insolvency Bill adopts substantially the regulations of the presenting binding acts.

9. Completion of Bankruptcy Proceedings and Its Effects.

The Insolvency Bill in this respect is based on the same rules as the hitherto binding Bankruptcy Act, subject to the following modifications:


(i) state-owned enterprises and wholly-owned companies of the State Treasury have been deprived of their privileged position (Art. 218 § 2 of the Bankruptcy Act);

(ii) situations in which the bankrupt does not collect books, correspondence or documents within the prescribed time limit, or does not collect its assets, have been regulated such that the books, correspondence and documents will be put in safe-keeping at the bankrupt's expense, and the assets will be liquidated at the bankrupt’s expense;

(iii) the legal effects of the quashing of bankruptcy proceedings have been determined;

(iv) the possibility to cancel the obligations of bankrupts that are natural persons has been introduced.

In the decision on the completion of bankruptcy proceedings with the liquidation of assets of the bankrupt who is a natural person, the court, at the request of the bankrupt, may decide to cancel in whole or in part the bankrupt's obligations which have not been satisfied in the bankruptcy proceedings when: insolvency had been the consequence of exceptional circumstances beyond the bankrupt’s control, the material collated in the case gives grounds for acknowledging that there are no circumstances that give grounds for depriving the bankrupt of the right to conduct business activity on its own account and to serve as a representative or attorney in a commercial company, enterprise or cooperative; and the bankrupt has conscientiously performed the duties imposed on it in the bankruptcy proceedings.

10. Proceedings in Cases of the Adjudication of an Injunction Preventing the Conducting of Business activity.

The Insolvency Bill largely adopts the hitherto binding regulations in this respect and simultaneously extends the scope of their application to persons who caused insolvency as the consequence of their intentional actions or obvious negligence. Further, the Insolvency Bill upholds the principle of the application of provisions concerning non-litigious procedures and regulates related issues such as the institution of such procedures, court hearings, and the admissibility of cassation.

4.0 Restructuring Proceedings in the Case of a Threat of Insolvency. The Insolvency Bill introduces special proceedings aimed at repairing a company’s standing. The provisions of the Insolvency Bill with respect to restructuring proceedings are largely based on Chapter 11 of the US Bankruptcy Code, which is discussed in more detail in Chapter III Point 4 hereof.

Restructuring proceedings may be conducted only with respect to entrepreneurs entered in the National Court Register (this does not apply to entrepreneurs subject to registration in the records of business activity, whose obligations may be cancelled as appropriate upon


completion of the proceedings). The Insolvency Bill defines that an entrepreneur is threatened with insolvency when despite the fulfillment of its obligations, according to a reasonable evaluation of its economic condition, it is obvious that it will shortly become insolvent. The provisions of the Insolvency Bill regarding the declaration of bankruptcy will apply accordingly with respect to restructuring proceedings.

Restructuring proceedings may not be commenced with respect to an entrepreneur: (i) that has already conducted restructuring proceedings, if two years has not yet lapsed since the date on which such proceedings were discontinued; (ii) that has already been the subject of an arrangement concluded in any restructuring or insolvency proceedings, if five years has not yet lapsed from the implementation of such arrangement; (iii) against whom insolvency proceedings have been conducted, as part of which its assets have been liquidated or a liquidation arrangement has been adopted, if five years has not yet lapsed from the legally valid completion of the proceedings; (iv) with respect to which a petition for the declaration of bankruptcy has been dismissed or insolvency proceedings have been discontinued due to a lack of sufficient assets to satisfy the costs of the proceedings, if five years has not yet lapsed from the proceedings becoming legally valid.

An entrepreneur institutes and conducts restructuring proceedings by submitting a statement on the institution of restructuring proceedings and a rehabilitation plan with the relevant attachments. The statement on the institution of restructuring proceedings is announced in Monitor Sądowy i Gospodarczy, and the date of such announcement is the date of the institution of restructuring proceedings.

The court may prohibit the institution of restructuring proceedings if such statement was submitted in breach of the provisions of the Insolvency Bill, or if the particulars included in such statement or the attached documents are not true.

For the duration of such restructuring proceedings, the court appoints a court supervisor and may also appoint an expert.

As a result of the institution of restructuring proceedings:

(i) the repayment of the entrepreneur’s obligations is suspended, with the exception of contributions for old age, disability and sickness insurance;

(ii) the accrual of interest due from the entrepreneur is stayed;

(iii) liabilities may be set off according to the relevant provisions concerning the effects of the declaration of bankruptcy on the bankrupt’s obligations in the case of a declaration of bankruptcy with the option of concluding an arrangement;

(iv) no enforcement proceedings or proceedings to secure claims may be instituted against the entrepreneur, and proceedings already instituted shall be stayed by law.

Further, at the request of the entrepreneur, the court may alter interim orders issued to secure cash claims, particularly by revoking effected seizures. This will not apply to liabilities which are not included in an arrangement under the relevant provisions of the Insolvency Bill.

The Insolvency Bill further forbids any property being sold during the restructuring proceedings.


A rehabilitation plan should ensure restoration for the entrepreneur of the capacity to compete in the market. The manner of rehabilitating the enterprise should define the restructuring of obligations, assets and employment in the enterprise that may be included in arrangements in the course of the bankruptcy proceedings,.

The restructuring of obligations shall take place through an arrangement concluded at the meeting of creditors. Voting on an arrangement may take place in groups of creditors. An arrangement will be accepted when it is supported by the majority of creditors authorized to attend the meeting of creditors, with a total of two thirds of the aggregate amount of liabilities giving the right to vote. The non-acceptance of an arrangement does not rule out the option to re-convene the meeting of creditors, at which new proposals for the restructuring of obligations and other alterations in the rehabilitation plan are admitted. Finally, the court shall approve the arrangement after holding a hearing, unless there are grounds for refusing such approval.

Where restructuring proceedings are being conducted by a small- or medium-sized entrepreneur, such proceedings shall be discontinued by law in the case of the non-conclusion of an arrangement within three months from the day of institution of proceedings.

12. International Insolvency Proceedings.

As opposed to the hitherto Bankruptcy Act and Arrangement Act, which contain very few regulations in this respect, the Insolvency Bill regulates the issues of international insolvency proceedings in a comprehensive manner by incorporating the provisions of the UNCITRAL Model Code. Please see the overview of the provisions of the Insolvency Bill with respect to international insolvency proceedings in Chapter III Point 1 hereof.

13. Separate Bankruptcy Proceedings.

The Insolvency Bill regulates the following separate proceedings: (i) proceedings instituted after the death of an insolvent debtor; (ii) bankruptcy proceedings with respect to banks; (iii) bankruptcy proceedings with respect to insurance companies; and (iv) bankruptcy proceedings with respect to issuers of bonds.

As regards bankruptcy proceedings with respect to banks, the Insolvency Bill adopts the hitherto existing regulations of the Act dated August 29, 1997, Banking Law (Journal of Laws of 2002 No. 72, item 665) and the Act dated December 14, 1994, on the Bank Guarantee Fund (Journal of Laws of 2000 No. 9, item 131). Provisions with respect to mortgage banks have been adjusted to the regulations adopted in the Act dated August 29, 1997 on Mortgage Bonds and Mortgage Banks (Journal of Laws of 1997, No. 140, item 940).

The Insolvency Bill contains separate provisions with respect to bankruptcy proceedings conducted against banks and credit institutions that have their seat in member states of the European Union, which constitute the implementation of Directive 2001/24/EC dated April 4, 2001, on the restructuring and bankruptcy of credit institutions, and, in particular, such part of the Directive as concerns restructuring and liquidation carried out in the course of bankruptcy proceedings.


5.0 The Participation of the State Treasury, Securities and Exchange Commission and Other Organizations in Bankruptcy Proceedings. This Chapter describes the role and authority of the State Treasury, Securities and Exchange Commission, the President of the Office for the Protection of Competition and Consumers and other organizations in bankruptcy proceedings conducted under the Insolvency Bill. The participation of such entities in bankruptcy proceedings is of a unique nature and depends on the specific features of debtors (a company owned by the State Treasury, a public company or a bank), with respect to which the insolvency proceedings are conducted.

1. The Role of the State Treasury in Proceedings Conducted with Respect to a Single-Shareholder Company Owned by the State Treasury and Other Bankruptcy Proceedings.

The State Treasury is involved in bankruptcy proceedings when a single-shareholder company owned by the State Treasury is a debtor who meets the conditions necessary to file a petition for the declaration of bankruptcy.

In the event of a single-shareholder company owned by the State-Treasury, the petition for the declaration of bankruptcy may be filed with the competent court not only by the debtor and its creditors, but also by the Minister of the State Treasury. If such a petition is filed by any of the other authorized entities, the court shall immediately notify the Minister of the State Treasury about such filing, and the Minister may furnish the court with their opinion on this matter within two weeks. In the course of the proceedings for the declaration of bankruptcy of a single-shareholder company owned by the State Treasury, the court may, if necessary, hear a representative of the Minister of the State Treasury in addition to hearing the debtor and the creditor who submitted the petition.

The decision on the declaration of bankruptcy of a single-shareholder company owned by the State Treasury will be delivered to the Minister of the State Treasury.

If a state-owned company is an insolvent debtor, its founding body is involved in the bankruptcy proceedings on terms similar to those described above.

The State Treasury may also be involved in bankruptcy proceedings if in the case of a declaration of bankruptcy with the liquidation of the bankrupt’s assets the bankruptcy trustee appointed by the court encounters obstacles when taking over the bankrupt's assets. In such a case, the bankruptcy trustee shall given possession of the bankrupt’s assets by the court enforcement officer (on the basis of the court’s decision on the declaration of bankruptcy or a decision appointing the bankruptcy trustee, without the need to append it with an enforcement clause). The costs of giving the bankruptcy trustee possession of the bankrupt’s assets shall be temporarily covered by the State Treasury. Such costs will subsequently be exacted from the persons who had obstructed the taking over of the assets, and in the case of the inability to exact such costs, they shall be satisfied from the bankruptcy estate. If actions hindering the taking over of assets by the bankruptcy trustee were taken up by several persons, the costs of giving possession shall burden these persons jointly and severally.


2. The Securities and Exchange Commission and the President of the Office for the Protection of Competition and Consumers.

