Attorneys tuning up for new bankruptcy law

The government's new bankruptcy law is designed to keep employees of bankrupt firms in their jobs and offer greater protection to lenders by improving conditions for financing, Polish lawyers say. But even though the government has passed the draft law to its ministries for approval, ailing businesses and insecure employees will need to wait until next year for its implementation. The number of businesses failing in Poland has soared in the past two years. The number of bankruptcies in 2001 was 104% higher than in 1999, with a 135% increase in settlement proceedings, according to Justice Ministry figures. But Poland's bankruptcy law has failed to keep up, forcing failed firms to cease trading, slash jobs and make creditors' assets difficult to recover, said Tomasz Wardyński, a managing partner at Warsaw law firm Wardyński & Partners. "The survival of companies is important because they employ people, allowing them to support their families and, just as significantly, to pay taxes," Wardyński said. "This element is more important for the economy than the question of whether a piece of machinery torn from a company's assets can be sold for a greater or smaller sum, especially since bankrupt assets are always sold at a loss."

Modeling a new law Inspired by Chapter 11 of the U.S. bankruptcy code, which allows for a reorganization usually of corporations or partnerships, the draft law makes the preservation of companies and jobs its central premise, said Robert Zegadło, the secretary of the Commission for the Codification of Civil Law (KKPC) at the Justice Ministry, which completed the draft bill in May. According to Zegadło, the new law will encourage creditors to keep companies intact while allowing for rapid shifts between settlement and bankruptcy procedures, permitting bankrupt firms to be restructured, increasing firms' viability and generating revenue to pay off creditors. "The settlement option allows the bankrupt company to continue to run with the bankrupt individual at the helm," Zegadło said. "(With) the liquidation option the draft allows the company to continue running under a receiver." He added that the law also favors the sale of a company as a whole during liquidation. "The owners change but the company, the business and jobs are preserved," he said. A lack of trust in current bankruptcy law means that creditors are unlikely to allow a company to keep running for fear that they will be unable to recover their money, said Jarosław Chałas, a partner at the Warsaw law firm Kancelaria Prawna J. Chałas, M. Wysocki i Partnerzy.

Shipshape "The situation of Szczecin Shipyard is symptomatic of this understanding of bankruptcy law: Government officials said 'Let's declare the (shipyard) bankrupt to clear the company's debts,'" Chałas said. "Smaller creditors who sense an approaching bankruptcy try to aggressively claw back whatever they can because they have no faith in the bankruptcy procedure." Although the new law would not have prevented last month's collapse of Szczecin Shipyard, it would have reduced the burden on the company's creditors by preventing management foot-dragging in filing for bankruptcy since it introduces new definitions of insolvency and management liability, said Beata Gessel Kalinowska vel Kalisz, a managing partner at the Warsaw law firm Beata Gessel, Andrzej Chajec & Partners. "From the press it appears that Szczecin Shipyard was insolvent since last year," she said. "However, due to certain negotiations with creditors, it did not file for bankruptcy … Such negotiations will not justify not filing on time. However, I rather don't think that such an earlier (filing) would have helped Szczecin Shipyard to survive … because of the structural problems of the whole sector." The draft law also offers additional protection to institutional lenders who secure their loans against a company's specific asset components. The current law pools a bankrupt company's assets, giving lenders with collateral on loans only a share of the pool proportional to the value of their collateral. By treating collateral separately from the asset pool, the new law promises to improve the ability of lenders to reclaim borrowed money, Wardyński said. "For banks that finance large undertakings with a high degree of economic risk … this is a significant change, and I believe it will increase the number of successful financing applications," he said.

Ready next year The government's draft will be submitted to the cabinet for approval in November. Zegadło anticipates it will be passed by the Sejm around the end of the year, but will not be fully implemented until the summer of 2003.