Restructuring: expedited voluntary arrangement proceedings at the time of covid-19 in Poland

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published on 1 April 2020 | reading time approx. 6 minutes

  

Bans on pursuing business activity in selected industries, introduced by means of Health Minister's regulations in connection with the state of epidemic emergency followed by the state of epidemic, are taking its toll on almost all enterprises in Poland. Owners of businesses which currently must be closed will have to figure out how to help their businesses stay afloat.

 

 

 

Restructuring proceedings – a lifebuoy

A significantly lower or no revenue as a result of the covid-19 pandemic, and at the same time the need to incur fixed costs will make many enterprises struggle financially, and others will be put at risk of losing financial liquidity. One of the solutions in such a case, apart from looking for alternative sources of income, is to try to negotiate with creditors. If there is more than one creditor, it is worth employing measures provided for in the restructuring law which, on the one hand, structure the enterprise recovery process, on the other hand secure its parties. The effects of the covid-19 pandemic are expected to be felt for at least a few more months (the period or 12 months often comes up) so it is worth considering restructuring in due advance, before you have to declare bankruptcy or liquidate your business. It is especially important at the time of the covid-19 pandemic as the processing time of applications for opening restructuring proceedings may take longer than usual because of the disrupted operations of courts, court experts and administrators. Furthermore, please remember that the laws currently in force do not allow online filing of such applications.

 
Out of four types of restructuring proceedings, approximately 2/3 of the applications filed with courts are applications for expedited voluntary arrangement proceedings (EVAP) and approximately a half of such proceedings ends in the arrangement approval. The high success rate of the EVAP does not come from nowhere. Its main advantages include less formalities, security and faster processing, which allows obtaining quick protection against creditors and making the financial situation more stable.

 

Less complicated applications

Like every official document, the application for opening EVAP must meet a number of formal requirements. This is lawyers’ job. Apart from the accounting and HR documentation, the business owner must only: 

  • prepare arrangement proposals along with the initial restructuring plan, 
  • make a list of creditors,
  • specify the total of receivables,
  • make a list of contested claims and specify their total worth.

  

The amounts which the business owner must have secured “just in case”, in particular at the time of the covid-19 pandemic, are: 

  • application fee (PLN 1,000),
  • costs of a flat advance for expenses in the amount of the average monthly remuneration in the enterprise sector without rewards paid from the profit in Q3 of the previous year, as published by the President of the Central Statistical Office.

 

And that is all that is necessary from the formal point of view to file an application for opening EVAP correctly.

 

Security

What is in it for the enterprise owner? First and foremost: security. In the course of the EVAP, during the restructuring the enterprise owner can still manage the enterprise being restructured. Of course, in some situations the court can revoke the debtor’s right to manage the enterprise and appoint an administrator. However, the assumption is to let the enterprise owner deal with the crisis himself. Additionally, on the date of the decision to open the EVAP the enterprise owner gains protection for the duration of the proceedings, in the form of: 

  • a ban on offsetting mutual claims,
  • no option for the landlord or lessor to terminate the rental agreement or lease of premises or real estate in which the debtor pursues his business activity, without consent of the creditors’ committee,
  • suspension by law of enforcement proceedings initiated before the EVAP opening date,
  • limitation of enforcement against a secured item to that item only.

  

Furthermore, in the decision to open the EVAP the court appoints an administrator, that is an expert lawyer being also a licensed restructuring advisor whose role is to professionally support the enterprise owner in the restructuring process. On behalf of the enterprise the administrator will: 

  • notify the creditors of opening the restructuring proceedings,
  • prepare the restructuring plan and the list of receivables,
  • prepare the list of contested claims,
  • evaluate the arrangement proposals and advise as to whether and how to change them so that they are legitimate and effective,
  • take actions to ensure that the creditors cast as many valid votes as possible,
  • attend the meeting of the creditors’ committee and support the enterprise owner during that meeting,
  • files with the court an opinion on the feasibility of the arrangement.

