Dawid Zwijacz

Attorney at law (Poland)
Phone: +48 12 378 66 05

prawo upadłościowe

The objective of the restructuring process is to avoid a declaration of bankruptcy by allowing the debtor to restructure by entering into an arrangement (agreement) with creditors, and in the case of rehabilitation proceedings (postępowanie sanacyjne) – by taking rehabilitation measures, while securing creditors' rights at all times. Rehabilitation measures aim at improving the financial position of the debtor and restoring his ability to fulfil obligations while protecting him against enforcement.

Settlement with creditors

In order to make an arrangement with creditors it is necessary to prepare and present arrangement proposals. They describe how the debtor's obligations towards creditors will be restructured. They may be submitted by the debtor himself, the creditors committee, the court-appointed supervisor, the administrator, or the creditor(s) who are owed more than 30% of the debt balance. Liabilities may be restructured for instance by:

• deferring the deadline to pay liabilities;
• dividing the repayment into instalments;
• reducing the amount of liabilities;
• converting debt into shares;
• changing, amending or cancelling a right that secures a certain claim.

The choice of the restructuring method is important because it determines whether you manage to convince the creditors that the planned measures are reasonable and effective.  And it is up to them to give a "second chance" to the debtor by entering into an arrangement. They must be convinced that if the debtor fulfils the arrangement, they will gain more than if he went bankrupt and his assets were liquidated. The creditors' assessment of the debtor's proposals is crucial for the decision on acceptance of the arrangement and the admissibility of the restructuring process. An open-ended list of available vehicles provides a degree of flexibility in structuring the arrangement proposals both to the debtor and his creditors. 

Debt forgiveness

The forgiveness of debt or its part is one of the ways to restructure an existing debt. Proposals to forgive at least some part of the debt are put forward in almost every case, so let us have a closer look at this option.  At first glance, you may think that forgiveness of debt cannot bring any benefits to the creditor. However, creditors accept this option under certain conditions. First, creditors' claims are often not satisfied at all in bankruptcy proceedings (as they get satisfied in the order of creditor groups they belong to). Second, tax-deductibility of the debt amount may encourage to forgive a debt. Both the principal amount as well as default interest may be forgiven.

Debt forgiveness and CIT

The general rule about the taxation of the forgiven debt is stipulated in Article 12(1)(3) of the CIT Act and Article 14(2)(6) of the PIT Act. Those articles say that the value of a forgiven debt is a taxable income. Thus, on the one hand, the debtor reduces his liabilities, on the other hand, he increases his taxable base. In the case of an enterprise which meets the conditions for initiating restructuring proceedings, meaning that it is heading towards insolvency, the additional income tax burden would significantly undermine the chances of successful restructuring. Consequently, the lawmakers have introduced an exception to the rule. According to Article 12(4)(8b) of the CIT Act, forgiven debt amount, including under loans, is not regarded as income if the debt is forgiven as part of restructuring or bankruptcy proceedings. An arrangement made in the course of restructuring proceedings which provide for partial or total forgiveness of debt is exempt from CIT and does not transform a civil burden into a tax burden.

If you have any additional questions concerning this topic, Rödl & Partner experts in Cracow, Gdansk, Gliwice, Poznan, Warsaw and Wroclaw will be glad to help you.

Dawid Zwijacz