The European Lawyer

Poland Banking/Finance

11 Mar 2010

International Acquisition Finance - Poland

Editors: TGC Corporate Lawyers - Artur Rogozik, Nicholas Johnson and Marcin Gruszko

1. INTRODUCTION
Acquisitions are increasingly used in Poland as a part of a company’s armoury in fulfilling its corporate strategy. Acquisitions are mainly used for market entry, market consolidation, increasing profitability, increasing market share, and the purchase of new products or skills. We are seeing increased activity by venture capitalists and private equity firms.

The main subjects outlined in this chapter are the legal issues relating to funding acquisitions and discharging any existing indebtedness of the target company in Poland. We also consider the commercial practicalities of the acquisition such as acquirers looking to minimise the amount of equity they need to commit to an acquisition whilst maximising the benefits. The balance between these two factors plays a key role in successful acquisition financing. We do not discount all-equity finance, for example, a successful increase in share capital by the acquirer may provide sufficient capital to finance the acquisition without the need to use bank debt.

One main point to remember when reading this chapter is that the mergers and acquisitions market in Poland is a relatively recent occurrence. With the opening up of the Polish economy from 1989 there has been a limited amount of time during which the market could mature. As a consequence, the dynamics of the acquisitions market is different as when compared to a mature economy. This has profound implications on the number and complexity of acquisitions, as well as the financing structures commonly used. To put it simply, the majority of acquisitions are not on the same scale (especially at the higher end) of those in mature economies, and on the whole use simple financing techniques and do not use complex financial products and structures. For example, mezzanine financing is not widely available in Poland and this means that debt is normally used in the form of straight forward vanilla secured lending. This also implies that there are considerable opportunities for new and sophisticated entrants into the mezzanine finance market and the corporate finance market in general.  It should also be noted that the derivatives and bond markets are not frequently used as financial tools.

A practical result of the lack of the more complex financial products and structures is that the cost of capital may be slightly higher and the terms of lending may be less flexible. In addition, it can take a while for companies to get up to speed with acquisition finance tools that are being introduced to the market and this learning curve can sometimes add to the cost of the transaction, as well as, the amount of time required to complete it. Equally, without the use of complex acquisition tools, most acquisitions are fairly straightforward. We remain very optimistic about the mergers and acquisitions market in Poland and are actively involved in developing new acquisition finance tools with major banks.

2. TYPICAL STRUCTURE OF A POLISH ACQUISITION
The two most common types of corporate acquisitions in Poland are the purchase of shares or assets. Each of these has negative and positive aspects which are briefly reviewed below.

2.1 The acquisition of shares
The acquisition of a company through the purchase of its shares can be seen as three separate transactions: acquisition of shares; equity financing and arrangements with the management team; and bank financing.

• In most acquisitions of shares, the purchasers will set up a special purpose vehicle (SPV), which at the early stages is known as `Newco’, as the acquirer of shares in the target company. Typically Newco is a Polish limited liability company.
• The equity documents govern the relationship between the investors and the management team. They set out the mechanics of the investment and the rules for the ongoing governance of the group. The main document where there are multiple investors is a shareholders agreement, which usually grants certain control rights to the investors and sets out the framework on which the management team will run the business on a day-to-day basis.
• The terms and conditions in the shareholders agreement may be supplemented by either the same or additional provisions being put in the articles of association of Newco. For example, any rights attaching to certain shares or procedures relating to the board of directors such as the appointment or removal of directors.
• The main acquisition document is the sale and purchase agreement (SPA), which sets out the terms upon which Newco will purchase the shares in the target company (Target).
• The terms of the debt finance provided by the senior and mezzanine banks (if applicable) are set out in a facility agreement, or potentially in two separate agreements - one for the senior debt and one for the mezzanine debt. Additionally, there will be security documentation under which the banks take security for the loans, for example, over the shares of the target.
• The other main agreement is the intercreditor agreement (or subordination agreement) which governs the order of priority of payment of any money by the Newco group and the control of any insolvency process. The parties to the intercreditor agreement will include the members of the Newco group, the senior and mezzanine banks (if applicable), the private equity investors - as they are likely to have provided shareholder debt to the Newco group by way of loan notes - and often management.

