Poland’s Parliament (the Sejm, the lower House of Parliament) is close to passage of an extraordinary debtor restructuring relief law as part of its fourth COVID-19 crisis legislation.
The measure, referred to as Shield Law 4.0 (Tarcza 4.0) would:
- Create a “simplified restructuring proceeding” that would permit any debtor to commence this proceeding if faced with the risk of insolvency, understood as a 3-month delay in meeting payment obligations, even if this has nothing to do with the effect of the pandemic;
- Create an automatic 4-month moratorium (in U.S. parlance, an “automatic stay”) on enforcement actions and executions, simply upon the debtor’s announcement, without any judicial action – the current restructuring law has no such automatic provision;
- Permit restructuring of all secured debt, so long as the new payment terms provided that such creditors would receive 100% of their obligations at some (later) future date, with a potential cram down if they object to the revised payment terms;
- Limit the role of the court to hearing motions to lift the automatic moratorium for cause, to approve the arrangement plan following creditors’ voting, or to dismiss the proceeding if 4 months have elapsed without a motion to approve the arrangement;
- Have the proceeding run by a licensed restructuring advisor (of which there are approximately 1400 in Poland) who has been contracted by the debtor. This advisor formally acts as an arrangement supervisor, who works with the debtor to prepare a list of creditors, collects and counts votes in favor of a plan, and determines whether it has been accepted;
- Limit the debtor to managing its ordinary business affairs; any decisions out of the ordinary could only be taken with the supervisor’s consent. The role of any creditors’ committee is effectively eliminated;
- Set a deadline for commencing simplified restructuring proceedings of 30th June 2021.
Under current law, a debtor can choose between four types of restructuring proceedings under the Polish Restructuring Law: proceedings for the approval of an arrangement, accelerated arrangement proceedings, regular arrangement proceedings, and remedial proceedings. Each type of proceeding offers a different level of protection against creditors’ actions linked with a different level of restrictions on a debtor’s management of its assets. The currently available proceedings have been underutilized and criticized as inefficient even before the pandemic. It is feared that the expected wave of insolvency and restructuring filings as a result of the COVID-19 financial shock will overwhelm this creaking system at great economic cost. Consequently, various proposals for more efficient restructuring proceedings have been discussed.
Currently, the least formalized type of restructuring proceedings are proceedings for the approval of an arrangement. In it, before the proceeding opens, the debtor enters into an agreement with a restructuring advisor, proposes an arrangement and collects the votes of creditors. The role of the court is limited to the decision on the approval of the arrangement approved by the creditors. During these negotiations of an arrangement and collecting the votes, a debtor has no special protection against creditors’ actions, which only apply for the short period between the time the court approves the arrangement and the time such decision becomes final. Due to this lack of a moratorium, this type of proceeding is almost never used.
Shield Law 4.0 would materially change these rules for approval of an arrangement by “simplifying” them in an attempt to make the procedure more attractive to debtors. However, the “simplification” appears to create few, if any, real incentives for creditors to agree arrangements with debtors.
First and foremost, a debtor who entered into an agreement with a restructuring advisor, can publish in the Official Gazette (Monitor Sądowy i Gospodarczy) information on commencement of the simplified proceeding. From this moment of publication a 4-month moratorium applies to enforcement actions; in particular, enforcement actions commenced before the opening of such proceedings are suspended by operation of law and new enforcement actions and temporary security judgments are prohibited. Second, from such date until approval of the arrangement or termination of the proceeding, the debtor’s voluntary repayment of debts to be covered by the arrangement is prohibited (with certain exceptions applicable to netting and setoff). Third, from such date a lessee cannot terminate a lease agreement of the real estate or premises where the debtor conducts its business operations, unless the basis for such termination is the failure by the debtor to perform obligations which are not covered by the arrangement or other circumstance set forth in the agreement, if they arose after the opening of proceedings. Fourth, the same rule applies to loan agreements with respect to funds made available to a borrower prior to the opening of the proceedings, leasing agreements, property insurance agreements, bank account agreements, guarantee agreements and contracts covering the licenses granted to the debtor, as well as guarantees or letters of credit. The moratorium on the enforcement actions and other restrictions listed above can be lifted by the court upon the motion of a debtor, a restructuring advisor or a creditor in case such moratorium leads to the detriment of creditors.
Extraordinarily, these rules would also apply to secured creditors. Ordinarily, secured claims can only be included in an arrangement or plan with the creditor’s consent. In the simplified procedure, such consent to inclusion would not be required. The proposed arrangement can provide for any new repayment schedule for secured loans, so long as the new repayment schedule provides for eventual full repayment of the principal debt, interest and other ancillary claims, or the proposed repayment level is not less than could have been obtained from enforcement of collateral. In such case secured creditors could be treated as a separate group and would have the right to vote to approve the arrangement, but if they failed to consent, the debtor could seek to cram down the arrangement on the grounds that they would be satisfied to at least the same extent as in a bankruptcy proceeding.
From the date of the opening of the proceeding the debtor’s management of its assets is limited to ordinary management, and any actions exceeding such scope require the consent of the restructuring advisor.
A debtor can only apply once to use the simplified restructuring proceeding. If a motion for approval of an arrangement is not filed with a court within 4 months from the opening of the proceeding, the proceeding is cancelled by operation of law. No change is made to the votes required to approve an arrangement – this remains at least a majority of those voting, and 2/3 of the eligible debt amount, of each class of creditors.
Simplified restructuring proceedings would have to be commenced by 30 June 2021, which is asserted to be the anticipated period through which businesses would be affected by the pandemic. However, no proof of such effect is required to commence the proceeding. This date also corresponds with the deadline for the transposition of Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency). The full implementation of such Directive will require more comprehensive amendments to the Polish Restructuring Law, and Shield Law 4.0 is not intended as such a transposition.
Poland has already enacted COVID-19 Shield Laws 1.0, 2.0 and 3.0, which introduced anti-crisis measures in response to the pandemic. As with these Shield Laws, Shield Law 4.0 encompasses a very broad variety of measures, including the ability of consumers with mortgage loans or secured loans who have been financially affected by the pandemic to apply for forgiveness of three months’ of interest on their loans. Combined with the simplified restructuring procedure and other provisions, Shield Law 4.0 is strongly opposed by Polish banks. Separately, new regulations that would require review of many foreign investments from outside EU/EEA jurisdictions also raise concerns.
It is very unclear what the simplified restructuring procedure would accomplish to incentivize creditors to accept a proposed arrangement. However, the new procedure appears to provide troubled debtors with an extraordinary incentive to extend the payment terms of secured debt. Debtors could attempt to use these proceedings simply to change these payment terms without changing the terms for unsecured creditors, because if approval of unsecured creditors is not obtained a cram down of secured creditors could be tried. In opening such a proceeding, a debtor would benefit from the automatic moratorium, but if it fails to obtain consent within the 4 months, it is left with little option other than to commence an alternative restructuring proceeding or file for bankruptcy. Other proposals to help troubled debtors in the post-pandemic environment that are being discussed but are not yet before Parliament include measures for much more robust debtor assistance and encouragement to work with secured creditors – not just the benefit to debtors of an automatic moratorium.
Nevertheless, in enacting COVID-19 Shield Laws 1.0, 2.0 and 3.0 the Polish government showed that it was determined to act very quickly. In the case of Shield Law 4.0, the legislation had its first reading on 27th May, and is expected to be passed by Parliament on 3rd June, after which it would be subject to Senate review (but inability to block the legislation), and upon final approval and Presidential signature would take effect one day after publication. This could come as early as mid-June.