Analysis

Bankruptcy and Reorganization Law

Pre-packed bankruptcy

Tax alert 14/2015

Challenges and new opportunities offered by the amended Bankruptcy and Reorganization Law coming into force on 1 January 2016

Bankruptcy and Reorganization Law – key changes

On 9 June 2015 the President of the Republic of Poland signed the Restructuring Law. As we have already mentioned in previous tax alerts, the law provides for a number of new legal solutions with a view to help entrepreneurs effectively restructure their organizations. It also includes many significant amendments to the currently binding Bankruptcy and Reorganization Law.

This alert will focus on pre-packed bankruptcy option introduced to the Bankruptcy and Reorganization Law and a change which will affect binding and future commercial contracts.

Bankruptcy and Reorganization Law – pre-pack sale

The amendment has introduced Section VII regulating pre-packed bankruptcy. Pre-pack sale is an arrangement to sell a bankrupt company or its organized part or assets constituting a significant part of the enterprise on terms and conditions determined in an motion filed with the bankruptcy petition. The objective of pre-pack bankruptcy is to shorten the bankruptcy process, to satisfy claims faster and to maximize recoveries.

Bankruptcy and Reorganization Law – preparing and filing a petition for pre-packed bankruptcy

A petition for pre-packed bankruptcy should include basic terms and conditions of the sale, i.e. it should specify at least the price and the buyer. Such petition may be filed by any entity authorized to file a petition for bankruptcy. A description and price estimation of asset items covered by the petition prepared by a person included on a list of court experts should be attached.

The requirement has been introduced to enable the court to determine if the proposed price is higher than the amount recoverable in the bankruptcy proceedings reduced by the costs of the bankruptcy process. The court will approve the petition only if the analysis indicates that in case of the pre-pack sale creditors will recover higher amounts than in the course of standard bankruptcy proceeding. The price does not have to correspond with the value of assets sold. In certain cases a lower price may satisfy claims of creditor better, because it will not have to be reduced by cost of long-lasting bankruptcy proceedings.

Bankruptcy and Reorganization Law – pre-packed bankruptcy will facilitate the sale of the company

The discussed method of sale is particularly important if the entire enterprise is sold. The company sale immediately after its bankruptcy has been declared will make it possible to preserve the going concern status of the insolvent enterprise and will also help sell the enterprise based on more beneficial terms (without a decrease of value and loss of reputation which otherwise occur as a result of opening bankruptcy proceedings). The court may also approve the petition for pre-pack sale if the proposed price is not higher but only close to the amount recoverable in the standard bankruptcy proceedings reduced by the costs of the standard bankruptcy process for reasons such as important public interest or the possibility to continue the debtor’s business. The solution offered by the lawmakers balances the interests of creditors and the debtor.

The amended Bankruptcy and Reorganization Law protects integrity of the debtor’s enterprise to a certain extent only, promoting interest of its creditors. In specific cases, however, when amounts recoverable by creditors would not be considerably reduced and at the same time the creditors will benefit from earlier collection, when determining the terms and conditions of sale the possibility to preserve the debtor’s company as a going concern or important public interest (such as ensuring the existing headcount of the company) may also be considered.

Bankruptcy and Reorganization Law – rights and obligations of the company acquirer

If the acquirer specified in the petition is a person listed in Article 128 of the Bankruptcy and Reorganization Law, (e.g. spouse, relative or akin in consanguinity, whether leaner or collateral, to the second degree or a company shareholder), the company may be sold at a price not lower than the estimated price. The estimated price is determined by the court based on expert opinion evidence. This regulation has been introduced to prevent debtor’s fraud.

The petition for approving the terms of sale should be analysed together with the petition for bankruptcy. Any creditor has the right to appeal against the decision issued. If the petition is accepted, the receiver concludes an agreement for sale in the period of thirty days provided that the acquirer has paid the entire price. The sale under the bankruptcy proceedings has the effects of enforcement sale, hence the acquirer of the bankruptcy estate items does not assume any tax liabilities of the bankrupt person, including those occurred after the declaration of bankruptcy.

If the top priority is to ensure the company’s ability to operate as a going concern, it is advisable that the acquirer pay the proposed price to the deposit account of the court before bankruptcy is declared, as in such a case the company will be transferred immediately after the bankruptcy decision has been issued. Before the decision concerning the terms of sale comes into force and the sale agreement is concluded the acquirer will manage the assets acquired within the limits of standard management practices at his own risk and responsibility.

Bankruptcy and Reorganization Law – contractual restrictions in case a petition for bankruptcy is filed

Amendments coming into force as of 1 January 2016 should be taken into account now. In particular, Article 83 of the Bankruptcy and Reorganization Law will be amended resulting in invalidity of contractual provisions concerning the change or termination of the legal relation with the bankrupt party also when case a petition for bankruptcy is filed. At present, parties to the agreement often evade the nullity sanction specified in Article 83 of the Bankruptcy and Reorganization Law by way of including contractual provisions stating that the legal relation will be changed or terminated as a result of filing a petition for bankruptcy and not due to bankruptcy declaration. When the amended law comes into force the practice will no longer be effective for future and binding contracts.

The amended Bankruptcy and Reorganization Law will come into force as of 1 January 2016, but it is advisable to review contracts with business partners now

The new law will take effect as of 1 January 2016. It will be critical for entrepreneurs that have found themselves in dire straits. Pre-pack bankruptcy will enable undisturbed operation of a business declared bankrupt, hence ensuring higher amounts recovered by the creditors. As the possibility to prevent negative consequences of business partner's bankruptcy by way of including contractual provisions terminating the legal relation in case a petition for bankruptcy is filed has been restricted, we recommend reviewing binding contracts to introduce better mechanisms mitigating risks resulting from financial problems of business partners.

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