Topic: Insolvency

As the coronavirus epidemic upends Polish reality, the effective date of the bankruptcy law amendment, introduced on the basis of the act of August 30, 2019, remains unaffected. New laws enter into force today (March 24, 2020). Next to personal bankruptcy, which may now be sought by almost anybody, debt release procedure regarding sole proprietors and trustees’ duties connected with proof-of-debt submissions, pre-pack bankruptcy is also up for a makeover.

Pre-pack bankruptcy – how does it work?

Pre-pack bankruptcy is one of bankruptcy strategies provided by Polish law, which is meant to enable smooth transition of an insolvent business from one owner to another soon after bankruptcy is declared. Thanks to this solution the business carries on, workers keep their jobs and contracts with clients and suppliers remain intact. A successful pre-pack bankruptcy reduces the bankruptcy process and costs involved, as well as ensures fuller satisfaction of creditors. In this type of proceedings, the petition for bankruptcy is filed along with the petition for approval of the sale terms regarding the insolvent company’s assets. Pre-pack bankruptcy may cover the entire enterprise, its business unit or a major portion of its assets. The pre-pack petition also includes a description and an appraiser’s valuation of the assets in question, the proposed price and the name of the prospective buyer (who can be almost anybody).

If the court finds that it would be more beneficial to sell the assets in the course of a pre-pack procedure than a regular bankruptcy procedure, it will approve the sale terms in addition to declaring the debtor bankrupt. Following a pre-pack sale, the whole enterprise may be handed over to the buyer on the same day the court issues its decision.

Key changes introduced by the revision:

1. The pre-pack bankruptcy petition may be filed at any stage of bankruptcy proceedings (before the amendment, the pre-pack bankruptcy petition and the regular bankruptcy petition were to be filed together);
2. All the entities involved in bankruptcy proceedings will have standing to file for pre-pack sale; so, the pre-pack bankruptcy petition may now be filed by:
   – a creditor filing for debtor’s bankruptcy,
   – a debtor filing for bankruptcy,
   – a debtor whose bankruptcy was instigated upon a creditor’s petition, especially, in response to the creditor’s petition (also as an alternative petition filed in case the court declares the debtor bankrupt, against the debtor’s will);
3. The petition for sale terms approval may cover more than one buyer;
4. The buyer will be required to post a bond equal to 10% of the price. If the sale falls through due to reasons within the buyer’s control, the trustee keeps the bond;
5. The protection of creditors with security over the debtor’s assets will be expanded – the petitioner will be required to submit a list of securities over the debtor’s assets, with copies of the petition for all identified secured creditors. The court will notify them about pending proceedings and serve them copies of the petition. Secured creditors will have the option to report comments about the petition to the court within 14 days of being served. They should remember to check if the petitioner’s valuation of the asset backing the relevant claim is accurate;
6. A provisional court supervisor (or a court-imposed administrator) will be appointed as a matter of obligation. Their duties will include examining the debtor’s situation and preparing a report covering information relevant to the sale terms approval petition. The idea behind this change is to ensure that the pre-pack process runs smoothly and is transparent;
7. The filing of a pre-pack bankruptcy petition will be advertised in the Court and Commercial Gazette (Monitor Sądowy i Gospodarczy). Advertising the petition is meant to reach out to other prospective buyers who may want to take part in the pre-pack bankruptcy procedure as well and protect those involved in the procedure against claims of acting against creditors’ interests by selling at an undervalue and neglecting to see if any other investors may be interested in purchasing the debtor’s assets;
8. If two or more petitions for sale terms approval are filed, an auction between the prospective buyers will be held in order to select the best offer. Auction, designed to obtain the highest possible price, is surrounded by much debate. Some argue that the pre-pack process, the main advantage of which has been its speed, will be dragged out, especially since 30 days have to pass from advertising the petition for sale terms approval before it can be examined by the court. There are also concerns about the fact that the new law does not provide for a case where two pre-pack petitions cover different subject matter. How is an auction to work and what rules it should follow when one of the petitions concerns the enterprise as a whole, while the other covers only its business unit? Only by putting the new laws into practice can these and many other questions be answered.

The amendment dispelled many doubts surrounding pre-pack bankruptcy and, to some extent, legitimized the judicial practice spanning 4 years (i.e. the appointment of provisional court supervisor). The introduction of a bond, stronger secured creditor rights and increased transparency of the procedure are definitely an improvement. However, some of the new solutions have led to a new set of questions regarding the application of the revised law, with the obligatory auction in the case of two or more petitions being the most controversial of them. In the end, all the issues related to pre-pack bankruptcy will be worked out in practice by legal scholars and courts in the years to come.

Contact us in case of any questions.

There is no doubt that the coronavirus pandemic and the ensuing state of epidemic threat will affect many businesses, some of which may even suffer cash flow difficulties. Struggling businesses may be faced with the question whether their financial troubles are serious enough to lead to insolvency.

This brings us to another question, i.e. whether the restrictions imposed as a result of the state of epidemic threat and legislation passed in connection with it affect Polish businesses’ obligations related to filing for bankruptcy within the prescribed deadline.

