Krzysztof Libiszewski

Corporate restructuring and creditors’ involvement in debtor’s corporate structure

Participation in the authorities of debtor companies gives creditors a greater assurance that restructuring programmes will be properly implemented, but also entails certain burdens, risks and obligations.

During the course of restructuring of companies, creditors often must decide whether to agree to accept what is typically a deep reduction in their claims against the debtor. The restructuring terms also include consideration of the creditors’ involvement on the debtor’s management board or supervisory board, as well as possible conversion of debt into equity in the debtor.

But it is not obvious that creditors would agree to appointment to the supervisory board or management board of the debtor. On one hand, by joining the corporate authorities they will obtain insight into management decisions affecting the debtor’s enterprise, or even, more rarely, an influence over those processes. In such situation, the creditors can assure that the restructuring programme is implemented correctly. On the other hand, appointment to the supervisory board or management board may entail liability for a loss to the company or its shareholders through improper performance of supervisory or management functions.

It can be an additional problem to find persons among the creditor’s management with the appropriate experience and capability to take on additional duties. The most frequent participants in restructuring processes on the creditors’ side are financial institutions. They have qualified staff, including those with deep experience in financing and restructuring of financing. But even these institutions run into significant staffing problems when it comes to delegating persons outside of top management to serve on the supervisory board or management board of debtor companies.

Even further-reaching limitations arise if the debt held by creditors is converted into shares in the company. A debt-to-equity conversion may allow the creditors to reduce their losses going forward. This is because even though the debtor’s balance sheet is cleared of debt items at the expense of the creditors, as occurs in most typical restructuring processes, the creditors gain in exchange the possibility of future profit. This prospect will seem attractive when the failure to reduce the debt will essentially bring the operations of the insolvent debtor to an end, and creditors will be satisfied only through bankruptcy mechanisms.

Conversion of debt to equity is subject to significant legal conditions. Regardless of the conversion mechanism selected, it should be borne in mind that an increase in the debtor’s share capital in connection with conversion is subject to restrictions under the Commercial Companies Code involving the protective function of share capital in companies and the related regulations assuring that the capital is truly covered. Restructuring of companies typically is combined with situations where the receivables that are the subject of the conversion may be regarded as uncollectable, and thus not meeting the criterion for proper contribution to cover the company’s capital increase. This gives rise to liability on the part of the management board but also an obligation by the new shareholder itself to supplement the contribution to at least make up for the missing market value of the contributions as compared to the issue price of the new shares.

Debt-to-equity conversion is also subject to major restrictions under acts governing trading in public companies as well as competition. In consequence, the very agreement between the restructuring company and its creditors setting forth a recovery programme and awarding the creditors certain corporate entitlements may be regarded as an understanding which among other things entails the obligation to make a tender offer in connection with exceeding 33% or 66% of the votes at the general meeting of shareholders as well as notification of the President of the Office of Competition and Consumer Protection of assumption of control over the debtor. Such understanding with respect to a public company is also subject to formal reporting obligations as well as limitations on arrangements concerning transfer of significant stakes of shares in public companies and prohibitions on transfer of such shares.

It appears that restructuring processes involving the creditors’ participation in the debtor’s corporate structure require the participants to have an extensive awareness of the conditions governing such processes, and sometimes the commitment of significant time and means. Nonetheless, experience teaches that such processes provide a real opportunity for effective implementation of recovery programmes.

Krzysztof Libiszewski, Corporate Law, Restructuring, and Commercial Contracts practices, Wardyński & Partners