Restructuring or Bankruptcy: Rescue Proceedings for Entrepreneurs

A loss of liquidity is one of the most stressful moments in the life of any business. Invoices fall into arrears, the bailiff knocks at the door and creditors demand immediate payment. In that situation the entrepreneur faces a crucial question: can the business still be saved, or is all that remains a controlled winding-up of the operation?

For such circumstances, Polish law provides two separate instruments: restructuring proceedings and bankruptcy proceedings. Both concern indebted entities, yet the procedure in each is different and they lead to radically different outcomes. Understanding those differences is the first step towards making the right decision — and sometimes also towards saving the business from liquidation.

I. Two instruments, two different objectives

Restructuring and bankruptcy are governed by two separate statutes: the Restructuring Law of 15 May 2015 and the Bankruptcy Law of 28 February 2003.

The objective of restructuring is to avoid a declaration of bankruptcy by enabling the debtor to conclude an arrangement (układ) with creditors, while at the same time respecting their legitimate rights. The Bankruptcy Law, by contrast, places the fullest possible satisfaction of creditors first — which in practice most often means realising the debtor’s assets and distributing the proceeds.

Put as simply as possible: restructuring is there to save the business, bankruptcy to bring its existence to an end in a manner that is orderly and as fair to creditors as possible.

II. The key differences between restructuring and bankruptcy

When can each of the proceedings be used?

Restructuring is available both to an entrepreneur who is already insolvent and to one who is merely threatened with insolvency — that is, whose financial position indicates that in the coming months it may lose the ability to meet its obligations. This is a significant advantage of restructuring, because it makes it possible to act preventively, before a deep crisis has even set in.

Bankruptcy may be declared only in respect of a debtor who is already insolvent. An entrepreneur is regarded as insolvent where it has lost the ability to pay its due monetary obligations — this is usually demonstrated where the delay exceeds three months. In the case of companies, insolvency also arises where liabilities exceed the value of the assets for a period longer than twenty-four months.

Importantly, from the moment the state of insolvency arises the debtor has only 30 days to file a petition — whether for a declaration of bankruptcy or for the opening of restructuring (where the basis is the threat of insolvency, a restructuring petition may be filed even earlier). Failure to observe that deadline may result in the personal liability of the members of the management board for the company’s obligations.

Who may file the petition?

In restructuring proceedings the petition may be filed by the debtor alone. This is a fundamental difference from bankruptcy, where the petition may be filed both by the entrepreneur itself and by any of its creditors. Restructuring therefore requires genuine willingness and initiative on the part of the entrepreneur — no one will compel it to rescue the business against its will.

What happens to the management of the business?

In restructuring — with the exception of sanation proceedings — the debtor retains its own management. It continues to run day-to-day operations, to conclude contracts and to take operational decisions. The court supervisor (nadzorca sądowy) performs a supervisory function, giving consent only to acts that exceed the ordinary course of management (for example, the sale of real estate or the taking out of loans).

In bankruptcy the position is the reverse: management of the assets is taken over in its entirety by the trustee in bankruptcy (syndyk), who conducts the liquidation of the bankruptcy estate. The debtor loses the right freely to dispose of its assets as from the day bankruptcy is declared.

Protection against enforcement by a bailiff

Both proceedings protect the debtor against enforcement, but the scope of that protection differs. The opening of restructuring proceedings stays enforcement proceedings (in part or in full, depending on the type of proceedings), and the bailiff loses the ability to commence new ones. In bankruptcy all pending enforcement proceedings are stayed and the debtor’s entire assets pass into the bankruptcy estate, out of which creditors are satisfied according to the statutory categories.

Employees and contracts

In restructuring the business continues to operate and employment relationships continue on their existing terms — only sanation proceedings provide additional tools, for example the possibility of terminating disadvantageous contracts with the consent of the judge-commissioner. In bankruptcy it is the trustee who decides whether the business continues or ceases, although the declaration of bankruptcy does not in itself cause employment contracts to expire automatically.

An arrangement — the rule or the exception?

Concluding an arrangement with creditors is theoretically possible in both procedures. In restructuring, however, it is the principal objective and the natural course of the proceedings. In bankruptcy an arrangement remains the exception — the default scenario is the liquidation of the assets, and any arrangement is implemented by the trustee rather than by a supervisor.

Who are the proceedings for?

Restructuring proceedings are intended exclusively for entrepreneurs — both natural persons conducting business activity and commercial law companies. Bankruptcy, by contrast, is available both to entrepreneurs and to natural persons not conducting business activity, under so-called consumer bankruptcy. A private individual who does not run a business therefore has no access to restructuring — the only route to debt relief available to them is consumer bankruptcy.

It is worth adding that, under Article 9a of the Bankruptcy Law, the court may not declare bankruptcy while restructuring proceedings are open. A restructuring petition therefore takes precedence over a bankruptcy petition — further evidence that the legislator rewards an attempt to rescue a business over its liquidation.

III. When to choose restructuring and when bankruptcy?

Restructuring will work where:

• the business has a real chance of emerging from the crisis and continuing to operate on the market,
• the enterprise generates revenue and holds valuable assets despite its financial difficulties,
• creditors can be satisfied to a greater extent through an arrangement than as a result of the liquidation of the assets.

Bankruptcy, by contrast, becomes a necessity where:

• there are no longer any realistic prospects of saving the business,
• the company’s assets are not even sufficient to cover the costs of restructuring proceedings,
• the debtor is a natural person not conducting business activity.

The key to the right decision is an early diagnosis of the financial situation. The sooner the entrepreneur reacts, the more room for manoeuvre it has — restructuring is available as early as the stage of a mere threat of insolvency, while the business still has the time and the means to act effectively.

