Business obligations in insolvency
Under Article 11(1) of the Bankruptcy Law Act of 28 February 2003, a debtor is insolvent if it has lost the ability to meet its due monetary obligations. That inability is presumed where payment delays exceed three months.
Inability to meet due monetary obligations may arise before three months have elapsed. A delay exceeding three months triggers a statutory presumption; it is not a period that can always safely be waited out. The general bankruptcy filing deadline is 30 days after grounds for bankruptcy arise. All conditions and applicable provisions must be checked for the particular case.
Three months’ delay establishes a presumption of insolvency, not a universal starting date for management board duties.
Otherwise, those concerned may be liable for failing to file within 30 days after grounds for bankruptcy arise. Persons entitled and obliged to file include sole traders and, for partnerships, each partner with unlimited liability. For legal persons, this includes everyone empowered by statute, the articles or constitution to manage and represent the debtor, alone or jointly. It also includes a liquidator or court-appointed curator.
Consequences of failing to file for bankruptcy
Adverse consequences include liability in damages to creditors (Article 21(3) of the Bankruptcy Law), joint and several liability of a limited liability company’s management board member for company debts where enforcement against the company’s assets proves unsuccessful (Article 299 of the Polish Commercial Companies Code Act of 15 September 2000), criminal liability of management board members and commercial company liquidators (Article 586 of that Code), and disqualification from business activity or from specified roles for between one and ten years (Article 373 of the Bankruptcy Law).
If a business becomes insolvent despite any assistance packages proposed in recent days, it should file for bankruptcy to avoid the liability described. It does not matter whether insolvency arose through fault or force majeure.
Preserving the business
Is bankruptcy filing the only solution? What about businesses that regard their problems as temporary and do not want to close, but fear liability for failing to file on time?
An alternative is restructuring proceedings, introduced by the Restructuring Law Act of 15 May 2015, effective from 1 January 2016. It provides four procedures:
- arrangement approval proceedings;
- accelerated arrangement proceedings;
- arrangement proceedings; and
- sanation proceedings.
To avoid liability for late bankruptcy filing, the business or its representative should show that restructuring proceedings were opened or an arrangement approved in arrangement approval proceedings within the bankruptcy filing deadline. Crucially, the date of the court’s decision matters, not the application date. Steps towards opening restructuring proceedings should therefore be taken as quickly as possible.
‘To avoid liability for failing to file for bankruptcy, it must be shown that restructuring proceedings were opened or an arrangement approved in arrangement approval proceedings within the filing deadline.’
Restructuring procedures differ and not all are available to every entity. Their common purpose is to avoid bankruptcy. They serve insolvent debtors or those threatened with insolvency, but the earlier the decision to restructure, the greater the chances of success.
Benefits of restructuring proceedings
Besides avoiding liability for late bankruptcy filing, restructuring offers measures to help a business overcome temporary problems and restore liquidity.
The measures depend on the chosen procedure. Where the problem is liquidity alone, accelerated arrangement proceedings (PPU) or arrangement proceedings (PU) are the optimal solution. Where more extensive measures are needed, such as redundancies, withdrawal from disadvantageous contracts or asset sales, sanation proceedings should be considered.
‘For liquidity problems, accelerated arrangement proceedings (PPU) or arrangement proceedings (PU) are the optimal solution.’
A detailed discussion of all procedures is beyond this article’s scope. Choosing one always requires an in-depth assessment of the business’s position and needs. To explain why restructuring offers opportunities in difficult times, however, it is useful to identify the main features. Arrangement approval proceedings differ substantially from the others and take place mainly out of court; they are therefore not described here, although they should also be considered when selecting the best solution for a business threatened with insolvency.
Arrangement proceedings
The principal advantages of arrangement proceedings (PPU and PU) and sanation proceedings are:
- Protection against enforcement. From the opening of proceedings, creditors cannot enforce against assets forming the arrangement or sanation estate. Existing enforcement proceedings are stayed. For PPU and PU this applies to claims covered by the arrangement; for sanation it covers all enforcement against estate assets. An exception applies to secured creditors, who may enforce only against their collateral, not the debtor’s entire estate.
- Suspension of payments on ‘old’ debts. Once proceedings open, liabilities arising earlier cannot be paid. With few exceptions, they enter the arrangement and are satisfied on its terms. A restructuring business therefore has both the right and the duty to stop payments relating to the period before proceedings opened, apart from the exceptions in Article 151 of the Restructuring Law.
- Restructuring aims to reach an arrangement with creditors. The business may propose reducing liabilities arising before proceedings opened, cancelling interest or scheduling instalments suited to its capacity. If creditors accept the arrangement, the remaining claims are extinguished.
- The business continues operating. It operates under a court-appointed supervisor or administrator. In sanation, the debtor generally loses management control to an administrator. Subject to exceptions, leases or usufructuary leases of premises or property where the business operates cannot be terminated during restructuring. Similar restrictions apply to terminating credit, leasing, property insurance, bank account, suretyship, licence, guarantee and letter-of-credit agreements.
Action plan
Restructuring law can therefore extend payment deadlines for pre-opening debts by several months and substantially reduce their amounts. Liabilities arising after proceedings open must, however, be paid as they fall due. Successful restructuring requires provision for both ongoing liabilities and performance of the arrangement. That may be difficult in extraordinary circumstances such as these, when future revenue is unpredictable and past financial data is unreliable as a guide. Arrangement proposals are flexible, however, and may defer payments for a sufficiently long period, during which the business enjoys protection from enforcement of ‘old’ debts.
Success depends on choosing the procedure best suited to the business and professionally preparing the application and accompanying documents, which vary by procedure. A professional can help with both the decision and documentation. Errors may lead to the application being returned, refusal to open proceedings, unnecessary costs or delay.
The principal document is the application to open restructuring proceedings. Arrangement proposals, submitted later in sanation, must also be prepared, together with a preliminary restructuring plan, lists of assets and creditors, and other documents. In arrangement and sanation proceedings, the debtor’s ability to pay procedural costs and post-opening liabilities must also be substantiated on a prima facie basis.
How quickly can restructuring begin?
Statutory time limits for considering applications are short: one week for accelerated arrangement proceedings, two weeks for arrangement or sanation proceedings, and six weeks where a hearing is needed. In practice, decisions usually take longer. When opening proceedings, the court appoints a judicial supervisor or administrator. Their roles, the process of establishing the list of claims and presenting arrangement proposals, and the time taken all vary by procedure.
As a rule, the arrangement vote comes soonest in accelerated arrangement proceedings. Sanation is the longest and most complex procedure. Once creditors approve an arrangement and the court confirms it, the business returns to normal operations and performs the arrangement as accepted, particularly by paying the amounts on the dates specified.
‘Acting quickly increases the chances of successful restructuring.’
Summary
Where a business has lost liquidity or expects to do so soon, using the Restructuring Law measures is the optimal solution. Given the advantages of opening proceedings, an application tailored to the business should be considered. Speed is essential: only timely opening of restructuring proceedings releases the business or its representatives from liability for late bankruptcy filing. Prompt action also increases the chances of success.
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