Assignment of receivables and effective satisfaction of lenders’ secured claims
Under an amendment to the Bankruptcy Law, the position of a lender holding an assignment of the borrower’s receivables in the event of the borrower’s bankruptcy has changed, but the application and effects of the amendment in practice remain unclear.
In financing transactions, repayment of credit is often secured by the assets of the borrower in the form of receivables, for example under commercial contracts. In commercial practice in Poland, the most often used forms of security against receivables are assignment of the receivables and a registered pledge—both of which forms are regarded as providing the creditor relatively effective protection in the event of default by the borrower.
Assignment of receivables as security
An agreement on assignment of receivables as security may cover existing claims (due and payable or not) as well as future claims. A receivable that is assigned must however be individualised, in the sense that the legal relationship under which the receivable will arise must be identifiable. There are two types of assignment: unconditional and conditional. In the case of an unconditional assignment, the lender (the assignee) becomes the creditor with respect to the claim of the borrower (the assignor) against its counterparty, upon conclusion of the assignment agreement. At the same time, the parties agree that the lender will not exercise the rights assigned to it until there is an event of default under the credit agreement secured by the assignment. Moreover, the lender (typically a bank) must re-assign the claims to the borrower if the borrower properly discharges its obligations under the credit agreement. The lender’s obligation to re-assign the claims to the borrower is extinguished when there is an event of default under the credit agreement.
Satisfaction of the lender outside of judicial execution
The issue of enforcement of repayment of credit out of receivables assigned to the lender is not specifically regulated under Polish law. This does not mean, however, that the lender must first commence an execution proceeding against the borrower in order to enforce its rights. The conditions agreed by the parties in the agreement on assignment of receivables, and in the credit agreement itself, to which the assignment agreement typically refers, will control. Assignment agreements usually contain provisions concerning the rights of the assignee (the lender) to satisfy itself out of the receivables by definitively assuming them and enforcing the rights arising out of the claims. When there is an event of default under the credit agreement, the lender provides the borrower notice that it is seeking satisfaction, and the debtor under the assigned receivable (the borrower’s counterparty), who has received notification of the assignment, then receives an instruction to make all payments directly to the account of the assignee (the lender). If the lender receives any excess beyond the amount of the claim against the borrower secured by the assignment, the lender is required to turn over the excess to the borrower.
Satisfaction of the lender’s claims in the event of the borrower’s bankruptcy
The prior wording of the Polish Bankruptcy & Rehabilitation Law enabled a secured lender (the assignee) to effectively enforce satisfaction of its claims notwithstanding commencement of bankruptcy proceedings of the borrower (the assignor). When the borrower entered bankruptcy, in order to satisfy its claims the lender was required to file an application to exclude the assigned receivables from the bankruptcy estate.
An amendment to the Bankruptcy Law (dated 6 March 2009) prevented direct exclusion from the bankruptcy estate of receivables that had been assigned to a lender for security (newly added Art. 701 of the law). Following this amendment, the status of a creditor (the assignee) holding this type of security against receivables was significantly changed. The assignment only “improves” such creditors’ position compared to the debtor’s other creditors, along similar lines as creditors secured by a pledge. As a result, despite the assignment, the assigned receivables continue to be a part of the bankruptcy estate, and the assignee (the lender) may enjoy a carve-out in the form of a right to satisfy its claims out of the proceeds obtained from sale of the assigned receivables ahead of the debtor’s other creditors, who may be satisfied under general rules out of any surplus, which will enter the general funds of the bankruptcy estate. There are certain doubts surrounding this new rule, however, in terms of its scope of application and its effects.
In order for the assignment agreement to be effective against the bankruptcy estate (and for the assignee to satisfy its claims based on the assignment), the agreement must bear a certified date.
The justification for amending the Bankruptcy Law in its treatment of assignment of receivables was to more fully achieve the purposes of the bankruptcy proceeding (equal satisfaction of the largest group of the debtor’s creditors) by preventing exclusion of the most valuable assets from the bankruptcy estate. The amendment was also designed to avoid drawn-out disputes over exclusion of specific assets from the estate, while continuing to provide secured creditors acting in a trust capacity, i.e. creditors who have taken an assignment of receivables or assumed title as security, with a level of protection comparable to that enjoyed by pledgees. It appears that the purposes of the amendment were achieved, but at the cost of weaker protection for holders of an assignment. The new provision also raises various doubts, which does not encourage certainty in commercial dealings.
Ewa Jasic and Aleksandra Polańska, Banking & Finance practice, Wardyński & Partners