The Securities and Exchange Commission becomes involved in bankruptcy proceedings in the event that the debtor is a public company in the meaning of the Act dated August 21, 1997, on Public Trading in Securities (Journal of Laws of 2002 No. 49, item 447). In such a case, the petition for the declaration of bankruptcy should additionally contain information whether the debtor is a company of this type. After its issuance, the decision on the declaration of bankruptcy with respect to a public company is delivered to the Chairman of the Securities and Exchange Commission.

In addition, in each case of a declaration of bankruptcy (not only with respect to a public company), the following bodies should be notified of such fact: the Securities and Exchange Commission, the relevant fiscal chamber and the relevant branch of the Social Insurance Agency. The Securities and Exchange Commission shall be notified on the date of the declaration of bankruptcy by means of direct information transmission such as the telephone, facsimile or electronic mail.

The third instance when the Securities and Exchange Commission as well as the President of the Office for the Protection of Competition and Consumers may be involved in bankruptcy proceedings is when ancillary proceedings are conducted in cases of the adjudication of an injunction preventing the conducting of business activity. This follows from the rule that besides a creditor, bankruptcy trustee, court supervisor or administrator, the President of the Office for the Protection of Competition and Consumers and the Chairman of the Securities and Exchange Commission are authorized to file a motion to institute such proceedings.

With respect to proceedings concerning the bankruptcy of a state-owned bank or a bank which is a subsidiary of the State Treasury, the court will also hear a representative of the Minister of the State Treasury.

3. Bankruptcy Proceedings With Respect to Banks, the Banking Supervision Commission, the Bank Guarantee Fund and the National Bank of Poland.

A petition for the declaration of bankruptcy may only be submitted by the Banking Supervisory Commission. Before declaring the bankruptcy of a bank, the court will hear a representative of the Banking Supervisory Commission, a representative of the Bank Guarantee Fund, the president and other members of the last management or bankruptcy trusteeship, or the liquidator of the bank that the petition concerns, with regard to the grounds for the declaration of bankruptcy and with regard to the person of such bankruptcy trustee, court supervision or administrator.

A petition on the declaration of the bankruptcy of a bank may not be dismissed for the reason that the property of an insolvent debtor is not sufficient to pay the costs of the proceedings, nor when the court establishes that the debtor’s property is encumbered with mortgage, lien, registered pledge, fiscal lien or mortgage of ships to such degree that the remaining property is not sufficient to pay the costs of the proceedings. The conditions of discontinuing bankruptcy proceedings referred to in Art. 361 of the Insolvency Bill shall not apply in this case. In certain specified cases, the costs of the proceedings will be paid by the National Bank of Poland.


The Bank Guarantee Fund participates in bankruptcy proceedings with respect to a bank, and payments of guaranteed resources are made by the bankruptcy trustee or administrator on behalf of and on the account of the Bank Guarantee Fund in accordance with separate regulations.

Reports by the bankruptcy trustee, court supervisor or administrator under Art. 168 of the Insolvency Bill will be made known to the Banking Supervision Commission and the Bank Guarantee Fund. The bankruptcy trustee or administrator shall be obliged to perform actions related to the payment of financial resources guaranteed by the Bank Guarantee Fund, defined in separate regulations. The costs of such actions shall be classified as the costs of bankruptcy proceedings.

The court will declare bankruptcy with the option of concluding an arrangement. Before approving an arrangement, the court will seek the opinion of the Banking Supervisory Commission. Where an arrangement has not been concluded, the court will change the decision on the declaration of bankruptcy with the option of concluding an arrangement into a decision with the liquidation of the bank's assets. In such a case, the conditions of the banking enterprise being acquired by other banks and the time limit for submitting bids shall be defined by the judge-commissioner after obtaining the opinion of the Banking Supervisory Commission. Furthermore, a decision approving the bid selection shall be issued by the judge-commissioner after the opinion of the Banking Supervisory Commission has been obtained. In the course of satisfying the liabilities and dues of the bankrupt bank, the dues of the Bank Guarantee Fund related to the transfer of amounts for the payment of guaranteed resources will be satisfied in the first category directly after the costs of bankruptcy proceedings and after dues for work have been satisfied. Only then will the liabilities related to bank accounts be satisfied.

The Banking Supervision Commission is also involved in bankruptcy proceedings with respect to mortgage banks. Before appointing a guardian to represent the rights of the holders of mortgage bonds, the court consults the Banking Supervision Commission with regard to the person of such guardian.

The National Bank of Poland may be involved in bankruptcy proceedings when an insolvent debtor is a participant of a system of payment or security clearing system in the meaning of the Act dated August 24, 2001, on the Finality of Clearance in Systems of Payment and Securities Clearing Systems and the Rules of Supervision of These Systems (Journal of Laws No. 123 item 1351) (the “Act on the Finality of Clearance”). In such a case, this should be stated in the petition for the declaration of bankruptcy. Furthermore, a decision on the declaration of bankruptcy is also delivered to the President of the National Bank of Poland after a prior notice of the time of the declaration of bankruptcy. It is also worth noting that a declaration of bankruptcy with respect to a participant of a system of payment or security clearing system, either non-liquidating or liquidating, does not preclude the possibility of using cash resources, as specified in Art. 80 of the Insolvency Bill, accumulated in its clearing account to fulfill obligations resulting from clearance orders entered in the system on the day of the declaration of bankruptcy at the latest. Further, pursuant to Art. 135 of the Insolvency Bill, the provisions of Art. 134 enabling the lodging of appeals against acts in law or defining the ineffectiveness of acts in law performed by the bankrupt will not apply to compensation and the results thereof performed by the bankrupt prior to the declaration of bankruptcy in connection with its participation in a system of payment or in a securities clearing system.


4. Bankruptcy Proceedings with Respect to Insurance Companies, Commission for the Supervision of Insurance and Pension Funds, the Insurance Guarantee Fund, and the Polish Office for Transportation Insurance.

Bankruptcy proceedings with respect to insurance companies involve the Commission for the Supervision of Insurance and Pension Funds (the “Commission”). Pursuant to Art. 471 of the Insolvency Bill, the Commission is authorized to file a petition for the declaration of bankruptcy and participate in the proceedings. Before the declaration of bankruptcy of an insurance company, the court shall seek the opinion of the Commission regarding the person of a bankruptcy trustee, who at least once a year will submit a report to the Commission on their activities and an accounting report, after its approval by the judge-commissioner. In the decision on the declaration of bankruptcy the court, after obtaining the opinion of the Commission, shall establish a trustee to represent the interests of the insuring persons, insured persons, the beneficiaries or persons entitled from insurance contracts in such bankruptcy proceedings. Such trustee is entitled to remuneration in an amount established by the judge-commissioner at the request of the Commission. Remuneration shall be paid from the funds of the bankruptcy estate and shall be counted towards the costs of the bankruptcy proceedings. The trustee has a broad authority specified in Art. 474 of the Insolvency Bill, including but not limited to the authority to conclude an agreement on transferring the insurance portfolio to another company with the option of a reduction of the insurance amounts of disbursed indemnity or benefits, subject to the Commission’s approval. Furthermore, it is worth noting that pursuant to Art. 478 para. 3 of the Insolvency Bill, liabilities of harmed persons and persons entitled under compulsory insurance that have not been satisfied in the bankruptcy proceedings will be satisfied by the Insurance Guarantee Fund and the Polish Office for Transportation Insurance in accordance with separate regulations. In the case of the dismissal of a petition for the declaration of the bankruptcy of an insurance company for the reason that the property of an insolvent debtor is not sufficient to pay the costs of the proceedings, as well as in the case of the discontinuance of bankruptcy proceedings, the Insurance Guarantee Fund shall satisfy the claims of harmed persons and entitled persons, in the procedure and under the principles defined in separate regulations.

7.0 Selected Issues Concerning Cross-Border Insolvency. 1. Provisions of the Insolvency Bill Concerning Cross-Border Insolvency.

While the Bankruptcy Act and the Arrangement Act contain very few provisions relevant to cross-border insolvency, the Insolvency Bill introduces comprehensive regulations in this respect based on UNCITRAL Model Code from 1997.

The provisions of the Insolvency Bill do not apply if an international agreement to which Poland is a party or the law of an international organization of which Poland is a member stipulates otherwise. The new provisions will apply accordingly to proceedings conducted for banks and insurance companies and their branches with their seat in European Union member states, unless special provisions stipulate otherwise. With regard to matters not regulated in the Insolvency Bill, the provisions of the Code of Civil Procedure concerning international civil procedure will apply. In practice, after Poland joins the European Union, the provisions of the Insolvency Bill will not apply to bankruptcy proceedings conducted in European Union member states. Such proceedings will be conducted on the basis of the EU Council Regulation dated May 29, 2000 (No. 1346/2000) (the “EU Regulation”). Please note, however, that the two regimes, i.e., the Insolvency Bill and the EU Regulation are very similar. In both cases, the recognition of foreign bankruptcy proceedings has been accepted,


which results in the extension of the consequences of a bankruptcy into the territory of the recognizing state. However, the laws of the European Union provide for such recognition by operation of law while the Insolvency Bill provides for special proceedings concerning such recognition and distinguishes main and secondary foreign bankruptcy proceedings.

The Insolvency Bill contains definitions of foreign bankruptcy proceedings, main foreign bankruptcy proceedings (conducted in the state in which the main center of the bankrupt’s business activity is located), secondary foreign bankruptcy proceedings, foreign administrators, foreign courts and the place of conducting business activity.

The provisions of the Insolvency Bill grant a creditor domiciled or seated abroad with certain rights vested in a domestic creditor, provided, however, that it is necessary to appoint an attorney ad litem or agent for delivery in Poland. This rule is limited by the exclusion of the possibility to satisfy tax dues and other public levies and dues from social insurance and property penalties that are not civil-law penalties, adjudicated abroad.

1.1 National Jurisdiction.

The Insolvency Bill excludes the possibility of the contractual regulation of a court jurisdiction in insolvency cases. The Insolvency Bill provides for the exclusive jurisdiction of Polish courts if the main center of the debtor’s business activity is located in Poland. The Insolvency Bill further provides that Polish courts shall also have jurisdiction if the debtor conducts business activity in Poland or has its place of residence, seat or assets in Poland. The Insolvency Bill stipulates that the appointment of a foreign administrator by a foreign court for taking up actions in Poland shall not exclude the national jurisdiction of Polish courts.


