Bankruptcy estate – methods of liquidating assets in bankruptcy proceedings.

Magdalena Żabińska

February 17, 2025

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In the previous article titled: "Bankruptcy estate - basic information" basic information on the bankruptcy estate has been presented - what it is, what it consists of and what is its role in bankruptcy proceedings. This article will be a continuation and development of the subject of the bankruptcy estate, and specifically will focus on the methods of liquidation of the bankruptcy estate, i.e. will answer the question of how the trustee can sell the assets of the bankrupt debtor to satisfy the creditors to the highest possible extent. In simple terms, this is the stage in which all the debtor's assets are collected, assessed and sold, and the funds obtained are divided between the creditors.

Contents:

The course of liquidation of the bankruptcy estate
1. Entrusting the management of the bankruptcy estate to the trustee
2. Inventory and assessment of the bankruptcy estate
3. Liquidation of assets
3.1 Sale of the business as a whole
3.2 Negotiated sale
3.3 Auction and tender
3.4 Collection of receivables
3.5 Taking over of assets by creditors
3.6 Pre-pack, or prepared liquidation
4. Distribution of funds obtained and conclusion of the proceedings
Summary

The course of liquidation of the bankruptcy estate

The liquidation of the bankruptcy estate aims to sell or recover the debtor's assets in order to maximize the satisfaction of creditors. The procedure includes several key stages:

1. Entrusting the management of the bankruptcy estate to the trustee

After declaring bankruptcy, the court appoints a trustee to manage the bankruptcy estate. The trustee is responsible for liquidating the debtor's assets, selling assets, and settling the funds obtained from the sale.

2. Inventory and assessment of the bankruptcy estate

The trustee conducts a detailed inventory of the debtor's assets, determining which components are part of the bankruptcy estate. The trustee conducts an inventory of the assets and also orders the valuation of individual components of the bankruptcy estate. The valuation is important because it will help determine the market value of the items, which allows for determining which of them are suitable for sale and will bring real positive value in order to maximize the degree of satisfaction of creditors. It is important that the valuation process is conducted reliably, because an unreliable valuation could reduce the sale price, which would ultimately harm the creditors. Importantly, the participants in the proceedings have the right to familiarize themselves with such a valuation and even file an objection to it if it turns out to be unreliable. In accordance with the applicable regulations, the trustee is obliged to prepare an inventory list together with a liquidation plan within 30 days of the declaration of bankruptcy, in which he will present to the judge-commissioner the proposed methods of selling the bankrupt's assets, the date of sale, a budget of expenses and the economic justification for continuing to run the enterprise. If it is impossible to submit the above information within the specified deadline, the trustee shall prepare a general report on the state of the bankruptcy estate and the possibility of satisfying the creditors, and shall submit the remaining documents immediately as soon as possible.

3. Liquidation of assets

After valuation and inventory, the trustee starts selling the components of the bankruptcy estate. This process is carried out in different ways depending on the components in the bankruptcy estate and their value. Liquidation may also look different in proceedings conducted against bankrupt companies than against consumers. The next article will discuss the issue of the influence of creditors and the judge-commissioner on the liquidation of the bankruptcy estate. In this state of affairs, this study does not take into account the specifics of individual types of bankruptcy proceedings, but is an outline of the generally available means available to the trustee in the course of liquidating the debtor's assets.

The trustee is required to sell the property for the highest possible price in order to ensure the highest possible profit for the creditors. At the same time, the liquidation is assumed bankruptcy estate should be carried out efficiently, and the trustee should take steps to complete it within 6 months of the date of bankruptcy. The trustee cannot simply sell assets at a low price if there is no justifiable reason for doing so (e.g. lack of interest in the subject of the sale). According to the provisions of bankruptcy law, the sale should be conducted in an open and transparent manner.

The liquidation of the bankruptcy estate is carried out by means of an unrestricted sale or by way of a tender or auction of the bankrupt's enterprise in its entirety or its organised parts, real estate and movables, receivables and other property rights included in the bankruptcy estate, or by collecting receivables from the bankrupt's debtors and exercising his other property rights.

3.1 Sale of the business as a whole

As a rule, if bankruptcy proceedings are conducted against a company, it should be sold as a whole in the liquidation process, which means that this involves the simultaneous acquisition of not only the movable and immovable assets of the company but also the name, concessions, permits, licenses, receivables, employment relations, etc. The trustee may decide to sell the company as a whole if he considers this to be the most advantageous solution. In such a case, the company may be sold to a single buyer who will continue its operations. This form of liquidation aims to maintain business continuity and employee employment. The sale of the debtor's entire company is one of the more complicated cases in bankruptcy proceedings. This type of sale requires a detailed analysis because the value of the company depends on many factors, including its profitability, location, the market value of its products and services, and its market potential. Only in the event that the sale of the company as a whole is not possible for economic or other reasons should the trustee consider a separate sale of individual components or an organized part of the company.

