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Second Chance Directive – what is it and when will it be implemented?

by Alicja Szyrner

30 January 2023

The deadline for the implementation of amendments to the restructuring proceedings expired on 17 July 2022, and the Polish draft act is still at the review stage.

Rumour has it that Polish enterprises will sue the State Treasury for damages as they are deprived of the right to use the tools introduced by the Second Chance Directive.

Second chance for enterprises

The Second Chance Directive [1] aims to help restore the viability of businesses, including by discharging the debts of enterprises. Insolvent businesses are supposed to have access to at least one type of procedure that can lead to complete discharge of debt.

The directive is supposed to aid effective restructuring at an early stage of financial difficulties, and thus avoid insolvency. The directive does not apply directly in the Member States and requires transposing into the national law.

Generally, the directive should have been transposed into Polish law by 17 July 2022. In fact, the bill was not published on the Government Legislation Centre website until 4 July 2022. At this point, we are waiting for the Minister of Justice to respond to comments on the bill made during the legislative process.

Current legal status quo

There are currently four types of restructuring procedures available to the debtor:

procedure for approving a voluntary arrangement, which is mainly out-of-court – the arrangement may be made if the debtor collects the creditors’ votes by himself,
voluntary arrangement procedure and expedited voluntary arrangement procedure, which provide partial protection against enforcement (prohibition to initiate new proceedings and suspension of enforcement of claims covered by the arrangement by operation of law),
rehabilitation proceedings which aim at improving the debtor's economic situation and restore its ability to meet its obligations.

The Second Chance Directive requires yet another type of the procedure – preventive restructuring addressed to both insolvent enterprises and enterprises at risk of insolvency. Rehabilitation proceedings are to be available only to insolvent enterprises.

Thus, three main types of procedures to be in place once the amendment comes into force are:

insolvency procedure (leading to the liquidation of the enterprise),
rehabilitation restructuring,
preventive restructuring aimed at healing up the enterprise and avoiding insolvency.

Goals of the bill

Distinguish restructuring procedures within the preventive restructuring framework (procedure for approving a voluntary arrangement, expedited voluntary arrangement procedure, voluntary arrangement procedure) from rehabilitation proceedings.
Simplify the application procedure for opening of restructuring procedure for micro-enterprises (detailed description of the enterprise, production capacity and description of financing methods and sources are to be no longer needed).
The application must describe the impact of the restructuring procedure on the headcount in the debtor's enterprise, representatives of employees must be informed about the possible effects of the proceedings and the employees must be consulted.
New rules for dividing creditors into separate interest groups (classes).
An arrangement may be adopted despite the cross-class cram-down, i.e. if the restructuring plan satisfies the best-interest-of-creditors test.
Satisfaction test – allows creditors to challenge the legitimacy of the arrangement while allowing the debtor to force through the arrangement by means of a cross-class cram-down.
The role of the supervisor and administrator is also to support the negotiations of the arrangement and thereby to look after the best interest of both the debtor and the creditors.
Creditors to whom more than 50 per cent of the total amount of claims is due will be able to request a change of the arrangement supervisor selected by the debtor in the procedure for approving a voluntary arrangement.
The adoption of the arrangement is to be declared by the supervisor or administrator (and not by the judge-commissioner as it was before), and it will be subject to judicial review.
A liquidation arrangement will be available and will involve the sale of the debtor's assets with the effects of a sale in enforcement proceedings.
Streamlined process of arrangement approval by limiting the requirement for a court hearing to cases where this is justified by the protection of legitimate interests of the litigants.
Restructuring courts will be allowed to modify the arrangement – currently the court cannot interfere with the arrangement, it can only confirm or reject it, which protracts the proceedings.
Claims secured by mortgages and pledges are to be unconditionally included in the arrangement, irrespective of the creditor's consent in this respect.
The debtor will be protected against enforcement from the adoption of the arrangement to the completion of the restructuring proceedings.
Extended protection of the debtor against creditors’ amendment or termination of contracts that are fundamental to the debtor’s business.
Creditors will be allowed to apply for the opening of rehabilitation proceedings of quasi-legal persons (e.g. general partnerships, limited partnerships).
The debtor will remain in full management of the enterprise during restructuring procedure (the debtor's activities may be limited to the ordinary course of business only by way of a court decision).

Rödl & Partner will help you to prepare well for restructuring to achieve the goal, i.e. to get rid of debt. We also support creditors in the recovery of their receivables.

Legal basis:

[1] Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132

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Alicja Szyrner

Attorney at law (Poland)

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