Project Finance 2024 Comparisons

In Poland, project finance is primarily provided by Polish banks (which hold the majority market share), alongside foreign banks (mainly European-based banks) and international financial institutions such as the European Investment Bank and the European Bank for Reconstruction and Development. The presence of the Polish Development Fund (PFR) – a Polish umbrella organisation pooling the resources of several governmental agencies and departments (including EU funds) – in this sector is also worth noting. Additionally, the authors have observed increased involvement of other lenders, including financial investors (notably, private debt funds).

For projects that demand significant funds for construction and development, lenders often form a consortium to spread the project risk among multiple lenders, thereby reducing the risk exposure for each individual lender. However, consortiums with more than five members are still rare and are typically reserved for the largest projects, such as the recent offshore wind plant projects in Poland.

On the borrowing side, similar to elsewhere, sponsors can be divided into two groups:

• industrial sponsors, which are actively engaged in the development and construction of a project, providing certain services throughout the project’s life and possessing the required know-how in the relevant sector; and
• financial sponsors, which invest equity into various projects but are not directly engaged in their development and construction.

Public-private partnerships (PPP) are employed by states to develop infrastructure projects connected with public services that may not be fully financed by the state budget, and which require other resources possessed by the private sector (eg, in the areas of construction, development and operation) often not available from the state. This approach is also true in Poland, particularly given the Polish Ministry of Economic Development’s estimate that PLN1.5 trillion in capital investments will be required by 2030 to sustain the current pace of infrastructure development in Poland.

Considering the above-mentioned enormous potential in Poland, the Polish PPP market is not growing in a satisfactory manner. To provide an example in numbers, in the years 2020–2023, on average only ten PPP transactions per year were concluded in Poland, mainly by local government authorities. This situation has been caused by a variety of factors, including a pan-European trend influenced by the challenging economic situation in the EU and recent events, such as the COVID-19 pandemic and the Russian invasion of Ukraine.

According to the Polish government’s policy for the development of PPP transactions until 2030, the PPP model should be promoted to ensure efficiency, quality and sustainability in public investments, with the aim of maximising long-term socio-economic benefits. The goal is to finalise up to 81 new PPP transactions between 2023 and 2030, with an increase in the number of PPP transactions at the national level. 

The Polish legal framework for PPP transactions consists of (among others):

• the Act of 19 December 2008 on public-private partnerships;
• the Act of 21 October 2016 on concessions for construction works or services; and
• the Act of 11 September 2019 – the Public Procurement Law.

The following issues should be considered when structuring a project finance transaction.

Form of the Project Company

Each project finance transaction typically requires the establishment by the sponsors of a special purpose vehicle (SPV) entity for the sole purpose of developing, constructing and operating a relevant project. The legal form of the project company is crucial when it comes to determining the security package relating to the equity to be made available to lenders.

In Poland, a limited liability company is typically used in this context. From the sponsors’ perspective, this is due to the fact that shareholders are generally not personally liable for a company’s liabilities, and their liability is limited to the value of the contributions made to the company. Regarding the lenders’ position, security established over the shares in the limited liability company enables them to take over the shares and to consequently gain direct control of the project company and the project, which is essential in any enforcement scenario. As such, such form is also preferred by the lenders.

On rare occasions (and with decreasing frequency over the years), other forms are also used in project finance transactions, including limited liability partnerships. In such partnerships, at least one partner has unlimited liability towards the partnership’s creditors (general partner), while the liability of at least one other partner is limited to the value of their capital contribution (limited partner). The use of this form adds complexity to the security package, which impacts on the lenders’ position in an enforcement scenario. In such cases, the security typically covers shares in the general partner (the main security, allowing the holder to take control of the limited partnership) as well as the rights (interests) of both the general partner and the limited partner in the limited partnership (serving as additional, backup security).

Additionally, it is worth noting that “hybrid” structures are occasionally used in Polish project finance transactions, where financing is extended to the operating company, thereby eliminating the need for a separate SPV.

Due Diligence Process

For a project to be bankable, it should be in the ready-to-build phase, with all of the necessary permits and legal, administrative and regulatory authorisations in place, and with the title to the project site properly secured (either through ownership, perpetual usufruct or a long-term lease along with the necessary limited rights (easements)). Lenders will then conduct a comprehensive analysis and require the submission of various due diligence reports (on a reliance basis) prepared by reputable advisers addressing (among other things) legal, tax, insurance and technical issues. Additionally, lenders may engage their own advisers to review these reports and provide recommendations on how best to mitigate the disclosed risks in the finance documents and the structure of the financing. 

