In Poland, pre-pack insolvency sales have been available since 1 January 2016. The legal framework regulating pre-pack insolvency sales was introduced into Polish insolvency law as part of a major reform of insolvency legislation that was aimed at preserving the value carried by the assets of insolvent entities and to ensure higher satisfaction for creditors.
Indeed, pre-pack makes it possible to sell a part or all of the insolvent debtor’s business or certain assets carrying a significant value and use the proceeds towards repayment of the bankrupt entity’s debts, avoiding standard bankruptcy proceedings, which are usually lengthy (up to several years, depending on the circumstances), formalistic and complicated.
The pre-pack insolvency sale may become an effective debt-recovery tool for financial institutions and other creditors (particularly for pre-packed assets) and also a lucrative opportunity for investors interested in acquiring the debtor’s business once it falls into financial distress.
Pre-pack sale procedure and main steps
1.Pre-pack application
The first formal step of the pre-pack procedure is to file the relevant application with the bankruptcy court. This pre-pack application may be attached to the ordinary bankruptcy petition or filed later once the bankruptcy petition is pending, but before the bankruptcy has been declared. (Normally, it takes several months for the bankruptcy court to declare a bankruptcy based on the bankruptcy petition, provided all the requirements have been fulfilled).
The pre-pack application may be filed by the debtor itself, or by its creditor. In this case, the debtor’s consent is not formally required. In practice, however, it is much more difficult to successfully complete a creditor-initiated pre-pack if the debtor is not cooperative.
Although the pre-pack procedure is formally initiated by the pre-pack application, an entity planning to file this application may search for a potential buyer and negotiate the terms of the sale with that buyer. The terms of the sale constitute an obligatory part of the pre-pack application. Normally, the draft Asset Purchase Agreement (APA) is attached to the application.
The pre-pack application must also be accompanied by a Description and Evaluation of the pre-packaged assets. The Description and Evaluation must be prepared by an expert who has been entered on the court’s list of experts. The Description and Evaluation is a key document in the pre-pack sale since it serves as a reference point to establish the purchase price of the pre-packaged assets.
If the pre-packaged assets are encumbered with a registered pledge giving the pledgor the right to take over the assets or seek other out-of-court enforcement, a pledgor’s written consent must be attached to the pre-pack application.
Lastly, prior to filing the pre-pack application, the prospective purchaser must pay bid security of one-tenth of the price offered to the court deposit. This amount is credited to the sale price or returned if the pre-pack fails or if the pre-packaged assets are sold to another investor. The bid security may be in cash, a bank guarantee or an insurance guarantee.
2.Public announcement and informing the secured creditors
The information on the filing of the pre-pack application is publicly announced. This may result in competitive pre-pack applications being submitted by other investors interested in acquiring the pre-packaged assets. Where at least two pre-pack applications concerning the same assets are filed, an auction is held to choose the most advantageous terms of sale. Copies of the pre-pack application are delivered to the creditors secured on the pre-packed assets.
3.Appointment of the interim court supervisor
Once the pre-pack application has been filed, the bankruptcy court appoints an independent interim court supervisor. It must be an insolvency practitioner listed on an official list of licensed restructuring advisors. The interim court supervisor submits a report to the bankruptcy court, which the bankruptcy court will base its decision on whether or not to approve the pre-pack. The key issue reported is whether the sale price offered in the pre-pack application is higher than the amount that can be recovered from the assets’ liquidation within ordinary bankruptcy proceedings. (Any such amount takes into account the cost of a potential bankruptcy proceeding). Otherwise, the bankruptcy court may dismiss the pre-pack application.
4.Court approval of the pre-pack
The bankruptcy court approves the pre-pack sale if the sale price offered in the pre-pack application of the proceeds is higher than the amount of proceeds expected from the liquidation sale in ordinary bankruptcy proceedings (decreased by the costs of the proceedings and other debts that would have been incurred in the course of bankruptcy proceedings to sell the pre-packaged asset). Exceptionally, the court may approve the pre-pack if the price offered is close to the amount recoverable in ordinary bankruptcy proceedings, less the costs of proceedings that would have to be incurred, provided that an overriding public interest so requires or if it is possible to maintain the debtor’s business enterprise.
The bankruptcy court will approve the pre-pack sale no earlier than 30 days from the public announcement and no earlier than 14 days from the date that secured creditors were served copies of the pre-pack application.
The court’s decision on the pre-pack is appealable. Non-secured creditors are also allowed to challenge the pre-pack decision.
5.Sale agreement
When approving the pre-pack, the bankruptcy court appoints a bankruptcy trustee who manages the execution of the pre-pack sale agreement. Generally, the sale agreement is concluded no earlier than 30 days from the date on which the court’s decision approving the pre-pack becomes final and non-appealable.
The pre-packaged assets may be released to the purchaser once the full purchase price is paid and prior to final approval of the pre-pack.
Current practice and EU Directive
Although the pre-pack insolvency sale makes it possible to sell the business of an insolvent debtor (or part or certain assets of the business) in a faster and more efficient way than in ordinary bankruptcy proceedings, preserving the value of the business and giving a chance to acquire it as a going concern, in practice it is not as popular as ordinary bankruptcy proceedings.
The draft EU Directive harmonising certain aspects of insolvency law published by the European Commission on 7 December 2022 will regulate the pre-pack framework and harmonise it within all EU member states. This framework is similar to the pre-pack framework that is currently regulated in Poland. However, there are still areas for improvement and so the EU Directive could lead to changes in the existing provisions of the pre-pack insolvency sale that may be attractive to all stakeholders.
For more details on pre-pack insolvency sale regulations in Poland and the draft EU Directive, contact your CMS client partner or these CMS experts:
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