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Bankruptcy and restructuring proceedings during the COVID-19 pandemic – 2020 summary

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by Katarzyna Kołodziej

22 January 2021

 

The COVID-19 pandemic and its negative economic effects have forced enterprises to take steps to find their feet in the new economic situation and maintain their position in the market. Enterprises may use newly introduced legal instruments that may help them overcome financial difficulties. 


COVID-19 and bankruptcy

As a result of the coronavirus epidemic and related restrictions, many companies may have experienced such a significant deterioration in their assets that those circumstances might well justify mandatory initiation of proceedings provided for in the Bankruptcy Act of 28 February 2003. What is at issue here is the insolvency requirement meaning that an enterprise is no longer able to pay its maturing debts.

 

Upon declaring the state of epidemic emergency in Poland on 14 March 2020, followed by the state of epidemic on 20 March 2020, enterprises have not been relieved from the statutory obligation to initiate bankruptcy proceedings once the requirements specified by law are met. However, the new regulations have introduced an exception under which the running of limitation periods in that respect may be suspended. In accordance with the applicable regulations, the statutory deadline for filing a bankruptcy petition does not start to run or if it has started to run it is suspended, provided that debtor’s insolvency has arisen, first, due to COVID-19, and second, during the state of epidemic emergency or the state of epidemic as declared in connection with that disease.

 

Simplified restructuring proceedings

 

Another anti-crisis solution introduced in 2020 are simplified restructuring proceedings that can be initiated by any enterprise at risk of insolvency. This means that an enterprise does not need to prove that its negative financial situation has been triggered by COVID-19. Under the Restructuring Act of 15 May 2015, the risk of insolvency refers to such an economic situation of an enterprise that there are grounds to suspect that it may soon become insolvent.

 

The simplified restructuring proceedings mean proceedings for approval of an arrangement as modified under the “4.0 anti-crisis package”. As in the case of other four types of restructuring proceedings, their purpose is to prevent a debtor who has become insolvent or is at risk of insolvency from being declared bankrupt by facilitating their restructuring by way of an arrangement with their creditors. As they are aimed to deal with negative economic consequences of the coronavirus pandemic, the debtor may declare its intent to initiate such proceedings for a limited period of time only, that is until 30 June 2021.

 

Proceedings from the debtor's perspective

 

These proceedings are innovative in the sense that the entire procedure is accelerated and less formal, in particular the opening stage. After concluding an agreement on the supervision of proceedings with a restructuring adviser – an enterprise announces the opening of proceedings in Monitor Sądowy i Gospodarczy (MSiG). In this way – without recourse to the courts – the debtor is protected as of the day of the announcement, which is also the day of opening the proceedings. This procedure offers the debtor several advantages that include, but are not limited to, suspension by law of enforcement proceedings with respect to claims covered by the arrangement and claims secured by debtor's assets (provided that certain statutory criteria are met), prohibition of initiation of new enforcement proceedings with respect to the specified claims, a moratorium on debt repayment, i.e. suspension of performance of the said claims, limited possibilities of setting off mutual claims between the debtor and the creditor and prohibition of termination of certain agreements by creditors of an enterprise (e.g. lease or loan agreements).

 

Proceedings from the creditor’s perspective

 

In order to guarantee the protection of creditors' rights and balance the privileged position of the debtor, the lawmakers have allowed creditors to apply to the court to repeal the above effects of the announcement made in MSiG in a situation where they might be detrimental to them. As a result of the court issuing such a decision, the debtor will be, for example, deprived of their enforcement immunity, whereas the creditor will be able to demand performance of obligations arising from the claims that were supposed to be covered by the arrangement. Moreover, these proceedings have a strictly defined time frame – a petition for approval of the arrangement should be filed with the court within 4 months from the date of the announcement. Otherwise, the proceedings are discontinued by law and creditors regain the possibility of enforcing their claims. Please also note that creditors may seek damages if the debtor has made an announcement and opened simplified restructuring proceedings in bad faith.

 

Statistics – summary

 

Statistics show that the simplified restructuring proceedings are attractive for enterprises in Poland. The report prepared by the Central Economic Information Centre (https://www.coig.com.pl/2020-restrukturyzacje-firm_grudzien.php, retrieved on 22/01/2021) on restructuring proceedings in 2020 shows that simplified restructuring proceedings accounted for nearly 50% of all restructuring proceedings opened in 2020 – thus being the most preferred form of court restructuring. Last year, 392 simplified restructuring proceedings were opened, with the highest monthly figure in December 2020 – as many as 118 proceedings of that type were initiated in the last month of the year. Also, the overall increase in the number of restructuring proceedings over the past two years cannot be overlooked – in 2019, there were 465 such proceedings, while in 2020, the number rose to 800.

 

A final assessment of the effectiveness of the legal instruments introduced to counteract the negative effects of the COVID-19 pandemic in 2020 has yet to be put on hold. The new year will undoubtedly be a time of challenges for enterprises but also a time of hope to overcome economic difficulties resulting from the situation.

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Jarosław Hein

Attorney at law (Poland), Tax adviser (Poland)

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