iThe coronavirus pandemic poses new risks and challenges for business at a scale unknown before. In order to assist businesses, the Polish government has announced that a PLN 212 bn ($53bn) stimulus package will be put in place. For a summary see our previous post. Start up of the aid package will take time, and the shape of further aid to come is as yet unknown. Thus entrepreneurs should consider what options are on the table at this moment.
If the situation lasts, many businesses will need to consider closing down or defaulting on their obligations to banks or other creditors. Polish civil law provides for certain relief that entrepreneurs may seek while justifying non-performance of the contract. Such relief may be based on the concept of force majeure. Although there is no definition of force majeure in Polish legislation, such definition has been created by jurisprudence and courts, force majeure being the unforeseeable, unavoidable, caused by external force event that prevents or seriously impairs a party’s ability to perform. Usually, acts of government (such as an order to close certain businesses) or pandemics may be considered a force majeure. Invocation of force majeure may justify a party’s non-performance of the contract but there are a few catches here. Does it justify non-repayment of a bank loan due to dwindling revenue? Or rather does it apply to contracts where the performance of the party is of a non-pecuniary nature (e.g., a supply contract)? Should the contract between the parties refer to force majeure as the reason for termination or suspension of performance? No general rule applies; the facts of each case need to be analyzed individually.
Another relief available in civil law is the hardship clause (also called rebus sic stantibus clause) that applies where due to an extraordinary change of circumstances, the performance by the party would be either extremely difficult or connected with glaring loss and the parties have not foreseen such circumstance when contracting. In such case the court may modify the performance of or terminate the contract. Is the Covid-19 pandemic “an extraordinary change of circumstances”? So far, the courts have stressed that the change of circumstances has to be really “extraordinary”, such as hyperinflation or a change of the state system. The problem is that relying on the hardship clause requires going to court and takes valuable time with no guarantee of the outcome.
One also needs to note that none of the measures listed above is effective against the tax authorities – these only apply to civil law liabilities. If the entrepreneur seeks relief from payment of tax liabilities, such relief should be sought separately, under the provisions of the Tax Ordinance. The Tax Ordinance provides the possibility of certain relief such as prolongation of the term of payment, payment by installments or forgiveness of either tax or interest due (though possibility of tax debt forgiveness is limited). Again, any of such relief needs to be done on the basis of an individual decision of the tax authority and may be granted only if there is a material interest of the taxpayer or a public interest, and shall take into account EU rules on State aid. Obviously, a key justification is that such assistance is in the public interest due to the Covid-19 pandemic. However, the foregoing also shows how formalistic is the current system, and how much streamlining would be required to provide contemporaneous relief to struggling businesses.
Social security premiums – which constitute a significant burden for businesses – are subject to separate proceedings.
While considering the above or waiting for the government’s stimulus package to come take effect, entrepreneurs may also consider relying on the provisions of the Restructuring Law (2015). This act allows the enterprise to seek protection against creditors by going into court-supervised restructuring, which the debtor to restructure its business and enter into the court-supervised restructuring or settlement with the creditors. Basically, this law, enacted in 2015 and in force from 2016, was to address the gap in Polish law concerning restructuring and insolvency. Prior to its enactment, many practitioners had commented that Polish law had not provided the equivalent to Chapter 11 in the United States, a law that allows the debtor to obtain temporary protection from creditors and to reorganize itself in order to remain in business. Before enactment of this law Polish R&I regulations were too “bankruptcy-centered”, meaning that liquidation was the only option.
The Restructuring Law provides a debtor that is either insolvent or threatened with insolvency with several possibilities. The insolvent debtor, or one threatened with insolvency, may apply for court supervised settlement with creditors (in certain cases the debtor may pre-agree the settlement with creditors and then move for the court to approve it). The settlement may provide for a full scope of actions starting from prolongation of debt, from reduction of debt to debt-to-equity swaps. The debtor may also propose that court-supervised reorganization of the debtor is allowed – the debtor gains protection from creditors and is allowed to implement a court-approved reorganization plan. The general goal of the proceedings is to allow survival of the debtor and avoid its bankruptcy while observing the rights of creditors.
Crucially, the Restructuring Law applies also to tax and (to a certain extent) social security liabilities, allowing the inclusions of all such debts into the settlement. Further, this type of restructuring does not require the debtor to invoke force majeure or hardship and to establish whether the conditions for reliance on these are fulfilled. Finally, filing for restructuring under the Act within the statutory limit means that the debtor’s management is not liable for the company’s debts (which liability arises in cases where the management fails to file for bankruptcy or restructuring of an insolvent company).
In conclusion, here are a few practical points for enterprises in difficulty (or for ones that may be in difficulty):
- formulate the plan – how long may I carry on the business in the current state of affairs (in the absence of any plan from the government)? When is the right time to file for restructuring?
- Be aware of the directors’ duties. Once the company is insolvent, the directors are obliged to file an insolvency motion. Filing a motion for restructuring may exempt directors from liability.
- Avoid preferential treatment of creditors in case of financial difficulties.
