Dr Marek Porzycki

 only after a bankruptcy petition (bankruptcy proceedings cannot be opened ex officio) - by the debtor (duty to file a petition within 30 days of insolvency, Art. 21 BL). In case of companies, the directors are required to file for bankruptcy. In case of partnerships, fully liable partners are required to file for bankruptcy of the partnership. - by a creditor (entitled to file a petition, Art. 20 BL)

 Persons with a duty to file for bankruptcy (the debtor, directors of a company, fully liable partners in a partnership) are liable for failure to file or late filing: - liability for damages under Art. 21(3) BL  presumption of guilt and presumption of liability in full amount of the unsatisfied claim - „subsidiary” liability under Art. 299 of the Commercial Companies Code (in fact liability for damages), applies only to directors of a limited liability company - sanctions under Art BL  ban on business activity - criminal law sanctions under Art. 586 CCC

 applicability of bankruptcy proceedings (in case of regular bankruptcy to enterpreneurs only) - Art. 5-6 BR  insolvency: incapacity to fulfill monetary obligations as they fall due (cash flow insolvency) or overindebtedness (balance sheet insolvency) – Art BR  sufficient assets to cover the costs of proceedings – Art. 13 BR

 Rule (Art. 5(1) BL): bankruptcy proceedings are applicable to enterpreneurs in the meaning of Art of the Civil Code  natural persons, legal persons and organizational entities carrying out a business or professional activity on their own behalf  all joint-stock and limited liability companies (Art. 5(2)(1) BL)  partners in partnerships who are fully liable for the debts of the partnership (Art. 5(2)(2) BL)

 Exclusions (Art. 6 BL)  no bankruptcy proceedings applicable to: - the State Treasury - local self-governing entities (local authorities) - public hospitals - certain public-sector entities - higher education institutions (including private ones) - farmers not carrying out any other business or professional activity

 Natural persons who are not subject to regular bankruptcy proceedings (non- enterpreneurs and farmers) can apply for consumer bankruptcy (Art et seq. BL), allowing them to obtain a discharge of their debts (  ‚fresh start’)

 General form: loss of ability to fulfill monetary obligations as they fall due (Art. 11(1) BL) [cf. cash-flow insolvency] - presumption of insolvency if the delay in performance exceeds 3 months  Particular form applicable to companies - liabilities exceed the value of assets of the debtor for more than 24 months - [cf. balance-sheet insolvency]

 Bankruptcy proceedings are intended to benefit creditors  costs of the proceedings are to be covered from the assets of the debtor. If the assets of the debtor would be completely consumed by costs, the opening of bankruptcy proceedings shall be refused.  The same rule applies if the assets of the debtor are encumbered by security interest to the degree that their remaining value is not enough to cover the costs (Art. 13(2) BL).  The proceedings should be nevertheless opened if the opening would lead to recovery of assets in result of challenging detrimental acts of the debtor (Art. 13(3) BL).  If insufficiency of assets appears later in the course of proceedings, the proceedings are to be discontinued (Art. 361 BL).

 Measures to secure assets of the debtor between the filing and the decision on the opening of proceedings  Rule: appointment of a temporary court surpervisor (Art. 38 BL)  Possibility of appointment of a compulsory administrator who takes over the administration of the debtor’s assets on a temporary basis (Art. 40 BL)

 Decision to open the proceedings: - immediate effect (Art. 51(2) BL) - „zero hour rule” – effect from the start of the day when the decision is issued - possibility to challenge the decision.  Refusal to open the proceedings: - dismissal of the petition  most commonly because of insufficiency of assets (Art. 13 BL) - inadmittance of the petition on formal grounds

 The bankruptcy court  The judge-commissioner  The liquidator (syndyk) – requirement to hold a licence of a restructuring advisor  Creditor bodies: - general creditors meetings (rare) - creditors committee – facultative but with considerable powers

 Conflict of interest between creditors – every creditor wants to be satisfied in a greatest possible extent, which would harm the remaining creditors. The bankruptcy law has to protect the collective interest of the creditors by minimizing privileges and protecting the bankruptcy estate.

 divestment of the debtor - the debtor loses the right to manage and dispose of his or her assets (  bankruptcy estate) - appointment of a liquidator (trustee, Polish: syndyk) to manage and wind up the bankruptcy estate - the bankrupt’s enterprise usually ceases its activity

 Bankruptcy estate (masa upadłości) – all assets of the debtor, including assets acquired after the opening of proceedings (Art. 61, 62 BL). Purpose of the estate: creditor satisfaction.  Assets excluded from the estate (Art. 63, 64 BL): - assets free from attachment in enforcement proceedings (covering a minimum level of necessities for the debtor); - the debtor’s remuneration in the attachment-free part; - social funds created for the debtor’s employees.

 deep impact on legal relations of the debtor, aiming at maximizing the bankruptcy estate - the non-monetary obligations of the debtor are converted into monetary debts (Art. 91 BR) - all obligations of the debtor fall due at the moment of the opening of the proceedings (Art. 91 BR) - the liquidator may choose whether to repudiate pending contracts (Art. 98 BR) - several special regulations for particular contracts - ban on enforcement proceedings against the debtor (justified by bankruptcy’s role as collective enforcement)