2.2 The form of share transfers under the Polish Commercial Companies Code (Companies Code)
The two typical forms in which Polish target companies operate are a limited liability company (sp. z o.o.) or a joint-stock company (S.A.). We have seen growing interest in other forms, especially in limited partnership (sp. k.), but due to the size of this article these are not considered here. Article 180 of the Companies Code provides that the sale of shares or pledging of shares in a limited liability company must be in writing with notarized signatures (otherwise it is null and void). There are no such limitations for joint-stock companies. However, Article 339 of the Companies Code provides that the transfer of registered shares in a joint stock company must be made in writing together with transfer of possession of the share certificate.

2.3 Limitations on share transfers under the Companies Code
The shares in a limited liability company and a joint-stock company can be transferred subject to certain limitations. For limited liability companies the major limitations are as follows:

• A disposal of shares before the registration of the company in the commercial register (KRS) or before registration of an increase in share capital is invalid;
• The articles of association may provide that the transfer or pledge of shares may require written consent from a shareholders meeting or the management board of the company; and
• The transfer of a share which obliges the shareholder to perform a recurrent non-pecuniary service to the company is subject to written consent of the management board of the company, unless the articles of association provide otherwise.

For joint-stock companies, limitations regarding the transfer of shares depend on the type of shares. There are no limitations concerning the transfer of bearer shares. The Companies Code also provides for certain limitations on the transfer of registered shares, and equally, provisions may be included in the articles of association for further limitations on the shares.

In addition, a shareholders agreement may provide for limitations on the transfer of shares, although, these limitations are only contractually binding on the parties to the shareholders agreement and are not binding on third parties or the company.

2.4  Acquisition of assets
The purchase of a company’s assets is used quite often in Poland, however, the choice between a share purchase and an asset purchase is not straightforward. In particular, the purchaser of an organised group of assets (enterprise) assumes any liabilities attaching to the enterprise on a joint and several basis with the seller. This liability is limited to the value of the purchased enterprise and it cannot be excluded or limited without the consent of the creditors. Some assets must be purchased on the basis of a specific required form. For example, purchase of the enterprise requires a written form with the signatures certified by a notary. If the asset transaction comprises real property then a notary deed is required. Transfer of the enterprise or its part requires the prior consent of the general meeting of shareholders of the seller. The transfer of real property requires the prior consent of the general meeting of shareholders of the seller and the purchaser unless the articles of association provide otherwise.

2.5  Merger regulations
Under Polish antimonopoly provisions (the Competition and Consumer Protection Act of 16 February 2007) certain acquisitions may require the consent of the antimonopoly authorities. The Act provides for certain statutory financial thresholds that are calculated in reference to the turnover of the participating groups both in Poland and worldwide. It should be noted that obtaining clearance may be time consuming and should be taken into account by the parties of the transaction at an early stage in order to avoid any unplanned delays to the transaction. For global transactions, involving various jurisdictions, EU competition clearance may be required. Due to the “one-stop-shop” rule, if EU clearance is required, no local clearance applies.

3. MAIN FINANCING OPTIONS AND RESTRICTIONS
3.1 Financing options
The main financing tool for acquisitions is the use of bank lending. In our experience, loans are vanilla and are only infrequently complemented by other types of facilities that take on different levels of risk, seniority or rates. However, we are increasingly seeing the use of mezzanine finance.

Debt security is rarely used as the procedure for the issue of bonds is lengthy and complicated and therefore it is usually not suitable for most acquisitions, which normally require negotiation, closing, and financing to be swiftly put in place. The main types of financing documents used in an acquisition in Poland are the following:

