Currently, Polish law distinguishes between insolvency proceedings and restructuring proceedings:
- arrangement approval proceedings (postępowanie o zatwierdzenie układu) which is of the most informal character and are designed for debtors who are meeting their obligations on an ongoing basis but have reasonable knowledge that they will face financial difficulties in the near future;
- accelerated arrangement proceedings (przyspieszone postępowanie układowe) are recommended to debtors who need immediate judicial protection against enforcement proceedings conducted by creditors, as upon the opening of the accelerated arrangement procedure, enforcement proceedings will be immediately suspended by operation of law;
- arrangement proceedings (postępowanie układowe) are designed for debtors who do not meet the criteria allowing the implementation arrangement approval proceedings and the accelerated arrangement procedure, i.e., if the sum of disputed claims entitling to vote on the arrangement exceeds 15% of the total sum of such claims;
- remedial proceedings (postępowanie sanacyjne) which go beyond the framework of other restructuring proceedings and make it possible to achieve the indicated objective also through instruments specific to bankruptcy proceedings, thus significantly interfering with the company's structure; and
- insolvency proceedings (postępowanie upadłościowe) which provides for the joint pursuit of creditors' claims against an insolvent debtor.
How does a party’s insolvency impact pending arbitration proceedings?
Until 2015, in the event of a party’s liquidated bankruptcy under the Bankruptcy Law Act of 28 February 2003, arbitration proceedings were discontinued and arbitration agreements would cease to have effect (inoperability of the arbitration agreement was imposed automatically). This regulation was heavily criticised and was finally changed with the enactment of an amendment to the Bankruptcy Law in 2016 (the “Bankruptcy Law”; together with the introduction of the Restructuring Law Act of 15 May 2015, the “Restructuring Law”).
Under the provisions of the Bankruptcy Law (and similarly under the Restructuring Law), as a general rule, when bankruptcy is declared, pending arbitration proceedings are automatically stayed and any new arbitrations. concerning the insolvency estate may only be commenced by or against the receiver (acting on behalf of the insolvent company).
After arbitral proceedings are stayed, the claimant would file a notice of its claim with the receiver who is required to draw up a list of the creditors’ claims (“list of claims”). The receiver decides whether to accept or reject the claim. If a claim is rejected, the claimant has a right to lodge an appeal. The proceedings are stayed until the list of claims is finalised. If the claim in question is not registered, the arbitration may proceed. The claim in dispute in the ongoing arbitration is treated as contingent and provisional. However, if the receiver accepts the claim, the arbitration would be terminated.
Once the insolvent party is “replaced” by the receiver, there is no need to amend a claim advanced against the insolvent party. Under Polish law a receiver has no other choice than to resume pending arbitration proceedings. The receiver may withdraw from the arbitration agreement before the start of the arbitration and only with the insolvency court’s permission, if the claim hinders the liquidation of the insolvency estate.
During the bankruptcy proceedings, certain transactions of the insolvent entity are ineffective by the order of law. However, the receiver may request the insolvency court to declare ineffective the insolvent entity’s non-gratuitous legal transactions that were executed within the six months preceding the filing of the bankruptcy petition. If the other parties to these legal transactions demonstrate that the transaction did not harm creditors, the transaction would not be declared ineffective.
Additionally, as the main objection of the receiver is to liquidate the insolvency estate’s assets and satisfy the creditors’ claims, the receiver may also try to contest certain decisions of the insolvent company if it considers that the estate is unable to recover funds. Depending on the “configuration” of the proceedings the pending arbitration may be stayed until a final judgment is issued with regards to acts contested by the receiver.
Can arbitration proceedings be commenced by or against an insolvent entity?
Can one initiate arbitration against an insolvent entity?
Under the Bankruptcy Law, when bankruptcy is declared, arbitration may only be initiated against the receiver. However, the prospective claimant must first exhaust the procedure to draw up the list of claims. Polish legal literature indicates that an arbitration agreement is temporarily inoperative while the list of claims is drawn up by the receiver. In case the claim is finally and irrevocably disclaimed, arbitration may be commenced. As a general rule, the receiver is bound by an arbitration agreement which previously bound the insolvent company.