1.2 Recognition of Foreign Bankruptcy Proceedings.

The procedure to recognize foreign bankruptcy proceedings is instituted at the motion of a foreign administrator. The participants of the procedure to recognize foreign bankruptcy proceedings shall be the bankrupt and foreign administrator. As of the date of submitting a petition to recognize foreign bankruptcy proceedings, at the request of the foreign administrator, the court may: (i) issue a decision on security; and, (ii) secure evidence necessary to vindicate claims against the debtor, unless the security would hamper the management of the debtor’s assets in the main foreign bankruptcy proceedings.

If the submitted documents show that the foreign proceedings are the main bankruptcy proceedings, and the foreign administrator is the administrator, the court may accept the presumption of the conformity of documents with the actual state of affairs and desist from seeking further evidence.

Foreign bankruptcy proceedings will be recognized if: (i) a case is not within the sole jurisdiction of Polish courts; and, (ii) recognition is not in contravention of the basic principles of legal order in the Republic of Poland.

The decision on the recognition of foreign bankruptcy proceedings shall obligate the bankrupt’s creditors to report their claims.

The recognition of foreign bankruptcy proceedings comprises the recognition of decisions issued in the course of such proceedings and concerning the appointment, recalling and change of the foreign administrator, as well as decisions concerning the course of such foreign bankruptcy proceedings, as well as their stay and completion.

Enforcement against the bankrupt on the basis of foreign enforcement titles enforceable in the state where they were issued in the recognized bankruptcy proceedings, including the list of liabilities or other similar documents, as well as enforcement on the basis of decisions of an arrangement concluded in the recognized foreign bankruptcy proceedings, and also enforcement on the basis of extracts, copies and other similar documents made out on the basis of an arrangement concluded in the recognized bankruptcy proceedings, may be carried out after the court determines their enforceability once it has recognized the foreign bankruptcy proceedings.

A decision on the recognition of foreign bankruptcy proceedings may be changed or revoked at any time on a motion of any person concerned or ex officio in the case of discovering later that there had been no grounds for recognizing such proceedings or such grounds ceased to exist.

From the date of recognition of the main foreign insolvency proceedings, by law: (i) court proceedings concerning the bankrupt's assets and enforcement proceedings conducted for the bankrupt’s assets will be stayed (provided that certain provisions of the Insolvency Bill concerning the effects of the declaration of bankruptcy on such proceedings in the case of the declaration of bankruptcy with liquidation of the bankrupt’s assets, shall apply accordingly); and (ii) the bankrupt shall forfeit the right to manage and administer its assets, unless proceedings with the option of concluding an arrangement have been instituted and management has been left to the bankrupt.


As of the date of the recognition of the main foreign bankruptcy proceedings, the foreign administrator will draw up an inventory and assessment encompassing the bankrupt’s assets included in the bankruptcy estate and located within the territory of Poland. The foreign administrator will submit the inventory together with the assessment to the court recognizing the foreign proceedings within four months from the date on which the decision on the recognition of insolvency becomes valid and non-appealable. An announcement will be made regarding the prepared inventory and assessment. Requests for exclusion from the bankruptcy estate will be examined by the court, which recognizes the foreign proceedings. The time limit for submitting such requests shall be one month from the date of announcement.

Subsequently, the foreign administrator will submit to the court recognizing the foreign proceedings a plan of the liquidation of assets located in Poland and general information on the envisaged method of satisfying creditors, including those who have their place of residence or seat in Poland. On this basis, the court shall issue to the foreign administrator its permission to liquidate the bankrupt’s assets located within the territory of Poland. The court shall issue this permission not earlier than after the lapse of the period within which exclusion from the bankruptcy estate can be demanded.

After the recognition of foreign bankruptcy proceedings, the foreign administrator shall be authorized to submit a petition for the declaration of bankruptcy and to participate in bankruptcy proceedings conducted by Polish courts, in the same way as a creditor.

If foreign bankruptcy proceedings are recognized, the effects of the declaration of bankruptcy with regard to the bankrupt’s assets located in Poland and obligations that have arisen or are to be performed in the Republic of Poland will be evaluated in accordance with Polish law.

1.3 Secondary Bankruptcy proceedings.

The recognition of foreign bankruptcy proceedings will be no obstacle to the institution of bankruptcy proceedings by Polish courts. If, however, main foreign bankruptcy proceedings have been recognized, only proceedings concerning assets located in Poland (secondary bankruptcy proceedings) may be conducted in Poland. If secondary foreign bankruptcy proceedings have been recognized, bankruptcy proceedings in the Republic of Poland shall take place under the general principles.

The provisions on secondary bankruptcy proceedings shall also apply to bankruptcy proceedings instituted before the recognition of foreign bankruptcy proceedings, if the Polish court recognizes the foreign bankruptcy proceedings as the main proceedings. In such a case, the court will change the earlier decision on the declaration of bankruptcy into a decision on the institution of secondary bankruptcy proceedings.

The court shall institute secondary bankruptcy proceedings when a creditor with its place of residence or seat in Poland files for such. Secondary bankruptcy proceedings may be instituted ex officio when they are required to protect the interests of creditors residing in Poland whose claims arise from employment relationships and creditors entitled to dues from indemnity for contracting an illness, incapacity for work, invalidity or death, as well as child support and alimony creditors.

If secondary bankruptcy proceedings have been instituted after the recognition of foreign bankruptcy proceedings: (i) the management of the bankrupt’s assets located in the Republic


of Poland, hitherto performed by a foreign administrator, shall be taken over by the bankruptcy trustee or administrator appointed in the secondary bankruptcy proceedings; and, (ii) the bankruptcy trustee or administrator shall enter into court or administrative cases conducted by the foreign administrator.

If secondary bankruptcy proceedings have been instituted with the option of concluding an arrangement and, in the course of the proceedings the bankrupt was liquidated, an arrangement may have a liquidating nature only.

Amounts obtained from the division of funds from the bankruptcy estate remaining after satisfying the creditors in secondary bankruptcy proceedings are transferred to the main foreign bankruptcy proceedings.

1.4 Cooperation with Foreign Courts and Foreign Administrators.

The court and judge-commissioner may communicate directly with the foreign court and foreign administrator, and the Insolvency Bill directly provides for the obligation to maintain such cooperation.

The bankruptcy trustee, court supervisor or administrator established in the bankruptcy proceedings shall communicate with the foreign court and foreign administrator through the judge-commissioner.

Within cooperation with the foreign court and foreign administrator, the court and judge-commissioner may take up actions that ensure the efficient conduct of bankruptcy proceedings, and, in particular, convey and seek information: (i) concerning the bankrupt’s assets and the place of its location, as well as information concerning court and administrative cases concerning the bankrupt; (ii) on the manner of securing and liquidating the bankrupt’s assets; and, (iii) on satisfying individual creditors.

2. The European Union Council Regulation on Insolvency Proceedings.

The EU Council Regulation dated 29 May 2000 (No. 1346/2000) came into force on 31 May 2002. It applies unconditionally to insolvency proceedings opened after that date in the Member States of the European Union (“EU”), except Denmark.

The EU Regulation is intended to ensure that cross-border insolvency proceedings are conducted efficiently and effectively. As well as providing a uniform set of rules identifying where insolvency proceedings can be started and which law is to be applied, judgments of the courts within the EU are automatically recognized in other EU Member States, as are insolvency office-holders.

The EU Regulation applies to the specified “collective insolvency proceedings”. For example, in the United Kingdom, this means liquidation, administration, voluntary arrangements and bankruptcy. Administrative receivership is excluded from the scope of the EU Regulation, as a contractually-based procedure and a remedy available only for certain secured creditors. Also excluded from the scope of the EU Regulation are insolvency proceedings concerning insurance undertakings and credit institutions, where different EU Directives are to apply.

2.1 Establishing Jurisdiction.


The EU Regulation provides that the courts of the Member State where the debtor’s “center of main interests” is situated, (“COMI”), are to have primary jurisdiction to open proceedings. These proceedings are to be called the “main proceedings”. Main proceedings are, except to the extent that any secondary proceedings are opened, deemed to be of universal scope; to extend to all of the debtor’s assets on a world-wide basis; and to extend to all creditors, wherever they are located.

The EU Regulation adopts a presumption, in the case of a company (in the absence of proof to the contrary) that COMI will be the place of its registered office.

2.2 Opening Secondary and Territorial Proceedings.

The EU Regulation envisages that secondary proceedings can be opened in another Member State, where the debtor has an establishment within that territory. An establishment is defined as “any place of operations where the debtor carries out a non-transitory economic activity with human means and goods.” Typically this rules applies to branch offices.1 Where these proceedings are the first proceedings to be opened, they are to be known as “territorial proceedings.” Where the proceedings are opened after the main proceedings, they are to be known as “secondary proceedings.” In either case, the scope of any secondary proceedings is limited to the assets located in the relevant UE Member State. Secondary proceedings are to be limited to winding up proceedings, and the insolvency office-holder, known throughout the EU Regulation as the “liquidator,” can require the stay of any rescue proceedings opened up in any territorial proceedings.

2.3 Applicable Law Under The EU Regulation.

Subject to a number of significant exceptions carved out from the EU Regulation, the law of the courts, which open the proceedings, is the applicable law for all matters, both procedural and substantive (lex concursus). This rule of choice of law will apply even if parties have contracted on the basis of an agreement an alternative choice of law.

2.4 Rights of Creditors.

The insolvency office holders in both main and any secondary proceedings must notify all known creditors domiciled or seated in the EU. Creditors then have a choice of submitting claims in either or both sets of proceedings. The insolvency office holders are required to co-ordinate distributions and operate a hotchpot rule to ensure equal treatment of creditors.

2.5 The Exceptions.

A significant number of exceptions have been carved out of the EU Regulation, probably most significantly, creditor’s rights in rem, which rights will be governed by the lex situs of the relevant asset.

