Vol 5 (2008) - Issue 2

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Distressed Asset Restructuring in Poland

Distressed asset management may not be a new phenomenon in Poland, but for various reasons it may be an activity that will attract new interest. In this article
we will look at the legal and economic environment surrounding the distressed market in Poland and the background to distressed assets related transactions.

Background

The mid-late 1990s in Poland saw the first wave of transactions that could be considered as management of distressed businesses. Some of the transactions
conducted in the 1990s or even the early 2000s have triggered processes which even today have not come to an end. Examples of such restructurings may be found
in the history of the Gdynia Shipyard, the insolvency proceedings of a leasing company Cliff, and the changes in the ownership structure of a computer company
Optimus. A number of reorganisations in the early days came in the aftermath in legal proceedings and disputes of various types such as claims for compensation,
proceedings resulting from changes in control exercised over a given company, or public prosecutors conducting investigations of transactions.

Later transactions were not immune from such types of problem and current restructurings of distressed businesses are also by definition potential targets for various challenges, which are in the worst case examples aimed at either invalidation of a restructuring transaction or a change of the terms of estructuring. A specific source of concern relates to restructurings of tate-owned distressed businesses, which are often subject to post-transaction checks.

The early 2000s saw the introduction of new legislation applicable to distressed asset restructurings, in particular the Commercial Companies Code (the 'CCC')
(2001) and the Bankruptcy and Recovery Law (the 'BRL') (2003), both of which have cleared some legal

concerns existing before that time and updated Polish legislation to the European regulations, but which at the same time have not been free of new problems for restructuring practitioners.

Legal environment

The BRL defines two grounds for declaration of insolvency.First, a company may be declared insolvent if it has stopped paying its current liabilities (i.e. cash flow insolvency) and second, even if its current liabilities are met, a filing should be made if the (current market) value of the company’s assets surpasses its total liabilities (i.e. over indebtedness). The definition of the
second ground for de claration of bankruptcy causes numerous practical problems as prima facie it is clear that when the provision refers to the term 'liabilities' it does not distinguish between conditional and unconditional
liabilities. An interpretation verbatim implies that all liabilities should be considered and taken into account, whereas clearly from a rational point
of view this does not make any sense, as any sort of long term financing would by definition be prohibited if the balance between all liabilities – including long term liabilities – and the value of (currently possessed) assets be abused. Clearly, this is one of the major hiccups of the definition of insolvency and even though the legislator has noticed the problem (in one of the Parliamentary drafts for amendment of the BRL provisions, the second ground for declaration of insolvency was deleted in full) in the current draft of the amended law this provision remains unchanged. A subsequent problem, which may be found when interpreting this provision, is whether to account for conditional liabilities
when summing up all liabilities. One possible approach suggested is to value conditional liabilities by making reference to market valuations on the terms
offered by financial players who would value such risk.