Bank finance and regulation. Multi-jurisdictional survey. Poland. Enforcement of security interests in banking transactions

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1 Bank finance and regulation Multi-jurisdictional survey Poland Enforcement of security interests in banking transactions Ewa Butkiewicz and Krzysztof Wojdyło Wardynski & Partners, Warsaw Part I - types of security 1. What are the most common types of security in banking transactions in your jurisdiction (eg, standard security package)? Please provide a brief characteristic of each type of security. The most common types of security in banking transactions involving Polish debtors are mortgages, registered pledges, financial pledges and security assignments, and voluntary submissions to enforcement. The standard security package depends on the type of financing, eg, acquisition financing, project financing or real estate financing. Generally speaking, it includes both registered and financial pledges on the shares of the borrower and/or its subsidiaries, registered pledges on all its movable assets and rights, registered and/or financial pledges on bank accounts, mortgages on real estate, security assignments of rights under key contracts and insurance policies, and also voluntary submission to enforcement of each party providing security. This is one of the most popular forms of security interest employed under Polish law, mainly due to the flexibility it offers. The pledged object may remain in the debtor s possession; in addition, a registered pledge does not result in the transfer to the pledge of title to the pledged object. A registered pledge gives the creditor the right to enforce its claims from the subject of the pledge even if title to the pledged assets has subsequently changed and generally with priority before other creditors of the owner of the pledged object (with some exceptions). To be established effectively a registered pledge must be registered in the publicly accessible register of pledges. One of the main advantages of the registered pledge is that non-judicial enforcement methods may be used when enforcing it, including foreclosure of title. Setting up a registered pledge is relatively cheap. Basically, the pledge contract does not have to be prepared in the form of notarial deed. Registration of a single pledge costs PLN 200 (approx EUR 50). The entire registration process takes usually just a few weeks. This is another type of pledge that may be used only to secure limited types of claims (including banks pecuniary claims) and may only be established on shares, funds and financial instruments. This type of security instrument was introduced into the Polish legal system as an implementation of EU Directive 2002/47/EC of the European Parliament and of 1

2 the Council of 6 June 2002 on financial collateral arrangements. This pledge is established merely by an agreement between the pledgor and pledgee and no registration is required for the pledge to be valid. In addition non-judicial methods of enforcement are possible. The main disadvantage associated with the financial pledge is that if further pledges are established over the same pledged object, a pledge established later has priority over an earlier one, unless the pledgor acts in bad faith. This rule does not apply in case of a registered pledge, where a pledge established earlier will have priority over the later pledge. This is why financial pledges are usually established in addition to registered pledges and not as the only security interest. There are no extra costs involved in establishing this type of security interest. Mortgage This is the most popular security interest established on real estate. Setting up a mortgage does not result in the transfer of legal title to the real estate to the creditor. A mortgage gives the creditor the right to enforce its claims from the real estate even if title to the real estate is changed and with priority before the real estate owners other creditors (with a few exceptions). A mortgage becomes effective upon its registration with the mortgage court. It can only be enforced by way of a regular court enforcement procedure (by a bailiff). Setting up a mortgage involves significant costs, such as notarial fees, court fees and civil law transaction tax. Together these may amount to several thousand PLN. Registration of a mortgage in the land and mortgage register may also take as much as a few months. / transfer of ownership This is a type of collateral that provides for security transfer of ownership of specific assets from debtor to creditor. There are very few provisions under Polish law that regulate this collateral. It is, therefore, a very flexible type of security. However, due to lack of regulations there is some uncertainty as to its effects. Basically three different structures may be used within the transfer of ownership security: a) unconditional transfer the creditor becomes the new owner of the assets and has only a contractual obligation to re-transfer the assets upon repayment of the secured debt; b) transfer under resolutive condition - the creditor becomes the owner of the assets until repayment of the secured debt; c) transfer under suspensory condition the creditor will become the owner upon default in fulfilment of the secured debt. The date of the relevant assignment contract will have to be certified by a public notary. This involves a notarial deed, the costs of which, in this case, are relatively low - 6 PLN (1.5 EUR) per page of the document. /transfer of ownership may also require payment of VAT tax. Due to the complexity of this issue and the possible negative consequences for parties to the security assignment contract we recommend seeking tax advice before establishing this type of security interest. Voluntary submission to enforcement This is a very specific type of security interest. Unlike mortgages or pledges it does not create any collateral over the debtor s assets. This type of security interest is established to quicken enforcement proceedings against a debtor. Voluntary submission to enforcement issued by the debtor constitutes an enforcement title that, upon appending an enforcement clause, allows for initiating judicial enforcement proceedings against debtor without the need to obtain a court ruling against the debtor beforehand. It may therefore result in a significant improvement in the effectiveness of enforcement against the debtor. 2

