The Covid-19 pandemic has brought significant uncertainty to the market. In the wake of this highly contagious virus, authorities have issued unprecedented regulations and restrictions to prevent the spread of the disease, accompanied by measures providing help to businesses seeing their economic activities curtailed or suspended. These measures were primarily focused on providing liquidity to the market, but some introduced interesting changes to Polish restructuring law.
Before 2016, Polish insolvency and restructuring regulations were ineffectual, with lengthy proceedings and little recovery. The situation improved after a major reform in 2016. However, the main problem — the time needed to obtain court decisions related to opening proceedings and other issues — remained.
Aware that Polish courts may soon be flooded with applications from businesses seeking to restructure their debts, lawmakers passed legislation introducing simplified proceedings.
In comparison with the existing process, the new proceedings are faster, and less formal. Despite being primarily out-of-court proceedings, with little court involvement, they offer extensive protection from creditors.
The publication of the announcement in the official court gazette suffices to commence the proceedings. The debtor need not apply to the court to initiate the proceedings and obtain protection. The rest of the proceedings follows the principle of involving the court as little as possible, which accelerates the entire process.
During the proceedings, the debtor remains in charge of the business and generally cannot be replaced with a court-appointed insolvency administrator. The debtor’s management is limited to the ordinary course of business. If a matter exceeds the ordinary course of business, the consent of a supervisor — a professional insolvency practitioner selected by the debtor — is required. This gives some level of protection to the creditors and allows the debtor to select someone who understands the business and plans.
Once opened, restructuring proceedings offer broad protections to debtors. By operation of law, a moratorium on all old debt payments is imposed and all individual enforcement actions are prohibited. This also applies to secured creditors, provided that the proposed arrangement offers them repayment which is at least the enforcement value of their security.
The proceedings may take up to four months. If the debtor is not able to conclude the arrangement within this time, the proceedings will end.
An arrangement is concluded if a majority of creditors holding at least two-thirds of the total sum of claims vote in favor. Outvoted creditors will be bound by the arrangement once the court approves it. Secured creditors will also be bound by the arrangement if they are offered at least an amount equal to the enforcement value of their security. The creditors can be divided into classes based on their interests and cross-class cram-down is possible. Court approval is required for the arrangement to be binding, but pending approval, the debtor remains protected from enforcement.
The new law offers flexible solutions to debtors willing to engage constructively in talks with creditors. With little court involvement, the process should be fast and more consensual.
The limited timing of proceedings, the supervision of an insolvency administrator, and the right of the court to intervene are meant to prevent abuse by debtors. However, the question of whether these measures are enough to achieve this aim remains open. Four months of extensive protection with little court oversight may result in irreparable damage to creditors.
There are other drawbacks which could have been avoided. Polish law offers little to protect new financing: incoming lenders are protected from avoidance actions – but only if the arrangement is approved, which means that financing before approval is unlikely. In addition, the proceedings are almost unavailable to bond issuers, so a number of companies with more complex debt structures will not be able to use the proceedings.
As the second wave of the COVID-19 pandemic looms and helicopter money is no longer an option, more businesses will need to reconsider their futures. Restructuring may be necessary to survive. Having an effective law is crucial to ensure that such restructuring is possible. Time will tell if this Polish solution rises to the challenge and if the lawmakers have struck the right balance between the interests of debtors and creditors.
By Michal Mezykowski, Partner, and Artur Bednarski, Senior Associate, CMS Poland