1 This definition of establishment is also used in the UNCITRAL Model Code.


2.6 The Impact of the EU Regulation.

It is too early to assess the impact of the EU Regulation in practice. The EU Regulation does not, however, contain any special rules for dealing with group structures and each multinational corporate or other entity must be considered separately. Where business is conducted across Europe by means of a branch network, the EU Regulation is likely to be of considerable significance. The automatic recognition of insolvency proceedings and office-holders is an important move forward generally. Since the EU Regulation came into effect, significantly, the UK courts have been prepared in at least one circumstance to apply its provisions to a company incorporated in Delaware, USA with its main center of interests in the UK, so that, potentially, it appears that the EU Regulation can have a global reach.

2.7 Recognition of Foreign Insolvency Proceedings.

Under the EU Regulation, main and secondary insolvency proceedings are, subject to any overriding matters of public policy, automatically recognized in other EU member states. Similarly, the powers of the relevant insolvency office-holders are automatically recognized, and such office-holders have authority to act in any other EU member state.

Outside of the EU, the common law principles concerning recognition of foreign insolvency proceedings, continue to apply. For example, English law recognizes foreign insolvency proceedings, including reorganization proceedings, conducted under the laws of the jurisdiction of incorporation of the company concerned. English law also, in certain circumstances, will recognize foreign insolvency proceedings, including reorganization proceedings, if a foreign or English company concerned has submitted or is otherwise amenable to the jurisdiction in which the proceedings are conducted.


2.8

The

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re o

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ceed

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y th

e E

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m 3

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ay 2

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ctiv

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solv

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pro

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r tha

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♦

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all

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exc

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and

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in in

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mai

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♦

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Reo

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stitu

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ctiv

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01/2

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be

impl

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by 0

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the

hold

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par

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♦

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mes

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art

date

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ss b

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mem

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tate

into

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out

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fa

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ou

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and

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by

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Mai

n Pr

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♦

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s ce

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rest

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CO

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juris

dict

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to o

pen

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lven

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t is

pres

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that

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mai

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of t

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its

regi

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♦

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loca

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olve

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law

will

app

ly –

(A28

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♦

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trict

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set o

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♦

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liqui

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sta

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ope

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(who

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ain

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ose

to o

pen

seco

ndar

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s

♦

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t be

win

ding

-up

proc

eedi

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unle

ss li

quid

ator

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pose

a re

orga

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Ter

rito

rial

Pro

ceed

ings

♦

Can

be

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ened

pr

ior

to

mai

n pr

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open

ed

afte

r m

ain

proc

eedi

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up

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.

♦

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lim

ited

to w

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p pr

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icile

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ally

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iden

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with

in th

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ituat

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be

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ired

by a

liqu

idat

or in

the

mai

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ocee

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s to

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to w

indi

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p pr

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37) w

hich

may

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curs

us

♦

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hts i

n R

em o

f Cre

dito

rs/T

hird

Par

ties

♦

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ff w

here

per

mitt

ed b

y th

e La

w A

pplic

able

to In

solv

ent D

ebto

r (A

6)

♦

RO

T (c

laim

s to

be d

ecid

ed a

ccor

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to la

w w

here

the

asse

t is s

ituat

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♦

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mun

ity p

aten

ts a

nd tr

ade

mar

ks.

♦

Con

tract

s of

em

ploy

men

t –

gove

rned

by

the

law

of

the

Mem

ber S

tate

app

licab

le to

the

cont

ract

♦

Fina

ncia

l mar

kets

♦

Inte

llect

ual p

rope

rty.

(Mai

n pr

ocee

ding

s onl

y)

W

orld

Ban

k G

loba

l Jud

ges F

orum

(Mal

ibu,

200

3)

47

3. The Insolvency Bill vs. The UNCITRAL Model Code.

The UNCITRAL Model Code on Cross-Border Insolvency (“the Model Code”) was adopted by the United Nations Commission on International Trade Law in 1997. The Model Code does not attempt to harmonize the substantive insolvency laws of participating jurisdictions, but is intended to provide a procedural framework to facilitate co-operation between courts and office holders in differing states. As a model law, countries are free to adopt and adapt the Model Code as necessary to accommodate local laws (by modifying and excluding its provisions), in connection with which the Model Code is not based on principles of reciprocity between different countries. The preamble to the Model Code recites that the aims of the Model Code are to promote the following five objectives:-

(i) Co-operation between the courts and other competent authorities of the states involved in cross-border insolvencies;

(ii) Greater legal certainty for trade and investment;

(iii) Fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested persons, including the debtor;

(iv) Protection and maximization of the value of the debtor’s assets; and

(v) Facilitation of the rescue of financially-troubled businesses, thereby protecting investment and preserving employment.

The central focus of the Model Code is in the recognition of and cooperation in cross-border insolvencies and, unlike the EU Regulation on Insolvency Proceedings, the Model Code does not contain rules determining jurisdiction or choice of law. However, to the extent that the Model Code applies without any geographic restriction, its impact and utility is potentially greater.

The Model Code has so far been adopted by Eritrea, Mexico, South Africa and Japan and within Yugoslavia, Montenegro. The UK has not yet adopted the Model Code, but the English Insolvency Act 2000 contains an enabling provision for the Secretary of State to put the Model Code into effect. The United States’ proposed amendments to its bankruptcy laws, (which were intended primarily to deal with provisions relating to individual debtors, but which also included the adoption of the Model Code as chapter 15 of the US Bankruptcy Code), have, for the time being, been put on ice.

The draft Polish Law on Insolvency and Restructuring (the “Insolvency Bill”) incorporates the provisions concerning cross-border insolvency proceedings based on the UNCITRAL Model Code.

3.1 Structure of the Model Code.

The Model Code comprises 32 Articles and is accompanied by a Guide to Enactment.

The Code is divided into the following four key areas: (i) the scope of the Model Law; (ii) recognition of foreign proceedings; (iii) access to the courts by representatives of foreign insolvency proceedings (including the treatment of foreign creditors); (iv) rules for co-operation and co-ordination of parallel proceedings concerning a particular debtor over different jurisdictions.

There follows a summary of main articles on the Model Code as incorporated in the Insolvency Bill. References in this note to Articles are references to the Articles of the Insolvency Bill.

3.2 Scope.

The provisions on cross-border insolvency included in the Insolvency Bill will apply irrespective of whether the state in which the foreign proceedings are taking place has enacted the Model Code in whole or part. Co-operation is not conditional upon a finding of the debtor’s insolvency. The Model Code applies to insolvency proceedings, whether relating to corporate entities or individuals. Foreign bankruptcy proceedings are widely defined in Art. 379 as “all joint court or administrative proceedings conducted abroad even if they are interim, against an insolvent debtor, in which the debtor’s assets and affairs are subjected to the inspection or management of a foreign court for the purpose of their restructuring or liquidation”.

Foreign court is also very broadly defined as “the court or other body authorized to conduct or supervise foreign bankruptcy proceedings”.

The term “foreign administrator” is used in the Insolvency Bill to refer to “the person or entity designated in foreign bankruptcy proceedings for management, reorganization or liquidation of the debtor’s assets”.

Article 378 of the Insolvency Bill stipulates that the cross-border provisions in the Insolvency Bill adopted from UNCITRAL will be of no application ‘where an international agreement to which the Republic of Poland is a party or the law of an international organization of which the Republic of Poland is a member stipulates otherwise.’ Where the EU Regulation on Insolvency Proceedings applies, those provisions take effect to the exclusion of the provisions concerning international insolvency proceedings at Part Two of the Insolvency Bill.

Poland will be joining the EU in 2004, at which point the provisions of the EU Regulation will prevail for the purposes of collective insolvency proceedings, where the relevant entity has its ‘center of main interests” in the EU and the subject matter does not fall within one of the areas excluded from the EU Regulation.

For the purposes of determining the manner in which the Polish court is to (i) be in a position to exert jurisdiction; and (ii) provide recognition and assistance to a foreign administrator, the foreign proceedings are classified as either “main foreign bankruptcy proceedings” or “secondary foreign bankruptcy proceedings”.

Main foreign bankruptcy proceedings take place in the courts of the country where the main center of the debtor’s business activity is located. This follows a very similar definition to that in the EU Regulation. Again, as under the provisions of the EU Regulation, where the debtor is a company, ‘the main center of the debtor’s business activity’ is presumed to be located at its place of incorporation. If the debtor’s center of business activity is located in Poland, the Polish courts have sole jurisdiction.

Secondary foreign bankruptcy proceedings are proceedings not amounting to main foreign bankruptcy proceedings, but are proceedings only permitted under Part 2 of the Insolvency Bill or if the debtor has taken up “business activity acts where they are not one-time or short-


term”. This appears to be a similar concept to that of an establishment under the EU Regulation, and would, for example, apply where a company had established a branch office.

Under the Insolvency Bill, it will not be possible for parties to contractually change the court jurisdiction.

The Model Code gives an option for specific types of insolvencies to be excluded and, in the case of Poland, the provisions concerning international insolvency proceedings in Part 2 of the Insolvency Bill are expressed not to apply to banks and insurance companies and their branches with their seat in European Union member states, unless special provisions stipulate otherwise.

In the case of bankruptcy proceedings conducted in the Republic of Poland, tax dues and other public levies and dues from social insurance and property penalties that are not civil-law penalties, adjudicated by courts or administrative bodies abroad are expressly stated as not being “subject to satisfaction.”

3.3 Recognition of Foreign Proceedings.

The Model Code is intended to help speed up the process and reduce costs incurred in connection with the recognition of foreign proceedings.

Foreign bankruptcy proceedings, which are capable of being subject to recognition by the Polish courts, are those that are main foreign bankruptcy proceedings and secondary bankruptcy proceedings. Polish courts are not, however, required to recognize foreign bankruptcy proceedings where this would be “in contravention of the basic principles of legal order in the Republic of Poland”.

Recognition is intended to be granted on the basis of quite a simple procedure, which, ordinarily, will involve the foreign administrator petitioning the Polish court for recognition and attaching to the petition the required documents.

Where the foreign proceedings appear from the submitted documents to be the main bankruptcy proceedings, the local court is then entitled to presume that the documents are genuine and that any assertions or findings made are true. In particular, acknowledgement of the foreign bankruptcy amounts to acceptance of decisions concerning the course of the foreign bankruptcy proceedings, its stay and completion. It is open to an interested party, however, to challenge recognition.

3.4 Requirements Concerning the Foreign Administrator.

Whilst the Model Code simplifies recognition of foreign office holders, it does not divest the local courts of their power to determine the effects of a foreign bankruptcy on assets in Poland or in respect of obligations, which occurred or are to be performed in Poland - This is a matter, which is determined according to Polish Law.

