Changes to the pre-pack liquidation procedure
On 24th March 2020, the amendments to the insolvency law governing prepared (pre-pack) liquidation will enter into force.
The amendments mainly seek to consolidate the practices surrounding the use of pre-pack liquidation, in the light of differences that have arisen in the practice of various Insolvency Courts in the last 3 years since pre-pack liquidation was first created.
Pre-pack, i.e. prepared liquidation
Prepared (“pre-pack”) liquidation is an insolvency law instrument that was introduced into Polish law on 1st January 2016. It works on the basis that the assets of an insolvent entrepreneur can be acquired immediately (and without encumbrances), thereby avoiding the need to organise a tender or to comply with conditions laid down by the Insolvency Court.
The premise of pre-pack liquidation, and investors’ willingness to use it, was that when an eligible entity applied for an insolvency declaration and the sale of a debtor’s assets, this application would be immediately confirmed by the competent court, based on documents submitted by the applicant, including a valuation prepared by a court expert. This was also the aim of the originally adopted pre-pack legislation, which was supposed to enable the pre-pack liquidation procedure to be completed in respect of an indebted business within 3 months – i.e. within the period corresponding to the market and economic realities of acquiring an ongoing enterprise.
Reason for amendment
Court practice concerning pre-pack liquidation was, unfortunately, inconsistent and Poland’s various Insolvency Courts adopted their own ways of dealing with pre-pack applications.
Significant doubts existed as regards the interpretation of Arts. 56a et seq. of the Insolvency Act and, consequently, this resulted in a “regionalism” of the way in which the law was applied.
Confusion existed, among others, regarding the following issues:
• Who is entitled to apply for pre-pack liquidation?
• Is it possible to submit multiple pre-pack applications?
• How should the Insolvency Court deal with such applications?
• Should the pre-pack procedure be public?
• What role should a temporary court supervisor play?
Judicial practice regarding these questions evolved and created different “regional approaches”, based on the experience of the various Insolvency Courts. This, in turn, encouraged applicants’ representatives to transfer the debtor’s seat so as to bring the case within the jurisdiction of a court whose practice suited their particular situation.
The legislator’s answer was to amend the law by adopting the Act of 30th August 2019 amending the Insolvency Act and other Acts (Journal of Laws of 2019, item 1802). The new law enters into force on 24th March 2020 and will regulate the partially-developed practice of applying pre-pack liquidation.
• The applicant
Pursuant to the amended provisions, every participant in insolvency proceedings will be entitled to submit an application for pre-pack liquidation which, in principle, means the debtor and its creditors.
A new Art. 56a paragraph 6 of the Insolvency Act was added. It explicitly allows a pre-pack liquidation in which the debtor’s assets are acquired by more than one buyer. This will significantly facilitate pre-pack applications to be drafted so as to allow open cooperation between investors that are interested in acquiring various components of the debtor’s assets. It will also enable the direct acquisition of specific assets into the assets of the target entity (without requiring the creation of structures dedicated solely to submitting a pre-pack application, which later requires additional activities to be undertaken to redistribute the assets acquired during the pre-pack liquidation).
The new legislation also clarifies what happens if competitive applications are submitted. It states that, in such a situation, the buyer will be chosen via an auction.
• Securing the offer
A significant weakness of the current regulations was the “sanction-free” manner of implementing pre-pack liquidation. The previous law did not require a bidder to secure their offer, nor enable effective claims for damages to be initiated against them if they failed to implement that offer.
The amendment imposes an obligation that pre-pack applications must be accompanied with proof of having paid into the court’s bank account a deposit of 10% of the bidder’s offer price.
This means that any failure to implement an approved pre-pack application will result in the bidder forfeiting their deposit. To counterbalance this obligation, the new legislation enables buyers to request that a pre-pack approval order be revoked in the event of a change or following the disclosure of significant circumstances affecting the liquidation.
• Increased role of secured creditors; more transparent nature of the proceedings
The amendments state that a debtor’s secured creditors will be notified by the Insolvency Court about the fact that an application for pre-pack liquidation has been filed (such creditors will be sent a copy of the application). They will be entitled to 14 days to respond to that application. At the same time, the Court will publish information that the application has been filed by announcing this in the Court and Economy Monitor.
• Assessing the application
The amendment contains a new provision which confirms that it is obligatory to appoint a temporary court supervisor compulsory administrator to assess every pre-pack application. This confirms the current practice of the Insolvency Courts. The new provision states that, apart from securing the debtor’s property, the temporary court administrator’s duties will also include verifying the circumstances indicated in the application.
• Subject of the pre-pack application
The new law removes any doubt regarding the fact that a pre-pack application can apply to a debtor’s whole enterprise or an organized part thereof or a significant part thereof.
Expected effects of the amendment
The amendments to the pre-pack procedure will enable a more effective and faster liquidation process.
Its most important positive effects are:
• removing any doubts regarding the subject of the sale and the possibility for multiple applications to be filed, both complementary and competing;
• introducing the mechanism for securing an offer which prevents destructive counter-claims being initiated with impunity, the sole purpose of which was to block an offer made by a bidder who wished to purchase the indebted enterprise which initiated the liquidation proceedings.
The legislation also:
• strengthens the position of secured creditors and
• increases the transparency of pre-pack proceedings.
By partially publicising pre-pack applications by delivering copies of such applications to secured creditors, the Insolvency Courts which review pre-pack applications are, in practice, somewhat relieved of the responsibility of accepting such applications. However, this can be unfavourable from the perspective of commercial risk, which is borne solely by the bidder who initiated the proceedings. This will result in more frequent approval of applications where creditors actually failed to respond and fewer applications being questioned by such creditors.
The amendment will probably not have a major impact on the way in which pre-pack applications are prepared, but it should encourage creditors to clarify their position in such matters.
The main beneficiaries of the amendments are creditors who formally adopt a position on pre-pack applications and, as a result, become active participants in the proceedings to determine the terms on which their debtor’s assets are sold.