Here and there one hears about corporate restructuring and judicial or resolution restructuring. Restructuring is regarded with apprehension by some. In particular, by banks demanding ever higher collateral after learning that their client is restructuring. By others, however, it is seen as a necessity in order to be able to continue to grow their business and successfully avoid the spectre of bankruptcy. What is the difference between these two types of transformation? What are the objectives and rationale for each restructuring of the company?
I will explain this in the article, paying particular attention to the issue of judicial restructuring, as it will be the protagonist of today's post.
Restructuring - reshaping, transforming, modifying
Corporate restructuring is another way of modifying a company. It involves taking steps to expand or reduce a company's core business. It is also a fundamental change to its assets or financial structure. (Marek Pawlak, Roczniki Ekonomii i Zarządzania Tom II/2010).
Corporate restructuring will include:
- Mergers, i.e. mergers of companies, only one of which will retain its legal existence,
- consolidations i.e. the merger of two or more companies into a completely new company,
- purchase shares in a company, in another company, or in certain assets of another company, e.g. a production facility,
- business creation (subsidiaries) from the parent company by transferring assets from the parent company to the daughter company.
The rapidly changing economic environment (increasing competitiveness, counterparties' expectations, changing legislation), makes it necessary to continuously adapt the needs and objectives of businesses to market realities. Hence, owners and management often decide to restructure their business. Sometimes this is necessary in order to maintain their market position or to expand into new markets. Restructuring is also a tool for companies to protect themselves from bankruptcy. This is the role of restructuring that I would like to address in today's article.
Judicial restructuring of a company
This is a type of corporate resolution restructuring. Here, the court acts as an entity overseeing its proper course. Judicial restructuring involves making changes to a company that is insolvent or at risk of insolvency. The aim is to avoid the need to file for bankruptcy. The entire process is carried out while respecting the claims of creditors.
When we speak of judicial restructuring, we mean, depending on the type of proceedings, a 'cure' modification of both:
- in the company's organisational structure (restructuring of employment, improving the profitability of existing departments),
- as well as in company finances (restructuring of debt, company assets, capital).
Restructuring proceedings are regulated by the current Act of 15 May 2015. Restructuring Law (entering into force on 01.01.2016). In the Act, we will find, among other things, the prerequisites for the initiation of proceedings, the types of proceedings and the applicable procedures.
The Act introduces 4 types of restructuring proceedings:
- proceedings to approve the arrangement,
- accelerated arrangement procedure,
- arrangement proceedings,
- sanitation proceedings.
Attention!
From 2021, entrepreneurs can also opt for the so-called simplified restructuring procedure, which you will read about in this blog post: Restructuring in an era of pandemics
The element common to all proceedings is the arrangement. This is an agreement between the debtor and its creditors to restructure its liabilities. What differs between the mentioned types of proceedings are:
- the course of the procedure,
- the rules governing the administration of assets forming part of the restructuring estate, and
- the way in which other parties intervene in the operation of the company under restructuring.
Who can restructure?
The subject of the proceedings may be:
- Entrepreneurs understood as natural persons (conducting business activity), legal persons (limited liability companies, joint stock companies) or organisational units to which the legislator grants legal capacity (e.g. general partnership, partnership, limited partnership, limited joint-stock partnership, housing community, ordinary association), conducting business or professional activity in their own name - also partners in a civil partnership,
- Limited liability companies and joint stock companies with no business activity,
- Partners of commercial partnerships liable for the company's obligations without limitation with all their assets (partners of a general partnership, general partners of a limited partnership and limited joint-stock partnership),
- Partners in a partnership.
A condition for the court to open restructuring proceedings is insolvency or the threat of insolvency.
A debtor is insolvent if he has lost the ability to fulfil his due monetary obligations or if he is delayed in the fulfilment of these obligations for more than three months. If the debtor is a legal person or an unincorporated entity to which a separate act confers legal capacity, the debtor is also insolvent when its monetary obligations exceed the value of its assets and this state of affairs persists for a period exceeding 24 months.
A debtor at risk of insolvency is an entity whose financial position indicates that it may become insolvent in the near future. In doing so, the threat is assumed to start shortly before insolvency.
Proceedings for approval of the arrangement
This is the least intrusive procedure in the sphere of economic activity of an entity that is insolvent or at risk of insolvency. It is dedicated to entrepreneurs whose sum of disputed claims entitling them to vote on the arrangement does not exceed 15% of the sum of claims entitling them to vote on the arrangement. The procedure involves collecting votes among creditors under proposals for an arrangement on debt restructuring, which are then approved by the court. The debtor is obliged to conclude an agreement to supervise the proceedings with a restructuring advisor. The court's action here is limited only to issuing a decision on the approval of the arrangement within two weeks from the date of submission of the application for its approval.
Restructuring of a company under an accelerated arrangement procedure
This is a type of procedure used by many indebted entrepreneurs. Mainly because of the accelerated course and the very high degree of informalisation. However, not all debtors can take advantage of it. As in the procedure for approval of an arrangement, accelerated arrangement proceedings may be carried out if the sum of disputed claims entitling to vote on the arrangement does not exceed 15% of the sum of claims entitling to vote on the arrangement.
The court shall, within one week, issue an order to open the accelerated procedure or to refuse to open it. The court shall inform the debtor, the court supervisor, the relevant Tax Administration Chamber, ZUS, as well as the enforcement authorities where the enforcement proceedings are pending - if these are known to the court - of the opening. The court shall also appoint a court supervisor and a commissioner judge.
In the accelerated arrangement procedure, the debtor manages the business itself. The exception to this is if he himself has violated the law in his management resulting in:
- harm to creditors or
- the possibility of such harm in the future, and
- when his or her management does not guarantee the implementation of the arrangement.
