Covid-19 coronavirus: major update to the Polish anti-crisis shield for directors of stressed companies
10 April 2020
As reported, the Polish act counteracting the Covid-19 pandemic did not explicitly deal with bankruptcy and restructuring law.
This was an unfortunate omission because it created the risk of a director overreacting and promptly filing for insolvency filings to avoid any potential sanctions. However, the Polish Parliament has made amendments to the current legal package that are very welcome. Although the legislative process regarding these changes has not yet been formally completed, it is expected that the unaltered changes will enter into force within the coming days.
1. Statutory stay on obligation to file for bankruptcy
During Covid-19, there will be a statutory stay on the requirement to file for bankruptcy (similarly as in Germany and Spain). This should give companies under pressure “breathing space” to stabilise their situation and engage in restructuring discussions with creditors (including banks and suppliers).
However, the stay will not apply to all companies under pressure but will be limited to companies which have experienced financial problems due to Covid-19 coronavirus. For companies becoming insolvent regardless of the pandemic, the general deadline to file will apply. This means that, subject to various sanctions, a director of such company has a statutory duty to file for bankruptcy within 30 days of the company becoming insolvent; insolvency would be assumed if the company did not make at least two timely payments for more than three months.
On the face of it, the decision to exclude companies not affected by Covid-19 from the requirements to file for bankruptcy seems reasonable. The companies, which can become insolvent for other reasons (eg their business model was sub-standard, they overinvested or made fraudulent transactions) should not benefit from undue protection. Nevertheless, we expect there will be some degree of uncertainty over which financial problems are a consequence of the pandemic. Similarly, it will be challenging to determine whether the state of insolvency started during the pandemic, or earlier. All of these aspects will be assessed by the court on a case-by-case basis. If the company lost liquidity during the pandemic period, all courts will be obliged to assume that is was due to COVID-19 (unless proven otherwise during the relevant litigation).
2. Extended hardening periods
Due to a statutory stay on filing for bankruptcy, the hardening periods will be extended accordingly during the pandemic period. However, there seems a loophole in the wording of this regulation, as the extension will only apply if a relevant company files for its bankruptcy within 30 days after the pandemic ends and that the company became insolvent because of it.
Thus, we believe that the extension of the hardening period does not provide sufficient protection to creditors in an effective manner. Creditors do not control if and when their debtor will file for bankruptcy, ie whether the hardening periods will be ultimately extended. In practice, any creditor aware of fraudulent transactions should file for bankruptcy of a debtor without undue delay, regardless of the Covid-19 crisis. This is because, as a general rule, manifestly undervalued transactions and third-party security interest can be challenged by the Insolvency Administrator only if they were concluded within one year before a successful petition for bankruptcy was filed.
3. Priority to reviewing restructuring petitions
Under the adjusted regulation, petitions for initiating in-court restructuring proceedings will be treated as high priority matters. This will allow companies under pressure to obtain judicial protection from creditors’ enforcement. Given that Polish courts are operating at a restricted capacity, they are permitted to prioritise resolving urgent matters (as defined by the COVID-19 Act).
Nevertheless, the restructuring petitions are only a small percentage of items on the agenda of the insolvency courts. The courts also handle bankruptcy petitions (including pre-pack terms) and deal with ongoing bankruptcy and restructuring proceedings on a daily-basis (including approving the arrangement accepted by the majority of creditors). These remaining items, although significant, will not have priority under the COVID-19 Act.
However, the president of the relevant court may decide to treat an individual matter as urgent if a procedural delay causes either serious harm to public interest or material economic damage. We believe that this option should be used in cases of major insolvent businesses (eg public companies subject to remedial proceedings), but it is unlikely that this exception will be widely used. Consequently, all parties to the insolvency proceedings will need to wait for any new developments and should therefore expect further disruptions.
4. Out-of-court restructuring remains the preferred solution
In summary, amendments to the Polish COVID-19 Act contain encouraging measures concerning matters related to insolvency law. However, this provisional act does not cure any shortcomings of in-court restructuring. Therefore, out-of-court restructuring negotiations remain the most effective solution. It is the most flexible way for interested parties to work out an appropriate solution for any new situation caused by the Covid-19 pandemic.