Whilst the judgment of a foreign court will on the face of it, and absent challenge, be recognized without need for inquiry, the provisions of Article 394 preserve to the Polish courts the right to determine, as a matter of Polish law, matters of enforcement and execution.


Within four months of the acknowledgement of the foreign bankruptcy proceedings the foreign administrator is required to draw up an inventory of the debtor’s assets in Poland which are included in the debtor's estate and to submit the inventory to the Polish court.

The Polish Court is then required to make an announcement on the inventory and examine any requests for exclusion from the estate.

Further, the foreign administrator is then required to submit to the court a "plan of liquidation of assets located in Poland and general information on the envisaged way of satisfying creditors."

Article 401 goes on to provide the Polish court with a wide discretion to "permit for liquidation of the bankruptcy estate in another manner as long as this does not infringe the basic principles of legal order in the Republic of Poland". This degree of flexibility in the manner into which foreign bankruptcy proceedings are dealt is to be welcomed.

As of the date of the recognition of a foreign proceeding, (i) any court proceedings in the Polish courts concerning the debtor’s assets are automatically stayed by operation of law, which does not, however, exclude third parties from filing actions against the debtor in order to preserve their rights; (ii) the debtor also forfeits the right to manage and administer its assets unless proceedings with the option of concluding an arrangement have been instituted.

Where main foreign bankruptcy proceedings have been recognized by the Polish court, the only permitted proceedings in Poland are secondary proceedings, and these proceedings are to be limited to assets located in the Republic of Poland. Note, however, that, unlike under the EU Regulation, there are no provisions prescribing how the location of an asset is to be determined, so that presumably this will be a matter subject to coordination between the Polish court and foreign administrator. Under Article 407 of the Insolvency Bill, the Polish court will institute secondary bankruptcy proceedings when a creditor with his place of residence or seat in the Republic of Poland files for this.

Where secondary proceedings are established in Poland, the management of the debtor's assets in Poland is to be handed over to the bankruptcy trustee or administrator established in the secondary proceedings.

Any surplus funds after the distribution of the funds of the bankruptcy estate in the secondary proceedings are to be transferred to the main foreign bankruptcy proceedings.

3.5 Access by Foreign Administrator and Creditors.

Further key aspects of the Insolvency Bill concerning cross-border insolvency are the provisions affording a foreign administrator the right of access to the Polish court.

A foreign administrator can (i) petition for interim relief pending determination of a recognition application and can apply for relief "securing the debtor's assets" at any time after any form of foreign insolvency proceedings have been recognized; (ii) bring an action to establish invalidity or for invalidation of acts in law performed by the bankrupt in contravention of the law or principles of social coexistence or aimed at evading the law, and bring an action for acknowledging acts in law performed to the detriment of creditors as ineffective, but where the foreign proceedings are secondary foreign bankruptcy proceedings,


any such actions are to be limited to assets in the secondary proceedings; and (iii) act as intervening third party in any proceedings to which the bankrupt is a party.

Foreign creditors are to be treated the same way as local creditors as regards capacity to commence/rights to participate in the proceedings. Article 380 of the Insolvency Bill merely excludes taxation and other public levies from the scope of the bankruptcy proceedings conducted in Poland.

3.6 Co-operation with Foreign Courts and Foreign Administrators.

In cross-border insolvency proceedings, the Polish courts are required to cooperate with foreign courts and foreign administrators and are permitted to communicate directly with them.

Polish bankruptcy trustees, supervisors and administrators are required to communicate with foreign courts and foreign administrators, through the Polish court.

The Model Code includes a non-exhaustive listing, by way of example, the means by which the courts of states adopting the Model Code might act, in keeping with the mandatory duty to cooperate and to ensure the efficient conduct of bankruptcy proceedings, as follows: (i) appointment of a person or body to act at the direction of the court; (ii) communication of information by any means considered appropriate by the court; (iii) coordination of the administration and supervision of the debtor’s assets and affairs; (iv) approval or implementation by courts of agreements concerning the coordination of proceedings; (v) coordination of concurrent proceedings regarding the same debtor.

Without in any way limiting the manner in which the cooperation is to be carried out, however, the Insolvency Bill includes a more detailed listing of examples of the way in which the Polish courts may fulfill their duty to convey and seek information. The Insolvency Bill provides that information may be conveyed and sought: (i) concerning the debtor’s assets and the place of its location, as well as information concerning court and administrative cases concerning the debtor; (ii) on the manner of securing and liquidation of the debtor’s assets; (iii) on satisfying the individual creditors.

In practice, in the area of cross-border insolvency generally it is quite common, but by no means invariably the case that insolvency office holders agree to set out their respective rules and reporting processes by means of an agreement or protocol which have been approved by their respective home courts. It may be that in appropriate cases this will be an approach deployed in cross-border insolvencies encompassing Poland.

4. Overview of Corporate Reorganization Under United States Bankruptcy Laws.

4.1 United States Bankruptcy Code and Court System.

A federal statute (the “Bankruptcy Code”) governs the bankruptcy proceedings of nearly all entities in the United States. Federal bankruptcy courts preside over bankruptcy cases and interpret the Bankruptcy Code. Parties in interest may appeal decisions of the bankruptcy courts to federal appellate courts. Decisions of the bankruptcy courts provide discretionary guidance for future courts’ interpretations of the Bankruptcy Code and decisions of the appellate courts generally provide mandatory guidance for such future interpretations by lower courts.


The Bankruptcy Code provides three main options for a corporate debtor. A corporate debtor may: (1) reorganize pursuant to chapter 11 of the Bankruptcy Code (“Chapter 11”); (2) liquidate pursuant to chapter 7 of the Bankruptcy Code, in which a trustee will be appointed to operate the debtor during the liquidation; or (3) liquidate pursuant to Chapter 11, in which the debtor’s management will usually continue to operate the debtor during the liquidation.

4.2 Policy objectives of Chapter 11.

The central premise behind Chapter 11’s facilitation of reorganizations is that in many cases the present value of a firm’s future potential earnings (a firm’s “going concern” value) is greater than the firm’s liquidation value. The provisions of the Bankruptcy Code are intended to strike a balance between (i) maximizing the debtor’s going concern value by allowing the debtor a fresh start free from pre-bankruptcy debts and (ii) protecting the interests of creditors by providing for the equality of distribution of the debtor’s assets and oversight of the debtor’s operation of its business. Most often, Chapter 11 cases are commenced in the United States by corporate debtors seeking to avail themselves of the laws facilitating reorganization. Secured debt, unsecured debt and equity interests may all be restructured in a Chapter 11 case.

Although a Chapter 11 case allows the company to address its liabilities and maintain sufficient liquidity to continue to operate its business, the principal drawback of a Chapter 11 case is a loss of control. Court approval is required for many actions, and statutory committees of creditors “participate” in major decisions of the company. In the context of plans of reorganization, preserving the interest of shareholders in the company is often impossible. Additionally, the expenses paid to professionals’ in Chapter 11 cases are usually significant2 – much less will likely be available for creditors in the event that a Chapter 11 debtor’s reorganization attempts fail and it must liquidate than if the debtor had initially liquidated.

4.3 Overview of a Chapter 11 Reorganization Case.

Generally, a debtor commences a Chapter 11 case to respond to a business crisis, such as an acute lack of liquidity or an overwhelming number of pending and/or expected lawsuits. After commencing the case, the debtor’s first priority will be to stabilize the business. Such stabilization is likely to include (i) obtaining financing to overcome a liquidity crisis and/or fund the professional expenses attendant to a Chapter 11 case and (ii) assuring employees and critical customers and suppliers that the bankruptcy case will not disrupt business operations.3 After stabilizing the business, the debtor will assess its operations, determine which assets are central to its future operations and attempt to determine whether the factors that precipitated the commencement of the Chapter 11 case may be alleviated. During such process, a debtor may sell many of its “noncore” assets. Finally, the debtor, or in some cases other parties in interest, will propose a plan of reorganization, which will be voted upon by the creditors and reviewed by the bankruptcy court. If the court confirms such a plan of reorganization, its

2 The debtor must also pay the professional expenses of statutory creditors’ committees, and often will agree to pay the expenses of its post-bankruptcy lenders and significant secured pre-bankruptcy creditors. 3 Although Chapter 11 debtors are generally not allowed to pay pre-bankruptcy claims prior to consummation of a plan of reorganization, bankruptcy courts may exercise their equitable powers to allow debtors to pay certain pre-bankruptcy claims of employees and critical suppliers if a debtor can demonstrate that the payment of such claims is necessary to allow the debtor to continue to operate its business.


terms will be binding upon the debtor and all creditors, and the debtor will emerge from its Chapter 11 case as a reorganized entity.

4.4 Eligibility to be a Debtor Under Chapter 11.

A party may only be a debtor under the Bankruptcy Code if it resides or has a domicile, a place of business or property in the United States. Municipalities and nearly all forms of business entities (with certain exceptions, such as insurance companies and banks) that meet the foregoing qualification may be debtors under the Bankruptcy Code.

There is no requirement that a debtor be insolvent, but there is a requirement that a debtor commence a Chapter 11 case in good faith, which generally means that a debtor should only commence a Chapter 11 case to attempt to remedy management problems or financial difficulties – as opposed to commencing the case as a litigation tactic or to hinder a secured creditor with an interest in the debtor’s only asset.

4.5 The Bankruptcy Estate.

A debtor’s estate is the pool of assets from which creditors may satisfy their claims. As such, the Bankruptcy Code defines a debtor’s estate broadly to include all beneficial rights in property – such as real property, personal property, intellectual property, contract rights and proceeds thereof – of the debtor at the time of the commencement of the bankruptcy case. The Bankruptcy Code contains a provision that allows a debtor to recover possession of property of the estate outside of the debtor’s possession.

4.6 Protection of the Estate: the Automatic Stay.

Upon the commencement of a bankruptcy case, the Bankruptcy Code automatically stays a variety of acts affecting the debtor, property of the estate or property held by the estate (such as the commencement or continuation of judicial or quasi-judicial proceedings that could have been initiated pre-bankruptcy, any act to enforce a pre-bankruptcy claim, the setoff of debts and acts that interfere with property of the estate). The purpose of the automatic stay is to protect (i) debtors, by giving them time to stabilize their business, and (ii) creditors, by preventing a race to collect payment. Most courts hold that acts taken in violation of the automatic stay are void, and a party may be assessed damages for contempt of court if such party knowingly violates the stay.