Obligation to file for bankruptcy

Unfortunately, none of the legislative acts adopted so far in response to the pandemic modifies the obligation to file for bankruptcy. After the Cabinet Council meeting of March 18, 2020, the President and Prime Minister announced a number of relief measures to mitigate the coronavirus’ impact on businesses. With detailed legislative solutions still in progress, the government remains silent on a regulation that would match the one adopted in Germany, where the obligation to file for bankruptcy was suspended until September 30, 2020.

In all likelihood, the insolvency criteria and deadlines for filing for bankruptcy will remain unchanged in spite of the crisis caused by the coronavirus pandemic.

Consequently, we need to bear in mind that:
– each insolvent business is required to file for bankruptcy within 30 days from the day of becoming insolvent;
– this deadline is triggered irrespective of the subjective impossibility to determine if a business has become insolvent; in other words, even if someone cannot tell whether their business is insolvent, they are still required to file for bankruptcy within 30 days of the day when the company is no longer able to pay its financial obligations;
– any potential difficulties resulting from the recently restricted operation of courts, authorities or banks do not prevent this deadline from being triggered, either.

Liability for damage resulting from failure to file for bankruptcy on time

The potential liability of a company’s directors might be assessed from a somewhat different perspective when a creditor suffers damage as a result of failure to file for bankruptcy on time (article 21 section 3 of the Bankruptcy Law; article 299 § 1 of the Commercial Companies Code; article 116 § 1 of the Tax Code).

In each of the above cases, a management board member may be exempt from liability if s/he is able to demonstrate (among others) that s/he is not at fault for the failure to file for bankruptcy on time.

Will it be possible for management board members to avoid liability due to the coronavirus pandemic in each case? Of course not.

The situation of a management board member who is hospitalized or quarantined due to coronavirus infection, and is consequently unable to manage company affairs, seems relatively clear. An infected management board member has very limited options of signing any document, e.g. a bankruptcy petition or a relevant power of attorney, which may potentially be used as the basis for exemption from liability for failure to file for bankruptcy on time.

It should be noted, however, that if the aforesaid circumstances apply to only one of several members of a governing body, its other members remain liable for failure to file for bankruptcy on time.

The situation might get more complex when management board members are able to run company affairs (e.g. none of is hospitalized or quarantined) but have limited access to financial information necessary to assess the company’s condition because the accounting staff member responsible for providing them is hospitalized, quarantined or has limited access to documents by reason of working from home. Situations of this kind should be analyzed closely on a case-by-case basis.

Undoubtedly, management board members should always remember about three basic issues:
– a management board member occupies a special place in the company structure. His/her actions must pass the test of increased due diligence required of professionals;
– if, as a result of the coronavirus pandemic, a company finds itself in financial distress, its management board should make sure that a proper record of the difficulties is kept. For instance, if access to electronic documents is limited by reason of server malfunction, a relevant e-mail message should be sent to the service provider or an internal memo should be prepared. These solutions may seem trivial but will be important once a management board member runs the risk of being held accountable for damage suffered by a creditor as a result of failure to file for bankruptcy on time;
– a management board member who steps down or is dismissed after the bankruptcy filing deadline is triggered may still be held accountable for damage, which is all the more reason to keep in mind the issues discussed above.

Recommended actions:

1. Staying on top of the company’s financial situation and taking notice of all problems (incl. minor and temporary ones) with timely payments because seemingly trivial events may have serious consequences when a crisis hits the market.
2. Responding immediately to any difficulties (e.g. negotiating with business partners, renegotiating payment deadlines and terms).
3. Recording diligently any difficulties the company encounters and remedial actions taken in response.

We are available to help businesses and management board members through this difficult time. Our law firm is a one-stop shop for any questions you may have. Do not hesitate to contact us for any assistance.

On 13 March 2020, the Polish government announced the state of epidemic threat due to COVID-19, more commonly known as the coronavirus. The days that followed saw the government close the Polish borders, impose a mandatory 14-day quarantine for Polish citizens returning home from abroad and ban international air and rail travel. Malls, pubs and restaurants have been partially closed, with fairs, exhibitions, congresses, conferences and meetings cancelled. All activities related to sport, entertainment and leisure have also been suspended. Without a doubt, these and other warranted measures meant to curb the spread of the epidemic will affect the liquidity of many businesses.

Legislative solutions are being introduced gradually to help business survive the economic turmoil. Regardless of the government’s help offered in the face of the pandemic crisis, business owners would be well advised to stay on top of the situation and take appropriate steps to navigate the crisis.

Business owners should take steps towards restructuring and renegotiate cooperation terms sooner rather than later. It may also be a good idea to reach out to creditors to discuss potential repayment solutions. Worst case scenario, businesses may be forced to file for restructuring, or even bankruptcy (own or contractor’s).

When to file for judicial restructuring?

