COVID-19 – Simplified restructuring proceedings
The legislative Act regarding subsidies towards interest on bank credit extended to enterprises afflicted by the effects of Covid-19 and simplified arrangement proceedings connected with the Covid-19 outbreak, as adopted by the lower chamber of Polish parliament on 19 June 2020, introduces to Polish law a new restructuring procedure, essentially a modification of the proceedings for approval of an arrangement. It is intended to afford a simple tool which enables the debtor to obviate the adverse effects of temporary financial turbulence through efficacious arrangement negotiations with its creditors while ensuring all along that the debtor’s assets are protected against enforcement and that key contracts with are not terminated.
Restructuring procedures available to date
Until now, Polish law distinguished four basic restructuring procedures before the courts:
- Proceedings for approval of an arrangement;
- Fast-track arrangement proceedings;
- Arrangement proceedings;
- Court-appointed restructuring proceedings.
The solution entailing the least formalities, and the least involvement of the court, is presented in proceedings for approval of an arrangement. Yet this procedure does not afford the debtor any protection against debt enforcement measures, and it does not in any way prevent termination of contracts by entities with which the debtor deals. In other words, the court simply puts its stamp of approval on the arrangement and lets matters run their course. The other restructuring procedures provide greater protection for the debtor, but also entail higher costs and more involvement of the court, which generally translates into longer duration.
The legislature has now deemed it necessary to provide for a procedure combining the advantages of “standard” proceedings for approval of an arrangement and of other court restructuring variants. One of the hoped-for outcomes is that the restructuring and bankruptcy courts may have their workloads lessened, at least for a while.
Commencement of simplified restructuring proceedings
Restructuring may be commenced by way of an announcement published – on instructions of the debtor – in Monitor Sądowy i Gospodarczy, preceded by execution of a relevant contract with a licenced restructuring advisor (who will act as arrangement supervisor in the course of the proceedings). Prior to publishing such an announcement, the debtor ought to draw up proposals for the arrangement and a list of liabilities (identifying any disputed ones) and present these documents to the arrangement supervisor. Under the new procedure, the day of publication in Monitor Sądowy i Gospodarczy marks the formal commencement of proceedings for approval of the arrangement.
The exact information to be included in such announcement is specified in the statute. And thus, the debtor, among his other duties, is bound by law to specify an arrangement date, i.e. the day in reference to which the creditors’ voting rights with respect to the arrangement, and likewise the effects of the arrangement, shall be defined. This arrangement date may not be more than 7 days prior to the date of the of application for the announcement, or more than 7 days subsequent to such application’s filing. The arrangement supervisor must notify the announcement to the court.
Benefits for the debtor
From the day of announcement in Monitor Sądowy i Gospodarczy through the day on which the proceedings are discontinued or completed:
- Receivables to be covered by the arrangement may not become the object of debt enforcement;
- The debtor may not provide benefits under the receivables to be covered by the arrangement;
- Any off-sets against payments owed to the debtor are subject to limitations;
- Any termination of the contract pursuant to which debtor leases / rents his business premises shall require permission of the arrangement supervisor;
- The arrangement supervisor’s permission is also required for termination of credit facility agreements with respect to funds remaining at debtor’s disposal before commencement of the proceedings, and likewise for termination of leasing / contract hire agreements, insurance policies, bank account agreements, assurances, licences granted to the debtor, and of guarantees and letters of credit executed / issued before commencement of the proceedings – unless the basis for such termination is comprised in failure of the debtor, subsequent to commencement of the proceedings, to perform obligations not subject to the arrangement or in grounds provided for in the relevant contract and arising subsequent to commencement of the proceedings.
In a point worth noting, the arrangement may cover, without permission of the relevant creditor, also liabilities for which security in kind had been instituted, provided that the arrangement proposals envisage their full satisfaction.
Arrangement with creditors
The main objective of the proceedings is defined as arranging with the creditors. The debtor is expected to, working on his own, gather in votes on the presented proposals. For these purposes, the creditors shall receive ballots complying with art. 213 of the Restructuring Law. Apart from this correspondence procedure, the arrangement may also be voted upon in the course of a creditors’ assembly, which may be called by the arrangement supervisor. In a nod to the times, a creditors’ assembly may also be held using electronic communications technologies.
The arrangement shall be deemed adopted and accepted – where the vote is held without calling a creditors’ assembly – if votes in favour are cast by a majority of the creditors entitled to vote on the arrangement holding, in aggregate, at least two-thirds of the sum total of the entitled receivables. Alternatively, where a creditors’ assembly is held, the arrangement shall be deemed adopted and accepted if valid votes in favour are cast by a majority of the creditors entitled to vote on the arrangement holding, in aggregate, at least two-thirds of the sum total of the entitled receivables, with at least one-fifth of the entitled creditors in attendance.
An application for approval of the arrangement should be submitted to the court not more than 4 months after the announcement commencing the simplified restructuring proceedings. At the same time, it should be borne in mind that a vote cast by a creditor shall remain valid as long as the debtor’s application for approval of the arrangement is received by the court within 3 months after the vote has been cast.
Restrictions re own management of the debtor
While the proceedings remain pending (i.e. from the day of their announcement until the day of their discontinuation or completion), the debtor may not perform actions departing beyond the ordinary management of his business without permission from the arrangement supervisor. Please note that such permission may also be secured on a retroactive basis, up to 30 days after the action in question has been performed. Where the debtor does not secure the arrangement supervisor’s permission for an action departing beyond the ordinary management, such action shall be invalid. Actions covered by the agreement supervisor’s permission may not be deemed void of effect vis a vis the assets in bankruptcy or assets in receivership if information about these actions had been included in the application for approval of the arrangement which had then been definitely approved by the court.
The arrangement supervisor may grant permission for execution of a credit facility agreement or loan agreement, for institution of an encumbrance on the debtor’s assets to secure a liability not covered by the arrangement, and for transfer of ownership title to secure a liability not covered by the arrangement only where this is necessary to maintain debtor’s ability to meet current costs of the restructuring proceedings and liabilities arising while these proceedings are underway and/or to execute and perform the arrangement, and provided that it is guaranteed that the relevant funds will be placed at debtor’s disposal and applied towards implementation of the restructuring plan. Also, any security / collateral must be commensurate to the credit facility / loan in question.
Liability of the debtor
In the event that an announcement of commencement of proceedings is made in bad faith, the creditors, and likewise any aggrieved third party, may claim against the debtor, seeking damages.
Discontinuation of the proceedings, repeal of the effects of the simplified restructuring announcement
The proceedings shall be discontinued through operation of the law if an application for approval of the arrangement is not received by the court within 4 months following the announcement. The effects of the announcement of commencement of simplified restructuring may be repealed by the court at the request of a creditor, of the debtor, or of the arrangement supervisor where these effects entail harm to the creditors; any such repeal must be formally announced by the arrangement supervisor.
The regulations concerning simplified restructuring adumbrated above shall come into force on the day following publication in the Journal of Laws. They are intended as a temporary solution; accordingly, the simplified restructuring procedure may be commenced not later than on 30 June 2021. The general idea is that the simplified restructuring procedure should remain available while the effects of the coronavirus epidemic continue to make themselves felt in the economic sphere. Also, the statute includes the proviso that any qualifying entity may avail itself of the simplified restructuring procedure only once.
senior associate, adwokat