Revenue Stream and Financial Projections

Project finance is typically structured as non-recourse (with certain possible exceptions), which means that the lenders bear the risk of the project’s ability to generate revenues sufficient for the repayment of the extended debt. Consequently, lenders need to carefully evaluate the proposed revenue streams of the project and the financial projections provided by the sponsors, considering in particular the operating costs relevant to the specific type of project. The outcomes of these evaluations affect key financing parameters, such as debt sizing, the repayment model and pricing/financing costs. The greater the market exposure to unfavourable price fluctuations of the revenue stream, the less favourable the terms proposed by lenders will be.

The proposed revenue stream and financial projections also determine the types of financial covenants being tested during the financing period and their required levels. For instance, in certain projects, the Loan Life Cover Ratio (LLCR) may be tested alongside the Debt Service Cover Ratio (DSCR).

Required Equity Contributions

Another key issue in structuring a project finance transaction is the amount of equity that needs to be contributed by the sponsors in connection with development and construction of the given project. The debt-to-equity ratio is established on a case-by-case basis, depending mostly on the underlying risks connected with the project as well as on the current market conditions in the relevant sector. The sponsors should provide the lenders with evidence that they will be able to provide sufficient equity (also in the event of any construction budget overruns) or that the contributed equity was used for the payment of the costs in the development phase of the project.

Additional Layers of Debt

A typical project finance transaction comprises two primary sources of funds provided directly to the project company:

• external debt extended by lenders (in this context, senior lenders); and
• equity contributed by sponsors.

In more capital-intensive projects, there may also be a need for an additional layer of debt – namely mezzanine financing, which can be provided to the holding company above the project company. In such instances, the transaction structure should address:

• the relationship between the mezzanine lenders and the senior lenders;
• the proposed repayment structure of the mezzanine debt; and
• the distribution of excess cash flow for that purpose, as well as the step-in rights of the mezzanine lenders that would allow them to take over the holding company if their debt is not serviced at the agreed level.

Senior lenders may also require the execution of an intercreditor agreement, primarily to address:

• the consequences of defaults arising under the mezzanine finance documents;
• the rights of the mezzanine lenders; and
• the terms of enforcement (including potential standstill periods).

Other variations of debt structuring are also possible, such as two tranches of senior debt with different maturities or tranches of senior debt with different purposes ranked pari passu (eg, separate financing of the net construction costs and VAT tax). These options should be considered while structuring a project finance transaction.

In Poland, project finance has primarily focused on initiatives related to renewable energy sources (RES), particularly the development and construction of solar (photovoltaic) and wind farms. Poland is emerging as one of the fastest-growing markets for RES in Europe. The country is consistently striving to increase the proportion of renewables in its energy mix, in alignment with the Energy Policy of Poland until 2040 (EPP2040), which is scheduled to be updated by the Polish government by the end of 2024 to further increase that proportion in line with EU policies.

The authors believe that the forthcoming years will see:

• a sustainable increase in projects concerning the development and construction of solar power plants with capacities exceeding 1 MW;
• further developments in the onshore wind energy sector due to the modification of the “10H rule”, which has made new areas available for onshore wind power plants (with further liberalisation announced by the Polish government); and
• significant advancements in the development and construction of offshore wind power plants in the Polish part of the Baltic Sea.

The Polish real estate market experienced a setback in 2023, mainly due to the COVID-19 pandemic and the Russian invasion of Ukraine, which affected both the Polish and the broader European economy. Irrespective of the above, the logistics sector (warehouses), the private rented sector (PRS) and the student accommodation sector will attract interest from investors and lenders in the coming years.

A crucial part of structuring each project finance transaction is determining the security package that will be made available to the lenders. Such security package is typically comprehensive and includes:

• shares in the project companies;
• project assets (including real estate if owned by the project companies); and
• rights arising from the commercial agreements and other project documents.

Polish security may be established in favour of the security agent only to a certain extent, depending on the type of security and how the secured claims are structured and defined in the security documents (while Polish law does not permit the creation of a parallel debt, it does recognise parallel debts validly established under other laws).

The following is a brief overview of the types of Polish security typically established in project finance transactions.

Mortgage

A mortgage may be established if a project company:

• is the owner of the real estate; or
• holds a perpetual usufruct right to the real estate (this is a real property title specific to Polish law that essentially grants the holder the same rights as an owner, but for a specified period of time – ie, 99 years) constituting the project site (which is mainly the case in real estate financings).

In principle, a statement on establishing a mortgage should be made in the form of a notarial deed (exceptions are available for banks). To be validly established, a mortgage needs to be entered in the land and mortgage register maintained by the appropriate registry court.

A mortgage is established up to a certain maximum amount of the potential claims of a creditor.

A mortgage may be established in favour of the security agent (but such entity needs to be appointed as the mortgage administrator, unless the mortgage secures claims arising from the parallel debt).

Pledges

Polish law provides for the following types of pledges:

• a registered pledge;
• a financial pledge; and
• a civil (ordinary) pledge.