 

Processing time

The greatest advantage of the EVAP is its quick course, which is supposed to let the enterprise owner to quickly conclude an arrangement with the creditors. The court has 7 days for considering the application for EVAP. However, in practice it takes from 2 to 3 weeks. The administrator files with the court the restructuring plan, the list of receivables and the list of contested claims within 14 days of opening the EVAP. Immediately after that, the judge-commissioner sets the date of creditors’ committee meeting and voting on the arrangement. In the meantime, creditors may file objections as to the list of receivables. After voting, the administrator immediately submits the arrangement voted through to the court which then, not earlier than a week after the end of the creditors’ committee meeting, sets the date of the court session to approve the arrangement. All that should take place within approximately three months of the date of filing the application for EVAP.

 
If as a result of the covid-19 pandemic commercial courts get snowed under with applications for EVAP, it will be necessary to hire more court staff. The Ministry of Justice should closely collaborate in this respect with the heads of courts which have bankruptcy and restructuring departments as part of their commercial divisions. Of course, all that will be possible only if courts resume their normal course of work from before the pandemic.

 

How to prepare for opening restructuring proceedings

First and foremost, it needs to be emphasised that restructuring proceedings require actions in due advance, in particular commencing talks with contractors and employees about the planned actions. Transparent cooperation with these two groups is a key for a successful restructuring process. The next step is developing a restructuring plan and determining which areas of the enterprise needs changing and what and how to change it. In practice it is becoming more and more important to develop the so-called rehabilitation plan and present it to the bank or to other creditors from the financial sector. The plan must be legitimate enough to let the interested parties conclude that despite temporary difficulties the borrower will regain his creditworthiness.

 
The feasibility of regaining the creditworthiness should be proven with true and accurate financial forecasts which will describe both the methodological aspects (e.g. assumptions as to the inflation, interest rate, prices of raw materials etc.) and the financial forecasts aligned with them, at least until the point when revenue equals expenses. It needs to be remembered that in practice the most difficult element at the stage of development of the restructuring plan may turn out to be ensuring the financing in the interim period, i.e. between the acceptance of the arrangement proposals by the creditors and the achievement of a surplus of positive cash flows from day-to-day business activity. Without safeguarding the access to the working capital in the interim period even the best restructuring plan might turn out unsuccessful.

 

How to talk to the creditors

Negotiations with the creditors is a different story. In practice, enterprise owners deal with various groups of creditors which can be divided into the public sector and private creditors. In case of a sudden and unforeseeable event, like covid-19 epidemic, negotiations with public law creditors may be easier because they might be interested in providing support in an emergency situation. Private creditors, in turn, may fear the loss of liquidity themselves, so convincing them to approve the presented restructuring proposals will sometimes require presenting two or more scenarios showing e.g. what will happen if no steps are taken, if one or two restructuring scenarios are implemented and if the enterprise closes down. The presentation of several alternative scenarios may convince a private creditor that if no restructuring plan is implemented, he may rather lose than gain.

 

Independent consultants

Developing a viable restructuring plan requires an effective combination of knowledge of different areas of law. It involves a combination of the knowledge of law, enterprise management and financial forecasting. In the case of EVAP, there is no need to disclose the financing sources for the proceedings and the liabilities which occurred after the proceedings are opened at the stage of filing the application. However, it is the creditors who decide whether or not to accept the arrangement proposal and they must be convinced that it will be possible to pay the due amounts. To carry out the entire process effectively it may turn out necessary to collaborate with specialists who will support the enterprise in the restructuring process in the areas that need it most.

 
EVAP may turn out to be a good solution which will help the enterprise get back on track, in particular when it comes to micro and small enterprises with an uncomplicated debt structure. A more favourable scenario for all the stakeholders is to keep the enterprise running rather than let it go bankrupt and close down. Therefore, if the situation is uncertain, it is worth preparing in due advance for using the opportunities that the EVAP gives.

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