Analysis

A second chance before going into bankruptcy

New Restructuring law and amendments to Bankruptcy law

Legal alert (7/2014)

Public consultations in respect of the draft version of the Polish Restructuring law ended in June 2014. The bill 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 (further called: Bankruptcy law).

Public consultations in respect of the draft version of the Polish Restructuring law ended in June 2014. The bill 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 (further called: Bankruptcy law).

New ways of restructuring

The underlying assumption of the new Restructuring law is to separate the restructuring procedure from the bankruptcy proceedings that – by their very nature – are stigmatizing for entrepreneurs. Under the currently binding legislation bankruptcy – even in the form of arrangement – is naturally associated with the end of business operations. This is about to change. Thanks to new regulations the entrepreneur will be able to choose a form of restructuring that is best suited for the organization and its financial standing. The restructuring law provides four new procedures.

The proceedings for approval of the arrangement with creditors are least formal. In this case the arrangement will be approved based on the creditors’ votes collected independently by the debtor and the role of the court is limited to issuing an approving decision. Under accelerated arrangement proceedings it will be possible to enter into the arrangement with the creditors immediately after preparation of the list of liabilities, which is a simplification of the regular arrangement procedure in which the arrangement is reached following approval of the liabilities’ list. Remedial proceedings seem to be the most advanced form of restructuring liabilities, assets and employment levels, however, in this case debtors will be deprived of the ability to manage their assets and will be subject to strict supervision of a court commissioner.

The solution based on which the debtor can enter into the so-called partial arrangement that will only concern the liabilities the restructuring of which is essential for further business operations is particularly innovative. This type of arrangement proceedings will specifically apply to creditors that finance the debtor’s activity (e.g. banks) or that are parties to crucial contracts (e.g. suppliers of most important materials, lessors of necessary assets, etc.)

In addition, to make it possible for the debtor to preserve financial liquidity, the draft act stipulates that creditors that provide the debtor with a loan or a credit facility in the course of the restructuring procedure (with the consent of the creditors’ committee) will enjoy preferential treatment in the course of the potential bankruptcy proceedings.

Bankruptcy law to be adjusted

The draft Restructuring law also includes a number of amendments to be made to the Bankruptcy law. Obviously, some of them directly result from implementation of the new regulations (for instance, the current provisions in respect of recovery proceedings and the provisions governing bankruptcy proceedings with an arrangement option will be repealed). At the same time, certain changes will be introduced with a view to improve the bankruptcy law institutions the application of which seems now unsatisfactory.

First of all, the state of insolvency, which constitutes a prerequisite for the declaration of bankruptcy, is redefined. An entrepreneur will be considered insolvent primarily when they lose the ability to fulfil their financial obligations (liquidity criterion). Thus, the new regulation links the state of insolvency with lack of economic viability to pay off the liability rather than with the fact of making the actual payoff as it is now.

The indebtedness criterion remains in place, but its wording will be modified and fine-tuned. As it is now, an entrepreneur whose financial liabilities exceed the value of the assets is considered insolvent. However, any future and contingent liabilities as well as some of the liabilities from shareholders will not be taken into account. In addition, the state of excessive indebtedness will form the grounds to declare bankruptcy only when it lasts longer than 24 months.

Other amendments to the Bankruptcy law are also planned. Apart from changing the definition of the state of insolvency, legislators also intend to extend the range of activities to be perceived as ineffective towards the bankruptcy estate, simplify division of liabilities into categories, and check the preferential treatment of the liabilities under the public law.

Additionally, the institution of the so-called pre-pack is introduced. When this solution is applied, the terms of selling the debtor’s enterprise can be agreed (primarily the purchaser and price) even before the bankruptcy is announced. If the court of bankruptcy approves such terms, the receiver will execute the relevant contract. This solution 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 new law will take effect in the second half of 2015. It will be critical for entrepreneurs that have found themselves in dire straits, because of the wider choice of legal restructuring tools. Creditors are also bound to benefit from the new solutions, as the likelihood of recovering their dues significantly increases when there are strong chances that their contractors will manage to get out of the woods. 

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