issues relating to the insolvency and restructuring market, and the key tools and emerging innovative processes for effecting restructures in 23 jurisdictions.
1. What trends, in terms of activity levels, affected industries or investor focus, have you seen in the restructuring and insolvency market in your jurisdiction over the last 12 months?
The restructuring market in terms of both court and out-of-court proceedings has been relatively stable and mainly focused on finalising the composition procedures started in previous years, especially in the construction sector. The stability of the Polish economy in recent years has brought about a decrease in the number of bankruptcies, and this is expected to continue in 2016. On the other hand, there are still industries, such as hard coal and transportation, where restructuring efforts are desperately needed.
2. What is the market view on prospects for the coming year?
The market players wait with great interest to see how the new restructuring law, which took effect on 1 January 2016, will actually work in practice. Many are of the view that the new restructuring tools may induce the management of some companies to use them to stabilise the future of their businesses. On the other hand, and this is the opinion of the authors of this review, apart from the coal mine sector, the insolvency and restructuring market will show a slight decrease in 2016 due to the prevailing stability of the Polish economy. More likely, 2017 will be the first year in which the new law will be confronted with the actual market needs including, but not limited to, distressed M&A.
3. What are the key tools available in your jurisdiction to achieve a corporate restructuring – are they primarily formal, court-driven processes, or are informal out-of-court restructurings possible? Do you feel that the tools you have available are effective in terms of providing speedy, fair and predictable outcomes?
Until 1 January 2016, the Polish insolvency regime was regulated by the Polish Bankruptcy Law enacted in 2003. All bankruptcy proceedings initiated prior to 1 January 2016 will continue to be governed by the old law. As a result, over the next few years, both the old and new regimes will coexist.
By way of background, many flaws in the Bankruptcy Law were revealed after over more than a decade of application, especially in respect of the ineffective and malfunctioning reorganisation proceedings. In 2012, a group of highly renowned experts began preparing an amendment to the Polish Bankruptcy Law, which ultimately resulted in a profound change to the Polish bankruptcy regime and the enactment of the Restructuring Law in 2015. The Restructuring Law, which took effect on 1 January 2016, amended the Bankruptcy Law and introduced four “new” types of restructuring proceedings.
As a result, as of 2016, five types of processes are available with respect to debtors with a centre of main interest in Poland undergoing financial difficulties. These processes vary from the point of view of the court involvement.
1) Bankruptcy proceedings
Bankruptcy proceedings may be initiated with respect to a debtor which became insolvent, i.e. (i) lost the ability to pay its debts (cash flow test), and/or (ii) whose monetary liabilities exceed the value of its assets – and such excess lasts for more than 24 months (balance sheet test). There are a number of exceptions to the balance sheet test.
The 2015 reform renounced the provisions on arrangement bankruptcy and reorganisation proceedings in their entirety (although substantive parts of the provisions on arrangement proceedings are reflected in the new reorganisation proceedings regulations). As of 2016, bankruptcy proceedings will always aim at liquidation of the estate of the bankrupt and distribution of the bankruptcy proceeds among the creditors of the debtor. The secured creditors of the bankrupt will continue to hold a privileged position up to the value of the security that they hold, and the unsecured creditors (as well as the unsecured parts of the claims held by the secured creditors) will be satisfied within four categories of unsecured claims. The entire bankruptcy proceedings are court-driven, although the recent reform has given creditors holding major claims a right to influence the choice of and a change of the court-appointed trustee.
Most bankruptcy proceedings under the old Bankruptcy Law ended by way of liquidation of the estate of the bankrupt, even if the bankruptcy process was initially conducted with a view to agreeing on an arrangement with creditors. These bankruptcy proceedings under the old regime had proven to be lengthy and not very effective, with the average creditors’ satisfaction rate at a level of 20-30% of the total value of claims.
The enactment of the new Restructuring Law is supposed to turn the bankruptcy proceedings into the last resort method of satisfaction of the creditors.
2) Reorganisation proceedings
The newly enacted Restructuring Law provides four types of proceedings which may be initiated by a debtor who is either insolvent or is threatened by insolvency.
