Protection of creditors' rights in simplified restructuring proceedings

Act of 19 June 2020 on interest rate subsidies on bank loans granted to entrepreneurs affected COVID-19 and simplified approval procedures 1 (Further: the COVID Act) which became applicable 24 June 2020, allowed the procedure for approval of the system in a simplified, accelerated mode.

The entry into force of these provisions has given rise to a strong interest in the possibility of an agreement in this procedure. Until now, it has not been very popular due to the lack of clear benefits for the debtor during its duration.

First of all, in the case of an agreement approval procedure under the provisions of the Law of 15 May 2015 Restructuring law 2 (Further: p.r.) there is no possibility of halting enforcement proceedings, which are a significant obstacle to effective corrective action for most firms in difficulty of insolvency.

For this reason, the new simplified restructuring procedure has proved to be a solution that is rapidly gaining popularity among debtors, as evidenced by the number of several dozen proceedings that were initiated within a month of the entry into force of the new rules.

1. Functions of restructuring proceedings – whose interests are to be protected

In this study, the author examines the new regulation – simplified restructuring procedure – from the point of view of the creditor, seeking information on how his interests in this procedure are protected.

Each restructuring procedure contains certain solutions on the basis of which it is intended to reconcile interests with the assumption that they conflict with each other.

On the one hand, have an interest in the debtor for whom it is in principle impossible to carry out all the obligations for a given moment and who will be interested in obtaining a solution allowing at least additional time for the performance of those obligations, and in many cases also to reduce the amount of those obligations, and in any case to obtain a guarantee that compliance with the renewed conditions for those claims will stop creditors from other enforcement activities.

In the opposite direction, we have the interest of the creditor – his actions come down to finding the best way to quickly and effectively enforce his claim, to which he is entitled and which he did not receive in due time.

Finding a way to achieve a compromise acceptable to both parties, which takes into account the interests of these parties as fairly as possible two pages one the most difficult tasks in which restructuring legislation can help.

In the simplified restructuring procedure, this task is certainly not easier, especially since the basic assumptions of this option are intended in principle to favour the interests of the debtor.

The procedure itself, which does not require any action on the part of the court, solely on the basis of a declaration from the debtor and publication of the notice, is a manifestation of the legislator's concern for the interests of the debtor who is in a difficult economic situation.

However, this does not mean that the rules on simplified restructuring procedures give rise to the possibility of restructuring activities with the effect of damaging creditors.

In any situation in which such an injury could arise, the creditor has the opportunity to take certain measures to protect his interests, and in extreme cases also resulting in discontinuance of proceedings.

2. Safeguarding the interests of creditors in the COVID Act

An example of an institution that aims to provide creditors with the opportunity to defend their interests is a claim for compensation for damage in relation to the notice itself – this is first the act performed by the debtor when the restructuring procedure was initiated.

The creditor shall be entitled to a claim for compensation if the debtor has made the notice in question under Article 14(1), in bad faith.

Furthermore, the creditor may request that the effects of the notice be abrogated, such as the inadmissibility of the performance of the benefits from the claims covered by the agreement, the limitations on the possibility of deducting reciprocal claims or the inadmissibility of termination of the lease or lease agreement.

A request for repeal of these effects may be submitted by both the creditor and the debtor or the arrangement supervisor, the grounds for repealing that the application of those restrictions leads to the detriment of creditors.

It is therefore a tool which creditors can use at a very early stage of the procedure – theoretically immediately after the opening of the procedure at the request of the debtor. In addition, the creditor is in principle guaranteed to participate in the discussion and voting on the arrangement proposals on the same level as in the case of the standard agreement approval procedure. This right will be discussed further in this study.

While considering the potential of the COVID Act itself, it is worth noting that Article 17 that law, according to which, in the event of the submission of contractual proposals relating to secured claims in kind, where those proposals provide for the full satisfaction of those claims within the time limit specified in the arrangement, together with the by-laws which were provided for in the contract on which the security was established, even if the contract was effectively terminated or terminated, or if its satisfaction was not less than that expected in the event of the recovery of the claim together with the collateral by-laws, the creditor’s consent is not necessary to cover those claims.[3]. It is therefore an exception to the general principle expressed under Article 151 p.r., according to which in the case of secured claims they cannot be covered by the arrangement without the explicit consent of the creditor[4].

In the case of a simplified restructuring procedure, the application of this rule is formally limited, in a material way, by giving the debtor the opportunity to make such arrangement proposals where the creditor's consent is not required. However, in the interests of that creditor, there is a restriction that this is only about contractual proposals which will cover the full satisfaction of claims with side claims.

In the opinion of the author, the principle that acts primarily in favour of the creditor is also the limited duration of the simplified approval procedure. Maximum period 4 The months between the opening of proceedings and the submission of an application to court for approval of the arrangement, of course, concern the sphere of action of the debtor, and for him the effects of such a time limit may be more severe if that time is insufficient to negotiate a favourable arrangement with creditors.

However, such a temporary limitation is primarily a manifestation of the protection of the interests of the creditor, who during the course of the proceedings has a ‘suspended’ possibility of executing the debtor. By introducing a four-month deadline, taking into account the time needed to assess the application by the court, the creditor receives information on the basis of which he is able to estimate the duration of the period during which he will not be able to enforce his claims.

It is also worth noting the severity of the effect of suspending enforcement proceedings from the perspective of creditors. What is an unquestionable attribute to a debtor at risk of insolvency does not necessarily entail a significant deterioration in the creditor’s situation.

