PRE-PACK IN CASE OF BANKRUPTCY IN POLAND
07 czerwca 2019

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The prepared liquidation (the so-called pre-pack) is a new legal structure in Polish law, which aims to accelerate and simplify the course of bankruptcy proceedings. In this case, the liquidation stage of the bankruptcy estate (within the scope of the liquidation) will not take place separately after the declaration of bankruptcy. An application for the declaration of bankruptcy may be accompanied by an application for approval of the terms of sale of the debtor's enterprise or its organized part or assets constituting a significant part of the enterprise.

 

The purpose of this construction is to speed up bankruptcy proceedings. At the same time, the scope of future duties of the trustee is reduced in connection with the preparation of liquidation even before the announcement of bankruptcy.

 

See: W. Piłat, Tryb przygotowanej likwidacji w nowym prawie upadłościowym, Doradca Restrukturyzacyjny 2015, no 1, p. 16, M. Kubiczek, K. Tatara, Przygotowana likwidacja (pre-pack) – wstępne uwagi na temat funkcjonowania instytucji, Doradca Restrukturyzacyjny 2016, no 4, M. Organa, Pre-pack po polsku, FenixPL 2012, no 1, p. 62, Y. Brulard, E. Huvelle, The first Belgian decision of English prepack procedure? Fenix.Pl 2011, no 5, p. 18, C. Shuttleworth, Pre-packs: the latest wave of reform, Corporate Rescue and Insolvency 2015, no 4, p. 1., V. Finch, Pre-packaged administrations: bargains in the shadow of insolvency or shadowy bargains? Journal of Business Law, 2006, no 9, p. 568, J. Moulton, The uncomfortable edge of property – pre-packs or just stitch-ups? Recovery, 2005, no 4, p. 2, B. Walton, Pre-Packaged Administrations: Trick or Treat?, Insolvency Intelligence 2006, no 19, p. 113, S. Frisby, A preliminary analysis of pre-packaged administrations, Report to The Association of Business Recovery Professionals, 2007, p. 4.

 

Two years of validity of this legal structure prompts us to ask about its real effectiveness.

 

In the subject literature as well as in practice, the pre-pack design raises mixed assessments. From a practical point of view, an economic alternative for negotiation between a debtor and a potential buyer is negotiating a future lease agreement with a potential buyer, however, the conclusion of the lease contract itself falls within the competence of the receiver and requires the consent of the judge-commissioner (Article 316 sec 2 of the Bankruptcy Law Act).

 

The problem of possible abuse of the pre-pack has at least two faces.

 

First of all, the provisions of art. 56a of the Bankruptcy Law Act one cannot be a patent for unlawful activities such as "indebt property and buy it without encumbrances". In view of the potential for abuse of pre-pack institutions, special emphasis should be placed on adequate control, which is expressed by:

 

a) description and estimation of the sales subject prepared by an expert from the list of court experts (Article 56a sec. 3 of the Bankruptcy Law Act)

b) limited trust in relation to purchasers as related persons (Article 56 b of the Bankruptcy Law Act)

c) control of the bankruptcy court of the application for approval of the terms of sale (Article 56 c of the Bankruptcy Law Act)

d) the possibility for each creditor to lodge a complaint against the order to approve the terms of sale (Article 56d sec. 2 of the Bankruptcy Law Act)

e) the possibility for the trustee to submit an application for repealing or changing the decision on the approval of the terms of sale (Article 56 h of the Bankruptcy Law Act).

 

It should be assumed that in the case of an application for the approval of the terms of sale, the court may hear the creditors in accordance with art. 217 of Bankruptcy Law Act conjunction from art. 30 sec. 4 of the Bankruptcy Law Act.

 

The concerns expressed above should be the subject of careful research. The question arises whether should there be a strengthening of control instruments in the form of granting specific competences to creditors or their representatives?