The Bankruptcy Code contains several enumerated exceptions to the automatic stay, including: (1) acts to maintain perfection of a pre-bankruptcy security interest; (2) the enforcement by governmental units of their police and regulatory power; (3) certain actions by taxing authorities; and (4) the repossession of nonresidential real property by lessors after the expiration of the stated terms of a lease. Additionally, a bankruptcy court may lift, or grant other relief from, the stay for cause or, with respect to an act against property, where the debtor has no equity in property and such property is not necessary to an effective reorganization of the debtor.


4.7 Operation of Chapter 11 Debtors.

4.7.1 Management and Oversight.

Absent unusual circumstances, the pre-bankruptcy board of directors and management of a debtor continue to manage the debtor in a Chapter 11 case. The board of directors of a debtor owes fiduciary obligations to creditors as well as stockholders.

The Bankruptcy Code provides several mechanisms for oversight of debtors. First, the Bankruptcy Code requires an office of the United States government to appoint a committee of unsecured creditors at the beginning of each Chapter 11 case. Usually, such committees are comprised of the creditors holding the largest unsecured claims.4 Committees may perform several roles, but their most important roles are to negotiate a plan of reorganization with the debtor and to investigate a debtor’s financial affairs. Second, a bankruptcy court may cause the appointment of a trustee (which is selected by the creditors) to assume the management of a debtor in exceptional Chapter 11 cases where there is cause, such as fraud, dishonesty and gross mismanagement. Finally, under less extreme circumstances, a bankruptcy court may appoint an examiner to investigate a debtor’s affairs, perform some of the duties of a trustee and/or mediate disputes. Where new management has replaced management accused of pre-bankruptcy wrongdoing, the trend in Chapter 11 cases (such as in the Chapter 11 cases of Enron and WorldCom) is to appoint an examiner instead of replacing such new management with a trustee.

4.7.2 Use of Property of the Estate.

The Bankruptcy Code allows a debtor to use, sell or lease assets of the estate in the “ordinary course of business” without first obtaining court approval. The use, sell or lease of estate assets outside of the ordinary course of business requires court approval after a hearing and notice to parties in interest.

Additionally, the Bankruptcy Code provides that a debtor may only use cash in which another party has an interest (such as proceeds of inventory subject to a creditor’s security interest) (“cash collateral”) with court authorization or the consent of such party. Generally, bankruptcy courts will allow the use of cash collateral if the court finds that the creditor’s security interest in such cash collateral is adequately protected, which protection may take the form of replacement liens on other property of the estate and/or payments of principal of and/or interest on the secured debt.

4.7.3 Obtaining Credit.

In recognition of the urgent need for most Chapter 11 debtors to obtain credit shortly after commencing Chapter 11 cases, the Bankruptcy Code facilitates the arrangement of such credit. The Bankruptcy Code allows a debtor, after a hearing and notice to parties and interest, to grant superpriority claims, liens on unencumbered assets and/or junior liens on encumbered assets to a post-bankruptcy lender if the debtor demonstrates to the bankruptcy court that it could not obtain credit without such grants. If a debtor demonstrates to the bankruptcy court that it could not obtain credit even with such grants, the Bankruptcy Code

4 Additionally, the Bankruptcy Code allows for, but does not require, the appointment, if needed, of special committees to represent the equity holders and special classes of unsecured creditors (such as tort claimants or bondholders).


authorizes the debtor, after a hearing and notice to parties in interest, to grant liens to a post-bankruptcy lender that are senior or equal to existing liens, so long as the holders of existing liens are adequately protected.

In practice, most corporate debtors negotiate the terms of post-bankruptcy financing before commencing a Chapter 11 case. On the first day of the case, the debtor will seek preliminary authorization to consummate a portion of the financing. Several days later, the debtor will seek final authorization to consummate the entire financing. Most commonly, the debtor will grant the post-bankruptcy lender a first lien on all unencumbered assets and a junior lien on all encumbered assets. The post-bankruptcy lender will often then be the most dominant creditor in the Chapter 11 case.

4.7.4 Executory Contracts.

The Bankruptcy Code further facilitates the maximization of the value of a debtor’s estate by permitting the debtor to choose whether to assume or reject executory contracts, which have been defined by court as a contract pursuant to which material obligations remain due from both parties. The other party to the executory contract must continue to perform under the terms of the contract until the debtor decides whether to assume or reject. Additionally, the Bankruptcy Code invalidates clauses that terminate or modify contracts due to the debtor’s commencement of a bankruptcy case or its financial condition.

Rejection acts are treated a pre-bankruptcy breach of the contract and give rise to an unsecured claim. Rejection thus allows a debtor to improve its future profitability by shedding burdensome contracts.

If a debtor chooses to assume an executory contract, the debtor must cure all defaults and provide adequate assurance of future performance. Additionally, a debtor may assign most executory contracts (with exceptions primarily being personal services contracts) to a third party if the third party provides adequate assurances of future performance.

4.8 Claims.

Essentially, all claims arising pre-bankruptcy are frozen as of the commencement of the Chapter 11 case. The debtor is not permitted to pay such claims (and claims for rent under capital leases that are in reality “disguised financings”) unless the court expressly authorizes such payment. These claims are ultimately treated in a plan of reorganization. Interest does not accrue on unsecured claims after commencement of the Chapter 11 case, and only accrues on secured claims up to the value of the collateral.

4.9 Plans of Reorganization.

Court approval of a plan of reorganization is the ultimate goal of a successful Chapter 11 case. A plan of reorganization is the “contract” among the constituencies in the debtor’s Chapter 11 case and sets forth how claims and equity interests will be treated when the debtor emerges from Chapter 11. One significant difference between a plan and a contract, however, is that a plan of reorganization does not require the affirmative consent of each and every individual party, and sometimes can be forced, or “crammed down,” on entire groups of creditors or shareholders even if such groups oppose the plan.


4.9.1 Exclusivity.

For the first 120 days after the commencement of a Chapter 11 case, and if no trustee is appointed, only the debtor may file a plan of reorganization. This benefits the debtor by allowing it to control the Chapter 11 process and forcing parties in interest to negotiate with the debtor. The time period may be extended or contracted for cause by order of the court. Upon the expiration or termination of the exclusive period, any party in interest, including a committee, may file and propose a plan. The recent trend has been to move as rapidly as possible through Chapter 11 to avoid the risks that opposing parties try to take over the plan process. Generally, however, in large Chapter 11 cases, the exclusive period is extended by the court if the debtor is diligently prosecuting its case and acting in good faith.

4.9.2 Classification of Claims and Interests.

The Bankruptcy Code requires a plan to designate classes of claims and equity interests. All creditors within a class must receive identical treatment under the plan. The composition of the class, including the number of creditors and the amount of their respective claims, will be critical in determining whether the plan has been accepted. A claim or equity interest may be placed in a particular class only if it is “substantially similar” to other claims or equity interests in that class.

4.9.3 Contents of Plans of Reorganization.

The plan may provide for the following: (i) treatment of claims and interests; (ii) sale of some or all of the assets of the debtor; (iii) cancellation of all existing stock; (iv) change in management and designation of directors of the board of the reorganized debtor; (v) conversion of debt to equity; (vi) incentives for the management of the reorganized debtor; (vii) issuance of new debt or equity securities; (viii) satisfaction of creditors’ pre-bankruptcy claims by the distribution of cash, notes and/or stock of the reorganized debtor; and/or (ix) exit financing.

4.9.4 Acceptance of the Plan of Reorganization.

One of the requirements for confirmation of a plan is that each class of claims or equity interests has accepted the plan or is not impaired under the plan. A plan is accepted by a class of claims if it has been accepted by creditors that hold at lease two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors that voted on the plan. A plan is accepted by a class of equity interests if it has been accepted by holders of interests that hold at least two-thirds in amount of allowed interests in such class that voted on the plan.

The Bankruptcy Code allows a plan to be confirmed by the court even if a class of claims or interests does not vote to accept the plan (as long as at least one class of impaired creditors has voted to accept the plan if any class of creditors is impaired under the plan). The court


must find, among other things, that the plan does not discriminate unfairly and is fair and equitable with respect to the rejecting class. The standard varies, depending upon the type of claims and interests represented by the class. With respect to secured creditors, the plan must satisfy one of three tests: (i) the secured creditor must retain its liens securing its claims and receive deferred cash payments totaling at least the allowed amount of such claims and having a present value equal to the value of the creditor’s collateral; (ii) the creditor realizes the “indubitable equivalent” of its claims; or (iii) the property that is subject to the liens is sold, the creditor’s liens attach to the proceeds of such sale, and the creditor receives treatment consistent with (i) or (ii). With respect to unsecured creditors, the plan must: (i) provide that each holder of a claim in the class receives property having a value, as of the effective date of the plan, equal to the allowed amount of such claim, or (ii) satisfy the “absolute priority rule,” pursuant to which no class of creditors or equity security holders may receive any distribution under a plan, unless all classes of creditors and equity security holders having claims or interests senior to such class either have voted in favor of the plan or are satisfied in full. With respect to shareholders, the plan must: (i) provide that each holder receives property of a value, as of the effective date of the plan, equal to the greatest of the allowed amount of any fixed liquidation preference, any fixed redemption price, or the value of such interest, or (ii) satisfies the absolute priority rule (which means that shareholders may receive nothing if all creditors are not satisfied in full).

4.9.5 Effect of Confirmation.

Confirmation of a plan binds the debtor, all creditors and all equity security holders, vests all property of the estate in the debtor and, so long as sufficient notice of the Chapter 11 case has been provided to creditors, discharges the debtor from any debt that arose before the date of confirmation, unless otherwise provided in the plan.

