Vol 2 (2005) - Issue 4

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EC Regulations in the Eastern Block: Successful Use in Rescuing an Insolvent Polish Business

The recent case of Parkside Flexibles SA (‘Parkside’) is a good example of how the EC Regulation on Insolvency can be used to facilitate the successful rescue of an insolvent business. It also gives some guidance to the extent to which the English courts will weigh up evidence that counteracts the presumption that a company has its Centre of Main Interests (‘CoMI’) at its registered office.
Parkside was registered in Poland and operated exclusively at a factory in Poland producing and selling flexible packaging, particularly food packaging, nappies and feminine hygiene products. Some 150 people were employed at the factory and it represented a valuable economic asset for the rural area in which it is based.

The company is the wholly owned subsidiary of an English company, Parkside International Limited (‘PIL’). Besides Parkside and PIL, there are three other companies within the same group, all registered in England and based at premises in Barnsley and Wakefield. In November and December 2004 we were appointed administrators of the English companies.

The group had invested heavily in Parkside, providing finance and equipping it with modern production lines. The company was loss making at the time of our appointment. The company’s operations were potentially very attractive to another operator wishing to establish a production facility in eastern Europe. Our first thoughts were to pursue a sale of the company’s shares so as to realise cash into the administration estate of the English parent. It soon became clear that the company was in dire financial difficulties – its Polish bank had frozen the overdraft facility and key suppliers were demanding cash on delivery. In the short term, the company’s management considered it needed a working capital injection of some EUR 1 million to continue trading. The company was clearly insolvent on a cash flow basis, although at book value it showed net assets of some EUR 8 million.

Our initial approach was to stabilise the company outside any formal insolvency proceeding: we made a significant cash advance from PIL and renegotiated with its Polish bankers to have the overdraft facilities reinstated for two months. We then conducted a short marketing campaign for the company. This resulted in five offers being received. Two serious offers were at a value sufficient to pay all creditors and deliver a significant return to shareholders. In both cases the interest was only to purchase the assets and business of the company rather than its shares. It became clear that due to the size of the business, any sale would have to be given clearance from the Polish government’s competition authority, a process expected to take up to two months. With the existing working capital spent and no prospect of further advances from the English administrations, we needed to examine the options for protecting the company from its creditors through a formal insolvency process.

Under EC Regulation on Insolvency the first step was to establish where the company’s CoMI was, so we knew in which jurisdiction to open main proceedings. This was not as straightforward as it might seem, as there were competing facts that supported both England and Poland. However, on balance, there was sufficient evidence supporting the CoMI being in England.

We knew that effecting such a transaction through an English administration process would be reasonably straightforward - the administrator once appointed could immediately contract to sell the business and assets for the best price and could continue to trade the company whilst competition clearances were obtained. The prospective purchasers understood the administration procedure and were happy to buy from an administrator. The Polish bank was prepared to extend funding to the administrators to fund the trading period. The administrators would, at a creditors meeting, have to get the agreement of the company’s creditors to their proposals; given the expected outcome of the administration was that all creditors would be paid in full, this was unlikely to cause any problems. However, this route would require proof that the CoMI was in England and it was thought to be the first time that a foreign insolvency regime had been applied to a Polish company under the EC Regulation.

Before heading down the administration route, we examined the options that were available under Polish insolvency law and took advice on these from Polish lawyers.