 

Second, the pre-pack institution cannot be used by the creditor to hostile takeover of the debtor's property. The provision of art. 56 sec. 2 of Bankruptcy Law Act does not provide for the possibility of challenging the decision on the approval of the bankrupt's terms of sale. To the extent that the legislator does not provide for a complaint against a bankrupt, regulation of art. 56d sec. 2 of Bankruptcy Law Act is contradictory at least with art. 21 par. 1 of the Constitution on the protection of property. M. Kaliński, "Własność" jako przedmiot ochrony na podstawie art. 21 ust. 1 Konstytucji RP, Przegląd Sądowy 2015, no 1, p. 17. It would be necessary to carry out research to determine whether in practice - through the lack of appropriate regulation - there are no violations of the right of ownership.

 

The subject of the liquidation can therefore be:

a) an enterprise of the bankrupt within the meaning of art. 55 [1] of the Civil Code

b) an organized part of a bankrupt enterprise or organized parts of a bankrupt enterprise

c) assets that constitute a significant part of the enterprise, which do not have the quality of an organized part of the enterprise, whereas the subject of liquidation may also be one asset. The term "a significant part of the enterprise" may be referred to the property, technology, etc. criterion. Assets may include, for example, shares or shares in other commercial companies, etc.

 

According to art. 2 sec. 1 of Bankruptcy Law Act the priority should have a pre-pack of the company as a whole. For obvious reasons, the subject of the acquisition may not be shares in the debtor. The question arises as to whether the subject of liquidation can be assets that do not form part of the enterprise (eg assets of a general partnership partner). As it seems, mutatis mutandis, the commented provisions can be applied to assets that are not part of the enterprise. Examination of the files of court proceedings should lead to establishing whether the manner of determining the subject of the liquidation prepared in the Act does not lead to dysfunctions.

 

The provision of art. 55 [2] of the Civil Code states that the legal act that is the subject of an enterprise covers everything that is part of an enterprise, unless the legal act or special provisions state otherwise.

 

The view must be defended that the object of a pre -pack transaction for the enterprise cannot be:

a) amounts

b) cash on hand

c) documents necessary for the receiver to establish a claim in bankruptcy proceedings (Article 243 sec. 1 of the Bankruptcy Law Act).

 

In practice, when making a business valuation for pre-pack purposes, special attention should be paid to components with variable amounts, such as materials and utilities for production, production in progress, stocks, etc. It can be suggested that either this type of components on the basis of art. 55 [2] of the Civil Code from the pre-pack transactions and make them the subject of "ordinary" liquidation or determine their quota of releases under the transaction and assess the value of this contingent in the estimate. Issuing the buyer of a significant amount of materials, production in progress, inventories disregarding the valuation (as a result of Article 55 [2] of the Civil Code) could cause damage in the mass of bankruptcy.

 

The conclusion regarding the liquidation can be submitted simultaneously with the application for bankruptcy, but also later during the proceedings for the declaration of bankruptcy. The regulations do not provide preclusions in this respect. The debtor and any of his creditors may file a petition regarding the liquidation. Whoever may be the first to file for the bankruptcy of the debtor and someone else for liquidation. The fact that there is a need to submit an application for liquidation does not in any way justify the failure to meet the deadline referred to in Article 21 sec. 1 of the Bankruptcy Law Act. One should defend the view that the application for liquidation is autonomous. The formal shortcomings of this application should not result in the return of a full-fledged bankruptcy petition. Examination of the files should lead to establishing whether or not a legislative adjustment is needed in this area, which could clarify the applicable provisions.

 

It is unacceptable to submit an application for approval of the terms of sale in respect of property components covered by a registered pledge, if the agreement on establishing a registered pledge provides for taking over the subject of the pledge or its sale pursuant to art. 24 of the Act on registered pledge unless the application is accompanied by a written consent of the pledgee. The provision of art. 330 of the Bankruptcy Law Act is used accordingly. This solution should be assessed as accurate. By examination of court files, it should be verified whether and how it affects the practice of the prepared liquidation.

 

The application for approval of the terms of sale shall be accompanied by a description and estimation of the component covered by the application prepared by a person entered in the list of court experts. Unfortunately, neither the specification of the scope of specialization in the Act regarding the entry in the list of experts (it should be assumed that specialization should be adequate to the subject of liquidation) nor the obligation to transparently select the person for the valuation should be specified. The literature on the subject aptly claims that the bankruptcy court may also hear the debtor, the creditor - the applicant, the buyer, the expert. The hearing may take the form of receipt of statements in writing.