4.10 Ancillary Proceedings Under the Bankruptcy Code.

The Bankruptcy Code allows a foreign representative of a bankruptcy estate in a foreign country to (i) commence a full bankruptcy case in the United States, (ii) institute a case ancillary to a foreign proceeding in the United States bankruptcy courts or (iii) request the suspension or dismissal of ongoing United States bankruptcy proceedings involving the debtor. The commencement of an ancillary case enables a foreign debtor initially to protect its assets located in the United States from local seizure, forces United States creditors to participate in the foreign bankruptcy proceeding and ultimately allows the marshalling and repatriation of the debtor’s assets to the home-country proceeding for equitable distribution.5 This approach is essentially a modified form of universalism, which accepts the central premise that assets should be collected and distributed on a worldwide basis, but reserves to United States courts discretion to evaluate the fairness of home country procedures and to protect interests of local creditors.

5 The commencement of a full bankruptcy case in the United States can be a less attractive option because of the time and money involved, and the potential difficulty in coordinating the parallel proceedings.


In an ancillary case, no bankruptcy estate is created, the automatic stay does not apply and the foreign representative is not vested with fiduciary powers to recover preferential and fraudulent pre-bankruptcy transfers. The United States bankruptcy court, however, has wide discretion to provide relief to the foreign representative, including by (i) enjoining the (x) commencement or continuation of litigation against or concerning the foreign debtor’s property being administered in the foreign proceeding, (y) enforcement of any judgment against the foreign debtor concerning such property or (z) creation or enforcement of a lien against such property and (ii) ordering turnover of property of the debtor’s estate (as defined by the law of the jurisdiction of the foreign proceeding), or the proceeds of such property, to the foreign representative. Other forms of relief that have been granted by United States bankruptcy courts in ancillary cases include requiring entities to submit to discovery by the foreign representative, appointing a co-trustee with responsibility for the debtor’s assets in the United States, ordering that entitlement under foreign law to assets claimed by a foreign debtor be determined in the foreign proceeding and authorizing the foreign representative to maintain foreign causes of action under the umbrella of the ancillary case.

Before exercising such discretion to provide relief, however, the court must first consider the following factors: (i) the just treatment in the foreign proceeding of all claims against the debtor; (ii) protection of United States creditors from prejudice or inconvenience in processing claims in foreign proceedings; (iii) prevention of preferential or fraudulent dispositions; (iv) whether dispositions pursuant to the foreign proceeding are substantially according to the priorities established by the Bankruptcy Code; (v) comity; and (vi) the opportunity for the debtor to obtain a fresh start in the foreign proceeding. Although the Bankruptcy Code accords primacy to no single factor, many courts have regarded comity as the paramount consideration. Courts evaluating comity tend to analyze the fundamental fairness of foreign proceedings and whether foreign proceedings are repugnant to United States law.

4.11 Recognition by United States Courts of Foreign Insolvency Judgments.

A debtor seeking recognition by United States courts of a Polish arrangement proceedings under the Insolvency Bill would most likely file a petition under section 304 of the Bankruptcy Code to commence a case ancillary to the Polish proceeding. Although no United States court has considered a section 304 petition filed by a debtor under the Insolvency Bill, decisions of (i) a United States bankruptcy court involving an ongoing section 304 case of Netia Holdings S.A. and its affiliates (collectively, “Netia”), each a debtor under the old Arrangement Act, and (ii) other United States courts considering section 304 petitions of debtors in foreign proceedings provide some helpful guidance.

Generally, a United States bankruptcy court will consider two eligibility requirements before exercising jurisdiction over an ancillary case under section 304 of the Bankruptcy Code:


whether (i) a “foreign proceeding” against the debtor exists; and (ii) the party filing the section 304 petition is a “foreign representative.”6

The determination of the existence of a “foreign proceeding” will focus on (i) the administrative or ongoing judicial process in the foreign jurisdiction, (ii) whether such process is conducted to liquidate the estate, adjust its debts or effectuate reorganization and (iii) whether the process is pending in a foreign jurisdiction in which the debtor maintains its residence, domicile or principal place of business. The United States bankruptcy court in Netia held, over the objection of United States creditors, that even before the Polish court opened the arrangement proceedings under the Arrangement Act, the filing of an application to open the arrangement proceeding constituted a “foreign proceeding.” The United States court primarily focused on the level of judicial supervision at that stage of the Polish process, and found that, among other things, the ability of the Polish court to examine the debtors, grant injunctions and hear objections of creditors (despite the lack of an automatic stay or restrictions on the disposition of assets or payment of debts by the debtors) brought the Polish proceeding at that stage within the definition of a “foreign proceeding.” In light of the level of judicial supervision and availability of creditor input provided by the Insolvency Bill, it appears likely that a United States bankruptcy court would find the existence of a “foreign proceeding” at any time after the filing of a declaration of bankruptcy under the Insolvency Bill by a debtor that has its residence, domicile or principal place of business in Poland.

A “foreign representative” is defined by the Bankruptcy Code as a “duly selected trustee, administrator, or other representative of an estate in a foreign proceeding.” As such, the analysis of whether the section 304 petitioner is a “foreign representative” will largely hinge on the existence of a “foreign proceeding” and whether the petitioner is a proper representative of the debtor’s estate in the foreign proceeding. United States bankruptcy courts, including the court in Netia’s case, have held that a debtor’s pre-bankruptcy directors or management that are empowered in a foreign proceeding to manage the debtor’s operations are “foreign representatives.” Thus, a United States bankruptcy court can be expected to determine that a petitioner, including a debtor’s pre-bankruptcy management that has management authority of a debtor in proceedings under the Insolvency Act or Arrangement Act (as well as under the Insolvency Bill) is a “foreign representative.”

As described above, once a United States bankruptcy court determines that a petitioner is eligible under section 304 of the Bankruptcy Code, the court has broad discretion to provide relief to the petitioner. In Netia’s cases, for example, Netia’s board of directors was motivated to commence its section 304 petition by a fund held by a United States bank and claimed by both Netia and certain of Netia’s bondholders. Netia sought two types of relief: (1) an injunction preventing the bondholders from seeking to obtain the fund; and (2) an

6 Some bankruptcy courts have also held that the foreign debtor must meet the Bankruptcy Code’s requirements to be a debtor in a plenary proceeding, including having a residence, domicile or property within the United States. Most recent decisions, however, have held that section 304 of the Bankruptcy Code does not impose such requirements.


order directing the bank to turnover the fund to Netia. The bankruptcy court granted the first request for relief, and Netia agreed to postpone determination of its turnover request because the fund was not necessary to Netia’s reorganization at this time. Netia will have to renew its request to the bankruptcy court when it ultimately wishes to obtain possession of the fund to apply it as provided by its foreign insolvency cases. Netia’s example illustrates the flexibility and creativity afforded United States’ bankruptcy courts in providing relief to foreign representatives – a foreign representative of a debtor under the Insolvency Bill should (i) evaluate the needed relief with respect to assets located in the United States and (ii) ask the United States court for such relief while explaining to the court how such relief is fair and necessary to the success of the Polish proceeding.

Finally, before the United States court can decide whether to grant relief to the foreign representative, and if so, what form of relief is appropriate, the court must consider each of the five factors described above. Consideration of such factors affords United States bankruptcy courts with wide discretion to address the tensions between foreign and local creditors and legal interests inherent in multinational bankruptcies. Generally, United States courts give deference to foreign proceedings, on the grounds of international comity, unless particular circumstances suggest that deference would be inappropriate. A recent decision by a major United States court of appeals clarifies that the bankruptcy court should not analyze the factors in the abstract (such as by making a determination whether a foreign bankruptcy law is generally fair on its face), but should analyze them as they affect specific creditors who oppose the relief requested by the foreign representative.7 This creditor-specific analysis makes it very difficult to determine whether a United States bankruptcy court would grant the relief requested by a Polish foreign representative – the court’s decision would ultimately hinge on the perceived fairness of the treatment under the Insolvency Act or Arrangement Act (or the Insolvency Bill) of the objecting creditor.8

7 Some cases are fairly easy to predict, such as that a United States court will not provide relief to a foreign representative when a country’s bankruptcy laws grant more favorable payment priority rights to local creditors. Most cases, however, are far more fact-specific. For example, United States courts refused to provide relief under section 304 in two cases where foreign bankruptcy laws treated local and foreign creditors the same because (i) in the first case, the form of notice of the foreign bankruptcy proceeding deemed to have provided notice to all of the creditors was not sufficient to provide a United States creditor with actual notice and (ii) in the second case, costs of administration of the foreign bankruptcy proceeding threatened to deplete the entire value of a secured creditor’s collateral (under the Bankruptcy Code, secured creditors have a first priority to their collateral). 8 Netia’s cases do not provide much guidance on this point: although the United States bankruptcy court granted relief requested by Netia’s foreign representative in the section 304 case, the court specifically noted that no creditor questioned whether the application of such factors rendered relief inappropriate.


5. A Brief Review of Some Cross-Border Insolvency Issues.

This review is intended to present practical problems, which may appear in connection with international insolvency proceedings after the Insolvency Bill comes into force.

Dutchco Limited

Scenario

A Dutch incorporated company, ‘Dutchco’ is in financial difficulties. Dutchco has its registered office in the Netherlands and runs its European affairs through a number of branch offices, including branches in London and in Warsaw. Dutchco has a substantial number of assets in the US comprising inter alia a portfolio of retail outlets. There are also a substantial number of US, UK, Polish and Dutch creditors.

Let us assume that Dutchco has commenced insolvency proceedings in the Netherlands providing a suspension of payments and freeze on creditor enforcement action. In the meantime, the debtor company is putting together a reorganization plan to be presented to its creditors for approval.

Q1 In what circumstances could Dutchco Limited file for chapter 11 protection in the US?

A1 As a matter of US law, a Dutchco could voluntarily file for chapter 11 protection under the US Bankruptcy Code given that it has a place of business or property in the US. There is no requirement to prove insolvency. However, in practice, difficulties are likely to appear in bringing Chapter 11 proceedings as the authority of the directors of Dutchco would be replaced by the trustee appointed in the Dutch proceedings and the trustee would be unlikely to authorize Chapter 11 proceedings.

Q2 What would be the effect of a chapter 11 filing by Dutchco?

A2 In the event of filing for chapter 11, there would be an automatic stay on creditor enforcement action. This would have the effect of preventing Dutchco’s US creditors, and such other creditors against whom the US courts could exercise personal jurisdiction, from taking steps to enforce their claims over assets in the US. From the point of view of the US courts, the US Bankruptcy Code is universal in scope and applies worldwide. However, as a practical matter, the provisions of the US Bankruptcy Code are enforceable only to the extent that its provisions will be applied to the particular creditor. The US automatic stay provisions will only be enforceable outside the US, in respect of the debtor in possession’s assets located outside the US, if a foreign court is prepared to recognize the effect in its territory of a chapter 11 filing.