Generally speaking, restructuring proceedings are designed for debtors who are either insolvent or facing insolvency. So, filing for restructuring should be considered by any debtor who is not able to reach an out-of-court agreement with its creditors on debt restructuring terms and believes it will not be able to pay its debts as they fall due. In this type of proceedings, an arrangement is adopted when the majority of the voting creditors, representing at least two-thirds of the total claims participating in the voting, vote in favor of the arrangement (in the case of arrangement approval proceedings, the majority is counted based on the number of all creditors entitled to vote, and not only those who exercise the right to vote). This means that the decisions made during restructuring proceedings by the majority of the creditors are binding on the rest of them.

Restructuring proceedings should be also considered by a business which has not been paid by its key client and knows that as a result it is about to suffer cash flow difficulties because this may bring about its insolvency. Practice shows that restructuring proves successful if the application for restructuring is filed well in advance, which is soon after the first signs of financial trouble, when the debtor is still able to pay its debts on time, in spite of facing insolvency. Unfortunately, the majority of restructuring applications are filed much too late, when the debtor is deep in financial distress and the odds of survival are slim.

Four types of restructuring proceedings – how to choose?

In accordance with the Restructuring Law, debtors seeking to arrange with the creditors have four types of restructuring proceedings to choose from: arrangement approval proceedings, expedited arrangement proceedings, arrangement proceedings and remedial proceedings. The best proceedings to tackle cash flow difficulties caused by the pandemic depend on the situation of the individual debtor and, most notably, the severity of the debtor’s financial distress. The arrangement approval proceedings allow debtors to obtain approval of the arrangement quickly, with the court’s involvement brought to a minimum. Remedial proceedings are the most radical in nature and dedicated to entities with the most difficult economic situation, requiring profound changes in the way they operate.

Arranging with creditors in restructuring proceedings – what are the available solutions?

An arrangement proposal sets out the plan for the repayment of the insolvent company’s debt. It may include the following restructuring tools:
1) payment date rescheduling;
2) division of the payment into installments;
3) debt reduction;
4) debt-to-equity conversion;
5) modification, replacement or cancellation of the security interest created for specific debt;
6) grant of a loan to the debtor or modification of the legal relationship or rights, or creating a security interest for the debt;
7) sale of the debtor’s assets.

The debtors and the creditors have much leeway to shape the arrangement as the law does not provide a finite list of ways in which debts may be restructured. Unusual arrangement terms can be often found in arrangement proposals regarding non-monetary obligations. Arrangement proposals may also specify more than one way of restructuring a debt as well as divide creditors into interest groups.

If a business files for restructuring, does it still have to file for bankruptcy?

If a business files for restructuring or arrangement approval, it is not exempt from the obligation to file for bankruptcy. However, as soon as the restructuring proceedings are opened (or the arrangement submitted as part of arrangement approval proceedings approved), the debtor is no longer required to file for bankruptcy, meaning that the court must grant the application – and must do so within 30 days from the day when the debtor became insolvent – in order for the debtor to be exempt from the obligation. Given the workload of the courts and the pace at which they work (which is expected to slow down even more during the epidemic), applicants filing for restructuring may have to wait a while before their applications are examined. The implications may be severe for those with the obligation to instigate the proceedings (the debtor’s representatives) – they may be held liable for belated filing of the bankruptcy application under civil or criminal law.

To solve this issue the business which filed for restructuring and in the meantime became insolvent should within 30 days file for bankruptcy as well. If both applications are filed, the one seeking restructuring will generally have the priority. The rule according to which the restructuring application has priority stems from the assumption that the goal of restructuring proceedings is to avoid the debtor’s bankruptcy by enabling the debtor to restructure its debt through arrangement with creditors and, in the case of remedial proceedings, remedial measures (without prejudice to creditor’s rights).

When is a business required to file for bankruptcy? Is the obligation to file for bankruptcy affected by the pandemic?

If a business becomes insolvent due to the coronavirus pandemic, it remains obligated to file for bankruptcy and the debtor’s representatives may still be held liable for belated filing of the application. Each business which becomes insolvent is required to file for bankruptcy within 30 days from becoming insolvent, irrespective of the reason for insolvency (even if insolvency has been caused by measures aimed at curbing the spread of the epidemic or key client’s failure to pay resulting from the coronavirus outbreak).

Under the Bankruptcy Law, there are two tests that may be applied to determine if a business is insolvent: the cash flow test and the balance sheet test. The cash flow test looks at whether a business is able to pay its liabilities (a debtor is presumed not to be able to pay its debts as they fall due if the delay in payment exceeds 3 months). The balance sheet test determines if the debtor’s assets are less than is liabilities (a debtor is presumed to be insolvent if its liabilities exceed its assets for a period of no less than 24 months).

We will be happy to answer any questions you may have, also ones regarding the coronavirus crisis. Our lawyers provide comprehensive advice on bankruptcy proceedings (incl. pre-pack bankruptcy) and restructuring proceedings, and will help you through business negotiations and litigation, incl. court disputes arising from failure to perform or inadequate performance of contractual obligations. They will analyze your contracts in terms of force majeure clauses, provide adequate tools to mitigate financial risks and efficient legal solutions.