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Restructuring is a way to reshape a business entity’s portfolio of obligations without closing and liquidating the business. By entering into an arrangement with creditors, the debtor commits to repay debts or their portions but has a chance to preserve their assets. Are restructuring proceedings equally advantageous from the creditor’s perspective, and what should they keep in mind?

Initiating restructuring proceedings – who can do it and when?

The primary goal of each of the four variants of restructuring proceedings is to avoid declaring the debtor bankrupt. While in the case of bankruptcy proceedings, both the debtor and any of their creditors can file a petition to initiate the proceedings. The right to file a restructuring petition is generally reserved for the debtor, per Article 7 of the Restructuring Law. An exception to this rule is the remedial proceedings, where, according to Article 283 of the Restructuring Law Act of May 15, 2015 (hereinafter referred to as the ‘Act’), the following entities can also initiate proceedings:

  • A curator appointed under Article 42 of the Civil Code.
  • A personal creditor regarding an insolvent legal entity.

The prerequisites allowing the debtor to file a petition to initiate restructuring proceedings are defined in Article – they encompass both insolvency and the risk of its occurrence in the near future.

Insolvency of the debtor is determined by criteria outlined in the bankruptcy law, primarily the inability to meet due monetary obligations. A presumption arises when the delay in fulfilling a monetary obligation exceeds 3 months.

In the case of legal entities and organizational units, insolvency occurs when obligations exceed the value of assets, and this state persists for more than 24 months. Simultaneously, it is considered that such a state exists when obligations, excluding:

  • Reserves for liabilities,
  • Liabilities to related entities,

exceed the value of assets for a period longer than indicated above.

In some situations, restructuring proceedings can be employed not only to restore a company but also as a means of protection against creditor claims. Can business owners truly use the restructuring procedure to evade their debts? What impact does restructuring have on legal proceedings that had already been initiated?

General effects of entering into an arrangement

According to Article 166 of the Restructuring Law Act, an arrangement binds all creditors whose claims have been included in the arrangement as per the provisions of the law. It in no way infringes upon the rights of a creditor who can still enforce their claim secured by a limited property right such as:

  • Mortgage,
  • Ordinary or registered pledge (lien),
  • Treasury pledge,
  • Maritime mortgage.

If a limited property right has been established on the debtor’s assets, the secured creditor may exercise their rights in full unless the entitled party agrees to include the secured claim in the arrangement. In such a situation, the scope of satisfaction is determined by the arrangement negotiated between the creditor and the debtors.

Upon the effective date of the court’s decision approving the arrangement, security, and enforcement proceedings relating to the assets covered by the arrangement are suspended. A creditor may consent to pursue these proceedings for claims not covered by the arrangement. It is also possible to lift the account seizure if necessary for the ongoing operation of the business.

The effects of restructuring should be analyzed separately for each type of proceeding.

Effects of arrangement approval proceedings

The arrangement approval proceedings are the least restrictive among the procedures and are characterized by minimal court interference in the relationship between creditors and the debtor. The main effects are defined by Article 226e of the Restructuring Law Act, which requires the appropriate application of Articles 256 and 312 of the Act, namely:

  • Prohibition of terminating lease agreements and tenancies of premises or real property where the debtor conducts its business without the consent of the creditors’ council.
  • Prohibition of terminating agreements of fundamental importance for the debtor’s business operations, including credit agreements, leasing, property insurance, bank account agreements, guarantees, licenses, warranties, and letters of credit.
  • Suspension of ongoing enforcement proceedings.

Such protection lasts 4 months with the possibility of extension until the day of finalization of the proceedings, approval of the arrangement, or conclusion of the proceedings, provided that an application for arrangement approval is submitted within the specified timeframe.

Effects of accelerated composition proceedings

Article 246 of the Restructuring Law Act imposes a prohibition on encumbering assets with limited property rights in the context of accelerated composition proceedings. Security cannot be established for claims that arose prior to the initiation of accelerated composition proceedings.

It’s important to note that the restrictions on establishing limited property rights do not apply if an application for the registration of a right (e.g., a mortgage) was submitted at least 6 months before the date of filing the application to initiate restructuring proceedings.

The limitations on agreements also involve the elimination of the possibility of introducing clauses into contracts that:

  • Reserve changes or termination of legal relationships in the event of an application for the opening of accelerated proceedings or the opening of such proceedings.
  • Prevent or hinder the achievement of the composition’s goal (e.g., by including a provision for the reversion of ownership in the event of proceedings involving the debtor).