 

The application for the approval of the terms of sale must contain the terms of sale by indicating at least the price and the buyer. The terms of sale may be specified in the submitted draft contract to be concluded by the trustee.

 

First of all, according to article 56c sec.1 of the Bankruptcy Law Act, the selling price should be higher than the amount possible to obtain in bankruptcy proceedings upon liquidation on general principles, less the costs of proceedings that should be incurred in connection with liquidation in such mode.

 

Secondly, the sale price may be close to the amount that can be obtained in bankruptcy proceedings on liquidation under general rules, reduced by the costs of proceedings that should be incurred in connection with liquidation in this mode, if there is an important public interest or the ability to preserve the debtor's enterprise (Article 56c sec. 2 of the Bankruptcy Law Act).

 

Thirdly, the sale price to the entities indicated in article 128 of the Bankruptcy Law Act cannot be lower than the estimated price (Article 56b sec. 1 of the Bankruptcy Law Act). The issue of judicial practice in this area should be examined in this respect with particular care.

 

The buyer's person should be sufficiently concretised. The buyer may be the applicant. The buyer may be one of the creditors or an investor who has no previous relationship with the debtor. The buyer may be a person related to the debtor as defined in art. 128 of the Bankruptcy Law Act (see Article 56 b of the Bankruptcy Law Act). It should be examined whether in practice no competing applications are submitted, and if so how are the doubts as to the best offer decided.

 

An application for the approval of the terms of sale may provide for the issuing of the business to the buyer from the date of the bankruptcy of the debtor. In this case, the application shall be accompanied by proof of payment of the full price to the court's deposit account. Issuing the buyer's business may also take place at a different date, for example after the bankruptcy order has become final.

 

Sale of bankrupt property to entities indicated in article 128 of the Bankruptcy Law Act is only allowed at a sale price not lower than the estimated price. However, in the practice of bankruptcy, the standard ("good practice") is sales - at the first attempt - at a price not lower than the estimate price. The content of the regulations can be used to build arguments (detrimental to the interests of creditors) that it is sometimes possible to sell assets below the estimate price. The assessment price for purchasers of related entities is obligatorily determined on the basis of evidence from an expert opinion other than the one referred to in article 56a sec. 3 of the Bankruptcy Law Act. It is impossible not to notice that the rigor of article 56b of the Bankruptcy Law Act is very easy to mislead (the buyer can be a newly created company with "transitional" and "neutral" shareholding financing the transaction for a loan from the "target" and "linked" to the debtor of the shareholding structure). This issue also needs to be tested in practice.

 

The applicant and the prospective buyer submit a declaration as to whether there is any relationship between them and the debtor referred to in art. 128 of the Bankruptcy Law Act. One should postulate changes de lege ferenda, or at least conclusions for practice, that the statement should be extended also to issues related to possible indirect linking within the meaning of art. 128 of the Bankruptcy Law Act.

 

It seems that one can be tempted to assume that the later a bankrupt enterprise will be sold, the lower the selling price will be.

 

First, the bankruptcy court includes an application for approval of the terms of sale, if the price is higher than the amount that can be obtained in liquidation proceedings on liquidation, reduced by the costs of proceedings that should be incurred in connection with liquidation in such mode.

 

Secondly, the bankruptcy court may grant the application if the price is close to the amount that can be obtained in bankruptcy proceedings on liquidation under general rules, less the costs of proceedings that should be incurred in connection with liquidation in this mode, if there is an important public interest or the ability of the debtor's enterprise to be preserved.

 

The introduction by the legislator of the grounds of "important public interest" causes de iure modification of the principles expressed in art. 2 sec. 1 of the Bankruptcy Law Act. The literature on the subject expressed the view that "the public interest in the application for approval of the proposed terms of sale should be expressed in the benefits that will result from the quick liquidation of the debtor's assets. This advantage does not have to take only a fiscal dimension. All economic, social and all other circumstances related to the postulated transaction should be justified in considering the application. The argument for stating that in a given case there is an important public interest will also be the fact that the entire social, economic and other benefits obtained as a result of the liquidation of property will concern a wide range of entities. "W. Piłat, Tryb przygotowanej ..., "Costs of proceedings" should be understood only as the costs referred to in article 230 sec. 1 of the Bankruptcy Law Act The liabilities of the bankruptcy estate remain outside the scope of this concept (Article 230 sec. 2 of the Bankruptcy Law Act).

