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"The Polish Bankruptcy and Arrangement Law Reform" |
Warsaw 16 January 2003
CONFERENCE REPORT
The conference on the Polish Bankruptcy and Arrangement Law Reform, which took place at the Marriott Hotel in Warsaw on 16 January 2003, was organized by the European Bank for Reconstruction and Development and the law office of Weil, Gotshal & Manges under the patronage of Grzegorz Kurczuk, the Polish Minister of Justice and Attorney General.
The conference was opened by Roman Rewald, a partner at Weil, Gotshal & Manges, who welcomed all the attendees, including Grzegorz Kurczuk, the Polish Minister of Justice and Attorney General; Ryszard Kalisz, Member of Parliament and Chairman of the Sejm's Legislative Commission; Professor Feliks Zedler, the author of the Law on Bankruptcy and Redress; and Michel Nussbaumer, Legal Counsel to the Manager of the Restructuring and Legal Knowledge Team of the European Bank for Reconstruction and Development. After a general introduction, Roman Rewald introduced Sylweriusz Królak, Vice-Secretary of the State at the Ministry of Justice, as the Chairman of the conference. Sylweriusz Królak welcomed all the participants and announced the first speaker, the Minister of Justice.
The speech of Grzegorz Kurczuk, the Polish Minister of Justice and Attorney General.
Grzegorz Kurczuk referred to the parliamentary discussions on the draft of the Law on Bankruptcy and Redress (hereinafter the "Draft"). He pointed out that the Draft was a governmental legislative initiative and that it was a comprehensive legal act regulating the legal standing of both insolvent debtors as well as those debtors which are merely threatened with insolvency. He also highlighted the fact that the Draft was a modern regulation which reflected the needs of the Polish business reality. Grzegorz Kurczuk emphasized the fact that bankruptcy and arrangement proceedings were natural phenomena of market economy business trade. He presented the latest statistics which indicate that in 2002, more than 3,000 bankruptcy proceedings and more than 900 arrangement proceedings were opened. At the same time, Grzegorz Kurczuk stressed, despite an increase in the number of these type of proceedings, the overall effectiveness of the Polish bankruptcy courts had improved, with the completion rate reaching 40% for bankruptcy and 60% for arrangement proceedings. The Minister said he hoped that the effectiveness and efficiency of the courts would further be improved by the planned increase in the number of judicial positions in the courts.
Grzegorz Kurczuk pointed out that the Draft was friendly to and met the needs of business entities which found themselves in financial difficulties and gave them a possibility to restructure their businesses according to certain pre-defined schemes. He referred in particular to Chapter 4 of the Draft, titled "Redress Proceedings", which was intended to be a counterpart of Chapter 11 of the US Bankruptcy Code. He highlighted a novelty introduced by the Draft, that is, regulations which provide that the debtor's assets are automatically secured after bankruptcy proceedings are opened, which is aimed at preventing such bankrupt entity from making unauthorized use of its assets before the petition for bankruptcy is ultimately considered. Grzegorz Kurczuk pointed out that declaring an entity bankrupt does not need to entail a liquidation of its business because a bankruptcy ruling providing for a liquidation of the bankruptcy estate may at any time be converted into a bankruptcy ruling providing for the possibility of opening arrangement proceedings. Where bankruptcy proceedings involve a liquidation of the bankrupt entity's business, such liquidation will primarily consist of selling the debtor's business as a whole.
The proceedings regulated by the Draft will be applied not only with respect to persons and entities conducting business or professional activity in their own name but also to certain other types of entities, as a result of which the Draft will become a common and broadly applied legal regulation.
The Draft comprehensively regulates bankruptcy proceedings, including redress proceedings conducted under the court's supervision. The prime objective of the proceedings, as stipulated in the Draft, is to preserve the bankrupt entity's business and, consequently, preserve the workplaces which such business provides. To this end, the Draft stipulates several solutions which involve maintaining such business' operations and improving insolvent companies' financial condition. Grzegorz Kurczuk strongly emphasized the social benefits connected with the introduction and application of the new Law on Bankruptcy and Redress and declared the Government's unreserved support for all reforms which allow workplaces to be protected and preserved. In his opinion, the Draft undoubtedly fulfilled the above-mentioned condition.
The Draft simplifies the entire bankruptcy procedure, which is expected to accelerate the process of considering the bankruptcy petitions and the bankruptcy proceedings themselves, thus improving the safety of business trade. The Draft introduces changes with respect to the priority of satisfying particular creditor categories and at the same time gives creditors more influence and control over the manner of conducting the bankruptcy or arrangement proceedings with respect to the bankrupt entity. Furthermore, the Draft regulates issues connected with prohibiting dishonest debtors from conducting business activity. Grzegorz Kurczuk highlighted another legislative novelty, namely the provisions regarding international insolvency proceedings, including secondary bankruptcy proceedings conducted in Poland with respect to assets located in Poland.
The Minister of Justice brought his speech to a close by thanking the European Bank for Reconstruction and Development for financing the conference and a series of follow-up trainings which will take place in 2003. In conclusion, Grzegorz Kurczuk stated that the new insolvency law will be beneficial for honest debtors.
The speech of Ryszard Kalisz, Member of Parliament and Chairman of the Sejm's Legislative Commission.