Registered pledge

This is validly established upon its registration in the register of pledges maintained by the appropriate registry court; additionally, there are other perfection requirements, including the issuance of certain notifications depending on the pledged item.

The registered pledge may be enforced by way of initiating ordinary court enforcement proceedings, as well as by using out-of-court enforcement methods, including taking over the pledged asset (to the extent provided in the relevant agreement for the establishment thereof).

In project finance transactions, a registered pledge is typically established over:

• shares in the project company;
• particular movable assets of the project company;
• rights to the bank accounts; and
• a collection of movable assets and rights (enterprise) of the project company.

Such pledge may be established in favour of the security agent (but such entity needs to be appointed as the registered pledge administrator, unless the registered pledge secures claims arising under the parallel debt).

Financial pledge

The financial pledge is less formalised than a registered pledge, as it is established upon the execution of the relevant agreement (being in written form) and does not require registration in a public register; however, there are other perfection requirements, including issuing certain notifications depending on the pledged item.

Similar to a registered pledge, a financial pledge may be enforced by way of initiating ordinary court enforcement proceedings, as well as by using out-of-court enforcement methods (to the extent provided in the relevant agreement on the establishment thereof).

Such pledge can only be established for the benefit of certain entities – ie, banks, financial institutions or similar regulated institutions (a closed catalogue of such entities is provided in the Polish Financial Pledges Act).

A financial pledge can only be established over certain types of assets indicated in the Polish Financial Pledges Act (such pledge may not be established over particular movable assets of the project company or a collection of movable assets and rights (enterprise) of the project company). Additionally, such pledge may not be established in favour of the security agent, unless it secures claims arising under the parallel debt.

Civil (ordinary) pledge

This is included in a security package only if there is no possibility of establishing financial pledges. It is established upon the execution of the relevant agreement (a form with a certified date or with signatures certified by a notary may be required, depending on the pledged item.

The civil (ordinary) pledge may only be enforced by way of initiating ordinary court enforcement proceedings.

Such pledge may not be established over a collection of movable assets and rights (enterprise) of the project company, and may not be established in favour of the security agent, unless it secures claims arising under the parallel debt.

Security Assignment

A security assignment is used to assign monetary claims arising from the project documents towards a creditor. A security assignment agreement must be executed in written form with a certified date.

The relevant debtors should be notified about the assignment (otherwise, a debtor is entitled to satisfy its claims to an original creditor (assignor)); however, the lack of such notification does not affect the validity of the assignment.

Statements on Submission to Enforcement

It is customary in Polish project finance transactions for the project company (and shareholder of the project company in respect of the pledged shares) to provide a statement on voluntary submission to enforcement. Such statement is an enforcement title allowing the commencement of enforcement proceedings against the relevant debtor, without the need to initiate a lengthy court proceeding or obtain an enforceable court judgment.

Security similar to a floating charge is available in Poland. Such security can be created by establishing a registered pledge over a collection of movable assets and rights (enterprise) of the project company that encumbers its entire business (ie, all movables and transferrable property rights) except for real estate, which can be secured by a mortgage.

The following costs (among others) may need to be incurred in connection with establishing security in Poland:

• court fees for submission of an application for the registration of a mortgage;
• court fees for submission of an application for the registration of a registered pledge;
• court fees for the submission of a new list of shareholders to the National Court Register (in connection with the establishment of pledges over shares in the project company);
• stamp duties regarding powers of attorney if the relevant applications are submitted to the appropriate registry court by an attorney-in-fact; and
• notarial fees connected with notarisations or for the execution of the relevant documents in the form of notarial deeds.

Any item that is subject to security must be precisely defined for the purpose of the valid establishment of that security.

Additionally, the following applies:

• mortgages – the relevant real estate must be defined and described in the manner required under the Polish Act on Land and Mortgage Registers;
• registered pledges – the relevant asset must be defined and described in the manner required under the Polish Act on Registered Pledges and the catalogue of descriptions of assets subject to a registered pledge attached to the relevant ordinance of the Polish Minister of Justice; and
• a registered pledge over a collection of movable assets and rights (enterprise) – at the moment of establishment, it is not required to provide descriptions of each element of the collection (however, the agreement may provide for an obligation of the pledgor to prepare a detailed list of the elements of the collection and to submit such list to the registry court).

As mentioned previously, financial pledges may only be established for the benefit of certain entities – ie, banks, financial institutions or similar regulated institutions (a closed catalogue of such entities is provided in the Polish Financial Pledges Act). In the authors’ experience, this restriction may be particularly important in project finance transactions that involve lenders other than banks, as most entities providing security agency services do not qualify as financial or similar regulated institutions listed in the Polish Financial Pledges Act.