The common goal of all the restructuring proceedings is for the debtor to reach an agreement with its creditors and to conclude an arrangement which will regulate the terms of repayment of their claims. The remedial proceedings additionally offer the debtor a range of legal measures to restructure its business and provide a high degree of protection against its creditors.
An arrangement is adopted if the majority (in number) of creditors who cast their vote (the creditors who do not cast their vote are not taken into account even if they are included in the list of creditors), holding at least 2/3 of the total amount of the receivables held by the voting creditors, vote for its adoption. Slightly different rules apply if the judge-commissioner decides to divide the creditors into groups of interests for the purposes of voting.
a) There are proceedings for pre- approval of an arrangement, i.e. the debtor collects the votes of its creditors to approve the arrangement and, only once the relevant number of votes is cast in writing in favour of the arrangement, the debtor files a motion for the opening of the restructuring with, and approval of, the arrangement by the court. Similar to accelerated arrangement proceedings, proceedings for the pre-approval of the arrangement may not be conducted if, based on the lists of liabilities prepared by a restructuring advisor engaged by the debtor, the amount of the disputed claims exceeds 15% of the sum of all the liabilities of the debtor. The proceedings are almost entirely conducted out of court by the debtor, supported by the restructuring advisor of the debtor’s choice.
b) There are accelerated arrangement proceedings under which the debtor and creditors may enter into an arrangement during a creditors’ meeting scheduled by the court. In this type of proceeding, the procedures will be simplified. Instead of a formal procedure involving the preparation of a list of creditors who will be entitled to take part in the vote on the arrangement, the debtor will prepare a list of its liabilities without the court’s involvement. The procedure does not provide for any verification of the correctness of the liabilities’ list prepared by the debtor (i.e. there is no appeal procedure contemplated). If a creditor opposes the correctness of an entry in respect of the liability owed to it, its claim shall be considered to be a “disputed claim”. The accelerated arrangement proceedings may not be conducted if the sum of disputed claims exceeds 15% of the sum of all the liabilities of the debtor.
c) There are arrangement proceedings which are similar to the old arrangement bankruptcy proceedings (removed from the Bankruptcy Law under the recent reform), but with certain modifications. Apart from remedial proceedings, arrangement proceedings are the most court-driven and formalised proceedings among the restructuring proceedings. The list of the creditors who shall be entitled to vote on the arrangement proposals is prepared within a formalised procedure conducted by the court in cooperation with the court-appointed supervisor (or the administrator) with which the creditors are entitled to file their objections as to the correctness of the list. The objections are then examined within the court proceedings.
d) There are remedial proceedings which are the key new restructuring tool. These proceedings resemble the French procédure de sauvegarde from the point of view of the protection offered to the debtor and allow the administrator of the debtor’s estate to use certain institutions (such as the right to terminate certain unfavourable contracts or sell the debtor’s assets free from encumbrances, etc.) which, until 1 January 2016, were available only within the course of liquidation bankruptcy. The creditors meeting to vote on the arrangement shall be scheduled within 12 months from the date of the opening of the proceedings.
4. In terms of intercreditor dynamics, where does the balance of power lie as between shareholders and creditors, and as between senior lenders and junior/mezzanine lenders? In particular, how do valuation disputes between different stakeholders tend to play out?
Relationships between various classes of creditors, including senior lenders, mezzanine/junior lenders and the shareholders are often governed by intercreditor agreements. Under Polish law, however, such contractual arrangements might not necessarily be given effect within bankruptcy proceedings.
As long as the bankrupt borrower has assets and the centre of main interest (COMI) in Poland, Polish Bankruptcy Law will govern the manner and sequence of satisfaction of creditors and the ranking of claims towards the bankrupt. As a rule, creditors' receivables towards a bankrupt will be divided into four classes and creditors with receivables in a lower ranking category may not be satisfied before all receivables in the higher ranking category have been satisfied in full. Within each category, each receivable is satisfied pro rata to the total value of receivables listed in such category (for more details regarding that aspect, please see our response to question 3 above).