Ryszard Kalisz stated that adopting the Draft was a milestone in shaping democratic legal order in Poland. He referred to Art. 2 of the Constitution of the Republic of Poland and pointed out that the governmental Draft combined two constitutional principles, i.e. the principle of market economy and the principle of social justice. This was reflected in provisions such as those stipulating that a debtor should not be declared bankrupt until it is proven unable to continue conducting its activity. Ryszard Kalisz drew the participants attention to the broad definition of a "business entity" in Art. 5 of the Draft, which takes into account the dynamics of commercial law. The Draft was created as a joint effort of many specialists in this field and the application of its provisions will be a real challenge to the judges and other court officials. Ryszard Kalisz further pointed out that until the Draft is adopted by the Sejm, it is actually a Bill. He stressed that the time remaining to the Draft's entering into force should be used to conduct a series of workshops and trainings on the contents of the new law. Ryszard Kalisz concluded by thanking Professor Zedler and the members of the government for their contribution to the Draft and encouraged the attendees to put forward any comments and proposals that they may have regarding the Draft which could be considered and included by the Senate which was working on the Draft at the time of the conference.
The speech of Michel Nussbaumer, a representative of the European Bank for Reconstruction and Development.
Michel Nussbaumer began by stressing how glad the European Bank for Reconstruction and Development was to be able to finance the implementation program for the new insolvency law in Poland and thanked Weil, Gotshal & Manges in particular for their contribution as the entity running the entire project. He pointed out that this type of trainings was part of aid programmes which the European Bank for Reconstruction and Development finances and conducts in order to foster the process of introducing market economy. In his speech, Michel Nussbaumer outlined the scope of the European Bank for Reconstruction and Development's activities, a significant portion of which are projects connected with law reforms prepared in cooperation with a given country's government or legislative bodies.
The European Bank for Reconstruction and Development also prepares evaluations of law reform processes, which enables it to advise governments to focus on certain legislative areas. Michel Nussbaumer stated that by providing a safe business environment, stable and secure bankruptcy law regulations are conducive to foreign investments, in particular as the bankruptcy regulations existing in Poland to date were far from perfect. The most important innovation from the point of view of foreign investors is regulations concerning international insolvency proceedings and the possibility of conducting redress proceedings.
The European Bank for Reconstruction and Development's assistance in the preparation of the Draft included advice on the Draft's compliance with the applicable international legal standards. Michel Nussbaumer wound up his speech by emphasizing the significance of the new law and the necessity of holding conferences and trainings in this field, which the European Bank for Reconstruction and Development will be happy to support.
The speech of a Weil, Gotshal & Manges representative.
The next speaker was Roman Rewald of Weil, Gotshal & Manges, who gave a number of insights into the organizational aspects of the conference and mentioned Weil, Gotshal & Manges's experience in restructurings, including the restructurings of Enron, World Com and the Polish-based Netia. He encouraged the participants to put forward their expectations and proposals regarding the subjects for the upcoming series of trainings in order to arrive at most effective methods and procedures of conducting them.
The speech of Professor Feliks Zedler titled "The Main Directions of the Bankruptcy and Arrangement Law (Insolvency Law) Reform".
Professor Zedler briefly outlined the assumptions and directions of the insolvency law reform in Poland and pointed out that a society's legislative level reflects its general development level.
The roots of insolvency law can be traced back to the medieval legal regulations applied in northern Italian countries. Poland first regulated the issue of insolvency in 1934. Those regulations, still currently in force in Poland, were modeled on German solutions in this respect elaborated a the turn of the twentieth century. Their author, Professor Allerhand, was in fact an Austrian Professor. The principle adopted at that time was a division of bankruptcy and arrangement law and proceedings. Bankruptcy law was applied to insolvent debtors whereas arrangement proceedings were intended for the "honest" debtors and were supposed to prevent bankruptcy. Such division was justified from an ethical and moral point of view because a debtor who was declared bankrupt faced being ostracized by the society. The only type of liquidation procedure involved auctioning the debtor's business and assets by a court enforcement officer or, in exceptional cases, by a receiver - advocate. In the second half of the twentieth century the solutions stipulated in the 1930s insolvency regulations proved outdated and not in keeping with the needs of modern business trade and market economy. That is why the concept of "active" bankruptcy law was conceived, which resulted in abandoning liquidation as the basic method of conducting bankruptcy proceedings in favour of restructurings. Hence the adoption of Chapter 11 of the US Bankruptcy Code in 1985, which provides for a restructuring of the insolvent business entity and its obligations. Germany, in turn, adopted their own insolvency regulations, followed by France, which reformed her insolvency regulations most extensively, by providing for a far-reaching sanitation of the insolvent business combined with mandatory redress proceedings including measures such as a court consent for employee lay-offs and strong social protection.
It needs to be emphasized that American redress proceedings under chapter 11 proved effective in practice: as a rule, 20% of American bankruptcies lead to arrangement proceedings. In contrast to this, Poland can hardly even boast a 2% bankruptcy-arrangement ratio. The Polish regulations proved outdated as early as in the early 1990s. The 1997 amendments did not improve the situation significantly while at the same time they did away with the rights of creditors whose claims were secured by rights in rem. Professor Zedler posed a question whether it would not suffice to simply amend the existing provisions and promptly answered his own question by saying that such amendments would not help to achieve the desired objective, which is why a new legal act needed to be drafted from scratch. Professor Zedler proceeded to present the legislators' main objectives, the most significant of which was to maximize the degree to which the creditors' claims are satisfied. This stresses the debt recovery function of the new law, whereas in the opinion of Professor Zedler, the existing provisions put the creditors at a disadvantage. The principle of maximizing the level of the creditor satisfaction may not mean, however, that the creditors' claims are to be satisfied at all costs. The social aspects of each bankruptcy case need to be considered, which means that preserving the debtor's business will be a priority. Preserving the debtor's business along with maximizing the creditors' satisfaction are the two main assumptions expressed in Art. 2 of the Draft. Preserving the debtor's business, apart from its social advantages, such as maintaining employment levels, may also be advantageous for the creditors. Such advantages include facilitating the co-operation with the future new owner of the bankrupt business, and in this aspect, the Draft also fulfills a restructuring purpose. The legislators' third assumption involved differentiating between proceedings for different types of insolvent debtors. The three types of insolvency distinguished in the Draft are: "criminal insolvency", "reckless insolvency" and "no-fault insolvency" (which arose due to circumstances over which the debtor had no control, such as the "domino effect", i.e. a payment backlog).
