Debt-proof Shield – A New Mode of Restructuring

On 19th June, entrepreneurs in Poland received new, even stronger version of the so-called Shield, a legal instrument created to assist companies, businessmen and workers in tough times of COVID-19 pandemic. The new act, officially known as Act on supplements to bank credits of entrepreneurs influenced by COVID-19 and on simplified proceeding on confirmation of an arrangement in connection with COVID-19 (Ustawa o dopłatach do oprocentowania kredytów bankowych udzielanych przedsiębiorcom dotkniętym skutkami COVID-19 oraz o uproszczonym postępowaniu o zatwierdzenie układu w związku z wystąpieniem COVID-19, Dz.U. 2020, poz. 1086) contains a vast amount of new legal solutions for companies, but today we will focus on one of the most interesting of them – a simplified restructuring mode.

This solution is far from offering a completely new path – quite the opposite, it is supposed to be just a variant of a standard proceeding on confirmation of arrangement, available – according to the act – only until 30th June 2021.

Arrangement in time of COVID

Changes provided in the new act apply mostly to early phases of the whole procedure. Any debtor may, after concluding a contract on an overview of restructuring proceeding with a licenced restructuring advisor, publish a single notice in MSiG (Monitor Sądowy I Gospodarczy, official Polish journal for legal persons’ obligatory announcements) in which he announces commencement of a proceeding on confirmation of arrangement. That is where the most fundamental difference lies – starting from the day of the announcement, until the day the proceeding is either finished or discontinued, the debtor is protected just as debtors, that had their arrangements settled and confirmed by the court in a standard proceeding. As a result, creditors are in a way presented with a fait accompli. The debtor may unilaterally refrain from paying due charges related for example to leasing, with creditor being unable to undertake any legal action against him. This, however, is not the end of consequences.

Debtor well protected

Protection offered in the simplified procedure is largely identical to what debtors can expect in a standard proceeding. First and foremost, any bailiff enforcement or other similar debt collection procedure relating to debts included by law in the arrangement, as well as debts related to mortgage, ship mortgage, or resulting from a lien, must be discontinued and no such action can be undertaken as long as the proceeding lasts. It is important to properly understand the term of debts included by law in the arrangement, as mentioned above. This term includes all debts arisen before the day of commencement of the proceeding (i.e. the day of publication), interest rates starting from the day of publication, debts dependant on fulfilment of a condition, as long as it is fulfilled during the proceeding, as well as debts arising from mutual agreements – provided that service offered by the other party is divisible and only to the extent, to which it has been executed before the publication without a due service from the party undergoing restructuring. For example, debt resulting from a contract will be protected if a creditor has paid for service, but has not yet received it, or conversely, if he still waits for payment for his service. Debts arising after the day of publication are in general not protected at all, although interest rates related to them cannot be enforced either. According to the amendment, further consequences of commencement of proceeding include additionally:

-lack of right for the debtor to fulfil duties related to debts included in the arrangement,

-offsetting of claims between debtor and creditor is prohibited, unless the debt has been purchased as a result of debt repayment, for which the buyer was personally or financially responsible, and his responsibility for the debt has occurred before the debtor has filed for publication (keep in mind that this is, consequently, an earlier date than date of publication, mentioned as a border point in all other cases),

-it will be impossible to terminate any leasing contract unilaterally, just as it is impossible in a standard restructuring proceeding.

The law has therefore given all debtors a great opportunity to catch a breath during those tough times. After the publication virtually all existing debts become frozen – they can be neither executed by creditor, nor fulfilled by the debtor himself. Such safety measures for debtors might be particularly tempting with regards to overdue bank loan payments, overdue rent, or other overdue payments related to business transactions.

In the simplified proceeding debtors are able to “freeze” most of debt enforcement actions undertaken against them basically unilaterally. As a result, they gain time and safe resources which can be used for further works on the repayment arrangement. The lawmaker has, in the end, removed the most problematic obstacle in the traditional proceeding – vulnerability of a debtor during a process of establishing of the arrangement itself with all his creditors. While commencing the whole process, debtors do not have to provide any information on their current debts or any other detailed documents – all required data is listed in the amendment and consist of the most basic information about a debtor.

What is next?