3 The main disadvantage of such voluntary submission is that it must take the form of a notarial deed, which significantly increases cost. The notarial fee depends on the value of debtor s debt and may amount to 10,000 PLN (approx EUR 2,500). Obligatory wording in a voluntary submission is regulated by the Polish Civil Procedure Code. Banks in Poland often make use of a similar instrument, the bank enforcement title. The bank s debtors are often required to submit themselves to enforcement of claims arising from their relationships with the bank. Notarial deeds are not required for such a submission, which makes the processs more advantageous and less costly than the voluntary submission described above. In the event of default, the bank may issue a bank enforcement title on the basis of the debtor s submission to enforcement, Such enforcement title is regulated in a detailed and strict manner by Polish Banking Law. It constitutes an enforcement title that, once appended with an enforcement clause, may be the basis for initiating judicial enforcement proceedings. There is some controversy as to whether EU credit institutions that provide loans to Polish debtors on a cross-border basis may issue bank enforcement titles. In theory, the idea of a single passport under which Polish law also applies to EU credit institutions operating in Poland on a cross-border basis, may justify a positive answer to this question. However, the lack of relevant experience in this matter, makes it difficult to predict how Polish enforcement officials would treat such bank enforcement titles. 2. In relation to the following types of assets, please provide the types of security that can be created or granted in your jurisdiction and give details of any registrations required: (a) Real estate; Mortgage The establishment of a mortgage requires entry of the mortgage in the land and mortgage register. Thus, before entry into the register the mortgage does not constitute a valid and effective security. The creation of a mortgage usually requires the debtor s statement in the form of notarial deed. Polish banks benefit from a special privilege that allow mortgages to be established in favour of banks without having to be in notarial form. Doctrinal controversies arise as to whether EU credit institutions acting in Poland on a cross border basis can benefit from the same privilege. Security transfer of ownership This type of security in respect of real estate raises some doctrinal controversies. However, it has been confirmed by the Supreme Court s decision that security transfer of ownership is also possible in case of real estate but only by unconditional transfer of ownership. Thus, transfer of real estate in this case would require the entry of a new owner into the land and mortgage register. Subsequently, re-registration of owner in the land and mortgage register is also required upon re-transfer of the real estate. (b) Charging assets (inventory, stocks etc); Establishing a pledge requires a written agreement between the pledgee and pledgor (the owner of the pledged assets) and registration of the pledge in the register of pledges. In the case of this type of assets the registered pledge is normally established as a floating pledge but a fixed pledge over specified assets is also possible. Security transfer of ownership 3

4 The sole agreement between the transferee and transferor (being owner of the transferred assets) is required. (c) Movables; Please see comments on charging assets. Please see comments on charging assets. (d) Shares; Security interests over shares are especially preferred by creditors. By establishing such security, creditors in effect establish security over all assets owned by the company whose shares are subject to the security interest. Establishing a pledge requires a written agreement between the pledgee and pledgor (being owner of the pledged assets) and registration of the pledge in the register of pledges. Verification is also required as to whether articles of association of a company contain any restriction on the establishment of collateral over shares in such company. Special consent given by the shareholders meeting is usually required. Establishment of the pledge should be noted in the company shares register. Establishing a pledge requires a written agreement between the pledgee and pledgor (being owner of the pledged shares). Special consent of the shareholders meeting may also be required. Basically, only an agreement between the transferee and transferor (being the owner of the transferred assets) is required. However, depending on the structure of the assignment re-registration in the company share register and public commercial registers of the company may be required. (e) Rights under contracts (receivables); Basically, establishing a pledge requires a written agreement between the pledgee and pledgor (being owner of the pledged receivables) and registration of the pledge in the register of pledges. Rules on assignment of receivables apply accordingly to the establishment of a pledge over receivables. Thus, before establishing a pledge it needs to be noted whether disposal of such receivable does not require any third party consent. Only an agreement between the transferee and transferor (being owner of the transferred assets) is required. Verification is also required as to whether consent of a third party is necessary to dispose of a receivable. Notifying a debtor of the receivable being subject to assignment is not a condition for perfecting an assignment. In many cases such notification is made only upon the occurrence of an event of default under the secured contract. (f) Bank accounts; 4