Additionally, specific Polish law limitations apply with respect to guarantees being given by a limited liability company or a joint stock company.

For a limited liability company, a guarantee is limited in such a way that said company may not be required to effect any payment that would result in a reduction of its assets necessary to cover its share capital in full.

For a joint stock company, a guarantee is limited in such a way that:

• it may not result in a breach of the restrictions regarding the return of share contributions; and
• it may not result in a breach of the restrictions concerning financial assistance.

In Poland, the following registers are publicly available:

• the register of pledges, in which registered pledges are disclosed (there is a legal presumption that no one may plead ignorance of facts disclosed in such register);
• the land and mortgage register, in which mortgages and other limited rights encumbering a real property are disclosed (such as easements) (there is a legal presumption that no one may plead ignorance of the facts evidenced in such register); and
• the treasury pledge register, in which treasury pledges are disclosed (such pledges are established in favour of the State Treasury or local government authorities in connection with the tax arrears of the relevant taxpayer).

In project finance transactions, the delivery of excerpts from such registers confirming the lack of any security (other than permitted) typically constitutes a condition precedent for the purpose of disbursing the financing.

The absence of any other security is typically covered by the representations and warranties section included in the relevant finance document.

In principle, under Polish law, security expires upon:

• the full and unconditional repayment of all secured claims (subject to certain additional actions that may be required in connection with a reassignment of rights and the revocation of powers of attorney); and
• the issuance of a release letter by the lender (or security agent, if appointed).

In the case of a release letter, the security is effectively released upon the issuance thereof, with the exception of:

• a mortgage, which is effectively released upon the deletion of the relevant entry from the land and mortgage register; and
• a reassignment of rights, which is effective upon the acceptance thereof by the original assignor.

The form of the release letter depends on the security to be released. For instance, the release of a mortgage should be made in written form with signatures certified by a notary.

Additionally, registered pledges should be deleted from the register of pledges. However, unlike mortgages, such deletion is not required for the expiry of the registered pledges.

In principle, Polish security may be enforced once the secured claims or any part thereof become due and payable, which may occur as a result of defaults/events of default under the finance documents or the acceleration of the debt by the lenders.

Each security may be enforced by way of initiating ordinary court enforcement proceedings based on a final and non-appealable court judgment or a notarial deed that includes the debtor’s statement on voluntary submission to enforcement. In such case, an encumbered asset (and real estate in the case of the mortgages) is seized and sold by a court officer (bailiff), and the proceeds arising from such sale are applied towards the satisfaction of the secured claims (taking into account, however, the order of priority provided in the Polish Civil Procedure Code). Real properties are typically sold at a public auction conducted by a court officer (bailiff), with certain exceptions where the simplified procedure of enforcement of real estate may apply.

In addition to the above, the following also applies.

• Registered pledges may be enforced by using out-of-court enforcement methods (to the extent provided in the relevant agreement on the establishment of a registered pledge), depending on the type of pledged assets. For example:
1. the taking-over of the ownership title to the pledged assets;
2. the sale of the pledged assets in a public auction conducted by a notary or a court officer (bailiff);
3. the leasing of the enterprise; and
4. the taking-over of the management of the enterprise.
• Financial pledges may be enforced by using out-of-court enforcement methods (to the extent provided in the relevant agreement on the establishment of the financial pledge), depending on the type of pledged assets. For example:
1. the taking-over of the ownership title to the pledged assets; and
2. the private sale of the pledged assets.

For a registered pledge, the pledgee should notify the pledgor in writing of its intention to take action to satisfy its claims by way of taking over the assets or selling the assets in a public auction seven days prior to taking such action. Such a requirement does not apply to financial pledges.

The choice of foreign law is generally recognised by Polish courts in proceedings in Poland. Please note, however, that pursuant to the Rome I Regulation certain overriding mandatory provisions may exist that are regarded by a country as crucial for safeguarding its public interest (such as its political, social or economic organisation), to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under the Rome I Regulation.

On that basis, the Polish courts may refuse to apply a provision of foreign law if the effect of such application is contrary to the basic principles of law and/or the basic principles of public policy in Poland.

In addition, a Polish court will recognise and give effect to an agreement on the jurisdiction of a foreign court, except in the case of the following disputes – in which case, such an agreement will not be recognised and given effect:

• disputes falling under the exclusive jurisdiction of the Polish courts;
• disputes concerning labour law, unless the agreement was concluded after such disputes arose;
• disputes concerning or arising from agreements concluded with a consumer that resides in or whose permanent place of residence is Poland; or
• disputes concerning or arising from an insurance relationship.