• Term Sheet: This is often the first step in arranging finance. The main point of the term sheet is to provide an outline of the basic financing, commercial and legal conditions attaching to the financing.
• Commitment Letter: In certain circumstances a more formal document than a term sheet may be required. For example, in the situation where a prospective bidder requires a bank’s commitment to the availability and conditions of financing.
• Term loans: These are the most common instruments used in acquisition financing. There are usually four types of term loans provided: loans granted to the Newco for acquisition of the target; a refinancing term loan granted to the target to refinance its existing debt; a term loan granted to the target to finance capex investments; and a term loan to finance potential permitted acquisitions of other companies or assets granted to the target.
• Revolving facilities: These types of facilities are normally short term, for example, one year. This type of facility is normally used in the acquisition only as ancillary financing and is usually granted to the target or the target’s group.
• Mezzanine facilities: This type of financing is not very common at the moment in Poland. Mezzanine facilities are mostly used in leveraged or management buyout transactions (LBOs and MBOs) and acquisitions. Mezzanine facilities have a hybrid character, which means that apart from the typical loan elements they also have some elements characteristic of capital market instruments. The mezzanine lenders are often banks but not exclusively. Mezzanine facilities are always junior to the facility agreement therefore mezzanines cannot be prepaid early until the term facility agreement is fully paid. Mezzanines facilities are quite expensive for borrowers and are often used in situations where bank financing in whole or part is not available.
• Hedging agreements: Hedging is rarely used. The most common practice is to include some hedging facility in the main transaction facility. The most common risk covered by the hedging facilities relates to interest rate risk and foreign exchange risk as most loans are granted in foreign currencies.
• Syndicated lending: Also known as “a multibank credit”. Syndicated lending is often used for financing large facilities or for banks to diversify their risk. There are three main issues under Polish banking law which should be considered in syndicated lending: financing conditions, securities, and “bank–agent”, “bank – security agent” and its rights and obligations arising from the syndicated credit.
• Equity/venture capital: Private equity and venture capital funds have become a very important source of financing in the Polish market. Investments are aimed at achieving high return over a relatively short period mostly by the sale of shares.
• Shares issue (equity financing): Another main source of financing is raising equity. This can be achieved by a private issue or a public offer (in the latter case only by listed joint-stock companies). An issue of shares requires, amongst other things, resolution of the shareholders meeting of the investor and registration in the commercial register. Usually, the pre-emption rights of the existing shareholders should also be taken into account. A public offer can be complicated and time-consuming as complying with listing requirements of most stock markets means additional cost and professional support and advice. The New Connect market in Warsaw is one way in which equity can be raised relatively cheaply.

3.2 Financial restrictions
The two main issues to consider with acquisition finance are financial assistance and thin capitalisation rules. Financial assistance restrictions are civil law restrictions and are mostly regulated by the Companies Code, whereas thin capitalisation rules are regulated by the corporate income tax legislation.

3.2.1 Financial assistance  
Financial assistance restrictions in Poland can be divided into four categories with regulations relating to:
(a) joint stock companies,
(b) limited liability companies,
(c) both joint stock companies and limited liability companies,
(d) all business entities.

1. Financial assistance regulations for joint stock companies
From 5 October 2008 the Companies Code will provide that a joint stock company may make loans, give security, provide advances or offer any other direct or indirect financing for the acquisition of or subscription to its shares. The financing can be made on market conditions once the debtor’s solvency has been checked. Acquisition of, or subscription to, shares has to be at a fair price, and a special capital reserve for such financing has to be created by the company. Also, the process requires a resolution of the shareholders’ meeting, adopted on the basis of a management board report on planned financing. The management board report requires filing with the commercial court and a public notice. These new rules replace previous regulations prohibiting financing by a joint-stock company of the acquisition of or subscription to its shares. These changes reflect EU Directive 2006/68/EC.

2. Financial assistance regulations for limited liability companies
Share capital and any increase in the share capital must be fully paid up before registration in the commercial register. An increase in share capital is only effective upon registration in the commercial register. A shareholder may not receive payment from the target to cover any increase in its share capital. This includes guarantees or other financial instruments. Payments received in breach of this provision must be returned to the company.

3. Financial assistance restrictions common to both joint stock and limited liability companies.
The following require the consent of the shareholders meeting: entering into a credit, surety or loan agreement, or other similar agreement, with a member of the management board, supervisory board, audit committee, a holder of the commercial power of attorney (prokurent) or a liquidator (or if such arrangements are for the benefit of any such person). In addition, if such an agreement is entered into by a dependent company with a member of the management board, a prokurent or a liquidator of a dominant company, then the consent of the supervisory board of the dependent company is required. If the dependent company does not have a supervisory board, the consent of the shareholders’ meeting of the dominant company is required. From 5 October 2008, the consent can be issued by the shareholders’ meeting of the dominant company only. Any agreement in breach of these restrictions is invalid. The consent can be granted prior to the conclusion of the relevant agreement or within two months of signature. 

4. Financial assistance restrictions common to all business entities
The Polish Bankruptcy Law provides that a corporate entity is considered to be bankrupt (‘niewyplacalny’) if its liabilities exceed the value of its total assets (‘majatek’). This applies in all circumstances including those where the liabilities are regularly paid off.  It is widely considered that this threshold for bankruptcy is low and easily breached and consequently it causes problems for many companies. For example, in acquisitions it is often the case that the value of the total assets of the target or Newco securing the financing is lower than the total value of all its liabilities. There are few options within the current legislation that provide ways around this situation. Within this context, the use of suretyships and guarantees by a company are a useful tool as they do not appear on the balance sheet until they are due for payment. Consequently, the management board may provide such guarantees without concern as to the impact of the bankruptcy legislation until the guarantee becomes payable. However, the risk is that if the guarantee becomes payable then the company may be in breach of the bankruptcy legislation and insolvency proceedings can be commenced.