 If neither of the parties has fully performed on a mutual contract (the contract is still pending at the moment of the opening of proceedings)  the liquidator can choose whether to assume or reject the contract (Art. 98, 99 BL).  Assumption of the contract  the bankruptcy estate enters into the contract, the counterparty’s claim is satisfied with priority  Rejection of the contract  the contract expires, the counterparty’s claims resulting from partial performance and for compensation of losses are satisfied as ordinary bankruptcy claims (2nd category)

Acts of the debtor detrimental to the creditors (Art. 127 et. seq. BL)  „suspect period” of up to 1 year before filing for bankruptcy  certain acts of the debtor concluded in that period are retroactively made ineffective in result of the opening of bankruptcy proceedings  examples: - donation made by the debtor to his brother (becomes automatically ineffective) - sale contract between the debtor and a closely linked company (may be rendered ineffective by a decision of the judge- commissioner if found to be detrimental to creditors) - disproportionately high remuneration of a manager (may be rendered ineffective by a decision of the judge-commissioner)  purpose: recovering assets lost in result of such acts and including them in the bankruptcy estate (for the benefit of creditors)

 drawing up the list of claims: - most creditors need to submit their claims in order to take part in the proceedings (exceptions: employees, creditors with security interest)(Art. 236 BL) - the submissions are verified and the list of claims can be challenged.  producing the inventory of bankruptcy estate and its assessment  sale of assets and distribution of proceeds among creditors - sale of enterprise as going concern (preferred but usually not realistic) (Art. 316 BL), - sale of assets, - claims belonging to the debtor may be realised or sold, - a possibility for a pre-packaged liquidation has been introduced in 2015, with details proposed already in the bankruptcy petition (Art. 56a-56h BL).

 post-commencement claims (with priority), Art. 230 BL: - costs of the proceedings (highest priority) - other claims related to the proceedings - almony claims arising after the opening of proceedings  pre-commencement claims (categories), Art. 342 BL: - privileged claims (employees, some social security contributions) – 1st category, - ordinary claims (including tax claims – loss of Treasury privilege in the 2015 reform!) – 2nd category, - subordinated claims – court and administrative fines, donations etc. – 3rd category, - claims arising from shareholder loans to a company – 4th category Payout principles: higher category before a lower one, proportionality within categories

 Payouts to the creditors according to distribution plans (Art BL)  Drawn by the liquidator  Subject to challenge by the debtor and any creditor  To be confirmed by the judge-commissioner  Several plans can be prepared and realised during the proceedings. After the realisation of the final distribution plan  closure of proceedings.

 right for separate satisfaction (Art. 336 and 345 BR)  Claims secured by rights in rem (mortgage, pledge, registered pledge) or title transfer are satisfied with priority from the collateral. The asset encumbered by a right in rem or transferred as collateral is sold separately and proceeds are paid out to the secured creditor. Any remaining proceeds are transferred to general funds of the bankruptcy estate and serve to cover claims of unsecured creditors.

 Sequence of satisfaction from the proceeds of an asset used as collateral (Art. 345, 346 BL): 1) costs of the sale of the asset and a share in general costs of the proceedings (calculated according to the proportion of the value of the asset to the value of the estate, no more than 10% of the value of the asset), 2) a limited range of employee claims and alimony claims [only in case of real estate and maritime ships], 3) secured creditors, according to the priority of their respective rights, 4) any remaining surplus is to be transferred to the general bankruptcy estate

 (Regular) closure of proceedings – after the realisation of the final distribution plan, once all assets of the estate have been sold and all proceeds distributed (Art. 368(1) BL)  (Exceptional) closure of proceedings – if all creditors have been satisfied in full (Art. 368(2) BL)  Termination (discontinuation) of the proceedings (Art. 361 BL)  if insufficiency of assets to cover the costs appears during the proceedings; or on unanimous demand of all creditors  annulment of the proceedings (Art. 371 BL) – if the decision on the opening of the proceedings is subsequently annuled by second instance court.

 Consequences of the closure of bankruptcy proceedings for the situation afterwards a) in case of natural persons – they still owe the remaining debts (unsatisfied during the proceedings), the creditors have an enforcement deed allowing them to initiate enforcement proceedings without a court judgment. Exception – in case of discharge of the debtor (see below) b) in case of legal persons (companies) – they are dissolved by the fact of bankruptcy. Bankruptcy proceedings assume the role of winding-up  loss of legal existence

 for enterpreneurs – in regular bankruptcy proceedings (Art f BL)  for consumers (non-entrepreneurs) – in consumer bankruptcy proceedings (Art BL)

 largely liberalised from  open to all natural persons non-enterpreneurs whose insolvency was not deliberate nor did it result from gross negligence  the Treasury covers costs of proceedings if the debtor has no assets  after sale of the estate and distribution of proceeds, a payment plan is adopted for up to 3 years  after the payment plan has been carried out, the remaining part of the debtor’s debts are discharged  flexibilities built into the proceedings – clause of equitable and humanitarian grounds allows for disregarding some obstacles to the proceedings

 regular bankruptcy proceedings  payment plan similar to one applicable in consumer bankruptcy  difference – no Treasury financing of proceedings  the debtor needs enough assets to cover the costs of his bankruptcy  solution for debtors with no assets  after cessation of business activities a natural person becomes eligible for consumer bankruptcy