Restructuring Law – Remarks on the new act
By Monika Strus-Wołos
Posted: 9th December 2015 16:43The new Restructuring Law will enter into force in Poland on 1 January 2016. It significantly changes regulations concerning entrepreneurs’ debt reduction. It also continues the reform of insolvency law system.
Current Bankruptcy and Reorganization Law recognise three models of procedures: (i) bankruptcy procedure involving liquidation of assets, (ii) bankruptcy procedure with the possibility of an agreement and (iii) reorganisation procedure. Restructuring law abolishes reorganisation procedure and procedure with the possibility of an agreement, leaving nonetheless an agreement possibility in the liquidating bankruptcy.
To replace these, four new procedures have been created: (1) procedure for accepting the deal; (2) accelerated deal procedure; (3) deal procedure; (4) restructuring procedure. The first two procedures may occur only if the sum of contentious debts eligible for voting on the deal does not exceed 15% of the all debts eligible for voting.
The newlaw also containsprovisions on public aid that are in compliance with EU regulations. Until now entities’ restructuring was made at the expense of individual creditors, also entrepreneurs. New provisions regulate aid provided by the government or with the usage of public funds. This aid can come in many forms, for example as diminishing the public-law liabilities or paying them in instalments, in forms of loans, credits, warranties or indemnities.
The new law proposes good solution for creditors – reducing the number of categories of creditors’ satisfaction in Bankruptcy Law from five to three. It also contains equalisation of regular debts with, previously privileged, public-law debts e.g. taxes and other public levies. It will increase the degree of satisfaction of non-privileged creditors, which are often the largest group.
A long-awaited institution of Central Registry of Restructuring and Bankruptcy has finally been created and it is set to start in February 2018. It will allow the creditors easy access to information about progress of procedure, that has fundamental value concerning short terms for challenging sentences in these proceedings. Until now, the creditors have been forced to search for information directly in courts. Due to the transparency of this registry, it can also be a valuable source of information about financial position of the counterparty, which will also increase certainty of transaction.
The new bill also changed Bankruptcy Law, having regarded some remarks of law practitioners.
Alas, the lawmakers have not warded off some mistakes. This act isample and very casuistic. Half of its size contains Bankruptcy Law amendment. Extraction of Restructuring Law from Bankruptcy Law, as an external bill, with upholding some common institutions and mutual references, lowers the transparency of insolvency law. Needlessly some of the procedures have been renamed – it also destroys 90 years of law practice.
The biggest controversy lies with changing the philosophy of approach to insolvent debtors. In the project’s justification, legislator wrote that it is meant to “de-stigmatise” debtors. In current model the creditors’ interests were the priority, meanwhile now the most important are those of debtors’. It creates doubts, both from moral and law point of view. Although the concept of “new beginning” seems to be more and more popular, legislator’s choice of one specific model has tremendous meaning not only for the parties of the procedure, but also for the whole economy. In 2009 a group of scientist from Center of Business Ethics ALK and Polish Science Academy have conducted research on the last global economy crisis. The results have shown that one of the crisis’ sources in United States was too liberal bankruptcy law, that have influenced ethic norms concerning debt payment and created an environment for moral hazard. A. Greenspan, former CEO of Central Bank of USA, have commented that approach in blunt words: “the number of consumers’ bankruptcies increases, because Americans have lost their sense of shame”. The scientists have been surprised by the fact that in USA the number of announced insolvencies grew insanely, without any macro- or microeconomic affiliations. Cheap and easy insolvency procedures in countries that wanted to reintroduce the insolvent consumers into the market in order to increase demand, have caused changes in the business ethics. Announcing insolvency has become a technique for dealing with financial problems. This conclusion should be taken into consideration while creating new regulation for restructuring, even more so when we know that globalisation concerns mostly economic matters. Responsible legislator, while creating new regulations, should not avoid the negative effect of too liberal norms on society’s ethics. Experience of other countries should be a warning sign, especially knowing that Polish entrepreneurs lack discipline in regulating obligations. Research of TNS Polska shows that 53% of entrepreneurs get less than half of their money on time.
The significant increase of court fee in the bankruptcy and restructuring procedure (from €50 even up to €5000) deserves a healthy dose of criticism. Legislator’s intention was to discourage creditors to challenge some procedural decisions for speeding the progress of proceedings. But it can be an infringement of right to a fair trial.
Under the new law the debtor is allowed to lend money from all sorts of entities during the restructuring procedure. In case of restructuring failing and announcing insolvency, the commitments from those loans will be privileged and satisfied first. Time will show if this new solution will put creditors in worse position than with an immediate announcement of debtor’s insolvency. It is obvious that entrepreneurs with financial problems will have difficulties with obtaining bank loans with reasonable percentage, if they cannot offer enough guarantee. Some debtors may be tempted into loaning money from “quasi-banks” (them being the plague of Polish loans market), who administer high percentage. In case of insolvency, the creditors will have to share the sum diminished by those loans.
The law states that the insolvency cannot be announced from the opening of restructuring until its closing. The legislator did not include the remarks of specialists in the field, who warned of the possible outcome, that is liquidating debtor’s assets with omission of creditors. There are a few more regulations that give the possibility of manipulation to the debtor.
The law also creates new profession on the legal market: restructuring advisor (replacing licenced trustee). Restructuring advisors not only will be performing as trustees, but they will be able to offer legal advice and act as entrepreneurs’ representatives before courts in specific proceedings. They will be obliged to have liability insurance and to educate persistently, which is a bit baffling. Ministry of Justice will be supervising this profession. An important note: in order to obtain the licence of restructuring advisor, the applicant does not need to have law degree. He just needs to pass the exam (relatively simple). This exam does not verify, even in the slightest, if the applicant has enough law knowledge not to harm his clients.
The assumptions of this article make a detailed analysis of such vast bill close to impossible. But only from those general remarks one can see that this bill has many disadvantages and surely will be amended, which is not good for the security of legal transactions. Persistent amendments are a true weaknesses of Polish law.
Adw. Dr Monika Strus-Wołosis a partner in Strus-Wołos i Wołos Law Office. For 20 years she has been practicing law specialising in civil and economic law. In 2010 she has obtained doctor’s degree for thesis Procedural rights of creditors in bankruptcy procedure. She co-authored Commentary on Registered Pledge and Pledge Registry Law. For her charity activities for children’s hospices she won „Golden Paragraph – Best Lawyer 2008” award. She has also been laureate of „Forbes’ Professionals” and „Pro Bono Lawyer” competitions. Between 2007 and 2013 she has been a member of National Bar Association.
Dr Monika can be contacted on +48 664 25 27 or by email at email@example.com