From the point of view of the UK courts, it is likely that, absent any policy reason arising from the regulations concerning public order, effect would be given to the chapter 11 stay, were Dutchco to seek a declaration/injunction in the UK courts.

From the point of view of the Insolvency Bill it appears that the Polish court will recognize foreign insolvency proceedings only with respect to the insolvent debtors.

Article 379 of the Insolvency Bill defines foreign insolvency proceedings as proceedings against an insolvent debtor. Therefore, unless proceedings under chapter 11 of the US


bankruptcy code are transformed into chapter 7 proceedings, it appears that such untransformed proceedings of chapter 11 would not be recognized as foreign recognizable insolvency proceedings in Poland.

On the other hand, a debtor who is applying for chapter 11 protection under the US law and therefore not yet insolvent, would be in a position to file a petition to the Polish court for reorganization under the Insolvency Bill only if the debtor could be recognized as a Polish entrepreneur registered in the Polish registry of companies.

However, the Dutch courts would not recognize or give effect to US Chapter 11 proceedings.

Q3 Would it be open to Dutchco to file for ancillary proceedings in the US courts pursuant to Article 304 of the Bankruptcy Code, and if so, what would be the consequences?

A3 A petition could be brought under Article 304 of the US Bankruptcy Code for ancillary proceedings to the Dutch suspension proceedings as the Dutch administrator would be able to demonstrate that it was a foreign representative to existing foreign proceedings. Although, there is no automatic stay in such case, the US court, in its discretion could make orders prohibiting the seizure of the Dutchco’s property and could order that the US assets be remitted to the foreign proceedings. In such a case, the US creditors would then need to participate in the proceedings in the Netherlands.

Q4 What forms of insolvency proceedings would it be possible to bring in the UK courts?

A4 Since the Netherlands and the UK are both member states of the European Union, the provisions of the EU Regulation on Insolvency Proceedings are of mandatory application on their territories. Dutchco would be presumed to have its center of main interests in the Netherlands, given that the company was incorporated there. On the facts, it appears unlikely that this presumption will be rebutted as Dutchco seems to conduct the administration of its interests on a regular basis in the Netherlands.

In consequence, main proceedings could only be brought in the Netherlands. However, as a branch office is in operation in the UK, it would be possible for the English courts on a creditor application to declare secondary proceedings. Such proceedings would be limited to Dutchco’s assets situated in the UK, and these proceedings would be subject to English substantive insolvency law. This would mean that the English insolvency rules e.g. as to the priority order in which creditors are paid would be followed, providing local English preferential creditors, (e.g. employees), with a right to receive payment from assets located in England ahead of unsecured creditors. Unless the proceedings in the UK were opened ahead of the main proceedings (in which case they would be termed ‘ancillary proceedings’), the secondary proceedings would be restricted to winding up proceedings and could not be used as a vehicle to mount a rescue.

Q5 Prior to the coming into force of the European Union Regulation on Insolvency Proceedings in May 2002, in what circumstances could insolvency proceedings have been brought in the UK courts?

A5 The English courts would have jurisdiction and a discretion to wind up Dutchco as a foreign company following the procedure laid out for the winding up of unregistered


companies in the Insolvency Act 1986. As insolvency proceedings had already been brought in the Netherlands, the English liquidation would be termed an ancillary liquidation and limited in scope to getting in and realizing the English assets only.

The English courts may also be prepared to provide assistance to foreign courts or representatives even if no ancillary liquidation has been started or is anticipated in England. This may, for example, involve the English courts freezing assets available in England and allowing those assets to be distributed by the foreign insolvency office holder. Such a remedy may not be ordered, however, where this would adversely affect English creditors.

Q6 Would it be open to the Dutchco to file for ancillary proceedings in the Polish court pursuant to Article 378 et seq. of the Insolvency Bill?

A6 The Dutch trustee may apply for the recognition of Dutch proceedings in Poland. The recognition of such proceedings would involve the recognition of all decisions made in the course of the Dutch proceedings including the decisions on the appointment and dismissal of the administrator as well as the decisions on the suspension and termination of the proceedings. The Dutch administrator would then be entitled to liquidate the part of bankruptcy estate situated in Poland and realize the assets in accordance with the provisions of the new law. The recognition of the Dutch proceedings in Poland would not prevent Polish creditors of Dutchco from filing for the commencement of secondary insolvency proceedings in Poland in accordance with the general provisions of the new law.

Q7 What are the proceedings available to Dutch court in Poland at the stage of it not being technically insolvent but threatened by imminent insolvency?

A7 As has been mentioned above, Dutchco is rather unlikely to take benefits of the US chapter 11 filing in Poland. However, Dutchco can consider filing for the commencement of restructuring proceedings under the Insolvency Bill. As an entity whose branch office is entered into the Polish National Court Register, Dutchco can make a filing as part of the secondary restructuring proceedings in the event it is not technically insolvent but its insolvency is imminent in its reasonable judgment. In the event of the filing for restructuring proceedings, Dutchco’s payments to creditors will be generally suspended and the creditor’s enforcement actions will be are frozen. Dutchco will be required to come up with a plan of reorganization that would be voted on by its creditors. The out of court arrangement would be subject to court approval. In the event the creditors of Dutchco file for bankruptcy in a Polish court on general terms the court will either adjourn the consideration of bankruptcy motion or jointly consider the bankruptcy motion with the approval of the out of court arrangement.


6.

Reco

gniti

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f for

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krup

tcy

and

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urin

g pr

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s bef

ore

and

afte

r Pol

and

join

s the

EU

.

R

ecog

nitio

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coun

trie

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in

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pr

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con

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ed in

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land

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olan

d of

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nkru

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m

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in

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co

untr

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re

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proc

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land

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art

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of

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Inso

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ill, e

quiv

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t to

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pter

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of

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ankr

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m

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join

s the

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o au

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atic

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ac

cord

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w

ith

EU

Reg

ulat

ion,

ba

nkru

ptcy

pr

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s in

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land

w

ould

not

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ed

unle

ss

a co

mpa

nyin

corp

orat

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in

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nd

has

the

cent

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of

its

oper

atio

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(“C

OM

I”)

in

an E

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in

whi

ch c

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(a

nd

inde

ed

any

non-

EU p

roce

edin

g)

in P

olan

d be

fore

Pol

and

join

s th

e EU

sh

all

be

base

d on

Arti

cles

378

–

417

of

the

Inso

lven

cy

Bill

. Th

is is

bas

ed o

n th

e U

NC

ITR

AL

Mod

el C

ode.

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ocity

requ

ired.

N

o au

tom

atic

rec

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tion.

In

ac

cord

ance

w

ith

EUR

egul

atio

n,

rest

ruct

urin

gpr

ocee

ding

s in

Pol

and

wou

ld

not

be

reco

gniz

ed

unle

ss

a co

mpa

ny

inco

rpor

ated

in

Po

land

has

the

cen

ter

of i

ts

oper

atio

ns (“

CO

MI”

) in

an E

U

mem

ber

stat

e, i

n w

hich

cas

e th

e la

ws

and

cour

ts

of

the

rele

vant

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m

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r st

ate

wou

ld h

ave

juris

dict

ion.

Non

e. O

nly

inso

lven

cy

proc

eedi

ng

are

reco

gniz

ed.

Res

truct

urin

g pr

ocee

ding

s m

ay

be

inst

itute

d un

der

sepa

rate

pro

ceed

ings

in

Pola

nd

- on

ly

if th

e de

btor

is a

regi

ster

ed in

th

e N

atio

nal

Cou

rt R

egis

ter i

n Po

land

.

afte

r Po

land

jo

ins t

he E

U

Full

reco

gniti

on

for

colle

ctiv

e in

solv

ency

proc

eedi

ngs

with

in

the

scop

e of

th

e EU

R

egul

atio

n In

solv

ency

Proc

eedi

n

gs

.

Full

reco

gniti

on -

EU

law

ov

errid

es

the

prov

isio

ns

of

the

Inso

lven

cy

Bill

co

ncer

ning

in

tern

atio

nal

bank

rupt

cy p

roce

edin

gs.

Full

reco

gniti

on

- EU

la

w

over

rides

the

prov

isio

ns o

f th

e In

solv

ency

B

ill

conc

erni

ng

inte

rnat

iona

l ba

nkru

ptcy

pr

ocee

ding

s.

Full

reco

gniti

on

Proc

eedi

ngs.

W

orld

Ban

k G

loba

l Jud

ges F

orum

(Mal

ibu,

200

3)

66

i Under this Directive, where an insurance undertaking with branches in other Member States fails, the winding up process will be subject to proceedings in and according to the law of the Member State where the registered office is located. ii Other directives are planned/apply. The Financial Markets and Insolvency (Settlement Finality) Regulations 1999 apply to the participation in financial markets (note these regulations apply without the need for any cross-border element and apply to systems, which have been designated by a competent authority (Banks/Credit Institutions/Investment firms) relating to payment systems and securities settlements. These Regulations provide that the powers of the court under IA 1986 shall not be exercised in a way so as to prevent or interfere with the default arrangements under the designated system. The law of the system applies. iii Broadly, this covers civil and commercial law. iv Article 47 EC 1346/2000 v Note that existing proceedings will be caught. The applicable proceedings are listed in an Annex to the Regulation and exclude administrative and other receivership but include voluntary arrangements. The Regulation applies to both companies and individuals. vi The current EU Member States are Belgium, Denmark, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, Finland, Sweden, and United Kingdom. The following countries are candidates for membership of the European Union: Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, Slovenia and Turkey. vii The “COMI” test will be applied when insolvency proceedings are started (which means that any due diligence done at the start of the transaction could become out of date when the transaction starts). The Preamble to the Regulation states that “COMI” should correspond to the place the debtor conducts the administration of its business on a regular basis and is therefore ascertainable by third parties.

WA1:\75321\07\1M4907!.DOC\68029.0003

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Global Judges Forum - World Banksiteresources.worldbank.org/GILD/ConferenceMaterial...Global Judges Forum Commercial Enforcement and Insolvency Systems 19-23 May 2003 Pepperdine University