Poland: How the COVID-19 pandemic may affect borrowers
As countries, including Poland, take drastic measures to contain the COVID-19 pandemic, many businesses are seeing a dramatic reduction in revenues and struggling to keep afloat. Those with the burden of bank debt on their backs, may find themselves in a particularly fragile position, especially if they operate in those industries which are likely to be hardest hit, such as: tourism, transport, gastronomy and retail.
Polish banks have already taken action to mitigate the adverse effects of the current crisis on borrowers. On 16 March, the Polish Bank Association announced that Polish banks will adopt a policy of three-month moratoriums on either just capital instalments or both capital and interest payments, in respect of consumer loans, residential mortgage loans and loans granted to entrepreneurs. The moratorium will be introduced on the borrower’s request, in which the borrower will need to justify why and how the COVID-19 crisis has affected its ability to service debt. According to information made available by the Polish Bank Association today, i.e. on 23 March 2020, several dozen thousand borrowers have already applied for moratoriums on debt service.
It is not entirely clear to what extent those policies will apply to large corporate loans. It is also worth underlining that they will apply to Polish banks only. Nevertheless, as banks tend to treat the acceleration of a loan and enforcement of security as a last resort scenario, all borrowers in distress due to the current crisis, who foresee that they might not be able to make payments on their loans, should actively seek to propose and enter into voluntary arrangements with banks aimed in particular at alleviating some of the burden of debt service in the most critical period. Some loan agreements may have specific provisions relating to suspension of payments or restructuring – agreements should be carefully reviewed before any action is undertaken by a borrower, in order to determine if and what contractual options of dealing with the situation are available to the borrower.
However, even if attempts to reach a voluntary arrangement with banks prove unsuccessful in a particular case, and no contractual provisions allowing for the suspension of payments are to be found in the finance documentation, the borrower is not left without statutory legal instruments that it may use to remedy the situation. In particular, a borrower may attempt to invoke the so called rebus sic stantibus clause, regulated in art. 3571 of the Polish Civil Code, which states that if, due to an extraordinary change of circumstances, performing an obligation would cause excessive difficulties or threaten one of the parties with substantial loss, which the parties did not foresee when concluding the contract, the court may, after considering the interests of the parties, define the mode of performing the obligations and the degree of the performance, and even decide upon termination of the contract. When terminating the contract the court may, as far as necessary, decide upon the terms of settlement between of the parties. Borrowers may also consider suspending the performance of some of their obligations under loan agreement on the basis of force majeure, i.e. by demonstrating that the lack of performance of such obligations was due to circumstances for which they cannot be held responsible.
Finally, and possibly as a last resort, in order to avoid enforcement by the bank and/or insolvency, borrowers may consider making use of one of the types of restructuring proceedings introduced into Polish law several years ago.