Simplified restructuring procedure: A new tool for businesses in crisis | In Principle

On 24 June 2020, a new restructuring procedure entered into force, enabling businesses to carry out debt relief smoothly without undue judicial interference. Potential risks and doubts may arise on the part of creditors on how to counteract the negative effects of opening these proceedings. Simplified restructuring is a hybrid of solutions provided for in other restructuring procedures, allowing the debtor to enter into an arrangement with creditors while ensuring extensive protection against enforcement and termination of key contracts.

Legal framework for simplified restructuring

The simplified restructuring procedure (uproszczone postępowanie restrukturyzacyjne) refers to the procedure for the approval of an arrangement (postępowanie o zatwierdzenie układu) regulated in the Restructuring Law, but with significant modifications resulting from Art. 15–25 of the Act on Interest Rate Subsidies for Bank Loans to Businesses Affected by COVID-19 and the Simplified Procedure for Approval of Arrangements in Connection with Occurrence of COVID-19 of 19 June 2020. The proceedings are for the most part extrajudicial. As in the previous procedure for approval of an arrangement, the debtor, with the help of a restructuring adviser, presents creditors with arrangement proposals, collects their votes and, only at the end, applies to the court for approval of the arrangement, which has already been voted on. However, with the new procedure, debtors gain privileges unknown under the existing procedure. Pursuant to Art. 4 of the Restructuring Law, all entities with restructuring capacity, irrespective of whether the insolvency risk or the debtor’s insolvency arose during or in connection with the COVID-19 epidemic, may benefit from the new procedure.

Opening of proceedings

The proceedings are opened automatically by publishing an announcement in the judicial and commercial gazette Monitor Sądowy i Gospodarczy, indicating the debtor’s details, the arrangement date, and the arrangement supervisor with whom the debtor has concluded an agreement to supervise the proceedings. Before making an announcement involving the effects of opening the proceedings, the debtor prepares and submits to the selected arrangement supervisor arrangement proposals, a list of claims, and a list of disputed claims. The preparation of both inventories has so far been the arrangement supervisor’s responsibility and, also under the new procedure, the debtor is expected to cooperate with the arrangement supervisor during their preparation. The debtor retains the right to set the arrangement date, which must be within 7 days before and 7 days after submission of the request for the announcement.

Effects of opening of proceedings

From the debtor’s perspective, the advantage of the simplified restructuring is far-reaching protection against court enforcement by both unsecured creditors and those secured by the debtor’s assets. During the period from the date of making an announcement on opening the simplified restructuring procedure to the date of completion or discontinuance, existing enforcement proceedings are suspended by operation of law and no new proceedings may be instigated against the debtor. Significantly, the debtor’s protection against enforcement takes place automatically upon publication of the announcement in Monitor Sądowy i Gospodarczy. In addition, during the period of simplified restructuring, it is prohibited to terminate key agreements concluded with the debtor, including rental, tenancy, leasing or loan agreements, without the arrangement supervisor’s permission. There is also a ban, known from the fast-track arrangement procedure (przyspieszone postępowanie układowe), on payment of claims covered by the arrangement by operation of law, as well as restrictions on setoff.

Another new feature is the possibility to include in the arrangement a claim secured against the debtor’s assets without the in rem creditor’s consent. However, a condition is that the creditor is presented with an arrangement proposal providing for full satisfaction of the claim along with any incidental amounts provided for in the agreement which is the basis for establishing the security (regardless of whether the agreement, e.g. loan agreement, has been terminated or has expired), or satisfaction to an extent not less than could have been obtained in satisfaction of the claim from the collateral. The assessment of compliance with the latter condition may be controversial due to the changing value of the collateral over time, affecting the degree of the in rem creditor’s satisfaction. In addition, when their claims are included in the arrangement, in rem creditors can be repaid in instalments and within the period set out in the arrangement, provided that an arrangement providing for repayment in instalments is approved in voting, which in practice has been extremely rare given the in rem creditors’ voting power on the arrangement.

Creditors’ protection

The possibility that simplified restructuring will have a negative impact on creditors’ interests has been greatly reduced. Any creditor may apply to the court for lifting in its entirety of the effects of the announcement of the opening of proceedings, including the prohibition of enforcement against the debtor’s assets. However, given the timeframe of this procedure, the court’s response to the creditor’s request may be delayed, especially taking into account the (optional) possibility of hearing the debtor, creditor or arrangement supervisor, thus removing the negative effects on creditors of opening of proceedings only at the final stage of the case. Due to the narrow time horizon of the proceedings, there is no provision for the possibility of challenging the court’s decision to lift the effects of the announcement. Protection of creditors against depletion of the debtor’s assets is to be provided by the debtor’s limited management, as the debtor will be required to obtain the arrangement supervisor’s consent to acts outside the ordinary course of business, under pain of nullity. Creditors will also be entitled to pursue a claim for redress of damages if the debtor made an announcement on the opening of proceedings in bad faith.

New funding

The law allows for the possibility of providing the debtor new financing after the opening of simplified restructuring, with the consent of the arrangement supervisor, in order to finance implementation of the arrangement or meet the costs of the proceedings and obligations arising after opening of the proceedings. With the arrangement supervisor’s consent, new financing may also be secured by the debtor’s assets. However, it may be problematic to maintain the effectiveness of new safeguards against the bankruptcy or reorganisation estate (if the simplified restructuring fails), as the effectiveness of the new safeguards is ensured by the condition that the application for approval of the arrangement and the final approval of the arrangement must include information on granting of security. Therefore, the entity providing financing to satisfy the costs of the proceedings and the debtor’s current liabilities will bear the risk of refusal to approve the arrangement and, as a result, if the debtor’s bankruptcy is declared or the debtor’s reorganisation (sanacja) is opened, the loss of security on the debtor’s assets. Therefore, in practice, it is only conceivable that a loan or credit could be granted to the debtor to finance implementation of the arrangement, with legal approval of the arrangement being a condition for triggering such new financing.

