“Bankruptcy holiday” may be coming soon

As we mentioned in our previous article on restructuring and bankruptcy in the context of the COVID-19 pandemic, the current special circumstances do not generally affect the absolute time limits and conditions for declaration of bankruptcy in case of insolvency.

The declaration of bankruptcy by the representatives of the entrepreneur is not so much their right as, above all, an obligation, which involves strict rules of personal responsibility.

Shortly after the publication four first article, the Ministry of Justice and the Ministry of State Assets prepared a draft amendment to the bankruptcy law. This amendment has been included in another special act, passed by the Parliament (with no changes made by the Senate) and presented to the President and the Speaker of the Senate in accordance with the legislative process (Act on Special Support Instruments in Connection with the Spread of the SARS-CoV-2 Virus dated 9 April 2020).

 

Existing Bankruptcy Law

The current Bankruptcy Law (consolidated text: Journal of Laws of 2019, item 498, as amended) seeks to balance the interests of creditors and debtors. Article 21, one of its key provisions, obliges a person authorized to represent a company to file a petition for bankruptcy with the competent court within 30 days from the date on which the grounds for declaration of bankruptcy occurred. If the person authorized to represent the undertaking fails to fulfil this obligation, they may be personally liable for any damage/loss caused by delayed bankruptcy.

Notwithstanding the current pandemic, on 24 March 2020, an amendment to the Bankruptcy Law (passed back in 2019) primarily aimed at better addressing the issue of excessive debt, entered into force. It was introduced particularly with debtors in mind.

The amendment was made with all debtors in mind. Similarly, the most recent proposed amendments are aimed at securing the position of the debtor (its representatives) – a position in which many entrepreneurs may be find themselves due to COVID-19.

 

Extension of the time limit for declaring bankruptcy

According to the Act passed by the Parliament, the time limit for the declaration of bankruptcy by a debtor insolvent due to the state of epidemic threat or the state of epidemic, will be three months from the date of revocation of the state of epidemic.

The Act also includes a presumption that, if an insolvency condition has arisen while an epidemic emergency or an epidemiological condition and announced because of COVID-19 is in force, it has arisen because of that condition.

The proposed amendment will enable company managers to focus on business operations and potential restructuring, so as to try to avoid insolvency and save the business, rather than consider filing for bankruptcy or resignation.

 

What is more favourable to creditors?

The main economic argument, in addition to the long-term impact of mass bankruptcies of undertakings on the economy, is that it is better for creditors that their claims be satisfied even with some delay than submitted to the bankruptcy estate where full satisfaction may not be achieved. Additionally, there are several safety measures for creditors.

First, the new regulations will cover only debtors that have found themselves in difficulty due to the effect of the epidemic (a presumption of this state of affairs provided for in the Act may be rebutted).

Second, creditors have not been prevented from effecting enforcement against recalcitrant contractors (under enforcement titles held).

Third, restructuring cases (being, by definition, more favourable to creditors than bankruptcy) have been given priority.

 

Is this a European standard?

These solutions are similar to those already introduced by some European states, e.g. Germany has suspended the obligation to file for bankruptcy until September 30, 2020, and has excluded managers’ liability in this respect, with Spain also suspending the obligation to file for bankruptcy during the pandemic.

We consider the solutions adopted to be necessary. In our opinion it is crucial that the legislative process is completed as soon as possible and the envisaged “bankruptcy holidays” enter into force as soon as possible.

 

CONTACT US

 

Rafał Rapala
Attorney at Law, Senior Partner, Head of Corporate Law Practice
T: +48 608 444 650
E:  r.rapala@kochanski.pl

Karol Połosak
Advocate, Counsel 
T: +48 608 377 788
E:  k.polosak@kochanski.pl

Michał Nowodworski
Associate
T: +48 604 122 712
E:  m.nowodworski@kochanski.pl


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