Converting receivables into shares or stocks.
16 grudnia 2018

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Converting receivables into shares or stocks

 

Converting receivables into shares basically refers to limited joint-stock partnership, limited liability company, joint-stock company being a debtor in restructuring proceedings.[1]

 

The conversion - which should be noted in the margin of this study - may take place on “silent shares” (Article 353 § 3 of the Code of Commercial Companies), which are privileged as to dividends but are without the right to vote. The issue of silent shares has this advantage for the current shareholder of the debtor, that it does not change the current distribution of voting power at the general meeting of shareholders. The conversion to silent shares may limit the risk of a hostile takeover of the debtor company by the creditors. However, if the debtor company had such a financial position that in the long run it would not be able to pay dividends - as prof, W. Popiołek claims - there would be doubts as to the admissibility of such arrangement proposals[2]

 

The method of restructuring liabilities in the form of conversion of receivables into "shares or stocks" has a special character. The Voivodship Administrative Court in Gliwice in its judgment of February 1, 2012 aptly pointed out that "a third party debt which is a debt of a company in bankruptcy is transformed into shares of the company subject to taking over by the person in return for the company's receivables up to the amount specified by the arrangement and for the price (value) indicated there. On the basis of civil law, this kind of activity (conversion) is basically a deduction of monetary claims, referred to in art. 498 Civil Code. which is treated as payment in cash in accordance with art. 503 Civil Code. This means that the conversion of receivables (cash) into shares, provided for by the arrangement, constitutes the coverage of such shares in the Company with a cash contribution by its current creditors. "

 

The question arises whether the exchange ratio of receivables for shares or stocks is arbitrary. In other words, it is a question about the limits of the autonomy of will in formulating the arrangement proposals. In the literature, prof. A. Witosz expressed the view that "he is deprived of an instrument ensuring verification of the contribution capacity and the value of the contribution made. For it is binding for him on the list of receivables approved by the judge - commissioner for the moment of registration."[3] This view has wide acceptance in the restructuring practice. Nevertheless, the view is presented that the restructuring procedure cannot be used to artificially "inflate" the company's share capital in restructuring. The value of converted receivables should not be higher than the value of acquired shares or shares. In the literature, A. Nowacki presented far-reaching position: "Statutory valuation of the converted receivables as part of the capital increase in exchange for a contribution in kind prescribes that this provision is a special provision for the provisions requiring the valuation of non-cash contributions, subjecting this valuation auditor's examination (in the case of a joint-stock company) and those who are responsible for the overvaluation. Thus, these provisions will not apply in such a situation, despite the fact that it is an increase in exchange for non-cash contributions."[4] The problem raised here is the issue of the registry court's cognition when examining non-cash contributions made to companies. According to art. 23 sec. 1 of the National Court Register Act, the registry court examines whether the documents attached to the application are compatible in terms of form and content with the law. However, in the case of conversion of claims for shares or stocks in connection with the arrangement, a special situation will take place. Testing the conformity of the arrangement - whose element of content is the conversion - in terms of compliance with the law exclusively belongs to the restructuring court. It should be acknowledged that the registration court, on general terms (Article 365 of the Code of Civil Procedure), should take into account the ruling of the restructuring court.

 

According to art. 167 R.L. if the arrangement provides for conversion of receivables into shares of a company being restructured, the legally approved arrangement replaces the activities related to the increase of the share capital and subscription of shares specified in the Commercial Companies Code. The arrangement along with the write-off of the final decision on the approval of the arrangement is the basis for the entry of the increase in the share capital of the company to the National Court Register.

 

