Modernizing bankruptcy
By Timothy Sifert
The new bankruptcy law to go into effect in October has won plaudits from most corners of the economy as the number of debt-ridden companies conducting successful financial restructurings is expected to increase sharply - something that could provide a kick to the economy. And with that, say lawyers, the swelling numbers of yearly bankruptcy filings will fall because businessmen will be able to better manage their fast approaching debt obligations.
By some industry estimates, bankruptcy and settlement proceedings have been shooting up by 50% per year as the country's economic pace has slackened. In 2001 there were more than 6,100 bankruptcy motions submitted to the courts, largely the products of mounting debt burdens following the country's exemplary economic growth in the later 1990s and precipitous fall at the turn of the century.
A mass of debt burdens is a natural result of the country's recent economically heady past, economists say. But the existing bankruptcy law, enacted in 1934, has proven woefully inefficient to be successful under the new post-communist market economy.
Most important, the new law, known as the Bankruptcy Recovery Act, allows forward-thinking, business-savvy entrepreneurs to file for protection from creditors at a point in time well before their concerns are actually insolvent. The existing law mandates that one must be insolvent, defined in the law as inability to pay debts, before actually being able to file for protection from creditors and seek a court-sponsored solution. Debtors and creditors were thus offered little time to settle their debts in a way advantageous to both parties while maintaining their operations and employment.
Jarosław Miller, an attorney at CMS Cameron McKenna, believes that the new law will pave the way for a new market for corporate restructurings that could be beneficial for law firms, bankers and, most crucial to the economy, businesses.
"I would expect some massive amounts of new restructuring," Miller said. "On Oct. 1, they can ask for an opening of the restructuring process."
After filing for restructuring proceedings, companies will be able to have a roughly four-month grace period to sort out their debt obligations with creditors.
"It will give some other companies, which are balancing on the edge, some fresh air," Miller said. "The existing structure is very restricting. This is going to be the major change."
He pointed out, too, that the law is already effecting the operations at CMS Cameron McKenna.
"We have two clients who are being pushed by their creditors to restructure," he said.
Miller explained that the new law would enable a more efficient procedure in fashioning an agreement between debtors and creditors by availing the parties involved of more time and options.
The firm, therefore, is pushing its client to wait for the law to be enacted.
"Hopefully, they can wait a few months," he said. "The best option is to wait and act pursuant to the new law. Our role has been to convince them that the best option is to do it under the new funding regime."
For some companies the law has come too late. Centrozap Odlewnie, a subsidiary of the country's steel product distributor Centrozap, recently filed for bankruptcy in a Katowice regional court.
"This could have been very helpful," an individual close to the company said. "It's probably a great model for the future. But it's too late for Centrozap. Generally, the situation in Poland is very poor for improvement of (debt-burdened) companies." He declined to be named in this article.
Miller added that one of the reasons why this law could be a sea change for the national economy is the obvious dearth of successful restructuring under the existing law. Most of the big-name financial restructurings, such as Elektrim's last year, were settled out of court.
"There will be a substantial number of restructurings," Miller said. Under existing law, only a couple of companies a year successfully restructure their businesses. "If it goes up to 100 per year, that's a lot," he said. "And this is the best evidence that the existing law was inadequate."
On the other side, some lawyers, though noting the benefits of the law, do not expect any earth-shattering effects on Oct. 1.
"I wouldn't expect a flood of restructuring motions," said Lech Giliciński, partner at Weil, Gotshal & Manges. "The main merit of the new law is that insolvency proceedings will happen much more quickly."
Weil, Gotshal & Manges has been selected by the government to aid in the education and enactment of the new law.
Giliciński said that the new law is a streamlined version of the current one. In the existing law, insolvency and arrangement, or restructuring, were two separate procedures. The new law combines the two procedures, allowing for fewer steps, he said.
Giliciński's colleague at the firm, partner Roman Rewald, praised the law because it recognizes that times have changed in the country and that a market economy needs changing law structures to keep in motion.
"Bankruptcy has evolved from the old times. Debtors used to just give up everything they had and creditors would fight for it around the table," Rewald said.
Now that debtors have a right to seek protection from creditors before they are actually insolvent, he said, the "rational" businessman will get a better chance to thrive in the country.
"The new law is a way for the entrepreneur to say, 'Look, I need a break,'" he said.
And as entrepreneurs get a lift from the new law, Miller said that lawyers will too.
"To the extent that it opens up a new market, it's good," he said. "And it could be good for bankers."