In principle, a judgment issued by a foreign court against a project company will be recognised and enforced by Polish courts, unless:

• such judgment has not become final and non-appealable in the country in which it was issued;
• such judgment was issued in a case that falls under the exclusive jurisdiction of the Polish courts;
• the defendant, who was not involved in the dispute as regards the substance of the case, was not sufficiently served in advance with the document that instituted the proceedings nor in such a way as to enable the defendant to arrange their defence;
• a party in the course of the proceedings was denied the possibility to arrange their defence;
• a case concerning the same claim between the same parties had been brought before a Polish court earlier than before the court in the foreign jurisdiction;
• such judgment is irreconcilable with an earlier final and non-appealable judgment of a Polish court, or with an earlier final and non-appealable judgment of a foreign court that is eligible for recognition in Poland, issued with respect to a dispute between the same parties in relation to the same claim; or
• such recognition is contrary to the basic rules of public policy in the Republic of Poland.

Additionally, in the case of judgments issued by foreign courts of EU member states, the provisions of European Parliament and Council Regulation No 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (dated 12 December 2012) will apply.

As regards foreign arbitral awards, Poland is a party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the “New York Convention”), meaning that awards obtained in states that are a party thereto may be enforced and recognised in Poland on the terms and conditions provided for therein.

As a rule, the ability of a foreign lender to enforce its rights will be subject to the same limitations and requirements applicable to Polish lenders, including those applicable to bankruptcy and restructuring proceedings (see 6. Bankruptcy and Insolvency).

Please note that Polish law distinguishes between two types of loans – ie, a bank loan and a regular loan.

A bank loan, which falls under a stricter regulatory regime, can only be granted by banks. In this respect, a foreign entity wishing to grant a bank loan in Poland must have the status of a credit institution (in the case of the EU) or a foreign bank (in the case of a non-EU country) and must meet a number of requirements under Polish banking law.

In principle, similar restrictions do not exist for regular loans, which can be granted by anyone. A foreign lender may therefore grant a loan in Poland without restriction, unless such loan is classified as a consumer loan (which is determined, inter alia, by the amount of the loan and the fact that the borrower is a consumer). In such case, consumer lending activities may be conducted by entities that are licensed as lending institutions.

Foreign entities may perform consumer loan activities in Poland if they meet the regulatory requirements and notify the Polish Financial Supervision Authority. However, this only applies to entities based in the EU, Switzerland or the European Free Trade Association (EFTA). Entities from other countries may not grant consumer loans.

Additionally, the following applies:

• certain restrictions on lending may result from sanctions concerning foreign lenders based in Russia or Belarus; and
• for obligated institutions, the provisions of the Anti-Money Laundering (AML) Act apply.

There are no legal restrictions related to the provision of guarantees or security to a foreign lender. Generally, the applicable law does not prohibit a guarantee or collateral such as a pledge or mortgage from being granted to a foreign entity.

Certain restrictions may arise from the general nature of the security in question – eg, in the case of financial security (see 2.1 Assets Available as Collateral to Lenders).

In the Polish legal system, foreign investors are (in principle) treated in the same manner as domestic investors and can invest freely in Poland, including by way of the acquisition of shares in Polish companies. However, certain restrictions apply to investments in entities of key importance for the activities of the state by foreign investors from countries outside the EU, EEA and Organisation for Economic Co-operation and Development (OECD).

Pursuant to the Act of 24 July 2015 on the Control of Certain Investments (the “FDI Act”), a (mandatory) Polish foreign direct investment (FDI) notification obligation may be triggered if the intended transaction results in obtaining – directly or indirectly – a significant interest in or dominance over an entity that has the status of a protected entity.

A protected entity is an entity seated in Poland if:

• it is a public company listed on a Polish stock exchange; or
• it is active in conducting at least one of the activities indicated in the FDI Act (a list of over 20 types of activities, including in the energy, fuel, chemical, defence, pharmaceuticals and telecommunications sectors, or in the field of critical state infrastructure), and generated revenue of over EUR10 million in the territory of Poland in any of the two financial years preceding the transaction.

As a rule, an investment subject to review under the FDI Act is subject to a standstill obligation. A violation of the FDI Act could result in an investment being deemed ineffective, or in a prohibition on the exercise of the voting rights attached to the shares in the protected entity. Additionally, criminal liability may arise.

Investments under the FDI Act are reviewed by the President of the Office of Competition and Consumer Protection, from the perspective of a threat to public order, public security or public health.

There are no restrictions related to payments made abroad or the repatriation of capital by foreign investors; however, a Polish entity that holds (including in accounts, real estate, shares or certain receivables) assets abroad of a value higher than that specified in the relevant regulation has a reporting obligation towards the National Bank of Poland.

It should also be noted that, for obligated institutions, the provisions of the Anti-Money Laundering (AML) Act will apply.