3.2.2 Thin capitalisation
In situations where financing is provided by the shareholder(s), then thin capitalisation rules will apply. Under Polish law, as in other European jurisdictions, interest due on loans or credits granted by a related party (i.e. shareholder holding at least 25% of share capital) is not recognised as a tax deductible cost when the loan/share capital ratio exceeds 3:1 in a portion in which the loan exceeds this ratio. Therefore, if additional financing is required by the company, then other options will need to be considered – such as increasing the share capital or additional payments (provided without interest due).

4.  MAIN TERMS OF THE FACILITY AGREEMENT
The facility agreement is still the most commonplace method used for financing acquisitions in Poland. The main terms of the facility agreement are set out below.

4.1 Signature
Polish law does not set out specific terms, conditions, or form for the facility agreement. Consequently, the facility agreement is generally subject to the commercial negotiation of the parties and subject to general contractual principals under Polish law. In general, standard type facility agreements are used that are based on the LMA model.

4.2 Repayment and voluntary prepayment of the loan
The loan is repaid according to the repayment schedule which is attached to the facility agreement (“harmonogram splat”). The facility agreement usually provides for voluntary prepayment of the loan before the end of the loan period. Such voluntary prepayments are usually subject to certain conditions which must be met by the borrower, which may be as follows: prior (written) notification to the bank (often irrevocable without the bank’s consent), minimal amount of the voluntary prepayment, and the penalty interests on the late payment in case of default of the voluntary prepayment. A prepayment fee may be payable.

4.3 Representations and warranties
The representations and warranties normally follow the commercial and financial context of the transaction being financed.  They usually include, amongst others, a statement regarding the status of the borrower (incorporation, conduct of business, subsidiaries, etc.), binding obligations, non-conflict, power and authority, validity and admissibility, no default, no misleading information, no proceedings pending or threatened, and no winding-up or insolvency. These representations and warranties may be repeated on each drawdown or at such other interval as determined by the parties.

4.4  Financial covenants
Standard facility agreements normally include positive and negative covenants. Breaching of such covenants by the borrower is usually normally treated as an event of default.

• The most common types of positive covenants are:
   (a) Information obligations; including any changes in the borrower’s corporate structure, and presentation of quarterly financial statements and other financial information. The borrower may also be obliged to notify the bank about circumstances that may negatively influence any security taken under the facility agreement and also  to provide the bank with all other financial and economic information which may be reasonably required by the bank.
   (b) Financial obligation; including assigning the borrower’s revenues to the borrower’s accounts with the lender bank.
• The most common types of the negative covenants are:
   (a) Financial obligations; one of the most important financial covenants in the facility agreement is the borrower’s obligation to ensure that debt to EBIDTA does not exceed agreed thresholds. Other financial restrictions may include: borrowers other liabilities; payment and repayments of dividends; and disposing or encumbering the borrower’s assets.
   (b) Corporate obligations; including ensuring that the management board members and shareholders do not change.

4.5  Events of default
An event of default is a breach of the terms and conditions of the facility agreement by the borrower and may result in the bank having the right to terminate the facility agreement.  Each event of default is normally specified in the facility agreement.  Full termination of the facility agreement results in the borrower’s obligation to repay immediately the loan with all due interests and other costs as stipulated in the facility agreement. All events of default should be strictly defined in the facility agreement. The following acts and/or actions are usually defined as an event of default: breach of a positive or negative covenant, breach of a representation or warranty given by the borrower, breach of the main provisions of the facility agreement (including default of payment of the loan), changing the status or legal structure of the borrower without the bank’s prior consent, or the filing for a declaration of the borrower’s bankruptcy. It should be noted that Polish bankruptcy laws provide that a court’s declaration of bankruptcy must not be the reason for terminating or amending any agreement with the bankrupt company. Therefore, any provisions of the facility agreement which authorise the bank to terminate or change the terms and conditions of the facility agreement for this reason will be null and void.

5.  GUARANTEES AND SECURITY
5.1 Guarantees and security – general issues
(a) Security Agent: Polish law does not recognize the concept of a Security Agent. As a result, lender taking security in Poland has to be a direct creditor of the secured receivable (resulting from the finance documents) in order to be able to enforce such receivable. It is not enough that a Security Agent has been authorised by other creditors to enforce the security (e.g. from other syndicate banks) in the finance documentation.