Of course, in the event of failure to comply with the instructions of the judge-commissioner or court supervisor, there is also the fear of the court appointing an administrator for the restructuring mass.
All enforcement proceedings on a claim that is part of the arrangement conducted prior to the commencement of the accelerated proceedings shall be suspended. In turn, the commencement of new proceedings after the date of the opening of the proceedings is not permitted. It is worth noting that the opening of the accelerated arrangement proceedings does not preclude creditors from initiating court, administrative, administrative and arbitration proceedings to enforce the claims subject to inclusion in the list of claims.
An indispensable element of the procedure is the need to prepare a restructuring plan and an inventory of claims, including disputed claims. Once the documents are delivered, the judge-commissioner convenes a creditors' meeting. There, by voting, a decision is taken on whether to accept the arrangement.
The accelerated arrangement procedure is intended for entrepreneurs who are facing an already difficult economic situation and bailiff executions, and the amount of outstanding debts is considerable.
Arrangement proceedings
Arrangement proceedings are provided for entrepreneurs whose total disputed claims entitling them to vote on the arrangement exceed 15% of the total claims entitling them to vote on the arrangement as opposed to the previous two proceedings.
The application for the opening of arrangement proceedings shall be heard within 2 weeks from the date of submission of the application. An exception is if the court decides to schedule a hearing. In this case, the deadline is 6 weeks.
In an arrangement procedure, a court supervisor shall be appointed. Within 30 days of the opening of the proceedings, he shall determine the composition of the composition estate. He shall do so in an inventory on the basis of the books kept by the debtor. The court supervisor is also responsible for drawing up the restructuring plan. The plan must take into account the restructuring proposals presented by the debtor and the inventory of receivables.
As in the accelerated procedure, the opening of the arrangement procedure does not exclude the possibility of creditors initiating proceedings to enforce the claims to be included in the list of claims. However, the costs of the proceedings shall be borne by the initiating party if there was no obstacle to the inclusion of the claim in its entirety in the list of claims.
Once the restructuring plan has been filed and the inventory of claims has been approved, the judge-commissioner shall set a date for a creditors' meeting to vote on the arrangement.
Arrangement proceedings are designed for indebted companies already involved in a number of contentious administrative, judicial and enforcement proceedings.
Restructuring of the company - sanitation proceedings
This type of proceeding is the only one among the restructuring proceedings that can be initiated not only by the debtor but also by its creditor. Moreover, it is a proceeding that can be initiated after creditors have failed to accept an arrangement in previous proceedings.
In sanction proceedings, the court obligatorily removes the debtor from the administration of the assets and transfers them to the administrator. The debtor is obliged to surrender to the administrator all its assets and documents relating to its business, assets and accounts, in particular its books of account, records kept for tax purposes and correspondence.
It is worth adding that the opening of the sanitation proceedings causes the expiry of the proxy and other powers of attorney granted by the debtor. From the moment the proceedings are opened, any powers of attorney may only be signed by the administrator.
Company restructuring - its course and effects
The initiation of sanction proceedings has a number of important consequences in the sphere of the debtor's obligations. In particular, with regard to reciprocal contracts, which may be terminated by the administrator. Following the opening of the sanitation proceedings, ineffective in relation to the sanitation mass are legal transactions, whether free of charge or against payment, by which the debtor disposed of its assets, if the value of the debtor's benefit exceeds to a significant extent the value of the benefit received by the debtor or reserved for the debtor or for a third party, made within one year prior to the date of filing the motion for the opening of the sanitation proceedings. The above shall also apply mutatis mutandis to court settlement, acknowledgement of a claim and waiver of a claim. The aim is, of course, to prevent acting to the detriment of creditors.
Sanction proceedings also have an effect on the employer-employee relationship. Employees in the event that employer sanction proceedings are initiated may be dismissed. This also applies to employees who are subject to special protection against dismissal, such as pregnant employees.
The administrator shall submit the restructuring plan and the list of claims to the judge-commissioner within a maximum of three months. The judge-commissioner shall convene a creditors' meeting to vote on the arrangement as soon as all or part of the restructuring plan to be implemented in the course of the sanitation proceedings has been implemented, but no later than within twelve months from the date of the opening of the sanitation proceedings. It is worth noting that in the course of the sanitation proceedings, with the consent of the judge-commissioner, the administrator may sell part of the debtor's assets included in the sanitation mass. Similarly to what a trustee may do in bankruptcy proceedings. The amount coming from the sale shall be used by the administrator for distribution among the creditors.
Especially for entrepreneurs in a major economic crisis, sanction proceedings are designed. In a situation where, in addition to finding a solution on the financial level, they additionally require changes to their organisational structure and operational activities.
Judicial (remedial) restructuring of a company. Summary
In the first half of 2018 alone, almost 500 entities took advantage of restructuring opportunities and this number is still growing (data source: Coface Report) This means that the possibilities for creditors to recover their debts in the course of ongoing restructurings have increased significantly compared to previous years. The Export Credit Insurance Corporation (ECC) estimates that the total number of insolvencies and restructurings should reach around 1,200 companies in 2019.
All the signs are that the rules governing judicial restructuring will not remain just dead provisions, as was the case with the earlier rules governing receivership and bankruptcy with composition agreements. Today, entrepreneurs have the right tools to ensure that, despite transient difficulties in settling debts, they do not go bankrupt, nullifying the achievements painstakingly built up sometimes over many years. Discussions with creditors about the difficult economic situation, a solid restructuring plan and an honest approach to repaying one's debts are probably the simplest and best solution to get out of a temporary impasse. Restructuring proceedings help to start the next - better - stage in the running and development of the business
If you have any questions, we invite you to leave them below in the comments or to contact the law firm directly. We will do our best to answer all your dilemmas related to this topic without delay.
