Protecting lender interests: the effectiveness of security documents in Polish restructuring proceedings

In-depth analysis

Introductory comments

In recent years, Poland has seen a significant rise in restructuring proceedings. These proceedings are an alternative to bankruptcy, aiming to remedy the debtor's situation and to enable continued business activity. Various types of security interest are available to creditors under Polish law, each of which offers differing protections to creditors. The way in which such interests are dealt with in a restructuring process is discussed below with a view to understanding the discussions a creditor/debtor may have once the debtor is in financial difficulties, and the factors at play in deciding how to proceed.

Restructuring proceedings under Polish law

In recent years, the number of restructuring proceedings in Poland (regulated by the Restructuring Act of 15 May 2015 (as amended) and in Polish referred to as postępowanie restrukturyzacyjne) has increased significantly. In 2023, according to the Central Office of Commercial Information (Centralny Ośrodek Informacji Gospodarczej (COIG), the number of opened restructuring proceedings was 4244 compared to 2379 in 2022. Restructuring proceedings are recognized as an alternative to standard bankruptcy proceedings (in Polish: postępowanie upadłościowe). The key difference between these two types of proceedings is that bankruptcy proceedings lead to the liquidation of the insolvent debtor (entity), while the purpose of restructuring proceedings is to remedy the debtor’s situation and to reach an arrangement with creditors, ie to seek a solution which allows the debtor to continue its business activity in solvent circumstances. Accordingly, restructuring proceedings would typically be preferred by the debtor.

One of the key consequences of initiating restructuring proceedings is that the debtor's management of assets and/or property is limited. Conversely, the debtor is typically protected from enforcement action by creditors as long as restructuring proceedings are ongoing, with the exception of certain creditors, for example a secured creditor who may continue to enforce against certain security interests such as a pledge or a mortgage (discussed below).

There are four types of restructuring proceedings under Polish law. They differ in terms of the level of formalities required and the involvement of the court:

Arrangement Approval Proceedings
Accelerated Arrangement Proceedings
Arrangement Proceedings
Remedial Proceedings.

Arrangement Approval Proceedings are by far the most prevalent type in Poland. According to the COIG these types of proceedings constitute over 90% of restructuring proceedings in Poland in total as they are the least formalised. Arrangement Approval Proceedings do not require a court decision to be initiated: the debtor brings forth an arrangement proposal and negotiates it with its creditors, then the arrangement is approved by the court.

The key characteristics of and main differences between each of the four different types of restructuring proceedings are illustrated by the table that follows:

	Is bailiff-led enforcement suspended?	Is the debtor barred from administering its assets?	Other key characteristics
Remedial Proceedings	Yes, and this includes enforcement against Limited Property Rights (ie pledges and mortgages and discussed below).	Yes, completely. Possibility of obtaining the right to ordinary (day-to-day) management.	Most formalised among restructuring proceedings; to a large extent similar to bankruptcy proceedings however, the aim is to reduce the debtor’s liabilities, not to fully liquidate its assets. The administrator in Remedial Proceedings is entitled to: (i) conduct an enforcement sale (including the expiry of security interests) of the debtor’s assets. (ii) terminate employment contracts in a simplified way. (iii) terminate agreements.
Arrangement Proceedings	Yes, but this does not include enforcement against Limited Property Rights.	Yes, in relation to actions exceeding ordinary management. Can be extended to include ordinary management actions.	More formalised procedure than those below, with more court involvement.
Accelerated Arrangement Proceedings	Yes, but this does not include enforcement against Limited Property Rights.	Yes, in relation to actions exceeding ordinary management. Can be extended to include ordinary management actions.
Arrangement Approval Proceedings	Yes, and this includes enforcement against Limited Property Rights.	Yes, from the date of public announcement, actions exceeding ordinary management require the consent of the restructuring authority.	The main role of the court is to approve the pre-agreed arrangement; the debtor collects the creditors’ votes in favour of the arrangement with the assistance of the arrangement supervisor.

Limited property rights

The most significant type of Polish security interest in terms of protection of the lender’s interests are limited property rights which include the following and are referred to in this article as Limited Property Rights:

a registered pledge (which can be established over rights, including in particular shares and contractual receivables, or moveable assets and is subject to registration in a pledge register in order to be effective security)
a civil or financial pledge (unlike the registered pledge, these types of pledge are not subject to registration in the public register and are often established simultaneously with the registered pledge since they are effective from the date the pledge agreement is signed)
a mortgage (which can be established over real estate and is subject to registration in a public register in order to be effective security).

