Bankruptcy law and restructuring in view of COVID-19
The current situation related to the COVID-19 pandemic has had a direct impact on business. For many, COVID-19 will be a direct cause that has already led, or may lead in the near future, to a breach of liquidity and the loss of ability to settle current liabilities.
- Insolvency test under the responsibility of the Managers
Polish law provides for the following reasons for insolvency:
- loss of the ability to meet maturing monetary obligations (presumption of loss of legal ability for two obligations over 3months past due);
- monetary liabilities exceed the value of assets, with the state being maintained for a period exceeding 24months (whereby the law regulates which liabilities are not included in such calculations, such as loans from a partner).
Failure to file an application for bankruptcy or restructuring within the statutory 30-day period entails potential liability for damages (or even criminal liability) of the Managers.
A regular insolvency test (especially the first premise) gives the entrepreneur an opportunity to submit an application for starting restructuring proceedings, which are generally much more favourable and promising for the long-term viability of the business.
Moreover, in the case of “hostile” filing of an application for bankruptcy (e.g. by the entrepreneur’s creditor) and a restructuring application, the restructuring application is considered first.
As part of the insolvency test, we recommend conducting a due diligence of the current state of the company, in practice starting with a meeting with the company’s accountant/CFO and lawyer (or, in the case of larger companies, commissioning an audit to external financial advisors and legal).
First of all, we recommend conducting operational and legal due diligence of agreements binding on the entrepreneur in terms of the possibility of their further execution, covenant(s) incumbent on the entrepreneur (especially financial obligations such as loans or credits), as well as in terms of the risk of charging the entrepreneur with contractual penaltiess/other compensation benefits in case of an event of default.
- Available restructuring procedures in Poland
Depending on the analysis of the company state, an entrepreneur may choose between four types of restructuring proceedings:
- procedure for approving the arrangement;
- accelerated arrangement procedure;
- arrangement procedure, or
- remedial proceedings.
The most frequent choice is the accelerated arrangement procedure (67% of all restructuring proceedings underwent this route in 2019). However, the sanitation procedure variant is also worth considering, due to the “freezing of enforcement
- Accelerated arrangement procedure
This enables the entrepreneur (debtor) to smoothly conclude an arrangement with a larger group of creditors.
Creditors cannot object to the inclusion or non-inclusion of given receivables in the debt list, which significantly speeds up the process.
In the assumptions, accelerated composition proceedings should last up to 3-4 months.
- Speed and relatively informal character;
- provides the debtor with some protection against enforcement, including the possibility for a judge-commissioner to override bank account seizures;
- Leaves the debtor free to manage his business to an extent not exceeding that of normal management;
- Protects the debtor against the termination of contracts which are crucial for the continued operation of the company due to their non-performance in the period preceding the opening of the accelerated composition procedure.
- The remedial proceedings
What distinguishes the remedial proceedings from other restructuring procedures is the possibility for the debtor to carry out corrective actions – aimed at improving the economic situation of the debtor.
The main advantage of the remedial procedure is that it provides the debtor with the fullest protection against enforcement – including claims secured in kind (e.g. by mortgages or pledges). This is of key importance especially in the case of enforcement of banks’ receivables. What is important is that the debtor may take advantage of the possibility of protection against enforcement even at the stage of considering a restructuring application.
Other advantages include:
- possibility of reducing employment in an indebted company (on the same basis as in bankruptcy proceedings);
- possibility for the administrator to withdraw from non-performing (unprofitable) contracts;
- possibility of conducting a “sale” of the debtor’s redundant assets without any encumbrances (the unencumbered sale is supposed to encourage buyers and speed up the process of clearing the sanitation mass from redundant assets).
The main disadvantage is the loss of management of the company to the manager.
- The bankruptcy procedure
The application is a formalised pleading, from which a court fee and an advance payment for expenses should be paid (currently this is around PLN 6200 ie around EUR 1400). Preparation of the application in practice requires support from accounting and legal parties.
A bankruptcy application may be filed by the entrepreneur’s debtor (this is the obligation of the Manager but not the proxy) or any of his personal creditors.
There is an obligation of appointing an interim court supervisor (at the stage of examining the application) and the obligation to appoint a trustee in case of bankruptcy. The trustee’s actions are primarily aimed at satisfying creditors, although a trustee should also try, as far as possible, to maintain the debtor’s business (de facto by selling it).
There is a potential risk of using bankruptcy to hostile takeover by a competitor.
However, looking at bankruptcy from the creditor’s perspective, it above all:
- gives the opportunity to purchase the assets of the bankrupt on attractive terms (although this will always depend on the circumstances of the case, including the number of bidders participating in the tender, which is the rule in bankruptcy proceedings);
- provides an opportunity to purchase the assets of the bankrupt company free of encumbrances (as well as in the case of an enforcement sale, in the case of a purchase from a trustee, the charges established on the sold assets shall fall, with some exceptions).
- COVID-19 and restructuring or bankruptcy application
The assessment of whether an insolvency has occurred is objective.
Other circumstances, including whether the insolvency is the result of erroneous decisions by the Managers, hostile actions by creditors or the consequence of unforeseen global events, such as the outbreak of COVID-19, are not relevant to the court’s decision.
- Other instruments of “sanitation” for the Entrepreneur
In addition to the restructuring and bankruptcy proceedings referred to above, there are other types of instruments that can be used in connection with the pandemic:
- renegotiation of concluded contracts, especially debt financing;
- analysis of contracts in terms of the “autonomous” rules of liability provided for therein, including in particular provisions of the “force majeure” type (in principle, Polish civil law provides for liability for failure to perform a contract based on the principle of fault);
- analysis of the possibility of using the clause of extraordinary change of relations provided for by Polish civil law (in the case law, epidemics or natural disasters are envisaged as giving the possibility of using this clause).
Attorney at Law, Senior Partner, Head of Corporate Law Practice and Transaction Practice
M: +48 608 444 650
Advocate, Partner, Head of Litigation Practice
M: +48 606 385 813
Advocate, Counsel in Corporate Law Practice and Transaction Practice
M: +48 608 377 788
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