5 Under Polish law, a security over a bank account is formally established over claims that the accountholder may have against the bank. For this reason, it needs to be verified whether the bank s consent is required to dispose of such claims. Quite often banks reserve such rights for themselves. It is therefore advisable to review the bank account agreement and general terms and conditions when opening a bank account before establishing a security interest. By failing to do so, creditors risk the established security interest being null and void. Establishing a pledge requires a written agreement between the pledgee and pledgor and registration of the pledge in the register of pledges. Establishing a pledge requires a written agreement between the pledgee and pledgor. Notification of a bank maintaining the account is also required. Only an agreement between the assignee and assignor is required, unless the consent of the bank that maintains the bank account is required to assign accountholders claims. (g) Financial instruments (eg, securities); Establishing a pledge requires a written agreement between the pledgee and pledgor and registration of the pledge in the register of pledges. In respect of pledges established over investment fund units, the pledge also needs to be entered into the register of the participant of the fund. It is controversial whether such entry is required to perfect a pledge. In respect of pledges established over investment certificates, the statute of an investment fund may require the consent of the investors meeting to establish a pledge. Establishing a pledge requires a written agreement between the pledgee and pledgor. Establishing a pledge over investment fund units is effective upon entry of a pledge into the register of the participants of the fund. In respect of pledges established over investment certificates, the statute of an investment fund may require the consent of the investors meeting to establish a pledge. This type of security interest may only be established over financial instruments that may be subject to trade (investment fund units, for example, are excluded from this type of security). If a financial instrument is registered or is held on a security account, transfer of such financial instrument into another account will be required if the security assignment provides for the unconditional transfer of financial instruments or transfer under a resolutive condition. (h) Intellectual property; Security interests on intellectual property rights are not commonly used in Poland, although these rights have significant value in many cases. Establishing security interests over such assets may be controversial. It is generally assumed that intellectual property 5

6 rights that may be subject to trade may also be subject to security interests. Due to close links with the author, disposal of these rights (including the disposal of these rights resulting from enforcement) may be limited. For example, in the case of copyright, the relevant regulations expressly exclude some rights from enforcement (eg, financial copyrights if these belong to author). Furthermore, the disposal of rights may be limited (eg, in license agreements). Establishing a pledge requires a written agreement between the pledgee and pledgor and registration of the pledge in the register of pledges. A pledge may be established over certain intellectual property rights, the disposal of which are not limited (eg, patents, trademarks, with some exceptions). Additionally, for intellectual property rights that are entered into an official register (eg, patents), establishment of a pledge would also require entry of the security onto such a register. Establishing this type of security over intellectual property may be controversial. Theoretically, such security may be established over those intellectual property rights that may be subject to trade. In case of intellectual property rights that are entered into a special register, the assignment of such security, depending on the mechanism used, may require re- registration. (i) Plant and machinery; Please see the comments on charging assets. In the case of some plant and machinery verification is required as to whether, due to their nature, these do not constitute a component part of the real estate. In this case they may not be subject to a registered pledge but to a mortgage. Please see comments on charging assets. (j) Other assets. Please see comments on charging assets. Please see comments on charging assets. 3 Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? Is the parallel debt clause concept recognized in your jurisdiction? 6