The significance of the action taken by the Trustee in the scope of the sale of the enterprise as a whole is emphasized by the necessity for the Trustee to obtain the consent of the Board of Creditors to withdraw from the sale of the enterprise as a whole, and if the Board of Creditors was not appointed in the course of the proceedings, the necessity for the Trustee to obtain The trustee consent of the Judge Commissioner.

3.2 Negotiated sale

It is a simplified and less formal method of selling seized assets. It also has other advantages, such as freedom in choosing a buyer and the possibility of negotiating the terms of sale. For example, assets can be sold in this way in a situation where:

there is only one potential buyer (e.g. in the case of the sale of a receivable that is not of interest to other people).
the value of the assets is too low to make it sensible to organise a tender or auction (e.g. in the case of used property of low value).

Nevertheless, sales without auctions must be transparent and prices must be justified by market valuations.

Even before the formal commencement of the liquidation of the bankruptcy estate, the trustee may sell movables without the consent of the creditors' committee or the judge-commissioner, if this is necessary to cover the costs of the proceedings. In addition, the trustee may sell movables that are subject to rapid deterioration or would lose significant value due to the delay in sale or whose storage entails costs that are too high in relation to their value.

During the proper liquidation of the estate, the trustee may sell components without a tender or auction procedure, after obtaining prior consent from the Judge-Commissioner or the Board of Creditors. This consent is not required in the case of the sale of movables if the estimated value of all movables included in the bankruptcy estate, as indicated in the inventory list, does not exceed the equivalent of PLN 50,000, and also in the case of the sale of receivables and other rights, if the nominal value of all receivables and other rights included in the bankruptcy estate, as indicated in the inventory list, does not exceed the equivalent of PLN 50,000.

3.3 Auction and tender

Other methods of selling assets included in the bankruptcy estate include auctions and tenders. An auction is a process in which potential buyers submit their bids publicly, and the price of the sale item increases as higher bids are submitted. Bidding can apply to various assets of the bankruptcy estate, including real estate or merchandise. The aim of the auction is to obtain the highest possible price. The trustee organizes an auction at which the assets are offered. Auctions often attract greater interest, which can lead to a higher sale price. In the case of public auctions, information about the auction is widely disseminated, which increases the chance of potential buyers participating.

A tender, on the other hand, is a more formal process in which the notice of sale specifies the rules for submitting bids. Interested buyers submit bids, and the trustee selects the one that offers the highest price or the most favorable terms. Tenders are usually used for more complex assets in the bankruptcy estate, such as businesses, commercial properties, or high-value machinery. Similar to an auction, a tender involves inviting potential buyers to submit bids for the purchase of assets. A minimum price is set, and then the bids are evaluated and the most favorable one is selected. Tenders can apply to individual assets or entire collections.

When organizing a tender and auction, the provisions of the Civil Code apply accordingly, except that:

1) the terms of the tender or auction are approved by the judge-commissioner;

2) a tender or auction must be notified by means of an announcement at least two weeks before the date of the meeting scheduled to conduct it, and if the tender or auction concerns an enterprise of a public company – at least six weeks before the date of the meeting scheduled to conduct it;

3) the tender or auction is conducted in a public meeting;

4) the tender or auction is conducted by the trustee under the supervision of the judge-commissioner;

5) the selection of the bidder is made by the trustee; the selection requires the approval of the judge-commissioner;

6) the judge-commissioner may issue a decision approving the selection of the bidder at a closed session;

7) the judge-commissioner may postpone the approval of the selection of the bidder for one week; in such a case, the decision on the approval of the selection of the bidder shall be announced

3.4 Collection of receivables

The liquidation of the bankrupt's receivables can be carried out by selling them or collecting them. Before deciding on the choice of a specific method of liquidation, it is necessary to conduct a careful analysis, which will allow to assess which of the options will contribute to the best possible satisfaction of creditors. In this assessment, both the potential costs associated with each of these processes and the risk that the collection of receivables may end in failure should be taken into account. It is also important to consider the need to settle the liabilities indicated in Article 230 of the Bankruptcy Law, which will be related to the possible extension of the bankruptcy proceedings. Only in this way can an informed decision be made, which will be aimed at the maximum protection of the interests of creditors and effective management of the bankrupt's assets.