The new proceeding is a countermeasure against drastic losses of entrepreneurs resulting from COVID-19 pandemic, that may quickly lead multiple businesses to bankruptcy. The simplified restructuring allows swift response to financial complications and effective protection against creditors. Consequently, the debtor has clearly better chances to survive the pandemic and return to financial prosperity afterwards. His main incentive to focus on restructuring is a 4-month deadline established by the amendment. That is how much time does the debtor have to succeed with the repayment arrangement and file for judicial acknowledgement of the arrangement in court. If he fails to meet the deadline, the whole proceeding will be discontinued by law, and he will have to launch a second, classic restructuring procedure. An entity undergoing simplified restructuring may also launch a sanative procedure – the most radical among restructuring tools offered by Polish law – if the repayment arrangement is rejected by the court or if the proceeding is discontinued after the arrangement is filed in court.

Interestingly enough, the repayment arrangement does not have to be agreed upon by a creditor, whose claim is to be fully repaid in accordance with the document. This enables the debtor to proceed the arrangement much faster.

All of the novelties mentioned above may be of concern to creditors, but they have been given a balanced countermeasure – either the debtor, the restructuring overseer or the debtor himself may file for repealing of all results of publication on commencement of arrangement procedure, provided that they cause harm to the creditors.

Further proceedings regarding the arrangement are largely identical with the classic procedure. An assembly of creditors, a body which can confirm the arrangement, may be held via internet, provided that certain technical requirements, such as creation of protocol of the meeting in an electronic form, are met. Most of online communicators are therefore perfectly suitable for this purpose.

During the restructuring procedure, debtors’ duties are limited to ordinary management activities. Any other action will require a consent of their respective restructuring overseers, which may be given up to 30 days after the action in question as well. The overseer should in principle limit activities of the debtor to the absolute minimum, allowing the debtor to resolve his debt issues and bear all costs related to restructuring.

Old law, old problems

In short, the classic proceeding on repayment arrangement is based on a contract between a debtor and an arrangement overseer (a certified restructuring advisor) and creation of the arrangement itself on a basis of debtor’s current financial situation. The next part of procedure is focused on financial safety of creditors, as it is their role to agree on the arrangement. The document needs to be acknowledged by at least half of creditors, representing at least 2/3 of all the debts related. As mentioned above, after a successful acknowledgement, the arrangement must be approved by court. The court must assess the arrangement with regards to legal requirements for such documents, as well as with regards to possibility of flagrant harm towards the creditors voting against the arrangement. This is where the old procedure has its main weakness – the arrangement will become binding and effective, first and foremost by prohibiting all debtors from undertaking or continuing debt collection, only after the arrangement is approved in court. As a result, it is barely popular with the debtors. Its length and costs make such proceeding worthless, with the procedure being largely ineffective against debt collection in the early phase of proceeding. Further stages of the proceeding include validation of the court’s approval and execution of the arrangement by the selected restructuring advisor. The whole procedure comes to an end with a statement of court declaring a complete execution of the arrangement. 


New restructuring solution seems to be a very promising tool for companies dealing with effects of the pandemic. The simplified restructuring might prove useful for those who cannot fulfil their financial obligations in this particular period. It must be admitted that the amendment itself does not contain any serious loopholes – financial needs of creditors were taken into consideration as well, so they may easily counter harmful activities of their debtors. The pandemic itself has also impacted the new law, as the creditors may easily cooperate online. As we mentioned, the new restructuring procedure is largely based on an old and well-known procedure, so the recent legislation should not cause much concern or doubts in practice. Entrepreneurs have received an effective and simple remedy, which may give them as much as four months to improve their financial situation. The publication on arrangement procedure itself does not create any strict obligations for the debtor, so in practice it may be enough to “freeze” all debts for four months to save a company without any actual restructuring actions.

The amendment itself is very rational and promising, so we may expect it to remain in force at least partially after the pandemic. New procedure is to a certain degree based on an EU Directive of 20th 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. Consequently, the simplified restructuring may remain in Polish legal system for good, as long as it proves practical and fair. Proceedings on repayment arrangement may gain popularity and become a handy solution, satisfying both debtors and creditors. Swift, effective, and cheap restructuring is, after all, profitable to everyone.

Author: Filip Walczak

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