Poland’s strict avoidance action regulations differ from EU Draft Directive

The European Commission has published a new proposal for a Directive that would harmonise certain aspects of insolvency law across the EU. This proposal, following the enactment of Directive (EU) 2019/1023, illustrates a strong desire to facilitate the free movement of capital within Europe. A significant part of the proposed Directive is designed to make laws governing avoidance actions uniform across the EU.

A review of the draft proposal indicates that Poland already has strict provisions relating to avoidance actions aimed at protecting creditors against fraudulent actions preceding the insolvency in comparison to those the proposed Directive.

General overview of Polish restructuring and insolvency proceedings

Polish law contains different legal procedures for restructuring and insolvency depending on the situation of the debtor and the aim of the proceedings.

Restructuring proceedings aim to preserve the debtor’s business as a going concern and on concluding an arrangement with creditors. The Polish law includes a robust moratorium on payments and protection against enforcement, which can be initiated if the debtor is insolvent or threatened with insolvency.

The procedures differ depending on the scale of the debtor’s problems. If the debtor’s liabilities are undisputed and the debtor can discuss debt restructuring with creditors out of court, the debtor can commence arrangement-approval proceedings where the proceedings are run by the debtor with the assistance of a restructuring advisor. The court is only approached at the final stage (to secure arrangement approval).

Other types of proceedings include fast-track arrangement proceedings, ordinary arrangement proceedings and remedial proceedings. The procedures differ depending on the terms of the protection afforded to the debtor, the available restructuring instruments and the scope of managerial powers that the debtor needs to give up. Remedial proceedings are the most far reaching in terms of protection and restructuring. In remedial proceedings, the management of the debtor’s business is taken over by a court appointed administrator, the assets of the borrower are protected, and the administrator can take actions to turn the business around.

If there is no prospect of rescuing the business and the debtor is insolvent, insolvency proceedings are started. The main purpose of the insolvency proceedings is to satisfy creditors and not to preserve the debtor’s business. The administration of the debtor’s assets is taken over by the bankruptcy administrator and debtor’s assets form a bankruptcy estate. The bankruptcy administrator lists all claims, secures the debtor’s assets, and sells them. The proceeds of that sale are then used to repay the liabilities of the debtor.

Depending on the type of procedure, Polish law contains different provisions relating to avoidance actions.

Avoidance actions in remedial proceedings

Regarding restructuring proceedings, avoidance action provisions apply only to remedial proceedings. Polish law envisages that any actions of the debtor undertaken within a year preceding the filing of the restructuring application are ineffective if:

• the debtor disposed of its assets gratuitously or if the consideration received by the debtor is significantly lower than the value of the disposed asset;
• if the debtor established a security over its assets and has not received any consideration (e.g. disbursement of the loan) for this security.

Furthermore, the security will be ineffective if the value of the collateral is excessive in comparison to the amount of the secured claim and the security was established within one year prior to the filing of the restructuring application.

Apart from the above, the restructuring law in some cases renders ineffective any remuneration of the debtor’s representative or the debtor’s employee who performs the enterprise’s management tasks or the remuneration of a person who provides services connected with the management or supervision of the debtor’s enterprise.

Avoidance actions in bankruptcy proceedings

If the debtor is declared bankrupt, the regime of avoidance actions is different.

Actions are ineffective where the debtor disposed of its assets within one year prior to the application for bankruptcy if the disposal was gratuitous or the consideration manifestly exceeds the value of the consideration received by the bankrupt. Other provisions will apply to security interest and debt repayments.

The security and payment of a debt not yet due and made by the bankrupt debtor within six months prior to the filing of a bankruptcy petition is ineffective. However, the beneficiary of the payment or security may defend itself if, at the time of performing those actions, the beneficiary did not know that there were grounds for declaring bankruptcy.

If the debtor established a security over its assets within a year preceding the filing of the bankruptcy application to secure third-party debt for no consideration or where the consideration is manifestly lower than the value of the collateral, then the judge-commissioner can declare that security ineffective.

Similarly, related-party transactions can be declared ineffective if performed within six months prior to the filing of the application for the declaration of the bankruptcy. The related party can defend itself by proving that the transaction was not detrimental to the interests of other creditors.

Importantly, according to the law, if insolvency follows restructuring proceedings that are unsuccessful, the suspect periods listed above are calculated not from the date of the insolvency application’s filing, but from the date of the restructuring application.

General avoidance actions

Notwithstanding the above, under the general rules of the Polish Civil Code, any creditor may challenge the actions of the debtor if, as a result of a legal act performed by a debtor to the detriment of creditors, a third party gains a financial benefit, the debtor acted knowingly to the creditors’ detriment, and the third party knew or should have known.

A creditor may seek to challenge actions dating back as far as five years prior to filing a lawsuit.

Summary

Polish law contains different rules relating to avoidance actions, depending on the type of proceeding.

These are usually more restrictive than those proposed by the European Commission’s proposal for a Directive harmonising certain aspects of insolvency law.

The Directive relates to actions taken within three months preceding the filing of the applications whereas Polish law relates to actions taken within six or even 12 months before the application. General avoidance laws allow creditors to challenge actions that date back as far as five years.

Even though the Polish provisions may be more restrictive, Polish law will need to be reviewed and adjusted to ensure that the degree of protection offered in the Directive is applied in each case the Directive requires.

For more information on the proposed EU Directive and avoidance action regulations in Poland, contact your CMS client partner or these CMS experts.