The Draft contains "educational" ("correctional") provisions applicable to dishonest debtors, such as: a ban on conducting business activity, depriving the debtor of the right to manage its business, and imprisonment. The court evaluates the debtor's recklessness which may have led to insolvency and, correspondingly, the seriousness of the debtor's responsibility. There are different regulations pertaining to insolvencies which arose due to reasons for which the debtor cannot be held responsible. Such regulations provide for the possibility of discharge of natural persons from their debts, which enables such debtors to function as usual after they were declared bankrupt. The Draft also includes provisions on how to regulate the redress proceedings.
The existing provisions concerning bankruptcy are very fragmented, i.e. different regulations apply to banks, insurance companies, etc. Therefore, it is particularly important that the provisions of the Draft will apply to all types of entities conducting their activity in Poland.
Professor Zedler went on to present the structure of the Draft and pointed out that its provisions apply to all business entities conducting their business activity in Poland, even the smallest entities such as corner grocery shops. The Draft includes a number of regulations which are aimed at facilitating and accelerating the proceedings. There is no one uniform procedure applicable to all business entities, instead the Draft provides for specific procedures for institutions such as banks or insurance companies.
Next, Professor Zedler described the entities to which provisions of the Draft apply. Professor Zedler stated that in most legal systems in the world the prevailing view is that legal capacity is universal, and consequently, that all entities can be declared bankrupt. Consequently, many world legislations introduce the concept of "consumer bankruptcy", that is, the bankruptcy of an overly indebted consumer. This concept was also considered in the early stages of the discussions on the Draft but finally given up due to organizational obstacles (the legislators realized that the courts would be flooded with such cases and effectively paralyzed). Professor Zedler pointed out that, on the other hand, the indebtedness level of enterprises and households in Poland is not as high as in Western countries. Professor Zedler estimated that the institution of consumer bankruptcy would be introduced to Polish law in approximately 7 to 10 years. Given the foregoing, the range of entities to which the provisions of the Draft apply was limited to entities which conduct business activity and to other entities conducting business trade activities. Professor Zedler drew the participants' attention to the fact that there were already five definitions of a business entity, none of which was universal. The Draft introduces a new definition of a business entity, which will also be included in the amended Civil Code.
Professor Zedler further pointed to the specific character of Art. 5 section 3 of the Draft, which provides that the provisions of the new bankruptcy law also apply to limited liability companies and joint-stock companies which do not conduct any business activity, to partners in partnerships who are liable for the obligations of their partnership with all their assets, partners in a professional partnership and to branch offices of foreign banks within the meaning of the banking law. The provisions of the Draft also provide that entities which are not entered in the business entities register may be declared bankrupt and that deceased persons too have a bankruptcy capacity (Arts 7, 8 and 9 of the Draft).
Professor Zedler discussed the premises for declaring an entity bankrupt and for opening bankruptcy proceedings with respect to such entity. He stressed that the premises for opening bankruptcy proceedings and those for opening redress proceedings were regulated separately.
The main premise for opening bankruptcy proceedings is the debtor's insolvency. This terminology, which is new to Polish law, defines an insolvent debtor as an entity which does not pay its due obligations. At the same time, the insolvency criteria are mitigated in Art. 12 of the Draft, which stipulates that the court may dismiss a petition for bankruptcy if the debtor is less than three months late with fulfilling its overdue obligations and the total amount of such unperformed obligations does not exceed 10% of the balance sheet value of the debtor's business. On the other hand, Art. 11 section 2 of the Draft provides that a debtor which is a legal entity or an unincorporated organizational unit with a legal capacity granted by separate provisions of law, shall also be deemed insolvent if the value of its obligations exceeds the value of its assets, even if such entity or unit pays off all of its obligations as they fall due.
Professor Zedler then went on to discuss the premises for opening redress proceedings, which were designed for business entities which are still able to pay their obligations but which expect that such ability might cease in the near future, i.e. are reasonably certain based on their situation that they will cease paying their obligations in the foreseeable future.
Next, a number of general remarks concerning bankruptcy followed. Professor Zedler pointed to the fact that under the Draft, bankruptcy proceedings were divided into two stages. The first stage involves considering the petition for bankruptcy. Stage two is the proper bankruptcy proceedings. Both stages are designed to be flexible and modifiable, e.g., after a bankruptcy with the possibility of an arrangement was declared, such bankruptcy may subsequently be converted into a bankruptcy with the liquidation of the estate.
As regards the first stage, the existing bankruptcy provisions limit it to the verification of the debtor's bankruptcy capacity and declaring it insolvent. Under the Draft, it will be possible to conclude an arrangement during this very first stage, at a so-called preliminary creditors meeting, which may or may not be held. Unlike under the existing regulations, during the first stage, the bankrupt entity's assets will now be obligatorily secured immediately after the petition for bankruptcy is filed, irrespective of what kind of bankruptcy proceedings (with liquidation, with an arrangement) will later be applied. Such obligatory securing will be conducted as soon as the petition is filed in order to prevent the debtor from transferring, pledging or otherwise disposing of its assets.
