Arrangement for liquidation in bankruptcy

Arrangement for liquidation in bankruptcy

According to Article 266a of the Act on Bankruptcy, an arrangement may be entered into in bankruptcy proceedings, and proposals for arrangement may be made by the bankrupt, a creditor and an administrator. However, can the arrangement proposals assume liquidation of the bankrupt’s assets and satisfaction of creditors with the money obtained in this way?


Pursuant to Article 266f of the Act on Bankruptcy, to the extent not regulated by the agreement and its effects, the provisions of the Restructuring Law apply accordingly. According to this reference, the provisions on composition proposals should also apply. There is no exception in this respect, so it would be necessary to apply Article 159 of the restructuring law providing for the so-called liquidation agreement.  However, is it acceptable to conclude an arrangement whose content provides for the liquidation of the debtor’s assets and the sequence of satisfaction of creditors differs from that provided for in bankruptcy? In extreme situations, the liquidator may already sell all the assets of the bankrupt and then the creditors intend to conclude an arrangement in which the division into categories of interest and the corresponding satisfaction proposals differ from the system of division of funds in bankruptcy.


The bankruptcy law regulates the order in which creditors are satisfied after the liquidation of the bankrupt’s assets (Article 342 Act on Bankruptcy).This order expresses the set of values adopted by the legislator, which protects certain entities. For example, the first satisfaction category includes receivables from the employment relationship. These are privileged over shareholder claims on loans to the bankrupt, which are included in category four. A similar hierarchy of satisfaction has been introduced into the provisions of the Code of Civil Procedure on enforcement, as well as into the provisions of the Act on enforcement in administration.


The transition in bankruptcy to the provisions of the Restructuring Law on Arrangement results in a different system of creditor protection. I will remind you, for example, that it also protects employees’ receivables which are not covered by the arrangement without the employee’s express consent and ZUS’s receivables which are forbidden to be even partially written off. By allowing the conclusion of an arrangement in bankruptcy, the legislator agrees that the satisfaction will take place according to the rules defined by the creditors in the arrangement. Thus, it gives preference to the principle of availability expressed by the decisions taken by a certain majority of creditors.

I do not see any disturbance of the model adopted in the situation of concluding a liquidation agreement. If the creditors’ will is to discount the debtor’s business activity, the act protects such a will. If the legislator has introduced a model of creditor protection in restructuring proceedings, it is difficult to consider that this model is “worse” than the model of protection in bankruptcy proceedings. Therefore, the primacy of creditors’ interest may also manifest itself in the fact that creditors change the order of satisfaction in relation to the one adopted in the bankruptcy law by way of arrangement. If the protective rules of the restructuring law are maintained, there is no reason to exclude the possibility of concluding a liquidation agreement in bankruptcy.


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