In some situations, creditors may decide to seize the debtor's assets as part of the repayment of their debt. This method of liquidating the bankruptcy estate may be beneficial for creditors who, instead of pursuing their claims through bankruptcy proceedings, prefer to seize the assets and dispose of them themselves. What situations are we talking about?

The liquidation of movable assets encumbered with a registered pledge and receivables and rights encumbered with a registered pledge or a financial pledge may be effected by their takeover by the creditor who is the pledgee of the registered pledge or the financial pledge, if the agreement on the establishment of the pledge provides for the satisfaction of the pledgee by way of takeover of the subject of the pledge.

If the pledged item is in the possession of the pledgee (or third parties), the pledgee shall notify the trustee of the satisfaction of the claim. Judge-Commissioner may set an appropriate deadline for the pledgee to satisfy their claim from the pledged asset. If the pledgee has not exercised this right within the specified deadline, the person in whose possession the item encumbered by the registered pledge is located is obliged to deliver the pledged asset to the trustee, after which the trustee sells it and from the proceeds of the sale satisfies the secured creditor.

If, however, the subject of the registered pledge from which the creditor may satisfy his claim is in the possession of the trustee and the creditor has the right to take ownership of the subject, the judge-commissioner first sets a deadline for the creditor to exercise this right (no shorter than one month). However, if the pledgee does not exercise his right within the specified deadline, then the subject of the pledge will be sold in a manner permitted by the provisions of the Bankruptcy Law.

In a situation where the bankruptcy estate includes movables, the sale of which is impossible under applicable regulations, the creditor has the right to take over ownership of these movables that have been put up for sale. The value of the items taken over cannot be lower than half of their estimated price. In the first place, the right to take over the movables is granted to the creditor whose claim is secured by a lien, including a registered lien or a fiscal lien on these movables, and then - to the creditor who offered the highest price. In order for the declaration of takeover to be taken into account, the creditor must submit it simultaneously with the full amount of the offered price. The transfer of ownership of the movables to the creditor takes place when the trustee informs him of the award of these items to him

3.6 Pre-pack, or prepared liquidation

Prepared liquidation (pre-pack) is a procedure, which begins at the stage of the bankruptcy proceedings, and therefore before the actual declaration of the debtor's bankruptcy. Prepared liquidation gives the debtor the opportunity to consciously choose the purchaser of the assets (whether the entire enterprise, its organized part or only a valuable asset) at a price specified in the application and accepted by the court. Fulfillment of the statutory conditions in this procedure allows the liquidation of the indicated assets within 30 days from the date on which the court's decision approving such sale becomes final. This is the most advantageous method of liquidating assets for all participants in bankruptcy proceedings, because it translates into a reduction in its costs and, therefore, a higher degree of satisfaction of creditors. Due to the extensiveness of this topic, a separate article will be devoted to this issue in the near future.

4. Distribution of funds obtained and conclusion of the proceedings

After the sale of assets, the trustee begins to distribute the funds obtained among the creditors. The funds are distributed in accordance with the classification of claims. Creditors whose claims were secured, e.g. by establishing a mortgage on the property sold by the trustee, can count on satisfaction from the funds obtained from the sale of the encumbered asset according to the order of priority to which they are entitled (according to the date of establishment of the security).

Creditors should be aware that bankruptcy proceedings, like enforcement proceedings, involve costs. The Bankruptcy Law Act specifies in detail how funds obtained from the liquidation of the bankruptcy estate may be spent. For example, the trustee may cover only part of the costs of bankruptcy proceedings from the funds obtained from the sale of secured assets. Funds obtained from the sale of unencumbered assets and those remaining from the sale of encumbered assets (after satisfying secured claims) contribute to the general funds of the bankruptcy estate, from which the costs of bankruptcy proceedings and other liabilities of the estate are first covered, and only after they have been satisfied are the funds distributed to creditors according to the categories in which their claims have been recognized.

Depending on the type of bankruptcy proceedings we are dealing with, the preparation of division plans will be a separate stage of such proceedings, after which the bankruptcy proceedings will be formally closed (in commercial bankruptcy or consumer bankruptcy on general terms) or it will be an element of the draft creditor repayment plan being prepared (in simplified consumer proceedings).

Summary

Liquidation of the bankruptcy estate is a complex process that requires thorough analysis and the use of various methods. The key to its effectiveness is skillful management of the debtor's assets and cooperation with creditors and other institutions. The right approach to liquidation can contribute to the satisfaction of creditors' claims and the completion of bankruptcy proceedings in a manner satisfactory to all parties.