(b) Multiple receivables: Polish law does not provide that multiple receivables (e.g. of different creditors to different debtors, resulting from different finance documents, multi-currency receivables, etc.) can be secured by one security instrument. Therefore a  number of security documents must be normally put in place. Certain mechanisms can be introduced to the finance documentation to achieve a comparable level of creditors’ security in one or few documents. It should be noted that typical “parallel debt” language often used in the non-Polish law finance documentation is usually not sufficient for Poland.

(c) Financial assistance restrictions: Polish companies are usually asked to provide a guarantee to the finance parties for the liabilities (receivables) under the finance documentation. Polish law provides for certain limitations for these guarantees (as set out in section 3.2.1 above).

(d) Repayment of existing indebtedness: if the whole indebtedness of the company is repaid and such indebtedness is secured by a mortgage then the mortgage will expire. The same refers (with certain exceptions) to other types of security.

(e) Valid security upon registration: Mortgages and registered pledges are valid security only upon registration in the relevant register. The registration procedures are usually lengthy and may take several months. With registered pledges temporary security is normally taken through a pledge agreement, for example, a financial pledge, ordinary pledge, power of attorney, or similar instrument.

(f) Articles of association: In order to ensure that the pledgee-creditor in certain share pledge security is able – upon the occurrence of an event of default – to execute voting  rights, receive dividends and receive (if applicable) rights in liquidation to the company the shares of which are pledged, certain amendments usually need to be made to the company’s articles of association. Due to time constraints of the transaction itself, this is usually done as a pledgor’s (shareholders) undertaking in the share pledge agreement, to be completed within a specified time period after signature of the share pledge agreement.

(g) Compulsory provisions: Certain provisions of Polish law relating to the priority, satisfaction and enforcement of receivables are compulsory and cannot be changed in  any agreement, including inter-creditor arrangements.

(h) Liability of directors: A board member of a Polish company has to act diligently, and in accordance with the law and the company’s articles of association, otherwise he can be held liable (by the company or by its shareholder) for the damage done to the company. This also relates to signature of the security documents. If the company becomes bankrupt, the creditors would be entitled to claim against the board members if enforcement against the company is unsuccessful, unless the board members have filed a motion for the company’s bankruptcy, or non-filing the motion for bankruptcy was not their fault, or if the creditor has not incurred any damage.

(i) Transfer of security: As a general rule, the transfer of security must include the  transfer of the secured debt and not just the form of the security. This may trigger stamp duty.

(j) Legal opinions: Lenders usually require a legal opinion on validity and enforceability of the loan documentation and the security documentation. Sometimes the borrowers are asked to provide an opinion on incorporation of the borrower/debtor and authority to enter into the transaction as well as on the transaction itself.

5.2 Personal guarantees and security interests
(i) Main features:
 (a) The pledgee or mortgagee, while remaining an ordinary creditor, will have a right against the relevant collateral asset. Other creditors will not be entitled to be paid with the proceeds obtained from the foreclosure of the collateral, unless the secured receivables of the pledgor/mortgagor have been fully discharged and any surplus remains;
 (b) The security interest follows the collateral asset, without prejudice to any transfer of the ownership of such asset; certain exceptions to that rule may apply to the registered pledge security;
 (c) Any person creating a security interest on an asset must hold full and valid title over such asset.

(ii) Types of security interests: the table on the following page lists certain security interests and types of assets that can be encumbered.