The second stage of bankruptcy proceedings under the Draft will be the 'proper' bankruptcy proceedings and it may involve a liquidation of the bankruptcy estate or the possibility to conclude an arrangement with the creditors. The decision which procedure is to be applied is taken by the court. The type of bankruptcy proceedings may be changed even after arrangement proceedings were opened (Art. 15 and Art. 16 of the Draft). As a rule, the bankruptcy estate is only liquidated when there are no chances for adopting a successful arrangement. Liquidating the debtor's assets involves selling them at an auction. Businesses are usually sold as a whole and only the creditors council or the judge-commissioner may agree to divide the business and sell the assets separately. The auction is conducted by a judge-commissioner and is modeled on the proceedings provided for in the Code of Civil Procedures.
The Draft contains certain new regulations regarding the arrangement, which may now be concluded in any manner whatsoever that is not prohibited under law. Under the old provisions, there was a closed list of the types of arrangements available to debtors which could not be modified.
Another interesting solution under the Draft is an arrangement through liquidation, in the course of which the creditors may be satisfied by means of selling the bankruptcy estate. The manner of liquidating the debtor's estate is determined by way of a resolution of the creditors' meeting. It may involve, for example, one creditor taking over the debtor's business and repaying the debtor's obligations to the remaining creditors. This method guarantees the continued operation of the debtor's business.
Discussion.
After Professor Zedler's speech, Sylweriusz Królak, Vice-Secretary of the State at the Ministry of Justice, started a discussion on the Draft and encouraged the participants to ask questions.
Sylweriusz Królak asked how the mechanisms contemplated in the Draft were meant to ensure "socially just" bankruptcies. In reply, Professor Zedler pointed to Art. 2 of the Draft, which stipulates that bankruptcy proceedings should be conducted to the end of maximizing the level of satisfaction of the creditors' claims and, if reasonably possible, in a way that allows for the debtor's business to be preserved. In Professor Zedler's opinion, if preserving the debtor's business hinders the process of satisfying the creditors, then liquidation should be the preferred method, given the priority of creditor satisfaction. This was balanced out by introducing an arrangement through liquidation, which is intended to encourage the creditors to preserve the debtor's business. If an arrangement through liquidation is adopted, then one creditor may take over the debtor's business and subsequently satisfy the remaining creditors in a sequence stipulated in the creditors' arrangement instead of the order provided in Art. 341 of the Draft. Another incentive for preserving the debtor's business is granting additional remuneration to the receiver depending on the profits earned by the bankrupt entity's business.
The second question came from Katarzyna Dąbrowska of BPH PBK S.A. who asked whether "the receivables secured by a transfer of title for security were part of the creditors' receivables subject to the arrangement?" In reply, Professor Zedler referred to Art. 272 section 1 of the Draft which provides that the arrangement applies to all the creditors receivables due from the debtor which arose before the bankruptcy date, together with the creditors' receivables secured by transfer of the ownership of property, receivables or other rights for security. Therefore, receivables secured by a transfer of title for security are subject to the arrangement or a restructuring and they may be satisfied in the manner specified in the arrangement agreement. On the other hand, if a secured receivable becomes due before the bankruptcy is declared and the transfer of things (or assignment of rights) is final, then it is obvious that a secured receivable shall expire as fully satisfied and a creditor will be entitled to a claim against the bankruptcy estate for the delivery from the bankrupt entity's assets of property, which is not part of the bankruptcy estate under Art. 70 and subsequent articles.
Janusz Płoch, a judge and head of VIII Commercial Division for Bankruptcy and Arrangement Matters at the District Court for Kraków-Śródmieście, stated that he had closely followed the development of the works on the Draft for the previous few years and that he was extremely happy about the Sejm's adoption of the Draft. However, he voiced his concerns over a few institutions which the Draft introduces, including the regulation of redress proceedings. Judge Płoch put it to Professor Zedler that business entities might not construe the legislators' intentions correctly and that the lack of court supervision at the early stages of the proceedings may affect the market by causing chaos. He also pointed to the disadvantages of doing away with prescribing the courts' competence with respect to the matter of the proceedings (an early version of the Draft provided that only circuit courts were competent in bankruptcy matters). Judge Płoch stated that as a rule, district courts are staffed with judges with less extensive professional experience, and it would be beneficial to stipulate that only circuit courts are competent to consider bankruptcy cases. He also highlighted the necessity to harmonize the provisions of the Draft with the provisions of the Commercial Companies Code.
Finally, Iwona Karpiuk-Suchecka, a court enforcement officer from precinct VI at the Warsaw District Court and President of the National Council of Court Enforcement Officers, pointed to the lack of appropriate regulations regarding informing court enforcement officers of bankruptcy declarations and stressed that mere notices in the Court and Business Gazette (Monitor Sądowy i Gospodarczy) were insufficient. Profesor Zedler referred to the applicable provisions regarding passing information to court enforcement officers, such as Art. 175 of the Draft, which provides that when the bankruptcy is declared, the receiver shall notify thereof those creditors whose addresses are known based on the bankrupt entity's books and records, as well as the court enforcement officer competent to deal with the bankrupt entity's matters.
After the discussion, the conference participants left for a lunch-break.
Working group meetings.
After the lunch break, the scheduled working group meetings took place, during which the participants discussed particular issues concerning the new bankruptcy and redress law. The participants were free to join any working group of their choice.
The following topics were scheduled to be discussed in particular working groups:
- Group I: "The proceedings leading up to the declaration of bankruptcy". The speaker in this group was Leszek Ciulkin, a judge at a district court in Białystok;
- Group II: "The arrangement". The speakers in this group were Roman Rewald and Artur Zawadowski of Weil, Gotshal & Manges;
- Group III: "International insolvency proceedings". The speaker in this group was Christopher Mallon of Weil, Gotshal & Manges;
- Group IV: "Redress proceedings". A speech by Professor Zedler; and
- Group V: "The procedure according to which creditors submit lists of receivables and the liquidation of the bankruptcy estate". The speakers in this group were Lech Giliciński and Justyna Młodzianowska of Weil, Gotshal & Manges. The participants decided to combine Groups I and V.