Hitherto practice shows that Polish bankruptcy courts and relevant bankruptcy officers are rather reluctant to give effect to contractual ranking of claims established under relevant intercreditor arrangements (irrespective of law governing such arrangements). Consequently, the position of a given creditor in the bankruptcy proceedings depends really on the ranking of security held by that creditor. Secured creditors holding in rem security interest against the bankrupt enjoying highest ranking will have the right of priority in satisfaction from the bankrupt’s assets.
In terms of balance of powers and the valuation disputes between different stakeholders, it has to be noted that in Poland equity investors and/or founders are rather attached to the companies that they own, and it is quite difficult for them to comprehend that in a distressed situation their equity may need to be decreased, or in certain instances even reduced to zero, in order to at least partially satisfy third party unsecured and/or secured lenders who’s claims rank ahead of equity. These situations often lead to failure of pre-insolvency negotiations aimed at debt restructuring, and it is often the case that equity holders prefer to put their companies into bankruptcy than to accept voluntary loss or decrease of their equity stake and to willingly consent to satisfaction (even partial) of senior and/or junior lenders.
5. Have there been any changes in the capital structures of companies based in your jurisdiction over recent years caused by the retreat of banks from loan origination? In particular, have you found that capital structures now increasingly comprise debt governed by different laws (such as New York law governed high yield bonds)? If so, how do you expect these changes to impact on restructurings in the future?
The retreat of banks from loan origination caused by the financial crisis contributed to considerable changes to the structure of financing Polish companies. Before the crisis, bank loan financing was the most common way of financing on the Polish market.
After the crisis, when the banks started to implement a more conservative approach to granting loans, bond financing became significantly more popular on the Polish market. According to the data of Fitch Polska S.A., there were more than 20,000 of bonds issues conducted by Polish companies in 2014 compared to less than 3,000 issuances in 2008. At the end of October 2015, the whole market of corporate bonds amounted to 62.6 billion zlotys (approximately 14 billion euro). The main purchasers of debt securities are banks and corporations, whereas investment funds and pension funds were less active on the bond market in the last few years, although, recently, more and more investment funds are starting to invest in Polish corporate bonds. It is also worth noting that in June 2015 a new law on bonds came into effect. It was a long expected novelty to the hitherto old and outdated law and it is expected that this reform will have a positive effect on the growth of corporate bonds issues in the coming years. Apart from corporate bonds, high yield bonds are currently also quite a popular form of financing used by Polish corporations with high enough financial needs. This is due to less stringent covenants than those used in loan documentation and the fact that Polish bond market is often too small to successfully place high volumes of bonds.
Unitranche financing is also becoming visible on the Polish market, but it is not as popular as bank loans or bond issues and the market for this type of financing is at a rather early stage of development.
6. Is there significant activity on the part of distressed debt funds in your jurisdiction? How successful have they been in entering the market, and how much has market practice (or law) evolved in response? If funds have not successfully entered the market, can you identify reasons why?
Although Polish banks have relatively low NPL ratio compared to other banks in Central Europe, which is due to a relatively good quality of loan portfolio, Poland has the most developed debt sales market in the region. Still, compared to the countries of Western Europe, the banks are quite reluctant to sell their NPL portfolios mainly because of the differences between the buyers’ and the sellers’ pricing expectations.
It is important to note that, nowadays, Polish regulations are generally favourable for the market of distressed receivables, as the debtor’s consent is generally not required for the sale of receivables and the banks can be relieved from their banking secrecy in relation to such sales under certain conditions. Additionally, among available structures, investors are not necessarily required to be licensed as financial institutions.
The most popular structures for the purposes of NPL transactions are sales to so-called “securitisation funds” which is mostly driven by certain tax preferences that the banks enjoy if they sell NPLs to such funds. Such funds outsource the services related to the purchased receivables, such as debt collection. Certain issues may be encountered with respect to the sale of receivables under mortgage loans or secured with registered pledge due to the time and costs required for the transfer of such receivables (in particular relating to the necessity of changing entries in applicable registers). Therefore, sub-participation agreements with securitisation funds are sometimes used whereby the bank commits to transfer all the proceeds from collecting the receivables to the fund but the receivables remain with the bank and the legal and organisational obstacles relating to enforcement of security may be avoided.