Procedural aspects of voting on the arrangement

An important solution in the era of the pandemic is the possibility to remotely conduct a creditors’ meeting to vote on the arrangement using electronic communications. The traditional formula of a meeting chaired by the arrangement supervisor is also acceptable. Unlike the arrangement approval procedure, the arrangement is adopted by a majority of creditors’ votes (and not of those entitled to vote), who together hold at least two-thirds of the amount of claims held by voting creditors. Doubts may arise as to whether the rule of a majority of persons counted from voting creditors will also apply to the debtor’s independent collection of votes.

Duration of the proceedings

A strict timeframe applies to simplified restructuring. The application for approval of the arrangement must be submitted to the court no later than four months after the announcement in Monitor Sądowy i Gospodarczy. If no application for approval is filed within this period, the proceedings will be discontinued by operation of law. The court will make a decision on approval of the arrangement within two weeks of filing of the application. The decision approving the arrangement may be challenged by the parties to the proceeding. The period for filing an appeal is two weeks. If an appeal is filed (e.g. by a creditor), it could significantly delay the finality of the arrangement and commencement of its implementation.

Failure of restructuring—possible scenarios for the debtor

If the simplified restructuring fails, resulting in refusal to approve the arrangement or discontinuation of the proceedings for approval of the arrangement after the application for approval of the arrangement has been filed, the debtor may submit a simplified application for the opening of reorganisation proceedings or a simplified bankruptcy petition. Thus, the law foresees a second chance for the debtor in crisis by opening reorganisation proceedings and maintaining protection against enforcement or, in the absence of prospects for recovering financial liquidity, declaration of bankruptcy.

Exclusion of personal liability of the debtor’s representatives

Pursuant to the new regulation, making an announcement on the opening of proceedings for approval of the arrangement within the time limit required to submit a bankruptcy petition (i.e. no later than 30 days from occurrence of the grounds for declaration of bankruptcy) excludes the liability of the debtor’s representatives for:

• Damage caused as a result of untimely filing of a bankruptcy petition (Art. 21(3) of the Bankruptcy Law)
• Obligations of the debtor which is a limited-liability company in respect of which enforcement has proved ineffective (Art. 299 §1 of the Commercial Companies Code)
• Tax arrears (Art. 116 §1 of the Tax Ordinance).

An additional condition for releasing the debtor’s representatives from personal liability for debts is to demonstrate that the arrangement has been legally approved in the proceedings for approval of the arrangement, or if restructuring fails, to open reorganisation proceedings as a result of a simplified application for opening this procedure, or file a simplified bankruptcy petition.

If an application for approval of the arrangement under simplified restructuring is not submitted within four months of the announcement, and as a consequence, the proceedings are discontinued, the debtor may not submit a simplified application for declaration of bankruptcy or opening of reorganisation proceedings, but its representatives may still be protected against liability for debts if, within seven days of discontinuance of the proceedings, they file for bankruptcy or for opening of any available restructuring proceedings and such proceedings are opened.

This regulation is quite complex, but the most important thing is to make an announcement on the opening of proceedings for approval of the arrangement by the deadline for filing for bankruptcy. The deadline is met by making the actual announcement, not by submitting the request for it. In the event of a claim for damages against the debtor’s representatives, their defence will be effective if they demonstrate first that they have met the deadline for announcing the opening of simplified restructuring. This means that in practice, requests for making an announcement, as with other restructuring proceedings, will be submitted in parallel with bankruptcy petitions in order to protect the debtor’s representatives from the negative effects of delay in making an announcement, when they have no influence over execution of the request once they have submitted the request to Monitor Sądowy i Gospodarczy. As a side note, it should be pointed out that in view of the existing moratorium on the obligation to file a bankruptcy petition, the above regulation will be applied in practice for debtors insolvent due to COVID-19 once the state of epidemic threat or state of epidemic has ceased. With respect to other debtors, whose insolvency is not linked to COVID-19, relief from personal liability may be achieved by making a timely announcement from the date of entry into force of the regulation.

Conclusion

Simplified restructuring can be used for the period up to 30 June 2021, which the parliament regards as the cut-off date for the negative economic effects of the COVID-19 epidemic. The probability of the courts being overloaded by bankruptcy petitions at that time is high, and therefore it was decided to provide debtors with a wide protective umbrella under an out-of-court procedure in which restructuring advisers will play a leading role.

But the effectiveness of the new procedure will largely depend on the debtors themselves. Debtors should not treat simplified restructuring as a temporary escape from enforcement, but negotiate transparently with creditors to conclude an arrangement. The chance for effective debt recovery under this procedure is only one-off, and failure of simplified restructuring may direct debtors to the complicated path of other restructuring or bankruptcy procedures.

Therefore, it is worthwhile to thoroughly examine and properly prepare for implementation of the new procedure, in order to take advantage of the limited time window for the new procedure announced by the parliament.

Jakub Kokowski, attorney-at-law, Restructuring & Bankruptcy practice, Wardyński & Partners