Report from the joint discussions of Groups I and V
The discussion was opened by Judge Ciulkin, who discussed the main premises and rules for conducting bankruptcy proceedings, as stipulated in the Draft, that is, in particular:
- the competence of courts for bankruptcy cases (Arts. 18 and 19 of the Draft);
- the premises for opening the proceedings: the debtor fails to pay its obligations as they fall due or the debtor's obligations exceed the value of its assets (Arts. 10 - 14 of the Draft);
- liability for failing to submit a petition for bankruptcy declaration within the specified time limit (Art. 21 and 521 and the subsequent articles of the Draft);
- the formal requirements which the motion for opening arrangement proceedings has to fulfill, when filed by the debtor as opposed when filed by the creditor (Arts. 22 - 25 of the Draft);
- the situations when the petition is returned without a call to remove the defects in such petition (Arts. 25 - 28 of the Draft).
Next, Lech Giliciński briefly discussed the most basic changes which the Draft introduces in comparison to the existing legal regulations concerning submitting lists of receivables and liquidating the bankruptcy estate. The Draft strengthens the position of creditors whose claims are secured and the changes include for example adjusting the provisions of bankruptcy law to the binding provisions of the law on registered pledges with respect to satisfying creditors from assets secured by a registered pledge. Furthermore, unlike the old bankruptcy law regulations, the Draft expressly permits and regulates the consequences of the pledgee's exercising its right to take over the assets secured with a registered pledge and either keep it or transfer it through a notary or a court enforcement officer.
Under the Draft, Lech Giliciński pointed out, the proceeds from the transfer of assets encumbered with property security shall be used to satisfy the creditors whose claims were secured by rights in rem. Any surplus is subsequently transferred to the bankruptcy estate funds. Moreover, the Draft will restore the role of the civil law pledge as a right in rem which enables the person or entity in favour of which such pledge is established to satisfy itself before other persons, also in the event of bankruptcy. Under Art. 204 of the existing bankruptcy law, receivables secured by a pledge are satisfied from the bankruptcy estate.
Lech Giliciński drew the participants' attention to the new regulation under the Draft which makes it obligatory to separate a certain portion of the bankruptcy estate for the satisfaction of those creditors whose claims are secured by rights in rem. It can be expected, Lech Giliciński stated, that tax offices will now be more interested in establishing treasury pledges on taxpayers' assets in order to secure their receivables.
Justyna Młodzianowska emphasized that the Draft introduces detailed regulations stating that the bankrupt entity's assets is to be divided into a portion due to those creditors whose claims are unsecured and a portion on which property securities were established and from which the creditors whose claims are secured by rights in rem will be satisfied. She pointed to a specific situation, i.e. if the debtor has issued bonds, then the assets with which such bonds are secured shall constitute a separate bankruptcy estate intended for the satisfaction of the bondholders' claims. She also quoted examples of situations which could potentially lead to doubts as to how a given asset should be classified (e.g. if one property is encumbered with a mortgage to secure bonds and a mortgage to secure another receivable). Justyna Młodzianowska concluded by briefly discussing the differences between bankruptcy proceedings conducted with respect to banks and insurance companies as opposed to other business entities.
During the discussion on the case study prepared by the attorneys of Weil, Gotshal & Manges, the participants discussed certain practical obstacles which may arise when the court applies the excessive indebtedness criterion as one of the premises for declaring the entity in question bankrupt. Most of the representatives of the judiciary (including e.g. judge Ciulkin and judge Bożena Suleja from the Disctrict Court in Częstochowa), Krzysztof Popiel, the President of the National Federation of Associations of Receivers and Liquidators, as well as the practitioners agreed that "the value of the debtor's assets" (for the purposes of Art. 12 of the Draft) is to be construed as such assets' market value. Furthermore, several participants were of the opinion that it was helpful to take into account the fact that the market value of the of the property included in the business entity's assets was considerably higher than its balance sheet value, and that the company discussed in the case study stood good chances of earning profits in the following year.
Judge Bożena Suleja confirmed that bankruptcy proceedings commenced due to the excessive indebtedness premise constituted a relatively small portion of all bankruptcy proceedings. The largest part of bankruptcy proceedings are proceedings commenced because the debtor failed to settle its obligations as they fell due.
The participants then went on to discuss the issue whether or not a court should approve an arrangement if one of the entity's major shareholders expressly refuses to vote at the general shareholders' meeting to adopt resolutions which are necessary to perform the arrangement. Justyna Młodzianowska suggested a practical solution of this issue: the court should oblige the debtor to hold the general shareholders' meeting in order to adopt the necessary resolutions and subsequently, after copies of the adopted resolutions were delivered to the court, a court sitting should be held in order to approve the arrangement.
Report from the discussions of Group II
The meeting of Group II was opened by Roman Rewald, who briefly presented the advantages of the arrangement regulations included in the Draft. He focused in particular on the greater freedom as regards submitting arrangement proposals. Discussions in this group were centered around the doubts connected with the contents of the new bankruptcy law.
The participants pointed out that although the freedom of formulating and putting forward the arrangement proposals has a number of advantages, it could lead to the creditors not being able to reach an agreement regarding the terms of a viable arrangement. The judges present in this group further pointed to the potential difficulties which such freedom may cause when it comes to formulating effective foreclosure judgments. As regards the possibility of submitting arrangement proposals, the participants stressed that there were no provisions regulating the order in which the submitted proposals should be put to a vote. One scenario could involve voting on the debtor's proposals first, as they tend to be least favourable for the creditors, and should such proposals be rejected, going on to vote on the creditors' proposals.