7 A security agent is currently regulated only in respect of registered pledges. In the near future, security agents are to be regulated in respect of mortgages. The concept of parallel debt is not regulated under Polish law. It is, however, used in many banking transactions involving foreign lenders. Normally, such a parallel debt clause included in an agreement governed by foreign law (if allowed by such foreign law) would be recognized in Poland. 4. Please explain the latest amendments to the law governing secured transactions in your jurisdiction. Are there any amendments which will be introduced in the near future (within one to two years) which might have an impact on the legal framework of secured transactions? Please also explain recent practical developments regarding secured transactions in your jurisdiction. The most important change is connected with mortgage regulations. A new law comes into force in 2011 and is expected to make the employment of mortgages as security more flexible. It will be possible to use mortgages to secure more than one claim arising under different legal relationships of the same creditor. It will also secure the claims of several creditors if they participate in the same credit facility. The amendment also provides for the possibility to dispose of the mortgage position on the expiry of the mortgage. Owners of real estate who are subject to a mortgage may decide that a new mortgage will be established at the same position as the expired one or, upon the consent of a creditor, under another mortgage established over such real estate, may transfer such other mortgage to the position of the expired one. Part II enforcement of security 1. Please explain briefly general rules of enforcement of security indicated in answer to the Question 1 in Part I above (excluding rules in a bankruptcy or insolvency proceeding see Question 3 below). In your answer please explain whether specific security may be enforced only through judicial proceedings or whether extra-judicial methods are also available. Furthermore, please provide estimate of costs (if they create significant obstacle in enforcement, including applicable taxes and any other duties/ costs) and timing for enforcing such security. Please also explain degree of difficulty (eg, burdensome formalities, whether enforcement requires actions of a state body) in enforcing security. Also please explain whether taking security by an entity from other jurisdiction influences possibility of establishing security and its enforcement. Security interests may be enforced through judicial enforcement proceedings and, in the case of some types of security interests, also through non-judicial methods of enforcement. In essence, non-judicial enforcement proceedings seem to be more advantageous for creditors since they permit more effective enforcement. It is difficult to estimate the costs of enforcement of security interests upfront and without closer analysis of the nature of the assets that are subject to the security interest. Some of the main concerns can, however, be outlined here. First, it is must be stressed that a claimant in an action before a Polish court, if not ordinarily resident in Poland, may be required to provide security for the costs of the court procedure. In some cases the creditor will also be required to provide prepayment for the activities of a bailiff. Secondly, the cost of enforcement proceedings can be quite high relative to the amount recovered through the enforcement process and have precedence when the claims of creditor are satisfied. Thirdly, costs can be substantially increased by the need to make a valuation, depending on the 7

8 accepted method (as an example, the cost of valuing an enterprise can amount to as much as EUR 125,000). From our experience, it is possible to identify the main practical problems faced by creditors in enforcement proceedings: - time (most procedures are time consuming; and the timing of some activities is of great importance; from this perspective security interests that allow for non-judicial methods of enforcement seem to be very advantageous); - valuations (choosing the method and expert; costs; legal tricks to decrease the value of assets, eg, concluding lease contracts with individuals ( natural persons ) to significantly reduce the value of real estate); - taxes (the tax situation is unclear in respect of VAT taxation in the case of alternative methods of enforcement); - challenges (most activities of parties engaged in court enforcement can be challenged and therefore blocked by debtors, and sometimes by third parties, for critical periods of time). Mortgage Only judicial methods of enforcement are possible in case of mortgages. By judicial methods of enforcement we understand enforcement that requires participation of enforcement officials (basically court and bailiff). In order to initiate enforcement, an enforcement title appended by an enforcement clause is required. A real estate being subject to security is seized and sold. The creditor benefits from sums received from the sale of real estate. However, some claims have priority before claims secured by a mortgage. With a few exceptions, if the first sale fails, then the creditor can request a second sale at a reduced starting price. If the second sale fails, the creditor can take over the title to the real estate. Where foreign creditors have obtained an enforcement title abroad, such enforcement title must be recognized in Poland. In case of court judgments or other enforcement titles issued within the EU, such recognition is simplified on the basis of EU Regulation 44/2001 and Regulation 805/2004. Enforcement of a mortgage usually takes more than six months. Relevant regulations permit regular (judicial) and non-judicial methods of enforcement of a registered pledge. This diversity of enforcement options is treated as one of the most important advantages of a pledge. Enforcement of a pledge in judicial proceedings requires the prior acquisition of an enforcement title. This would usually be a court judgement or pledgor s submission to enforcement from a registered pledge (in notarial deed form). Once an enforcement title is appended with an enforcement clause the pledgee may initiate enforcement proceedings. Enforcement proceedings are conducted by a bailiff and lead to the sale or, in some cases, the taking over of the title of the pledged assets. A pledgor benefits from sums received from sale of the pledged assets, however some claims have priority before claims secured by a registered pledge. Usually, the value of the assets is estimated by an expert chosen by the bailiff. As stated above a pledge agreement may also provide for the following non-judicial methods of enforcement: a) foreclosure 1 of the pledged assets (in respect of some classes of assets); 1 Foreclosure used in this context should not be confused with the English law concept of foreclosure which is a remedy available to a mortgagee where a mortgagor has failed to pay off his mortgage by the redemption date. In this text, foreclosure means the assumption of possession and ownership of pledged assets without the involvement of a court. 8