After first, The provisions of the COVID Act provide for the suspension of enforcement activities and the inability to undertake new ones rather than their remission. In practice, this means that no bailout, recovery, enforcement costs will increase during the simplified restructuring procedure.

If no agreement is reached, all suspended operations may be resumed. Therefore, from the point of view of creditors, there will be a break in the ability to carry out enforcement activities, but no other restriction will take place.

It is also important in this situation to see what the standard execution process looks like.

In most cases these are activities whose duration and duration significantly exceeds the duration 4 months, and in many cases already at the time of the opening of the restructuring procedure, the debtor does not have the financial resources to allow him to quickly satisfy creditors' claims and it is necessary to carry out enforcement operations from his assets.

Given both the time needed to carry out these activities and the action of the debtor, which aims to postpone the feasibility and use of the available means of securing his own assets, the period 4 months does not seem sometimes too long.

On the other hand, where the agreement is concluded and approved by the court, creditors shall receive new rules governing their claims. The current enforcement titles are losing their power and until the debtor executes the arrangement the rules established and confirmed in the content of the arrangement itself apply.

This means in many cases a reduction in the amount that the debtor can obtain, a waiver of interest or a distribution of payments over time. However, in return for these restrictions, the creditor may gain a higher degree of probability of repayment of the amounts indicated in the arrangement than in the case of general investigation.

The reason often followed by creditors in their comments on the possibility of concluding the agreement is to assess whether the debtor has assets to secure their claims in the event of possible insolvency proceedings.

3. Safeguarding the interests of creditors under restructuring law

Guarantees for the protection of creditors' interests also derive directly from the content p.r. The basic provisions to be indicated in this respect concern the rules on the approval of the arrangement and the possibility for the court to refuse approval of the arrangement.

All restructuring proceedings, excluding the procedure for the approval of the Agreement, require the formal initiation and order of the court.

The guarantee of the protection of the legitimate rights of creditors is mentioned Article 8(1) p.r., according to which the court will refuse to open a restructuring procedure if the result is to harm creditors.

This principle is limited in the case of the procedure for the approval of the arrangement, but in this respect too, the provisions of the COVID Act provide for a solution which allows to remedy the injury to creditors as mentioned earlier.

However, in the case of this analysis, reference should be made to solutions directly related to the approval procedure. Such arrangements are applicable in particular at the stage of judicial review, after the debtor has requested approval of the arrangement.

Principle of equal treatment of creditors resulting from Article 162 p.r., refers directly to the way arrangement proposals are formulated. Under this rule, all creditors of the debtor should be treated equally, whereas in the case of the division of creditors into groups, this rule should apply to the category of interests concerned.

It is therefore acceptable to submit different content arrangements for the different categories of interests. However, it is crucial that the arrangement proposals differentiated across different groups are formulated in a manner appropriate to the particular interest category.

It is common to distinguish between categories of interest by identifying the groups concerned in relation to the value of claims to creditors.

This is justified first of all from the point of view of the debtor, who seeks to assess the real chances of spreading different claims over time, taking into account the possibility of obtaining funding from his company.

The view that it is not permissible to create a separate category of interest is now fairly well established, which could lead to unjustified favouring of certain creditors or harming others. Where a group breakdown is made, if one from the creditor groups had contractual conditions far less favourable than the other groups, a plea of infringement of the principle of equal treatment of creditors may be raised in such a case[5].

In this case, attention should be paid to the intention to distinguish between categories of interest and to verify that the principle of proportionality has been respected.

There are therefore no contraindications that the interest category should cover only one the position, the key aspect requiring control is to determine whether the debtor has been motivated by the intention of artificially creating very favourable conditions for one of the creditors he favors for some reason.

It is for the debtor to risk incorrectly formulating the arrangement proposals in this respect and to make such a complaint about the arrangement proposals submitted.

The formulation of the arrangement proposals is the stage at which an important part of the restructuring process is actually taking place and in this very phase there is a likelihood of real injury to creditors, especially those who could be voted on.

In the case of a simplified restructuring procedure, there is doubt whether the principle of Article 165(2) p.r., according to which the court may refuse to approve the arrangement if its conditions are grossly detrimental to creditors who voted against the arrangement and raised objections.

The simplified restructuring procedure did not provide for a separate opposition procedure.

It therefore appears that, in the simplified restructuring procedure, an active contact between creditors and the debtor may be important in the formulation of the arrangement proposals, which will help to reach an appropriate compromise. The final, immanent right of the creditor is the exercise of the voting right over the arrangement, and therefore, when it is not satisfied with the addressed arrangement, it votes against the arrangement, having at its disposal in most cases a fairly comprehensive knowledge of the situation of the debtor and the reality of the recovery of claims, for example in insolvency proceedings.

4. Summary

Protection of the rights of creditors in each restructuring procedure is one the essential conditions which should be ensured and in each of the procedures. It is no different in the case of a simplified restructuring procedure.

The provisions of the COVID Act in conjunction with the basic solutions based on the content of the regulation p.r. do not seem to deviate from this rule.

Despite the very simplified form of this procedure, the legislator appears to have found objective, reasonable solutions which, with a large degree of facilitation of the possibility of restructuring the debtor's activities properly guarantee the preservation of the rights of the creditor.

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4 In the case of a procedure for the approval of the arrangement, no order from the court is necessary to initiate it, thus there is no area in which there would be an initial control of the risk of injury to creditors, as is the case in other proceedings on the basis of Article 8(1) p.r., according to which the court refuses to open restructuring proceedings if the result is to harm creditors.

5 R. Adamus, Restructuring Law. Comment 2019, Edition 2, 2019.