Asset Type	Normal type of security	Documentation, Registration,  Enforcement
1. Real estate	MortgageOther registerable interests may include: ·    rights in rem (e.g. easement, right of use, etc.) ·    rights in personam (e.g. lease, right to repurchase, pre-emption rights)	Mortgage agreement or declaration on establishment of the mortgage.   Notary deed required in all cases.Registration in land and mortgage register kept by the District Courts.   The land and mortgage register has 4 sections:1. Identification and ownership-related rights2. Ownership and perpetual usufruct3. Limited rights in rem and other rights (excl. mortgages)4. MortgagesEnforcement is by court judgement.
2. Shares	A) Registered pledge	Share pledge agreement. Notarisation of signatures is required for pledging shares in a limited liability company. Registration in the public pledge register.   The company should be notified about the pledge over its shares.   Simplified enforcement possible otherwise enforcement by court judgment.
	B) Financial pledge	Financial pledge agreement or provision incorporated in other agreement (e.g. share registered pledge agreement). Simplified enforcement possible.  No registration.
	C) Civil law pledge	No registration. Certification of the date is required.  Notarisation of signatures required.
	D) Assignment (conditional or unconditional)	No registration. Notarisation of signatures is required for assignment of shares in a limited liability company.  Notification to the company.
3. Bank Accounts	A) Assignment (conditional or unconditional)	No registration. Written agreement. Bank should be notified of the assignment.
	B) Registered pledge	See item 2A) above accordingly.  Bank should be notified.
	C) Power of attorney	No registration. In writing.
4. Lease rent	A) Assignment (conditional or unconditional)	Written agreement.  No registration.  All lessees must be notified of the assignment of rent.  Otherwise rent payments are an effective release from any obligation to the transferor and transferee.
	B) Registered pledge	See item 2A) above accordingly. Lessees should be notified.
5. Intellectual Property  Rights	A) Conditional assignment (non-payment as a condition for transfer)	Written agreement.  No registration.
	B) Registered pledge	See item 2A) above accordingly. The registered pledge should also be entered in the IP register.
6. Receivables (General)	A) Assignment (conditional or unconditional)	Written agreement.  No registration.
	B) Registered pledge	See item 2A) above accordingly.
7. Whole Business	Registered pledge	See item 2A) above accordingly.
8. Movable Assets	A) Assignment (conditional or unconditional)	Written agreement.  No registration.
	B) Registered pledge	See item 2A) above accordingly.
9.  Insurance policies	see item 6 above	See item 6 above.
10. Financial Instruments	Financial Pledge	See item 2B) above accordingly.
11. Group Receivables	Subordination Agreement	Written agreement.   No registration.
12. All	Guarantee	Written agreement.  No registration.
13. All	Submission to enforcement	Contractual clause in notary deed.  Direct enforcement.
14. All	Temporary injunction	Application to court.  Court order.
15. All	Submission to enforcement	Contractual clause.
16. All	BillBill of exchange (promissory note)	A bill of exchange (“weksel”) partially completed or promissory note (“weksel własny”).  No registration.

5.3 Enforcement of security
Generally, enforcement is possible when the creditor obtains a final court judgement stamped with an enforceability clause. The enforcement proceedings are conducted by a court bailiff and are supervised by a court. Polish law allows for certain types of security to be enforced in a simplified (i.e. easier and faster) way, therefore avoiding lengthy court proceedings. The main types of security allowing simplified enforcement are: registered pledge (possible takeover of the pledged asset), financial pledge (possible settlement, set-off and takeover), submission to enforcement under the Polish Civil Proceedings Code or the Polish Banking Law, and the assignment of security. Only the creditor with a direct relationship can enforce the security. This is an issue for syndicated loans as only direct creditors can enforce the security. No authorisation or power of attorney providing for enforcement by a third part will work under Polish law. Timing issues should also be taken into consideration as enforcement proceedings in Poland may be lengthy. In the event that bankruptcy proceedings have started and the court has provided for creditor arrangements to be made then any security enforcement proceedings that have been commenced are suspended.  However, if bankruptcy proceedings have been commenced for the winding up of the company then any security enforcement proceedings commenced will terminate.

6. DEBT RESTRUCTURING
The objective of debt restructuring is to ensure that a company remains commercially viable by matching revenues to expenditure and servicing debt. This is usually achieved through the agreement of creditors in a composition agreement. A composition agreement is normally made with the court’s agreement in arrangement proceedings under the Polish insolvency law. The arrangement is made between all creditors and may be enforced through the courts subject to certain requirements. The bankruptcy law provides that the debtor must make a proposal to restructure the debt and submit an economic and commercial justification in support of the application. The restructuring may comprise: delay repayments, payment by instalments, conversion of the debt to equity (debt-for-equity-swap) and changes in the security taken. If the creditors are not able to successfully restructure the debt or find that the company is insolvent then they may file for bankruptcy. During the bankruptcy proceedings, debt collection is suspended. In the event of bankruptcy, the company's debts are satisfied in the following order of priority (for sake of clarity only the main items are referred to below):

• costs of the bankruptcy proceedings, outstanding certain social security contributions, salaries and pensions,
• taxes and other public and social security contributions not classified in the first category for a year preceding declaration of bankruptcy together with the interest,
• other dues, together with the interest for a year preceding declaration of bankruptcy,
• other interest, provided that the debts secured by any mortgages or pledges are satisfied from the funds obtained from the sale of the object of securities.