9 b) public sale of the pledged assets by a notary or bailiff; c) receivership or lease of an enterprise where a pledge has been established over a collection of assets. Enforcement under a) and b) requires prior enforcement notice to be sent to the pledgor. Enforcement by foreclosure is possible seven days after receipt of the enforcement notice, upon a foreclosure notice provided to the pledgor. Enforcement by public sale also requires an enforcement notice before the request is sent to the notary or bailiff to conduct the public sale. The public sale takes place 14 days after the request. The value of the pledged assets for the purposes of foreclosure or public sale is set by the parties in the pledge agreement, usually at a symbolic value. In some cases the parties agree on a method of valuation or on the expert who is to provide the valuation. By the means of foreclosure, the creditor acquires the pledged assets and can sell them on to a third party. Further sale should comply with the provisions of the pledge agreement. In a public sale, the creditor cannot participate in the auction. If a pledged object is seized by a bailiff (eg, as a result of enforcement conducted by a third party) extra-judicial enforcement proceedings are no longer possible. Enforcement of this type of security is not regulated under Polish law. Thus, basically, it is subject to the will of the parties to the security assignment. Generally, it is assumed that upon an event of default under a loan agreement, assets that are subject to security assignment are finally transferred to the assignee. This raises some doctrinal controversies since it may be to the detriment of an assignor. Therefore, security assignment agreements usually provide for a special mechanism for the sale of assigned assets. Upon foreclosure of the assigned assets the assignee is obliged to sell the assets and return the surplus to the assignor. 2. Please explain briefly specific features (if any) of enforcement of security established over following types of assets: (a) Real estate; Mortgage A mortgage established over real estate may be enforced only through judicial enforcement proceedings. Enforcement is performed by a bailiff on the basis of an enforcement title appended with an enforcement clause. The real estate is seized by a bailiff and sold at public auction. A mortgagee is satisfied from the proceeds of sale of the real estate or, if the real estate is not sold, by taking over the title. In practice enforcement of debtor s real estate used for residential purposes may be difficult since alternative accommodation must be guaranteed for the debtor and his family. In addition taking over a title to Polish real estate may, depending on the circumstances, require special consent of the Ministry of Internal Affairs. 9

10 Enforcement of this type of collateral is not regulated by any special provisions. Generally, enforcement is carried out by extra-judicial proceedings through (i) a notification to the security grantor that its claim to re-transfer the encumbered real estate has expired and that the security grantor should transfer possession of the asset to the beneficiary of the security; or (ii) through an extra-judicial sale of the real estate and satisfaction from the proceeds. If the debtor does not transfer possession of the real estate, then judicial proceedings must be used to enforce transfer of possession. The same difficulties as in the case of a mortgage, may arise in such case if real estate is used for residential purposes of a debtor. (b) Charging assets (inventory, stocks etc); Apart from judicial enforcement proceedings, the registered pledge can also be enforced by extra judicial methods. This would usually be foreclosure of ownership of the encumbered asset, especially if the pledged asset constitutes a collection of assets. The foreclosure takes place at foreclosure value determined by the parties to the pledge agreement. If the pledged assets constitute a collection of assets and if the parties decide to do so in the pledge agreement, the pledge may be enforced through receivership or lease of an enterprise. In the pledge agreement parties usually provide a template of a contract with an independent receiver that regulates rules for managing the debtor s enterprise where receivership is established. It is enforced through extra judicial proceedings, usually by the sale of assets that have been transferred for security. (c) Fixed charge over movables; (d) Shares; Apart from judicial proceedings, enforcement may be carried out through extra-judicial enforcement proceedings, through foreclosure of the pledged shares or public sale of the shares organized by a public notary or bailiff. In case of pledges established over shares, special attention must always be paid to potential restrictions on changing the ownership of the shares stipulated in the company s articles of association. It is also very important to properly structure the provisions concerning voting rights. In most cases the pledgor gives the pledgee power of attorney to exercise voting rights after the occurrence of an Event of Default. Attention must also be paid to the company s articles of association in this case. (e) Rights under contracts (receivables); 10