Main characteristics

The main characteristics of Limited Property Rights are their effectiveness against each owner of the pledged asset/right and the priority of satisfaction of the secured creditor over unsecured creditors. Additionally, registered pledges and mortgages are disclosed in the public registers maintained by courts, which increases the level of the secured creditor’s protection. Specifically, the assets subject to such pledges or mortgages cannot be subject to the transfer or establishment of further security with prejudice to the terms of the existing and registered security, for example, if the registered pledge agreement includes a negative pledge clause, the transfer of the pledged asset or right contrary to the terms of such a clause would be deemed invalid in law.

Restructuring Proceedings

In restructuring proceedings, the secured creditor also enjoys the following:

While in standard bankruptcy proceedings, separate enforcement proceedings by a creditor against a pledge or a mortgage is not permitted, such an option exists in certain types of restructuring proceedings; Arrangement Proceedings and Accelerated Arrangement Proceedings allow a creditor secured by a pledge or mortgage to initiate or continue a separate enforcement of its claims.
In certain circumstances, the secured creditor may also use an out-of-court method of enforcement such as a takeover of the pledged asset or right – for example, a takeover of pledged shares at the value determined in the pledge agreement by way of submission of a notice.
As a rule, the receivables secured by a pledge or a mortgage are not included in an arrangement in the part which is covered by the value of the security, unless the creditor has agreed to include them in the arrangement. Further, if the debtor has presented a creditor secured by pledge or mortgage with an arrangement proposal providing for full satisfaction, or providing for the satisfaction of the creditor to a sum not lower than that which may be expected were the claim pursued against the security, such a creditor’s consent is not required.
The arrangement must not violate the rights of the secured creditor arising under the pledge or the mortgage, unless the secured creditor has agreed for its claims to be subject to an arrangement as mentioned in point 3 in the bullet point above.
In the case of the revocation or termination of the arrangement, creditors secured by a mortgage or pledge may pursue their claims at the original sum.

Security Assignment and Security Transfer of Ownership

Other types of security instruments which are standard on the Polish market are Security Transfer of Ownership (in Polish: przewłaszczenie na zabezpieczenie) (Security Transfer of Ownership) and Security Assignment (in Polish: przelew na zabezpieczenie) (Security Assignment). They both relate to the transfer/assignment in favour of the secured creditor of:

in the case of a Security Transfer of Ownership: moveable assets or property rights
in the case of a Security Assignment: contractual rights owed to third parties (for example, monetary claims under lease agreements or trade agreements to which the debtor is a party).

In both cases, the transfer/assignment is made for the sole purpose of securing the creditor’s claims. Accordingly, the secured creditor is not allowed to exercise any right in relation to the subject matter of such transfer or assignment unless the debtor in in breach of its obligations (for example non-payment of secured claims or another event of default under the agreement between debtor and creditor). Further, the rights or assets are transferred back or re-assigned to the debtor upon repayment of the secured claim.

In restructuring proceedings (in the same way as in bankruptcy proceedings) the Security Assignment and the Security Transfer of Ownership enjoy as a rule the same benefits and the priority of satisfaction as Limited Property Rights (pledges and mortgages). In particular, the protection of a secured creditor referred to within the third and fourth bullet points of "Restructuring Proceedings" above also applies to these types of security.

Other types of security

While the above mentioned security instruments are regarded as the most significant and are recommended as a way of protecting the lender’s interests in restructuring proceedings, the following ones are also standard on the Polish market and may be effective in restructuring proceedings:

Guarantees, including also bank guarantees and insurance guarantees: these are payment obligations of third parties which are of an abstract nature. Accordingly, the bankruptcy or restructuring of the main debtor should not prejudice the guarantor’s payment obligations as the guarantor bears the risk of such debtors’ insolvency; however, the terms of a guarantee should be reviewed to make sure it also covers the restructuring of the debtor.
Sureties (in Polish: poręczenia): these are similar to guarantees as they constitute a third party’s obligation to repay the secured claim in the event the primary debtor does not pay at the prescribed time. They are however of a less abstract character as the surety's scope of liability is related to the scope of liability of the main debtor. As in the case of a guarantee, the bankruptcy or restructuring of the main debtor should in principle not affect the surety's liability, which is based on the original secured claim.
Escrow account or notarial deposit: if sums were transferred by a debtor in accordance with the terms of an escrow agreement or a notarial deposit agreement (for example, to be paid to the buyer of a property or shares if specific conditions are met); then as a rule the opening of restructuring proceedings should not affect the terms of such escrow arrangements.
Subordination agreements: while standard in major financing transactions, such agreements providing for subordination of certain claims (eg shareholders’ claims) to the senior creditor’s claims are, from the perspective of Polish law, only binding on the contractual parties; accordingly, they are not binding on third parties such as the restructuring courts and parties to the proceedings.

Concluding comments

Understanding how security interests are treated under Polish law during a restructuring process is crucial, as it can influence the choice of procedure. This knowledge should be integrated into discussions on this topic to ensure informed decision-making.