 

The legislator does not require the debtor's consent to the liquidation. The consent of the debtor is not, moreover, required when liquidating the assets included in the bankruptcy estate.

 

The prepared liquidation can be an instrument of hostile takeover of the debtor's assets. In fact, by adopting the only criterion in the form of the purchase price, the debtor's production assets may be taken over by its competitor.

 

In some situations the acquisition of property may constitute a so-called paraconcentration within the meaning of art. 13 sec. 2 point 4 of the Act on competition and consumer protection.. It is about the entrepreneur acquiring part of the property of another entrepreneur (all or part of the enterprise) if the turnover realized by this property in any of the two fiscal years preceding the notification exceeded the equivalent of EUR 10,000,000 in the Republic of Poland. National thresholds for notification of the intention of concentration are specified in art. 13 sec. 1 of the Act on competition and consumer protection. According to art. 14 sec. 4 of the Act on competition and consumer protection is not subject to notification of the intention to concentrate in the course of bankruptcy proceedings (lege non distinguente also in the pre-pack variant), except when the entity intending to take control or acquiring property is a competitor or belongs to the capital group to which the competitors of the merged entity belong or part of the property is purchased. Concentration control is ex ante control. According to art. 97 sec. 1 of the Act on competition and consumer protection entrepreneurs, whose intention to concentrate is subject to notification, are obliged to refrain from making the concentration until the President of the Competition and Consumer Protection Office issues a decision or expires the date on which the decision should be issued. At the same time according to art. 97 sec. 2 of the Act on competition and consumer protection, the legal act on the basis of which the concentration is to take place may be effected under the condition precedent of issuing by the President of the of the Competition and Consumer Protection Office, by way of a decision, consent for the concentration or the lapse of time limits referred to in art. 96 or in art. 96a of the Act on competition and consumer protection.. Concentration without obtaining the consent of the President of the of the Competition and Consumer Protection Office is punishable by a financial penalty within the meaning of art. 106 sec. 1 point 3 of the Act on competition and consumer protection. The bankruptcy law does not exempt from compliance with anti-trust laws.

 

Taking into account the application for liquidation is possible only in the event of the bankruptcy of the debtor. The bankruptcy court, having regard to the application for liquidation, decides in the bankruptcy resolution the terms of sale, specifying at least the price and the buyer of the assets being the subject of the sale referred to in this chapter. In the order, the court may also refer to the terms of sale specified in the draft contract. Empirical research should determine the applicable practice in this respect.

 

The decision of the bankruptcy court rejecting the application for approval of the terms and conditions of sale may be appealed to the applicant, and the order granting the application to each of the creditors. A complaint may be filed within one week of the date of the announcement in the Register. To the extent that the legislator does not provide for a complaint against a bankrupt, regulation of art. 56d sec. 2 of the Bankruptcy Law Act is contradictory at least with art. 21 par. 1 of the Constitution on the protection of property. The complaint may relate to the pre-pack principle, the selection of pre-pack assets, the amount of the sale price, etc. The appeals of court decisions regarding the prepared liquidation should constitute a separate segment of empirical research.

 

The trustee concludes a sale agreement (with the disposing or obligatory - disposing) effect under the conditions specified in the court decision (conditions may be defined in general terms but the contract form may also constitute an attachment to the decision) not later than within thirty days from the day this order becomes final. , unless the terms agreed by the court provided for a different date. This period may be longer or shorter than 30 days. The official receiver is in principle related to: selecting the buyer, the object of sale, and selling price.

