Poland: Restructuring instead of bankruptcy

The effects of the spread of Covid-19 are felt by most businesses. In some cases, lack of liquidity may jeopardise the very existence of a company. The current crisis may be particularly dangerous for those who were already in a difficult financial situation before the outbreak of the pandemic and before the ensuing government restrictions.

Time is of the essence

It is important for businesses to take remedial actions as early as possible, without waiting for their situation to deteriorate to the extent that the only possibility will be to file for bankruptcy. 

Whenever possible, it is worth starting by engaging in direct talks with creditors and business partners, trying to work out new ways of settling liabilities, e.g. by postponing payment deadlines or agreeing to repayment in instalments. When appropriate, legal arguments can be used in such negotiations; for example, force majeure or an extraordinary change of circumstances (the so-called rebus sic stantibus clause) may be cited as grounds for a modification of payment terms. However, if such out-of-court arrangements with creditors are not possible and the financial situation of the company clearly indicates a risk of insolvency, consideration should be given to submitting a restructuring application as soon as possible on the basis of the Restructuring Law. Although the government's anti-crisis plans include the suspension of the statutory deadline for filing an application for bankruptcy, this will not apply to entities who were in financial difficulties already before the Covid-19 pandemic. Moreover, a statutory suspension of enforcement proceedings is not planned, so failure to pay on time may in any case lead to the actual collapse of the company.

Restructuring proceedings are intended for businesses that are either insolvent or at risk of insolvency. A restructuring application is not the same as an application for bankruptcy, although in common perception these terms are often understood similarly and arouse negative connotations.

Meanwhile, a restructuring application may be a good solution when a business has financial problems, often preventing a situation when the only remaining solution is to file for bankruptcy, and thus enabling the company’s survival through a difficult time.

Protection against creditors

Restructuring proceedings give the debtor protection against enforcement. The degree of this protection depends on the chosen type of proceedings. There are four types of restructuring proceedings:

(i) arrangement approval proceedings;

(ii) accelerated arrangement proceedings;

(iii) arrangement proceedings; and

(iv) remedial proceedings.

All of them are aimed at concluding an arrangement with the creditors and involve participation of the court in the proceedings. 

In the case of a professional debtor who is well aware of its financial situation and whose difficulties in meeting its obligations are not very serious, it may be appropriate to proceed with arrangement approval proceedings. This is the most flexible and at the same time the fastest procedure.

The opposite can be said about remedial proceedings, which are the most formal and restrictive type of restructuring proceedings. Remedial proceedings involve the furthest-reaching interference of the court, while the debtor is usually deprived of the management of its business. On the other hand, however, it is this type of proceedings that gives the debtor full protection against enforcement, as well as enables the termination of reciprocal agreements with counterparties.

How can an arrangement with creditors help?

The arrangement with creditors reached within the framework of restructuring proceedings may provide for various solutions facilitating the timely settlement of the debtor’s obligations, such as deferring payment deadlines, reducing the amount of liabilities or splitting them into instalments. The only requirement is that creditors or their groups, if any, are treated equally. Arrangement proposals can be made by the debtor and the creditors (if certain conditions are met) or by a court supervisor.

Submitting an application for the opening of restructuring proceedings may prove to be not only a way to gradually resolve the company’s financial problems, but may also ensure that members of the management board avoid liability for failing to submit a bankruptcy petition. The obligation to submit a bankruptcy petition will cease as soon as restructuring proceedings are opened (not when the application is filed). Therefore, it is worth to act quickly and file a restructuring application when the financial condition of the company still allows it. 

It seems that taking advantage of the solutions described above in the event of a deterioration of a business’s financial situation caused by the effects of the Covid-19 pandemic may now be an appropriate step for a large number of businesses, increasing their chances of surviving the crisis.

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