Next, the participants mentioned the lack of precision in Art. 300 section 3 of the Draft and voiced their doubts whether creditors whose claims were satisfied in full generally or within the arrangement should or should not be allowed to participate in the creditors meeting as well as whether the arrangement conditions may be amended only with respect to those creditors whose claims have not been satisfied in full. The participants stressed that this provision should be reformulated and rendered in more detail during the Senate discussions.
The participants reached similar conclusions with regard to Art. 285 of the Draft. A discussion followed on the manner of calculating the two-third majority stipulated in the said article: whether it should be calculated separately for particular creditor groups or collectively for all creditors and how many creditor groups can lodge their objections with the adoption of the arrangement remaining unaffected. The participants paid particular attention to the lack of precision in the contents of section 2 of Art. 285 of the Draft.
In view of the above-mentioned provisions, the participants stressed the significance of dividing the creditors into correct categories, especially if there are to be more than four of such categories. The participants stressed again that there was no applicable provision to regulate this issue and that the bankruptcy judges would need to elaborate the appropriate solutions to be applied in practice.
One of the last discussion topics was the definition of "arrangement receivables". The participants contemplated the different categories of receivables which may need to be excluded from arrangements, such as the receivables from executed but unperformed executory agreements, future creditors' receivables and creditors' receivables for the performance of services within one business. The participants agreed that the legislative amendments of the Draft should aim at limiting the creditors' receivables subject to the arrangement to the creditors' receivables listed in the balance sheet, except for the long-term receivables which will fall due after the end of the scheduled period for performing the arrangement.
Group II participants, as well as all participants of the conference, repeatedly criticized the fact that under the Draft, district courts were competent to consider bankruptcy cases. In the opinion of the representatives of the legal profession present at the conference, such cases should be considered and decided by circuit courts, given the fact that district court judges often lack the necessary experience or specialist knowledge and that the best district court judges are in fact quickly promoted to other courts, e.g. circuit courts.
In conclusion, the participants agreed that it will be the judges ruling in bankruptcy cases that will add new, practical aspects to the provisions of the Draft and that the effectiveness of such provisions will largely depend on the rulings issued in the course of dealing with bankruptcy cases. The participants spoke very favourably of the proposal to create a compendium of guidelines and rules which the judges and other officials could find useful in applying the measures provide by the new law.
Report from the discussions of Group III
The presentation prepared by Christopher Mallon concerned the international aspects of the new bankruptcy law. Christpher Mallon drew the participants' attention to the key factors crucial to cross-border insolvencies, then went on to briefly comment on the provisions of the Draft, the EU Council Regulation and the UNCITRAL Model Code. He also presented an outline of the provisions of Chapter 11 of the US Bankruptcy Code, the counterpart of which is Chapter 4 of the Draft. He pointed out that Chapter 11 is significant for cross-border insolvencies because a great number of business entities have all or some part of their assets in the United States. Furthermore, it is fairly easy to establish the jurisdiction of an American court to consider a given bankruptcy case as it suffices to prove that a given entity has its business and at least some assets in the United States. Chapter 11 contains several solutions which are beneficial for debtors, such as: an automatic stay on enforcement and court action with respect to the debtor's assets, the ineffectiveness of termination clauses triggered by insolvency, no obligation to for the debtor to be declared bankrupt when applying for the protection under Chapter 11, and the possibility to receive super-priority funding in order to rescue the debtor's business.
Christopher Mallon commented on the similarities and differences between the provisions of the Draft and the provisions of Chapter 11. The similarities included an automatic stay on enforcement and court action with respect to the debtor's assets, the ineffectiveness of termination clauses triggered by insolvency and cram-down provisions which are intended to bind a dissenting class of creditor to an arrangement (stipulated in Art. 285 of the Draft).
The differences, in turn, include a provision that the international provisions regulated by the Draft may only apply if a given entity is insolvent. Furthermore, the Draft contains no provisions on super-priority funding which could help to rescue the debtor's business.
Christopher Mallon pointed out that the Draft adopts some of the solutions stipulated in the UNCITRAL Model Code and that the provisions of the Draft will be supplanted by the provisions of the EC Regulation on Insolvency Proceedings after Poland has joined the European Union.
Next, Christopher Mallon discussed the structure of the Draft with respect to its cross-border insolvency provisions (Art. 376 and the subsequent provisions). The second part of the Draft is divided into the following titles: general provisions, national jurisdiction, acknowledgement of foreign bankruptcy proceedings, secondary bankruptcy proceedings and co-operation with foreign courts and foreign administrators. Christopher Mallon made a few general remarks on the EC Regulation. The process of drafting the model code regulating substantive bankruptcy law was very long and was eventually abandoned because the differences between the bankruptcy provisions in the member states were too far-reaching. The redress proceedings contemplated in the Draft cannot be conducted with respect to foreign debtors operating in Poland unless such debtor has a Polish-based branch office entered in the National Court Register, in which case the proceedings will only apply to such debtor's assets located in Poland.