11 (f) Bank Accounts; It should be noted that the possibility of satisfaction through extra-judicial proceedings by a pledgee other than a bank maintaining the pledged bank account can be controversial. The relevant registered pledge regulations provide that foreclosure of a pledged bank account occurs by the bank holding such account taking over the funds held on a pledged bank account. Some interpret these regulations as a prohibition on enforcement through foreclosure by creditors other than the bank holding the account. In addition to judicial enforcement proceedings, a financial pledge can also be enforced by a seizure of the money in the bank account which is set-off against the secured claims. Enforcement of this type of collateral is not regulated by any special provisions. An assignee becomes the creditor under a bank account agreement and may exercise rights under such agreement (including a claim for repayment of the funds held on the account) instead of the debtor. A relevant security assignment agreement would usually provide that the value of the secured claim is decreased by the value of the funds held on the bank account. (g) Financial instruments (eg, securities); Basically, the general rules of enforcement of registered pledges apply. Special regulations apply in respect of enforcement from investment fund units. Enforcing a pledge established over such units is only possible through the redemption of these units by investment fund. Where financial instruments are admitted to organized trading the foreclosure value is determined by law as being equal to the closing price from the day the foreclosure commences. Foreclosure of financial instruments is made on the day such financial instruments are registered on a relevant safekeeping account. In addition to judicial enforcement proceedings, a financial pledge over financial instruments can also be enforced by a seizure of financial instruments. The foreclosure value is determined by law as being equal to the closing price from the day the foreclosure commences. Foreclosure takes place on the date the foreclosure notice is served on the debtor. Enforcement of this type of collateral is not regulated by any special provisions and as such may be regulated by parties to the security assignment contract. 11

12 (h) Intellectual property; Registered Pledge In principle, general rules regarding enforcement of a registered pledge apply. However, the Polish Copyright Act provides for certain limitations on enforcement of copyright. In general, as long as copyright is not disposed of by an author, it may not be subject to enforcement. Furthermore, even if copyright is transferred to a third party, an author may still try to exclude copyright from enforcement if he proves that such enforcement infringes his moral rights. It may be assumed that the same limitations would also apply in case of extra-judicial enforcement methods concerning copyright. In respect of those intellectual property rights that are entered into the public register, extrajudicial enforcement methods may require amendment of the entry. Enforcement of this type of collateral is not regulated by any special provisions. Therefore, parties to the security assignment contract regulate methods of enforcement in a contract. In some cases enforcement may require amendment in the public register concerning intellectual property rights. (i) Plant and machinery; (j) Other assets. 3. How does a commencement of bankruptcy or insolvency proceedings influence the rights of the security holder to enforce its rights? In bankruptcy or insolvency proceedings, what are the suspect periods, is claw-back possible, and what other types of rights (tax debts, employees, etc) have preference over security granted? Please explain briefly specific features (if any) of enforcement of security established over following types of assets in a bankruptcy or insolvency proceeding: It is worth noting that a court may dismiss the petition to declare bankruptcy if it ascertains that the debtor's assets are encumbered with a mortgage or pledge to such a degree that the debtor's remaining assets are insufficient to satisfy the cost of the proceedings. A declaration of bankruptcy affects judicial enforcement proceedings that are in progress. If a bankruptcy open to arrangement is declared, the enforcement proceedings concerning the assets covered by the arrangement are suspended. In the event of bankruptcy with liquidation, all enforcement proceedings are discontinued. 12