IV. Restructuring in more detail — four types of proceedings

Since restructuring is usually the more advantageous route for an entrepreneur, it is worth knowing that it is not a single, uniform procedure. The Restructuring Law distinguishes four types of proceedings, differing in the scope of protection, the formalities, the duration and the degree of interference in the management of the business. The choice of the right route depends on the scale of the indebtedness, the number and attitude of the creditors and how urgent the need for protection against enforcement is.

1. Proceedings for the approval of an arrangement (PZU)

This is the most frequently chosen form of restructuring — above all because of its speed and the minimal number of formalities. Its characteristic feature is that, as a rule, it is extrajudicial in nature: it is not the court but a restructuring adviser (acting as arrangement supervisor) who opens the proceedings and collects creditors’ votes independently. In practice the court’s involvement is limited to the stage of approving an arrangement that has already been negotiated.

Since December 2021 the PZU may be conducted in two variants:

• the classic variant — without an announcement fixing the arrangement date, and therefore without any special protection against creditors,
• the amended variant (so-called PZU 2.0) — with an announcement, which gives the debtor protection against enforcement almost as strong as in sanation proceedings, together with protection against the termination of key contracts (lease, tenancy, credit facilities and contracts key to the business’s operations).

Protection under the PZU 2.0 variant lasts four months from the announcement — within that time a petition for approval of the arrangement must be filed in order for the protection to be extended until the proceedings are concluded with final effect. It is worth bearing in mind that this route (with an announcement) may be used only once every 10 years.

Who is it for? For businesses that want to carry out a restructuring efficiently, to retain as full control of management as possible and that have a chance of reaching a relatively quick agreement with their creditors.

2. Accelerated arrangement proceedings

This is an intermediate solution — faster than classic arrangement proceedings, but already involving the court. The court issues a decision opening the proceedings, and a court supervisor oversees the preparation of the arrangement and the conduct of the creditors’ vote.

Protection against enforcement here is partial in nature — only enforcement proceedings concerning claims covered by the arrangement are stayed by operation of law, not the debtor’s entire assets. The debtor retains its own management, although the court supervisor must consent to acts exceeding the ordinary course of management. As in other proceedings, the prohibition on terminating key contracts applies.

Who is it for? For enterprises with a relatively simple structure of liabilities that need a fast but at the same time formalised restructuring route.

3. Arrangement proceedings

Arrangement proceedings are intended for businesses with a more complicated claims situation. The key difference from accelerated arrangement proceedings is that the arrangement is concluded after the list of claims has been drawn up and approved — which in itself lengthens the whole process, often to more than a year.

This route applies in particular where the total of disputed claims (that is, claims not acknowledged by the debtor but carrying the right to vote on the arrangement) exceeds 15% of the total of all voting claims. If that threshold is not exceeded, using this route is not permissible — accelerated arrangement proceedings will then be more appropriate.

As in the previous case, protection against enforcement is partial in nature and the debtor retains management, albeit under the supervision of a court supervisor.

Who is it for? For enterprises with an extensive and diversified debt structure, where a significant part of the claims is disputed and the process requires more time for detailed negotiation.

4. Sanation proceedings

This is the most elaborate and at the same time the most deeply intrusive form of restructuring. It is the only one that makes it possible to carry out so-called sanation measures — legal and factual acts intended to restore the debtor’s ability to perform its obligations, with full protection against enforcement at the same time.

In these proceedings the debtor loses management of the business to an administrator (zarządca) appointed by the court (exceptionally, the court may leave the debtor with its own management). In return, the business gains the widest possible protection — all enforcement proceedings are stayed, including those conducted by creditors secured in rem (mortgage, pledge), which is not the case in the other three routes.

In addition, only in sanation proceedings may the administrator withdraw from unprofitable contracts without the risk of having to pay a contractual penalty, and the debtor’s assets may be sold free of encumbrances. The price for these broad powers is, however, a rigorous procedure, higher costs and a longer duration of the proceedings — in this respect close to bankruptcy proceedings.

Who is it for? For businesses requiring a deep, comprehensive overhaul — not only financial but also organisational — and prepared to accept the takeover of management by an administrator in exchange for the widest possible protection.

V. The benefits and limitations of restructuring

A properly conducted restructuring gives an entrepreneur a real chance of continuing to operate on the market. On the benefits side, the following are worth mentioning above all: the remission of additional costs and part of the interest, the extension of the repayment period and sometimes even a reduction of the principal amount of the debt itself. Importantly, filing a restructuring petition in good time — like filing a petition for a declaration of bankruptcy — may protect the members of the company’s management board from personal liability for its obligations.

Restructuring has its limitations too, however. The debtor loses part of its freedom in managing its assets — certain acts require the consent of the supervisor or the administrator. Creditors secured in rem (for example by a mortgage) may decline to join the arrangement and continue enforcement against the secured asset.

VI. Summary

Restructuring and bankruptcy are two fundamentally different legal instruments and not — as is sometimes mistakenly assumed — two names for the same thing. Restructuring gives an entrepreneur a chance to save the business, to retain control over its operations and to negotiate more favourable repayment terms with creditors. Bankruptcy, by contrast, leads to an orderly liquidation of the assets and the fullest possible satisfaction of creditors.

Within restructuring itself the entrepreneur has four routes to choose from — from the fastest and least formalised proceedings for the approval of an arrangement, through accelerated arrangement proceedings and arrangement proceedings, to the most far-reaching sanation proceedings. The right choice depends on the scale of the indebtedness, the structure of the claims and how urgently the business needs protection against enforcement.

The most important principle, however, remains unchanged: the earlier the entrepreneur takes a decision, the more room for manoeuvre it has. Restructuring is available as early as the stage of a mere threat of insolvency — it is therefore worth reacting before the financial crisis becomes irreversible.