by Ben Davey, partner, international counsel, Wierciński, Kwieciński, Baehr sp.k
Klaudia Frątczak-Kospin, legal counsel, Wierciński, Kwieciński, Baehr sp.k
Generating deal flow is one of the persistent challenges for private equity and other alternative investment fund managers. Often, changes in the economic, market, financial or regulatory conditions are catalysts for new deal opportunities. The introduction of a “pre-packaged” bankruptcy process in Poland might be such a change, particularly for funds with a focus on distressed and turnaround assets.
For almost two years, a discussion has been underway with respect to the Polish bankruptcy law based on recommendations prepared by a group of experts under the auspices of the Ministry of Justice. In May of this year, the Ministry published draft amendments to the bankruptcy law, which, if enacted, would constitute the most profound changes since the law was introduced in 2003.
Among numerous innovative ideas, the draft introduces the concept of “pre-packaged” bankruptcy into the liquidation bankruptcy regime. Specifically, it allows for filing a motion for bankruptcy in respect of an insolvent debtor, along with a request for court approval of a plan for the sale of at least a significant part of the debtor’s enterprise, as previously agreed by the debtor and a potential purchaser. The plan should be accompanied by a description and valuation of the assets which are subject to the procedure, as prepared by a person listed as a court expert, and should specify at least the purchase price and the identity of the potential buyer.
If the court finds the plan beneficial to the creditors and approves it, the court-appointed receiver would then need to sell the assets within one month. Since the sale occurs within the bankruptcy proceedings, the assets would be acquired free of any encumbrances and the purchaser would not be liable for the seller’s debts, in the event the entire enterprise or an organized part of it is acquired. This is important because, ordinarily, in the case of an acquisition of an entire enterprise or an organized part, the associated debts would become joint liabilities of the seller and the purchaser.
The concept still needs to be enacted and proven in practice. However, there is hope that it will reduce the hesitancy of potential buyers to purchase assets from entities on the verge of insolvency or bankruptcy for fear that the transaction may be challenged within subsequent bankruptcy proceedings. Further, since the process releases any encumbrances, it may prove useful in circumstances where important assets are heavily secured. Moreover, the swiftness of the operation process increases the chances of breathing life into a struggling enterprise before its financial situation irretrievably prejudices its future operations and value.
Importantly, for astute and proactive alternative asset managers, the process might create opportunities to acquire attractive distressed assets without some of the risks associated with participation in competitive sale processes.