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Research blog: Polish Pre-Pack in the Context of the Proposal for a Directive Harmonising Certain Aspects of Insolvency Law

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Pre-packs have recently received a lot of attention due to the proposal for the directive of the European Parliament and of the Council, harmonising certain aspects of insolvency law, which set some common rules for pre-packs. However, this topic has also been discussed under Polish law with reference to a procedure called “prepared liquidation,” which is often considered the “Polish pre-pack.” This blog will provide an overview of both proceedings and highlight some of the differences between them to consider whether there is a need for adjustments regarding the prepared liquidation resulting from the proposal for the directive.

Pre-packs vs. Prepared liquidation

Pre-packs are widespread in numerous legal systems (both in the common and statutory lawlegal systems), including, in many European Union Member States. Although procedures involving pre-pack vary, pre-packs generally refer to the transfer of the assets of an undertaking in distress, prepared before the commencement of insolvency proceedings (reorganization or liquidation) with the assistance of an insolvency practitioner and usually implemented immediately after the initiation of insolvency proceedings. 

The proposal for the directive contains an autonomous definition of pre-pack proceedings, understood as “expedited liquidation proceedings that allow for the sale of the business of the debtor, in whole or in part, as a going-concern to the best bidder, with a view to the liquidation of the assets of the debtor as a result of the established insolvency of the debtor”. The sale as a going concern should allow the business to continue to operate as an economically productive unit. Such sale should protect both the business and the creditors, as, in principle, it should be more profitable than a piecemeal liquidation. 

​Prepared liquidation has a broader scope than the pre-pack in the proposal for the directive. On the one hand, it allows for the sale of the whole business or a part thereof. On the other hand, this procedure might also be applied to particular assets, such as the real estate assets (in practice, around 30 % of pre-packs relate to real estate assets). The prepared liquidation might be seen as a restructuring procedure, because it can contribute to saving companies in distress. However, it is in line with the general objective of the Polish bankruptcy procedure, in which the creditors’ interests are in the foreground.

Pre-pack sales can be approved by the court only if they lead to better results than under a regular liquidation. Saving business and keeping the employees is not a decisive argument – such reasoning can only support a fundamental argumentation that such sale is more profitable than a piecemeal liquidation. In practice when deciding on such a sale, courts do not investigate whether the business is likely to survive in the hands of the potential buyer. If the petitioner provides evidence that the sale of certain assets in prepared liquidation will be more beneficial than the sale of the business in whole or in part, the court will approve such sale.

What’s up for the Polish legislator

Having in mind the above, if the proposal for directive comes into force in its current state, it will be necessary for Polish lawmakers to rethink the concept of “prepared liquidation.” Although some topics are already covered in Polish law (i.a., the transfer of employees), there will be a need for some adjustments. One of these would be auctions, which are already allowed within the prepared liquidation, however they are not competitive enough.

According to the Polish legislator, auctions should lead to the obtaining of a better price for the debtor’s assets. In practice, auctions within the prepared liquidation are less competitive than auctions within a regular liquidation because only the buyers mentioned in pre-pack petitions can participate (no third party is otherwise allowed to make an offer or take part in an auction within the prepared liquidation). At the same time, the proposal for a directive requires from pre-pack proceedings that the best possible market value is achieved as a result of a competitive sale process. Another issue that will need to be addressed if the proposal for the directive is passed is the assignment of the contracts to a purchaser. 

the proposal for a directive requires from pre-pack proceedings that the best possible market value is achieved as a result of a competitive sale process

Currently, under Polish law, it is not clear, whether the debtor’s contracts can be taken over by a purchaser. The result of the sale within bankruptcy proceedings is that no debts are transferred to the buyer. This leads to the conclusion that the purchaser of the business acquires only rights from contracts without any obligations, which stay with the debtor. Such solution is not rational because transfer of contracts cannot mean transfer of rights with no corresponding obligations (e.g. right to use property with no obligation to pay for that). Therefore, separate agreements in which both the rights and the obligations from the contracts are transferred from the debtor to the purchaser are concluded. Such practice is time consuming and seems to be unreasonable. 

Conclusion

Although prepared liquidation is a mechanism successfully used in practice bybankruptcy courts and it sometimes makes bankruptcy possible (otherwise bankruptcy petitions would be denied due to insufficient assets to cover the costs of the proceedings), the adoption of the directive harmonising certain aspects of insolvency law as it is right now would require some adjustments. The question is whether prepared liquidation should stay as it is and a new additional procedure that would correspond with the ideas from the proposal for the directive should be invented or whether prepared liquidation should be revised. However, it is too early to answer this question. In this regard, it must be underlined that prepared liquidation was introduced in 2016 so it is a relatively new procedure, and, undoubtedly, frequent changes in law are not desired by stakeholders.

*This research blog was written by Monika Maśnicka, PhD Candidate at the Doctoral School of Humanities and Social Sciences of the University of Gdańsk, Poland.

About BWILC and the PhD Workshop

This research was presented and discussed at the last PhD Workshop on European and International Insolvency law, organised by the Stichting Bob Wessels Insolvency Law Collection (BWILC). Since 2018, BWILC maintains the private insolvency law book collections of Prof. em. Bob Wessels, extended with the collections of the late Prof. Ian Fletcher and the late Gabriel Moss QC, in addition to books that have been kindly donated by scholars and practitioners from around the world. To browse or visit this unique collection, click here.

Since 2019, BWILC organises an annual PhD Workshop for PhD students from Europe and beyond. At this workshop, PhD candidates can present their ideas, but also the challenges and questions they are confronted with in a two-day workshop attended by their peers and senior academics. At the end of the workshop, organised in alternately in Leiden and another city, prizes are awarded for the best presentations.

For information about the next PhD Workshop, click here.