The receiver may withdraw from an arbitration agreement with the Bankruptcy Court’s permission, if seeking a claim in arbitration hinders the liquidation of the insolvency estate. In particular, the receiver may withdraw from the arbitration agreement if the condition of the insolvency estate makes it impossible to cover the arbitration costs. As a result of the receiver’s withdrawal, the arbitration agreement becomes ineffective, and therefore is no longer binding (the agreement is treated as not containing an arbitration clause).
The counterparty to the arbitration agreement is vested with a similar right. It may request (in writing) the receiver to confirm whether it will withdraw from the arbitration agreement. The receiver’s failure to submit a statement to this effect within 30 days of receiving the written request is considered to be a tacit withdrawal from the arbitration agreement. Lastly, the counterparty may withdraw from the arbitration agreement, if the receiver refuses to contribute to the arbitration costs despite not withdrawing from the arbitration agreement.
It is also possible to set off the insolvent entity’s claim from the creditor’s claim provided that both claims existed on the day of the bankruptcy declaration. Such possibility exists even if the maturity date of one of the claims has not yet been reached. The creditor who intends to apply the set-off is required to make a relevant statement at the latest upon declaring its claim.
However, under the Bankruptcy Act set-off is not permitted if a debtor of the insolvent entity acquired the receivable debt by means of assignment subsequent to the declaration of bankruptcy, or acquired it within the year preceding the bankruptcy declaration while being aware of the existence of a ground for the bankruptcy declaration. Additionally, set-off is not permitted if the creditor has become a debtor of the insolvent entity after the date of the bankruptcy declaration.
Can an insolvent entity commence arbitration?
When bankruptcy is declared, an arbitration involving the insolvency estate may only be initiated by the receiver (acting on behalf of the insolvent company). The main obligation of the receiver is to liquidate the insolvency estate’s assets and satisfy the creditors’ claims . Hence, if the insolvency estate includes claims against a third party (and there is a binding arbitration agreement), the receiver may initiate arbitration.
However, as receivers are required to balance the costs of the insolvency estate’s liquidation against the possible funds that may be obtained, it is rather unusual for them to initiate proceedings (including arbitration) against third parties unless the prospect of wining the case is high and the estimated length of the proceedings is relatively short.
What processes are available to raise the objection of pending arbitration proceedings against insolvency proceedings?
How does insolvency affect recognition and enforcement of an arbitral award against an insolvent party?
Arbitral awards are enforced in the relevant insolvency proceedings. From the date when the bankruptcy is declared, enforcement measures against the insolvent company are automatically suspended. Enforcement of the award by the creditor (through a law enforcement officer) is prohibited. The creditor is required to file a notice of claim with the receiver in order to have it listed on the list of claims.
The receiver may challenge the arbitral awards in the same way as a regular party in an ordinary arbitration. It is however highly unlikely that the receiver would challenge the award and refuse to add the claim to the list of claims. The rank of the claim depends on the nature of the claim in the arbitration. It is rather common that the amount actually recovered is lower than awarded due to the pari passu principle.
Under Polish law, an arbitral award which was rendered in favour of the insolvent party may also be challenged in setting aside proceedings
Has a special insolvency regime been introduced in response to the SARS-CoV-2 / Covid-19 pandemic?
Under the Bankruptcy Law a debtor is obliged to file a petition for bankruptcy with a court within 30 days from the day when the grounds to declare bankruptcy arose. In light of the SARS-CoV-2 / Covid-19 pandemic, the Act of 16 April 2020 on specific support measures relating to the spread of the SARS-CoV-2 virus (the “Anti-crisis Shield”) introduced changes to the Act of 2 March 2020 on specific arrangements for preventing, counteracting and combating Covid-19, other infectious diseases and emergencies caused by them (the “Covid Law”).
The Covid Law provides that if the grounds for declaring the debtor insolvent arose during the state of epidemic emergency, and if a company’s insolvency arose due to Covid-19, the time limit for filing a bankruptcy petition does not start, and any time limit that has commenced is interrupted. After this period, the period runs anew. Where a state of insolvency has arisen during the state of epidemic emergency, it is presumed to have arisen due to the Covid-19 pandemic.