The main difference regarding the share capital increase in a capital company under the provisions of the Commercial Companies Code and on the basis of the provisions of the Restructuring Law is connected with who makes such a decision. In the first case, the decision to increase the share capital is in the nature of an internal act. In the case of a limited liability company with the increase of the share capital is decided by way of a resolution of shareholders (Article 257 § 1 of the Code of Commercial Companies), unless the capital increase is effected under the current provisions of the articles of association. On the other hand, in the case of a joint-stock company, the share capital is decided on by way of a resolution of the general meeting of shareholders (Article 431 of the Code of Commercial Companies.), with the exception of the so-called target capital (article 444 of the Code of Commercial Companies). It should be noted that within the internal procedures of a capital company, the decision to increase the share capital is made by the "owner" factor. Also in the case of target capital, the management board of a joint-stock company operates within the limits of the statutory authorization. An internal decision to increase the share capital - a resolution - can be appealed to the court on general terms (Articles 249 and 252, as well as Articles 422 and 425 of the Code of Commercial Companies), except for the target capital. The situation is different when the company's share capital is increased by covering it with contractual debts. The decision on such increase of the share capital is external. It falls on the creditors' meeting. The company at the creditor's meeting as well as in the entire proceedings is represented by the management board (the so-called managerial factor), and the creditors actually decide about the increase of the share capital of the company. Therefore, it should be stated that the Code of Commercial Companies and Restructuring Law regulate separately the procedure for increasing the share capital. It is difficult to assume that the decision to increase the share capital in the restructuring proceedings, undertaken in special circumstances, outside the company would coincide with the intra-company resolution regarding the increase of the share capital, which could be challenged by the shareholders. As a consequence, to the extent to which the essence of the agreement is related to the increase of the company's share capital by way of external decisions, the provisions of the Commercial Companies Code on the procedure of internal capital increase do not apply to such extent. One should defend the view that the essence of the agreement replaces the internal decision of shareholders or stockholders about the increase of capital and statements of creditors about taking up shares or stocks. The functions of the provisions of the Code of Commercial Companies which constitute premisses and the procedure of increasing the share capital replace the provisions on the arrangement. In the literature, prof. A. Witosz aptly notes that the insolvency law creates "an additional exception depriving the shareholders of the pre-emptive right, without the need for a resolution by the general meeting in this regard." According to the author, the view of the necessity of the general meeting of a resolution separate from the approved arrangement that excludes the pre-emptive right would not guarantee it, which would call into question the effectiveness of the conversion. In addition, the need to protect the company's creditors outweighs the need to protect the interests of its shareholders or shareholders.

 

It is permissible to address conversion of receivables into shares or stocks to stationes fisci and stationes municipi. This means that municipalities, poviats, voivodships, universities, presidents of courts, etc. may, under the arrangement, receive shares or the participation of the debtor in restructuring. This view is recorded in the literature (it was expressed in relation to the previous legal status, including public finances): "The conversion of claims for shares or shares as part of the resolution procedure is also acceptable if the creditors are public sector entities within the meaning of the provisions of public finance. As a rule, public finance sector entities may not acquire or acquire shares or stocks in companies and buy bonds issued by entities other than the State Treasury or local government units (...). This ban does not apply to taking up or purchasing shares or purchasing bonds in order to satisfy claims, secure claims or secure performance of a public contract.”[5]

 

 

[1] A. Witosz, Zatwierdzony układ z konwersją wierzytelności na udziały lub akcje a podwyższenie kapitału zakładowego, Przegląd Prawa Handlowego 2005., No 3, A. Witosz, Oferta publiczna w spółce publicznej a konwersja wierzytelności na akcje w zatwierdzonym układzie, Przegląd Prawa Handlowego PPH 2007., No 1, A. Witosz, Konwersja wierzytelności na udziały lub akcje w upadłości z możliwością zawarcia układu a chwila podwyższenia kapitału zakładowego upadłej spółki, Przegląd Prawa Handlowego 2007., No 5, A. Witosz, Wykonanie układu obejmującego konwersję wierzytelności na akcje, gdy wierzytelności okazały się nieistniejące, Przegląd Prawa Handlowego 2007., No 6, A. Witosz, Spółka w upadłości układowej, Warszawa 2008, A. Witosz, Instytucja zmiany układu w świetle prac nowelizacyjnych nad prawem upadłościowym i naprawczym, Przegląd Prawa Handlowego z 2008, no 12, L. Giliciński, P. Moskała, Konwersja wierzytelności na udziały lub akcje w prawie restrukturyzacyjnym, Monitor Prawa Bankowego 2015, no 12, p. 93; G. Godlewski, Konwersja wierzytelności na udziały/akcje w toku postępowania restrukturyzacyjnego, Doradca Restrukturyzacyjny 2017, no 9, p. 32.

[2] W. Popiołek, Konwersja wierzytelności układowej na akcje nieme wyemitowane przez dłużnika, in: Z badań nad prawem prywatnym. Księga pamiątkowa dedykowana Profesorowi Andrzejowi Kochowi, A. Olejniczak, M. Orlicki, J. Pokrzywniak, Poznań 2017, p. 391.

[3] A. Witosz, Wykonanie układu obejmującego konwersję wierzytelności na akcje, gdy wierzytelności okazały się nieistniejące, Przegląd Prawa Handlowego 2007r., no 6, p. 6.

[4] A. Nowacki, Konwersja długu na kapitał, Przegląd Prawa Handlowego 2008, no 12, p. 43

[5] R. Adamus, Prawo naprawcze przedsiębiorcy, Warszawa 2009, s. 678

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