As regards the provisions on national jurisdiction, Poland asserts exclusive jurisdiction when main centre of business activity is located in Poland and also when the debtor has a branch office in Poland. Christopher Mallon pointed out that it is also possible to open secondary bankruptcy proceedings where the debtor conducts business activity in Poland through a branch office. Further, parties to bankruptcy proceedings cannot contract out of the provisions and nominate another jurisdiction to apply. Christopher Mallon stated that the procedure for acknowledging foreign bankruptcy proceedings was opened by the foreign administrator and generally quite straightforward. He further stressed that a Polish court can issue a decision on security. Under the Draft, a Polish court can refuse to acknowledge foreign proceedings if this would be against Polish public policy (Art. 390 of the Draft). If, however, foreign bankruptcy proceedings are acknowledged, the following ensues: court proceedings and the enforcement proceedings concerning the bankrupt's assets are stayed; the bankrupt loses its right to manage and dispose of its assets unless an arrangement is envisaged and the bankrupt is allowed to continue managing its business; a foreign administrator has the right to bring proceedings in Poland, e.g. in order for certain acts in law to be declared ineffective; a foreign administrator produces a list of assets located in Poland, based on which a Polish court issues a decision approving the liquidation of the assets; a foreign administrator is also entitled to petition for a declaration of bankruptcy in Poland. Christopher Mallon put particular emphasis on the provision stating that the effects of bankruptcy on Polish assets are determined by a Polish court according to Polish law, that is, Polish law remains the law according to which the effects of liquidation or the distribution of the assets from the liquidation are assessed.
Next, Christopher Mallon discussed secondary bankruptcy proceedings, which are opened where main foreign bankruptcy proceedings are located outside Poland but the debtor conducts business activity in Poland. Secondary proceedings are limited to assets located in Poland. Any surplus funds from the secondary proceedings are to be passed to the administrator of the main proceedings.
In conclusion, Christopher Mallon referred to the European Council Regulation and stressed that the provisions of the Regulation will apply in Poland after Poland joins the EU, which is scheduled for 2004. The Regulation contains mandatory rules determining the jurisdiction and the choice of law for given bankruptcy proceedings, however it does not replace the national provisions of substantive bankruptcy law. Under the Regulation, the main bankruptcy proceedings are conducted in the country where the debtor's centre of main interest (COMI) is located. It is presumed that the COMI is in the country where the debtor's registered seat is. The EC Regulation also applies to secondary proceedings conducted in a country where the debtor has an establishment or a branch office but it only applies to the assets located in such country. The Regulation contains provisions simplifying the recognition and enforcement of foreign bankruptcy proceedings and stipulates a requirement for insolvency office holders to co-operate with each other.
The participants of this working group came forward with several questions and doubts concerning the acknowledgement of foreign bankruptcy proceedings in Poland as well as distributing the funds in cross-border insolvencies. The participants wondered if it was viable to acknowledge proceedings conducted under Chapter 11 of the US Bankruptcy Code. They also discussed the issue of distributing funds where the main bankruptcy proceedings is conducted abroad and secondary proceedings in Poland. Under the provisions of the Draft, any surplus funds remaining after the conclusion of secondary proceedings in Poland should be transferred to the main proceedings conducted abroad. Christopher Mallon pointed out that if the creditors of the main proceedings conducted in, say, Holland, receive a repayment of 50% of the actual amount of their receivables, whereas in Poland, creditors taking part in secondary proceedings receive a repayment of their receivables at the rate of 80%, then in accordance with the EU law, the rate of distribution should be balanced out so that the claims of all creditors are repaid in the same proportion. Therefore, the creditors in Poland would receive a repayment of 50% of their receivables, the surplus of the remaining 30% would be transferred to Holland, where the surplus would be evenly (i.e. proportionately) divided among both Polish and foreign creditors. The participants of this working group concluded that under the provisions of law now in effect in Poland before Poland joins the EU, such procedure would have no legal standing.
The plenary session
The plenary session included reports of the discussions conducted in the working groups as well as summing up the entire conference.
The reporting person from the combined groups I and V, Lech Giliciński, thanked the 11 participants and briefly reported the main discussion topics in the group. During that working group meeting, judge Leszek Ciulkin spoke about the proceedings leading up to the declaration of bankruptcy. He presented the premises that need to be fulfilled for an entity to be declared bankrupt, as well as the jurisdiction of the courts and the formal requirements that a petition for bankruptcy has to fulfil. He pointed out that the Draft provides that in some cases, the court may reject a petition for bankruptcy without summoning the petitioner to remedy the defects. Judge Ciulkin also discussed the debtor's liability for failing to file the petition or for providing incorrect or untrue data. Another topic that Group I went into was the change in the legal situation of creditors whose claims were secured during the bankruptcy proceedings. Particular attention was paid to the need to adjust the provisions of the Draft to the law on registered pledges and restoring the role of civil pledges as security in rem during bankruptcy. The last discussion topic based on the discussed case study involved the practical aspects of how the court is supposed to determine whether or not the premises required for a declaration of bankruptcy have been fulfilled.
The reporting person from Group II was Artur Zawadowski, who thanked the participants of his group and outlined the topics that were discussed. He mentioned the doubts regarding determining the scope of the definition of "arrangement receivables" (i.e. receivables subject to the arrangement) and stated that it can be assumed that a list of arrangement receivables should include all receivables. Another topic involved the institution of creditor categories in the context of voting on approving the arrangement. The Draft provides for the possibility to establish different categories for different creditor interest groups apart from those listed in the Draft. Artur Zawadowski stated that working out standards in this respect will in fact be a matter of practice but that preparing certain guidelines for judges would be very useful. He also pointed out that the new categories will probably be created to reflect the arrangement proposals put forward by the creditor(s). The third topic discussed by group II was the order in which the voting on particular proposals should be conducted. The participants concluded that this will also be a matter of practice. Another discussed issue was centred around Art. 285 of the Draft, which stipulates that for an arrangement to be adopted, a majority of 2/3 of votes in favour is required. The question was posed whether the 2/3 majority requirement applied to particular creditor categories separately or to all creditors jointly. Artur Zawadowski stressed that this issue should be rendered in more detail by the Senate to avoid the possible doubts in the future. Group II also discussed the issue of extracts from the list of receivables used as an enforcement tile. In conclusion, Group II discussed the possibilities of changing the arrangement terms: whether or not the creditors who have been satisfied in full have the right to participate in such proceedings and how effective the introduced changes are.