There are no restrictions as regards maintaining an offshore foreign currency account. However, please note the reporting obligation referred to in 4.4 Restrictions on Payments Abroad or Repatriation of Capital. Please also be aware that certain restrictions may arise in the jurisdiction in which these accounts are held.

It should also be noted that, for obligated institutions, the provisions of the Anti-Money Laundering (AML) Act will apply.

For security documents, agreements on the establishment of a registered pledge and a statement on the establishment of a mortgage should be submitted to the appropriate registry court, along with the relevant applications.

For project documents, in project financing transactions in which the title to a project site is secured by way of a long-term lease, the relevant lease agreement should be submitted to and disclosed in the land and mortgage register.

Depending on the sector, a licence (concession) may be required for undertaking the business of the operation of certain assets in Poland.

For instance, in renewable energy projects, a project company must obtain and maintain a generation licence allowing the project company to generate and sell electric energy. Such licence may be held by a foreign entity seated in a member state of the EU, Switzerland, Turkey, a member state of the EFTA, or a party to the Agreement on the European Economic Area, upon the satisfaction of certain conditions and subject to certain limitations (as discussed previously). However, this is not often the case in such transactions as the project company is typically a Polish law-governed entity.

The trust concept is not recognised under Polish law.

Generally, under Polish law, the appointment of an agent/security agent to act on behalf of the lenders is based on the concept of a power of attorney, and the relevant provisions regulating the scope of the agent’s/security agent’s authorisation are provided directly in the finance documents.

Considering the foregoing, only certain types of security may be established directly in favour of a security agent. These include:

• registered pledges – in such case, the security agent also needs to be appointed as a registered pledge administrator;
• mortgages – in such case, the security agent also needs to be appointed as a mortgage administrator; and
• non-accessory security (ie, not directly connected with or dependent on the existence of the secured receivable), such as a security assignment.

An alternative solution may include a structure with a parallel debt. Under Polish law, it is not possible to create a parallel debt. However, a parallel debt validly established in other jurisdictions is recognised by Polish law and thus may be secured by Polish security. In that case, all security can be provided directly to the security agent (without the need for additional appointments such as a mortgage administrator or registered pledge administrator) as it would act as a creditor having an independent and separate claim towards the project company.

Priority among several security interests is governed by mandatory provisions of Polish law, and depends on the nature and type of the security in question. The key issue is whether the security is a right in rem (eg, a pledge, a financial pledge, a registered pledge or a mortgage) or a contractual instrument (eg, surety, guarantee, subordination, an irrevocable power of attorney to exercise certain rights of the debtor, or any other obligation).

Another category of contractual instrument is a security assignment, which provides the creditor with an ownership title to asset(s), or the right to assume the ownership of the asset in the case of a default/event of default. 

The general principles are as follows.

• If several rights in rem encumber the same thing, the right created later may not be exercised to the detriment of the right created earlier.
• In the case of registered pledges, if the same item is encumbered by more than one registered pledge, the priority of these pledges is determined by the date of submission of the application for entry in the register of pledges. The date on which the application was deemed filed is the day on which it is received by the court maintaining the pledge register. Applications received on the same day are deemed to have been submitted simultaneously.
• In the case of civil (ordinary) pledges and financial pledges, a pledge created later takes priority over a right in rem created earlier, unless the pledgee acts in bad faith.
• The priority of mortgages is determined by the moment from which the mortgage is deemed to be effectively entered in the land and mortgage register – mortgages entered on the basis of applications filed simultaneously have equal priority.

It is possible to change the priority of rights in rem by way of an agreement between creditors. In the case of a mortgage, an entry in the land and mortgage register is needed for the change to be effective.

Polish law does not include a direct requirement that a project company be incorporated in Poland, although this is the case in the vast majority of transactions in the Polish market.

Typically, a limited liability company is used for the purpose of project financing transactions, with other forms being used on an exceptional basis (as discussed previously).

The rules concerning company reorganisation proceedings (restructuring proceedings) are mainly provided in the Polish Restructuring Law. Such proceedings may be conducted against debtors who are insolvent or at risk of insolvency. The aim of each is to avoid declaring the bankruptcy of the debtor by enabling it to conclude an arrangement with creditors. In remedial proceedings, it is also achieved by conducting in-depth restructuring of the debtor’s enterprise.

The Polish Restructuring Law provides for the following restructuring proceedings.

Arrangement Approval Proceedings (Without Announcement of Fixing the Arrangement Day)

This is the least formal of all restructuring proceedings, conducted largely out of court and generally not limiting the debtor in managing its assets (other than by the obligation of supervising this management during the short in-court phase).

Arrangement approval proceedings are voluntarily initiated by the debtor, by concluding an agreement with an arrangement supervisor (who is a licensed restructuring adviser) and fixing an arrangement day on which the receivables involved in the restructuring are determined.