13 Polish Bankruptcy Law provides for the possibility of adopting an arrangement between creditors and debtor that may modify rules of satisfaction of creditors (eg, by reducing the amount of a creditor s claims). Creditors secured by mortgage, pledge and security assignment, unless they decide to participate in the arrangement, are excluded from the arrangement, however, only to the extent that the claim is covered by the value of the secured asset. Thus, their claims and rights toward debtors are not modified unless they decide to do so. In respect of registered pledges Polish Bankruptcy Law provides for the possibility of enforcement of a pledge through foreclosure or public sale. However, there are some practical problems in the early stages of the proceedings, before a list of receivables is prepared, particularly in the case of bankruptcy open to arrangement. Claw-back provisions exist in the Polish Bankruptcy Law in certain situations the suspect period lasts for up to a year. It is also worth pointing out here that Polish Civil Code provides for actio pauliana. Furthermore, in some situations a third party may request that the agreement between the creditor and debtor is recognized as ineffective towards it. (a) Real estate; Mortgage Claims secured by a mortgage are satisfied, with priority over other creditors, from proceeds of sale (decreased by the costs of sale) of the encumbered asset. In case of sale of a real estate encumbered by a mortgage certain privileged claims (including alimony claims, employment claims capped up to a certain value, and certain social security claims) have preference over claims secured by such assets. To the extent claims secured by a mortgage are not satisfied from the proceeds of sale, they can participate, on a non-preferred basis, in satisfaction from the proceeds of the remaining parts of the bankruptcy estate. If so, they are satisfied in the third category. Satisfaction from this type of security interest during bankruptcy proceedings is controversial. Generally, rules regarding satisfaction from a registered pledge shall apply accordingly. (b) Charging assets (inventory, stocks etc); In principle, registered pledges may be satisfied through seizure of the encumbered assets, if a registered pledge agreement provides for such option. However, in some cases this would be impossible. Then, claims secured by a registered pledge are satisfied, with priority over other creditors, from proceeds of sale (decreased by the costs of sale) of the encumbered asset. (c) Fixed charge over movables; Please refer to comments made on Ccharging assets. 13

14 (d) Shares; Please refer to comments made on charging assets. In case of bankruptcy proceedings this type of pledge may not be satisfied through seizure of the pledged assets. Despite that, claims secured by such pledge are satisfied, with priority over other creditors, from the proceeds of sale (decreased by the costs of sale) of the encumbered asset. (e) Rights under contracts (receivables); Please refer to comments made on charging assets. Please refer to comments made on shares. (f) Bank accounts; Please refer to comments made on charging assets. Please refer to comments made on shares. (g) Financial instruments (eg, securities); Please refer to comments made on charging assets. Please refer to comments made on shares. (h) Intellectual property; Please refer to comments made on charging assets. 14

15 (i) Plant and machinery; Please refer to comments made on charging assets. (j) Other assets. Please refer to comments made on charging assets. 5. Are there any specific features or problems of enforcement proceedings if the security is granted to a trustee or security agent or the parallel debt structure is used? Basically, no specific problems should occur since a security agent faces the same challenges during the enforcement proceedings as any other owner of security. The only difference is that upon satisfaction a security agent is obliged to divide the received proceeds among all the creditors pursuant to the agreement between creditors. Polish law does not regulate the division of proceeds between creditors. Please note, however, that the status of a security agent under a parallel debt clause may, in practice, raise some controversy. We are aware of court decisions under which in the case of the bankruptcy of a debtor agent as a creditor under parallel debt is likely to be considered as a joint and several creditor with other lenders. This concept may lead to some practical problems if there are conflicts between creditors. Please note that this issue would require more extensive study. 6. Please explain the latest amendments to the law governing secured transaction in your jurisdiction in relation to a bankruptcy or insolvency proceeding. Are there any amendments which will be introduced in the near future (within one to two years) which might have impact on the legal framework of the enforcement of secured transactions in the light of insolvency law? Please also explain recent practical developments regarding secured transactions in your jurisdiction in relation to insolvency law. New mortgage regulations that will come into force in 2011 include one very significant amendment to Bankruptcy Law. The new provision would respect the specific position of a security agent (both in the case of a registered pledge and mortgage) where such agent is declared bankrupt. Assets received by such bankrupt agent as result of enforcement of security by him will be excluded from the bankruptcy estate of such bankrupt security agent insofar as they concern other creditors. It may be assumed that this amendment will result in the institution of security agent under Polish law becoming more popular. 15