Christopher Mallon, the speaker of Group III, thanked the participants of his group and praised the authors of the Draft for producing a legal act which in many respects is innovatory also in comparison to the English and American bankruptcy provisions. He pointed to the similarities between the Draft and the UNCITRAL Model Code and the EC Regulation. He also stressed the significance of Chapter 11 of the US Bankruptcy Code, which applies to all debtors which conduct their business activity or have any assets in the United States. He pointed to the lack of any regulations in the Draft regarding the provision of priority funding to the debtor if its liquidity is threatened, whereas such funding is available to debtors based on Chapter 11. Christopher Mallon stated that as regards determining jurisdiction, the Draft contains similar solutions to those stipulated in the EC Regulation and the UNCITRAL Model Code. As in the case of the two latter regulations, the Draft provides that the crucial factor for determining the jurisdiction is establishing where the debtor's Centre of Main Interest (COMI) is located. Christopher Mallon also raised the issue of the definition of a foreign administrator. The working group participants pointed out that a foreign administrator will not always be a receiver, a supervisor or another administrator because in foreign bankruptcy proceedings, the role of a foreign administrator is sometimes fulfilled by the bankrupt entity's officers or management board. Christopher Mallon stressed that such officers or management board may be treated as a foreign administrator before a Polish court in the course of bankruptcy proceedings conducted in Poland.
Professor Feliks Zedler briefly summarized the conference and thanked the team with whom he had worked on the Draft for the previous 6 years. He admitted that certain interpretational problems could indeed be expected but said he hoped that the Draft would help business entities to function more safely on the market.
Sylweriusz Królak of the Ministry of Justice also summed up the conference, thanked all the participants and said he was certain the conference would be followed by a series of helpful and successful trainings. He once again stressed the significance of the Draft, which in his opinion not only constituted a change of law but would also necessitate a change in the mentality of Polish business people. The social significance of the Draft was also emphasized, under which preserving the debtor's business and the workplaces it provides is one of the priorities of the proceedings. After his short summary, Sylweriusz Królak closed the conference.
A summary of the responses to the questionnaires completed by the participants
63 people took part in the conference, out of which 38 participated in the working group discussions. Each working group consisted of between 6 and 10 people. All participants were given anonymous questionnaires to fill in. The results are based on the 26 questionnaires which were returned to the conference organizers.
88.5 % of the participants stated that the conference had fulfilled their expectations and had been indispensable in familiarizing those interested with a range of issues connected with the new insolvency regulations. The participants considered the speakers interpretations of certain provisions of the new law to be particularly valuable and useful. As few as 11.5% participants stated that the conference only met their expectations to a certain extent. No conference participant said that the conference had not met their expectations at all.
In the questionnaire, the participants were asked to state the most prominent reason(s) for participating in the conference. 92% ticked "the subject of the conference", 19% marked "the speakers", while 4% ticked "the subjects of particular speeches".
The subjects of particular speeches as well as the speakers were rated very highly. The speakers were given marks of between 1 and 5, with 5 being the highest. Prof. Feliks Zedler, who gave a speech during the official part of the conference on the "main trends in Polish insolvency legal reform" and was the chairman of the working group which discussed the redress proceedings, was rated 4.9 on average; Leszek Ciulkin, a judge in the District Court in Białystok and who was the chairman of the working group which discussed "proceedings aimed at declaring an entity bankrupt", was rated 4.8 on average. The participants of the group which discussed the arrangement law rated both speakers in that group, WGM's Roman Rewald and Artur Zawadowski, at 4.7. Chris Mallon's presentation on "international insolvency proceedings" was rated 4.3 on average. WGM's Lech Giliciński and Justyna Młodzianowska, who prepared and gave a presentation on "creditors submitting claims and the liquidation of the bankruptcy estate" were rated 4.7 and 4.8 respectively.
In reply to the question who else would the participants would like to have seen as speakers at the insolvency law conference, the participants mentioned the representatives of the Ministry of Economy, the Ministry of Labor and Social Policy and the National Chamber of Commerce, as well as Prof. Andrzej Jakubecki of the Maria Curie-Skłodowska University in Lublin, as well as judge Dariusz Czajka from the Warsaw Circuit Court.
Furthermore, the participants suggested that the conference should have addressed both subjects regarding the general bankruptcy proceedings issues as well as specific proceedings applicable to banks, insurance companies, etc. Other suggested topics included a more detailed discussion of the issue of transfers for security and the role of the debtor in the proceedings. At the same, the participants stressed that they were aware of the fact that it was impossible to include all these topics due to time constraints.
The next question concerned the organizational side of the conference, for which WGM's marketing department and the Polish Ministry of Justice were responsible. The venue was awarded on average 4.9; the form of the conference 4.5; the prepared and distributed materials 4.9; the choice of the speakers 4.6; and the assistance of the organizers 4.9.
The last question concerned possible changes or improvements regarding the conference's organization and schedule. The vast majority of the participants stated that, in view of the broadness of the subject, a conference such as this should have lasted more than one day. They also stated that they would have liked to have been able to participate in more than one workshop so as not to have to choose between several very interesting topics. They further pointed out that it would have been advisable to extend the time available for each working group discussion as, during this conference, there was not enough time to discuss the participants' doubts, questions and practical issues which the participants encounter in connection with their professional activities. The participants were extremely interested in the materials prepared by WGM and they also stated that they would welcome some additional materials summarizing the conference.
The participants suggested that a series of similar conferences should be organized, provided that the range of topics of each such conference would be limited to a specific area of the broadly understood bankruptcy regulations and thus more detailed
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