Court restructuring in practice
For nearly four years, Polish businesses have been in a possession of an important tool to restructure their debt and return to economically sustainable operations. Our experience since the Restructuring Law has been in force shows that with proper selection and cooperation with creditors, the new court procedures have many advantages and can lead to effective debt reduction. At the same time, we see room for improvement in the current regulations, which cannot be corrected through the practice of the authorities and participants in the restructuring process alone.
Fast-track arrangement proceedings (przyspieszone postępowanie układowe) have been the most frequently chosen model of judicial arrangement proceedings over the last four years. We had the opportunity to conduct this procedure while representing a debtor with debts of several million zlotys, starting with the submission of an application for restructuring and ending with confirmation of the arrangement by the creditors’ meeting. After the filing of the application, pending the opening of proceedings, doubts already arose as to the debtor’s ability to pay its liabilities arising in the period between the filing of the application and the court’s issuance of a decision opening the proceedings. The problem was serious because we were dealing with a company on the move, which had to accept new orders every day, make many payments for supplies and services, and participate in bidding procedures, in which new commitments were also made.
The case was opened within the instructive period of one week, which is quite exceptional anywhere in the country, but nevertheless this period was a challenge for the debtor. After all, it had to incur liabilities which were soon to be included in the arrangement as a result of the opening of proceedings, and also to pay creditors who refused to deliver goods to the debtor without making any prepayments on this account. Failure to supply the goods necessary for production by the debtor’s plant would result in a loss of production capacity and thus interruption of the plant’s operation. Therefore, a failure to supply due to non-payment would be undesirable from the perspective of maintaining the debtor’s business and the continuity of production essential to the debtor’s activity.
Basically, the Restructuring Law does not contain any provisions regulating the debtor’s operational and financial situation (e.g. payments) during the period when the restructuring application is pending. We regard this as a far-reaching shortcoming, especially as there are known cases of waiting even two months for the opening of proceedings. During that time, the debtor may not know how to meet its obligations, given that under criminal law, selective satisfaction of creditors in a situation threatening the debtor’s insolvency or bankruptcy is a punishable offence.
The basis for the success of restructuring proceedings, as proved by our case, is the debtor’s close cooperation with creditors, even before submission of the restructuring application. An agreement with creditors even on the outline for the arrangement proposals submitted with the application results in a more favourable attitude towards the whole court procedure, which is still perceived as stigmatising in the market reality. Our practice proves that surprising creditors with information on the submission of an application or even the opening of proceedings often leads creditors, especially creditors secured by collateral in the debtor’s assets, to break off negotiations on the terms of the arrangement, which in effect significantly limits the debtor’s ability to achieve acceptance of the arrangement. Openness to talks with creditors, who often understand the difficult situation of the debtor (they often find themselves in a similar situation and are also dependent on the market situation), may help the debtor not only to create a widely acceptable arrangement proposal, but also to gain support for the candidate proposed by the debtor to act as the court-appointed supervisor in restructuring proceedings. And obtaining the support of creditors holding more than 30% of the total amount of claims for the court-appointed supervisor nominated by the debtor obliges the court to appoint the supervisor proposed by the debtor.
The role of the court-appointed supervisor in a time-bound procedure, such as a fast-track arrangement procedure, is invaluable. Within a relatively short period of two weeks, the supervisor prepares three main documents that will determine the dynamics and effectiveness of the proceeding: the list of claims (including the list of disputed claims), the restructuring plan, and, for the needs of the creditors’ meeting to vote on the arrangement agreement, an opinion on the feasibility of the agreement. Smooth cooperation between the debtor and the supervisor is essential for timely and accurate preparation of the list of claims on the basis of which the creditors’ votes on the agreement will be calculated. The supervisor also prepares ballots, which creditors often mistake for a certificate of the amount of their claim, comparing them with the balance in their account books.
The role of the supervisor is also to “educate” creditors about their rights during voting on the arrangement and the scope of claims covered by the arrangement. Clarification of any doubts related to the creditors’ voting power and the amount of the claims covered by the arrangement allows for efficient voting and also voting in favour of the arrangement by creditors, which is in the interest of both the debtor and the creditors. The supervisor may also communicate directly with the judge-commissioner, which is conducive to efficient organisation of the creditors’ meeting to vote on the arrangement and to resolve legal doubts, which often crop up in the course of the proceedings.
In the case of large companies with numerous creditors (more than 100), the fast-track arrangement procedure can be completed within six months by approval of the arrangement (pending appeal), but this period must be regarded as optimistic. The two-month deadline for completion of such proceedings projected by the Parliament will only be realistic in extreme cases involving companies encumbered with low debt and subject to the jurisdiction of courts handling a small number of insolvency and restructuring cases, and there are currently very few such cities.
The example of the case we dealt with in our practice ended with approval of the arrangement, and therefore a vote for the arrangement by a large majority of the creditors on the terms proposed by the debtor. This shows that the model of judicial restructuring can be effective and helpful to companies in crisis. It should be remembered, however, that a vote in favour and approval of adoption of the arrangement is just the first step toward successful completion of the restructuring proceeding. The court will refuse to confirm the arrangement if it violates the law, in particular if it provides for the award of state aid contrary to the regulations, or if it is obvious that the arrangement will not be executed. The latter ground, obvious inability to execute the arrangement, is often founded on the debtor’s failure to perform its obligations arising after the date of opening of the restructuring proceeding. During the hearing on confirmation of the arrangement, the court may take statements from the debtor and the court-appointed supervisor on whether since opening of the restructuring proceeding the debtor has currently and timely performed all of its obligations towards creditors. Fulfilment of this requirement is often problematic for debtors undergoing restructuring, and therefore estimating the debtor’s capacity to bear the burden of the costs of the proceeding and current obligations arising after opening of the proceeding should be considered as an element of the restructuring strategy at the stage leading up to filing of the application.
Completion of the restructuring proceeding with confirmation of the arrangement, which we have encountered in our practice, was possible primarily thanks to close and transparent cooperation between the debtor, the creditors, and the court-appointed supervisor. Other cases of restructuring proceedings known to us, often ending in a discontinuance, would contradict the claimed effectiveness of the Restructuring Law. However, in our opinion, this results from inappropriate selection of the specific procedure for the debtor, lack of agreement with key creditors at the stage of submitting a restructuring application, or the debtor’s attempt (often late) to save itself from inevitable bankruptcy using court restructuring procedures.
Therefore, the future of the Restructuring Law depends to a large extent on practitioners dealing with it on a daily basis. Nevertheless, the procedures available to businesses currently contain a wide range of remedies that can save properly prepared debtors from bankruptcy, which is the main aim of restructuring procedures.
Jakub Kokowski, adwokat, Restructuring & Bankruptcy practice, Wardyński & Partners