After presenting an arrangement proposal to its creditors, the debtor collects their votes without the court’s involvement. There is no creditors’ meeting; thus, the votes are collected in writing. When the debtor collects the majority of creditors’ votes, it submits the motion with the court for the approval of the arrangement. During the proceedings – either before the submission of the motion to the court or afterwards – there are no provisions for securing the debtor’s assets. The debtor’s assets are protected after the decision on approval of the arrangement by the court.

Such proceeding can be used by a debtor that is able to convince its creditors to vote in favour of the arrangement through informal negotiations.

Arrangement Approval Proceedings (With Announcement of Fixing the Arrangement Day)

This proceeding is similar to the previous one; however, it requires a public announcement in the National Debtors’ Register of the commencement of the proceedings.

Such proceeding provides the debtor with protection against the termination of key contracts and any enforcement conducted by creditors (for a maximum period of four months).

Accelerated Arrangement Proceedings

This is a voluntary in-court proceeding. It begins after the acceptance by the court of a restructuring application submitted by the debtor. At the same time, a court supervisor is appointed, whose role is to supervise the debtor’s activities during the restructuring.

Such proceeding is intended for debtors who need transparent restructuring under the supervision of the restructuring court and the court supervisor. In this proceeding, the debtor may choose to only restructure its liabilities towards its key creditors; such proceeding cannot be conducted if the value of the disputed claim exceeds 15% of the total value of the claims.

During the term of accelerated arrangement proceedings, the debts to be restructured in the arrangement are not paid and creditors cannot effectively demand their payment. In such proceeding, the stay on enforcement actions of the creditors does not include the enforcement of receivables not covered by the arrangement – ie, employment claims and secured claims (unless a secured creditor has agreed to be covered by the arrangement or its claim has been compulsorily covered by the arrangement).

Arrangement Proceedings

This proceeding is similar to the previous one, but is intended for debtors whose value of disputed debts exceeds 15% of the total value of debts, and cannot be initiated if the level of disputed debts is lower.

In such proceeding, due to the high level of disputed debts, creditors have formal tools allowing them to challenge the pledges over claims prepared by the court supervisor based on the debtor’s books and documents. Filing a complaint allows for a court procedure to be conducted to determine whether a claim should be restructured in an arrangement. The conclusion of the arrangement may only take place after the final determination of the list of claims covered by it.

Remedial Proceedings

This is the only restructuring proceeding provided for in the Polish Restructuring Law that can be initiated involuntarily. If the debtor is insolvent, the petition for initiating remedial proceedings may also be filed by its undisputed personal creditor. In other cases, the petition may be filed only by the debtor itself.

In remedial proceedings, an administrator is appointed to take over the management of the debtor’s enterprise. An administrator also has powers that facilitate the restructuring of the debtor’s enterprise, including:

• withdrawal from unfavourable contracts;
• termination of employment contracts; and
• selling unnecessary assets. 

This is the only restructuring proceeding that provides for a claw-back of certain actions of the debtor undertaken before the initiation thereof. Additionally, it provides for the full protection of the debtor against all enforcement conducted by creditors and the termination of key contracts.

The opening of restructuring proceedings (with the exception of arrangement approval proceedings) without the announcement of fixing the arrangement day has an impact on the possibility of conducting enforcement against the debtor’s assets.

The commencement of arrangement approval proceedings with the announcement of fixing the arrangement day and remedial proceedings results in all pending enforcement proceedings being discontinued.

The commencement of accelerated arrangement proceedings and arrangement proceedings results in the pending enforcement proceedings concerning the claims covered by the arrangement being discontinued.

The above-mentioned restrictions do not apply to enforcement against the debtor’s security providers or guarantors.

If bankruptcy is declared, all enforcement proceedings conducted against the debtor are discontinued by law. Secured creditors may only satisfy their claims against secured assets in bankruptcy proceedings from the amounts obtained from the sale of the collateral (minus liquidation costs and part of the costs of the proceedings). The exception are registered pledges, which allow for satisfaction by taking ownership of the pledged asset.

The Polish Restructuring Law does not provide for the order of repayment. Creditors are repaid on the terms specified in the adopted and approved arrangement.

In bankruptcy, the costs of the proceedings and liabilities resulting from the actions of the bankruptcy administrator are paid with priority over the creditors. After those are paid, the unsecured creditors are repaid in the following order:

• claims of employees and farmers, maintenance claims, pensions, social security contributions (due for the last three years before the declaration of bankruptcy), claims from previous restructuring proceedings (if bankruptcy was declared as a result of a simplified bankruptcy petition) and new financing provided for in the arrangement adopted in the previous restructuring proceedings;
• general unsecured claims (including public law claims) not included in other categories;
• interest on claims included in higher categories, judicial and administrative fines, and receivables from donations and bequests; and
• claims of stockholders and shareholders from loans or other legal acts made within five years before the bankruptcy.