 

One should defend the view that the trustee may conclude a valid and effective contract also after the deadline specified in the commented provision. The contract should be concluded with respect for general rules regarding the form of legal transactions (eg Article 751 § 1, 155 § 1 of the Civil Code). In the case of the sale of perpetual usufruct right, where the entry in the land and mortgage register is of a constitutive nature, the date of conclusion of the contract is decisive (the premise for the transfer of the right of perpetual usufruct is entry in the land and mortgage register - judgment of the Supreme Court of 4 February 2005, I CK 512/2004) . It is also irrelevant when the date of entry into the register of disposal of an enterprise belonging to a person entered in the register (Article 752 § 2 of the Civil Code).

 

Empirical research should also cover the practice of concluding and implementing contracts based on the provisions on liquidation.

 

Conclusion of a sales agreement incorporating the disposing effect may take place only after the buyer has paid the whole price to the bankruptcy estate or after the receiver has been given a price previously paid into the deposit. The entire price is the gross price including VAT. Depending on the object of sale referred to in art. 56 a sec. 1 of the Bankruptcy Law Act the transaction may benefit from the subject VAT exemption.

 

The sale made as part of the liquidation has consequences of bankruptcy (enforcement) sale. The effects of sales apply to art. 313, art. 314 and art. 317 of the Bankruptcy Law Act, depending on the type of the object of sale.

 

If the application for the approval of the terms of sale was accompanied by proof of payment of the full price to the court's deposit account, the issuing of the business to the buyer takes place immediately after the provision of the declaration of bankruptcy. Mutatis mutandis this provision should also apply to the organized part of the enterprise. This issue also needs to be examined in practice.

 

Issuing the buyer's business takes place directly to the buyer's hands, with the trustee's share. The provision of art. 174 of the Bankruptcy Law Act is used accordingly. This means that the introduction of the buyer into the assets of the bankrupt may be made by the bailiff based on the court's decision on the declaration of bankruptcy without the need to obtain the enforcement clause.

 

Until the term validating the terms of sale and conclusion of the sale agreement become valid, the buyer "manages the purchased assets" within the limits of ordinary management at his own risk and responsibility. The legislator used here a bizarre phrase "manages acquired assets" because the scope of the designations of the term "assets" is not identical to the scope of the designations of the term "enterprise" used in the other part of the Act, and the form made is logically inconsistent with the whole recipe. This regulation also raises specific substantive doubts that may arise in the taking over of an "economic living" organism, as in question about:

a) the right to collect benefits

b) bearing costs

c) "taking over" contracts

d) transfer of a workplace within the meaning of art. 23 [1] of the Labour Code, etc.

 

 

By repealing the decision approving the terms of sale, the court obliges the buyer to return the enterprise to the receiver or the debtor. The decision is a writ of execution against the buyer. Theoretically, in the mode of art. 788 of the Civil Procedure Code it is possible to give an enforcement clause against a third party. Irrespective of the debt collection claim, the receiver may, depending on the circumstances, claim for reimbursement or compensation claims.

 

Once the order approving the terms of sale becomes valid, the court, ex officio or at the request of the receiver, decides to issue the price to the receiver with a deposit. Secondly, on the issuance of the price of the deposit, it adjudicates at the request of the buyer of the court within thirty days from the day of issuing the business to the trustee or debtor. The trustee or debtor may submit an application to keep the deposit price for the next two weeks needed to submit an application for securing an action for damages in accordance with general provisions. After this date, the court will immediately decide to issue a deposit price, unless a security application has been submitted.

 

The trustee may submit an application to the court for annulment or change of the decision approving the terms of sale, if after the issuance of the order the terms and conditions of the sale agreement have been changed or circumstances have been disclosed that have a significant impact on the value of the asset being the subject of the sale. An appeal against the application may be appealed against. The provisions of art. 56a-56g of the Bankruptcy Law Act shall apply accordingly. The competence of such trustees is not available after the conclusion of the contract with the effect of obliging - disposing or having a disposing effect.

 

It should be considered admissible, taking into account the nature of the purchase of property with enforcement effect, to specify in the sales contract that if during the bankruptcy proceedings (or at another date specified in the contract), after signing the contract the circumstances existing before the date of the contract will be disclosed, and having a significant impact on the value of the asset being the subject of the sale, the receiver may demand an appropriate surcharge according to the appraiser's valuation (security clause).

 

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