EU brings new financial instrument to Poland

   To the careful reader of this column it will come as no surprise that once again I have chosen to explore the intricacies of a new financing method. While the government is having difficulties in closing chapters in European Union (EU) accession talks, the legislature seems to have been busy reviewing EU member country laws that provide solutions to various issues in Poland’s developing market.

   One of the latest examples is the Warehouse Act, which on Jan. 1, 2001 introduced the concept of a warehouse receipt (dowód składowy) into the legal landscape. Although warehouse receipts may not be a topic that keeps everyone on the edge of their seat, anyone whose business involves maintaining inventory, warehousing or lending should take note.

   The act has two major purposes. Obviously, it regulates the warehousing industry. Of more universal interest, however, it introduces a new financial instrument – warehouse receipts.

   The act regulates who may operate a warehouse. At first glance it would appear that just about anybody may. As with many other business activities, however, the prospective investor will first need to obtain a permit from the proper government agency. Where you apply is determined by what you intend to warehouse and whether you are a foreign entity. Moreover, if you intend to store agricultural products or raw materials, you will be subject to additional government controls and insurance requirements.

   The application itself will need to be supplemented with additional information, including the investor’s corporate documents, shareholder information, business history, financial statements, and data on any parent company and subsidiaries, along with the proposed regulations of the warehouse. Once you have submitted your completed application, the agency will have up to two months to issue a permit or deny the application. If approved, you will need to pay a fee of E 1,000 for the permit.

   From a market perspective, the second major element of the act, the creation of the warehouse receipt, is the most important. An operator of a warehouse issues a warehouse receipt to a person or entity depositing goods in a warehouse for safe keeping. A warehouse receipt actually consists of two documents, the receipt itself and a warrant.

   Similar to a bill of exchange, a warehouse receipt is used to transfer rights to the goods deposited in the warehouse. The receipt evidences ownership title to the stored goods, and you may transfer ownership title by simply handing over the warehouse receipt to a buyer.

   The warrant provides an efficient mechanism to establish a lien on the stored goods as collateral for a loan. The act allows you to transfer the warehouse receipt in its entirety or to transfer separately the receipt and the warrant. By separating out the warrant, the owner is able to sell the goods without seeking prior permission from the lender that is holding the warrant. The lender, meanwhile, is still protected because the warehouse will not release the goods to the new owner until either the warrant is presented along with the receipt, or an amount of money equal to the face value of the warrant is deposited with the depositary bank, which ensures that the lender is paid in full at the moment the loan comes due.

   The role played by the depositary bank and other parties to the transfer of a warehouse receipt may be best explained by an example. Let’s say that you manufacture computers. At present you are unable to sell your computers, but you need to raise some cash quickly. You agree to deposit your computers with a warehouse, which issues you a warehouse receipt. You and the owner of the warehouse agree that Bank X will act as depositary.

   You then apply to a different bank for a six-month loan using your deposited computers as collateral and give the lender the warrant from the warehouse receipt. The next day a major computer manufacturer announces cuts in production, resulting in a mass buy up of computers on the market. You then sell all of your computers for twice their original value. You give the buyer the warehouse receipt, minus the warrant, which you previously gave to the lender.

   The buyer, realizing that the warrant is missing, knows that someone else may have an interest in your computers. To ensure that the warehouse will release the computers, the buyer will want to pay you the amount of the purchase price, less the face value of the warrant. The buyer will then deposit the difference into the account of the warehouse maintained by bank X, which will be identified on the face of the warehouse receipt. Once bank X has notified the warehouse that the buyer has paid the amount of the warrant, the warehouse will release the computers to the buyer upon surrendering the warehouse receipt. Six months later when the loan is due, bank X will pay back the loan when the lender surrenders the warrant.

   While it can be entertaining to dwell on a seller’s fantasy, it is also possible that you will not be able to sell the computers in six months and repay the loan. The act allows for a public auction of stored goods in the event the funds held by the depositary bank are insufficient to satisfy the warrant. Pursuant to the act, the holder of the warrant may, subject to the fulfillment of certain conditions enumerated by the act, demand that the warehouse auction the pledged goods. Once the stored goods are auctioned, the holder of the warrant will be paid out of the proceeds.

   This article was prepared by Lejb Fogelman, the managing lawyer of Hunton & Williams’ Warsaw office, with the assistance of Joanna Fonfara, an associate attorney.