Additionally, the debtor and the administrator may not fulfill obligations arising from claims covered by the arrangement until the conclusion of the proceedings or the finality of the decision to conclude it. Such provisions aim to stabilize legal relationships during the restructuring period. On one hand, they allow the debtor to maintain their assets and sources of income until the conclusion of the restructuring. On the other hand, they protect creditors from changes in the debtor’s financial situation that could impede the satisfaction of their claims covered by the composition.

Restrictions on terminating agreements of fundamental importance to the business, as specified in Article 256 of the Restructuring Law Act, also apply to accelerated arrangement proceedings.

The provisions regarding accelerated proceedings also introduce limitations on setting off claims between the debtor and the creditor. This is not possible when the creditor:

  • Became a debtor of their debtor after the opening of the proceedings.
  • As a debtor of their debtor, became their creditor by acquiring a claim that arose before the opening of the proceedings.

Any statement of setting off should be made within 30 days from the date of opening the proceedings or if the basis for offsetting arises later, from the date of the establishment of that basis.

The initiation of restructuring does not preclude the simultaneous initiation of judicial, administrative, judicial-administrative, and alternative dispute resolution proceedings, provided that they aim to enforce claims included in the list of creditors. However, as per Article 259(3) of the Act, there is no possibility of initiating enforcement proceedings and executing a security order.

In other words, a creditor has the possibility to obtain an enforceable title, although they cannot demand enforcement through a bailiff based on that title. Execution is permissible only regarding assets secured by limited property rights and only from the specific asset on which the security was established.

It is also essential for creditors to note that the provisions allow for the suspension of enforcement proceedings concerning claims not covered by the arrangement, provided that the secured asset is crucial for the operation of the business. The duration of such suspension cannot exceed 3 months. The provisions allow filing a complaint against the decision of suspension by the creditor conducting the enforcement proceedings.

Effects of restructuring in arrangement proceedings

The regulations for accelerated arrangement proceedings largely overlap with those prescribed for regular arrangement proceedings, and Articles 238-256 of the Act apply accordingly to creditors. For creditors, this entails:

  • Limitations on terminating contracts.
  • Limitations on initiating proceedings and enforcing claims.

It’s worth noting that the legislator significantly restricts the debtor’s authority regarding substantive and dispositional acts carried out during the court process. Court supervision consent is required for:

  • Conclusion of an agreement.
  • Waiver of a claim.
  • Acknowledgment of a claim.
  • Admission of material facts relevant to the case.

Effects of remedial proceedings

Remedial proceedings involve the most extensive court intervention in the relationship between creditors and debtors. In this case, limitations regarding the termination of contracts of essential importance to the business and the initiation of proceedings and enforcement of claims apply.

Additionally, under Article 298 of the Restructuring Law Act, the administrator can withdraw from reciprocal agreements under certain conditions. Both the creditor and the other party to the agreement can lodge an objection to such withdrawal. When deciding to withdraw, the administrator should consider, among other things, the purpose of the proceedings and, consequently, the interests of the creditors.

Remedial proceedings also dictate that an inheritance opened after the initiation of restructuring becomes part of the remedial estate and is considered accepted with inventory benefits. For creditors, this can represent an additional source of assets to satisfy their claims.

Restructuring proceedings significantly limit the debtor’s ability to manage their assets and interfere considerably with contracts they have entered into. However, they indirectly protect the debtor from creditors’ direct enforcement of debts, making it a temporary asset protection. Given the differences between the various restructuring procedures, seeking legal advice from a law firm is advisable before taking action. Experienced attorneys can help choose the appropriate procedure and negotiate agreements between the parties involved.

Questions and Answers

Yes, but according to Article 129(1)(1) of the Restructuring Law Act, permission from the creditors’ council in writing is required for this, under penalty of invalidity.

A contractual netting, as defined in the Act on Certain Types of Financial Collateral, allows for the immediate setting off or compensation of claims in the event of security enforcement. In principle, restructuring proceedings do not hinder its execution. However, one should always analyze the date of opening of the restructuring proceedings and the issuance of the decision to open such proceedings.

According to Articles 302 and 303 of the Restructuring Law Act, actions such as the sale or disposal of assets forming part of the inheritance and the rejection of the inheritance or windfall legacy do not have legal effect.