The risks for lenders are the provisions regulating claw-back in remedial and bankruptcy proceedings.

In principle, in both of these proceedings, the claw-back principle can be applied to the debtor’s actions taken within a year prior to the date of filing the petition to initiate the proceedings, on the basis of which the debtor disposed of its assets gratuitously or in a grossly inadequate manner.

In bankruptcy proceedings, claw-back also covers the security and payment of a non-matured debt established or made by the debtor within six months prior to the date of filing a bankruptcy petition, unless the other party was not aware of the debtor’s insolvency at the time the security or payment was established or made.

The bankruptcy administrator can also claw back actions (even equivalent) taken by the debtor with respect to entities related to it within six months prior to the date of filing the bankruptcy petition, unless the creditors were not harmed.

In remedial proceedings, claw-back also covers:

• security that was not established directly in connection with the debtor receiving the benefit; and
• the part of the security that exceeds more than half the value of the secured benefit received by the debtor, established within a year before the date of filing the application to open restructuring proceedings, and as established by the debtor within a year before the date of filing the remedial petition.

A claw-back has retroactive effect, meaning that all the actions covered by a claw-back are ineffective. If the action consisted of a disposal of assets, the subject of the disposal should be returned. The security covered by the claw-back will not have any effects in bankruptcy and remedial proceedings.

Bankruptcy law excludes bankruptcy for the following entities:

• the State Treasury and local government units – there is no legislation providing for their bankruptcy or restructuring;
• independent public complexes of healthcare facilities;
• institutions and legal persons established by law (unless the law provides otherwise) or established in performance of an obligation imposed by law;
• natural persons running a farm who do not conduct any other business or professional activity;
• universities – there is no legislation providing for their bankruptcy, but they can be restructured on the basis of the Polish Restructuring Law; and
• investment funds – the termination of the operation of investment funds is regulated in the Polish Act on Investment Funds.

Generally, there are no restrictions, controls, fees and/or taxes on insurance policies over project assets provided or guaranteed by insurance companies, other than relating to third-party insurance policies that may not be assigned or otherwise be subject to security in favour of lenders.

Insurance policies over project assets may be payable to foreign creditors once they are assigned to a foreign creditor or the foreign creditor is disclosed in the insurance policy as a co-insured entitled to insurance proceeds.

The Polish CIT Act provides for a list of Polish-sourced income that should generally be subject to tax in Poland, which includes interest.

Consequently, withholding tax (WHT) is due each time interest arising in Poland is paid to a non-resident entity. Interest is considered to arise in Poland when the distributing entity is seated in Poland. Furthermore, “payment of interest” encompasses any form of settlement of an interest obligation by the obligor, including the actual payment, set-off or capitalisation of interest.

The WHT rate on interest amounts to 20% in Poland. However, the Polish CIT Act provides for:

• an exemption in respect of the payment of WHT based on the Interest-Royalties EU Directive; and
• the possibility of applying a WHT exemption or reduced WHT rates resulting from double taxation treaties (DTTs) concluded by Poland.

The application of preferential WHT rules under a DTT is only possible upon the exercise of due care in verifying the fulfilment of the prerequisites for the use of the tax preference.

In general, the repayment of principle and other payments related to financing falls outside the scope of WHT.

Other than withholding tax, there are no other taxes, duties, charges or tax considerations relevant to lenders extending loans to entities incorporated in Poland. Note that, as a rule, loans are subject to what is referred to as the Tax on Civil Law Transactions (a sort of transfer tax) at the rate of 0.5% of the loan’s principal, whereas the party liable to pay such tax is the borrower. At the same time, Polish tax provisions provide for certain exemptions and exclusions from the foregoing (eg, for shareholder loans or when a loan is granted within a transaction subject to VAT).

From a tax perspective, there no usury laws or other rules limiting the amount of interest that can be charged. Nonetheless, pursuant to the general rules, interest should be at the market level (particularly between related entities). Moreover, note that the Polish CIT Law provides for certain limitations on borrowers with respect to recognising interest as tax-deductible costs (eg, thin capitalisation rules).

Project documents are typically governed by Polish law with certain exceptions, which may include parent company guarantees provided as security for performing construction contracts.

Financing agreements are typically governed by Polish law.

However, for projects with consortiums consisting of multiple Polish and foreign banks or financial institutions, or including international financial institutions such as the European Investment Bank and the European Bank for Reconstruction and Development, the lenders may choose English law to govern the main financing agreement.

Hedging transactions may be provided under English law-governed ISDA documents.

A parallel debt structure may be used if created under applicable law other than Polish law.

The establishment of security is typically governed by domestic law.