It is also important to mention that the majority of NPLs sold on the Polish market are consumer NPL portfolios. Other types of loan portfolios, such as corporate or mortgage loan portfolios are traded less often because of various legal, tax and operational issues such as, in particular, the obstacles related with changing entries in registers of security interests mentioned above. Looking at issues that can sometimes put off the distressed debt funds from acquiring mortgage loans portfolios, one such issue that can be mentioned is the inability to seize the title to the property encumbered with a mortgage (though credit bidding is allowed in court enforcement processes).
7. Are there any unusual features of your insolvency or restructuring law that an external investor should be aware of (such as equitable subordination, or substantive consolidation)?
Polish law does not allow for substantive consolidation, nor any other form of piercing the corporate veil. However, the shareholders of entities with a centre of main interest in Poland should take into account certain provisions of law which may limit the possibility of satisfaction of their claims. Until the 2015 reform, a loan granted by a shareholder to a limited liability or a joint stock company subsequently declared bankrupt was treated as a contribution of the shareholder to the company, provided that the loan agreement had been entered into within two years before the date on which the motion for bankruptcy of the company was filed. Consequently, the shareholders were deprived of the right to claim the repayment of the loan within the bankruptcy proceedings.
Since 1 January 2016, such a loan will not be treated as a shareholder’s contribution within the bankruptcy proceedings, but will be included in the last (fourth) category of claims. At the same time, generally, claims of a shareholder under actions of a similar effect to a loan (such as a sale of goods with a deferred payment deadline) shall also be included in such last category of satisfaction. Moreover, these rules shall also apply to loans granted to the bankrupt and transactions carried out with the bankrupt by a majority shareholder of a direct shareholder of the bankrupt. However, the law provides certain exemptions from these rules. Most importantly, claims of shareholders who hold less than 10% of the votes at a shareholders’ meeting of the bankrupt will not be relegated to the fourth category of claims, unless such shareholders are members of the governing bodies of the bankrupt or are its shadow directors.
The 2015 reform also introduced pre-packaged bankruptcy proceedings to the Polish legal system. Since 1 January 2016, a motion for bankruptcy may be accompanied by a motion for approval of the terms of sale of the debtor’s enterprise, a part of its enterprise or a substantial part of its assets. If the court considers that the sale would lead to satisfaction of the creditors to a greater degree than an ordinary sale within the bankruptcy proceedings, the court shall approve such sale when opening the proceedings. Unless, the terms of sale approved by the court provided otherwise, the sale agreement shall be executed by the purchaser and the court trustee within 30 days as of the date of approval of such terms by the court. Provided that the purchase price is deposited with the court, the assets may be handed over to the buyer on the date following the opening of the proceedings.
8. Are there any proposals for reform of the legal framework that governs insolvency and restructurings in your jurisdiction?
Since 2016 is the year of entry into force of the ground-breaking Polish insolvency and restructuring reform, almost everything is new. The crucial thing to observe is when and how the system (e.g. the courts, judges, restructuring advisors, debtors, financial institutions as main creditors and other stakeholders) will adapt to the new legal and institutional environment. A key element in this regard will be the pace of launching the online platform where all fundamental information about pending restructuring and insolvency proceedings should be accessible.
9. If it was up to you, what changes would you make?
In fact, the mentality of people changes slower than the legal environment. Therefore, bearing in mind the reform of the insolvency and restructuring law, we would like to create a clear mechanism to motivate bankruptcy judges to be more open for semi-formal hearings, which would enable debtors and creditors (and their respective advisors) to present their opinion in an open and result-focused manner. Another important issue from the point of view of past experience would be, on the one hand, to review the list of court valuers with the aim of choosing the most experienced and business-focused among them, and on the other, to incentivise judges to approve a valuer if the debtor and the main creditors (i.e. the council of creditors) are of the same opinion with regard to the choice of such person (firm) for that role.
The authors would like to thank Klaudia Frątczak-Kospin, a member of M&A and Insolvency & Restructuring teams, and Piotr Grabarczyk, a member of the Banking & Finance and M&A teams, of WKB Wierciński, Kwieciński, Baehr Sp.k. for their valuable contribution to the preparation of this chapter.