Shutting their doors

The government is in the early stages of revamping a pre-war bankruptcy law that can leave creditors penniless as a sour economy makes thousands of firms insolvent While Arena.pl's bankruptcy spiral began nearly four months ago, those involved expect it won't fully play out for another half a year. Maybe longer. Saddled with debt and stricken by infighting between shareholders and company management, the decision to bankrupt the Internet portal was reached internally in mid-October - weeks after the firm sacked employees in an effort to slash costs by 90%. "By the time I arrived, it was too late," said Jan Steckiewicz, president of Arena.pl, who took his post Aug. 29. Economic analysts say it's a scenario likely to be played out many more times this year, as companies fold under the weight of a poor economy, taxes and a depressed global outlook. Bankruptcies are rising at a rate that neither the current law, nor the nation's legal system, are equipped to handle, experts say. Arena.pl's case is typical for many Polish firms. The company's first application for bankruptcy in late October was rejected as incomplete. "We had problems creating a balance sheet because the company didn't have enough cash to hire an accountant," said Małgorzata Klukowska, Arena.pl's legal counsel through bankruptcy. "Only after the sale of a major part of (Arena.pl's) hardware, the president was able to pay the person to create the requested document. If there was nothing to sell, the company could not go bankrupt because it could not afford (the process)." The company's balance sheet was included in the second filing Nov. 28, along with a list of debt holders, a report on debt payments dating back six months, a list of assets and the most recent record of appearances before the nation's courts. Strict documentation requirements consume time and money - both in short supply late into private companies' death throes, bankruptcy lawyers and accountants said. "We waited more than a month for the court session … during that time the company's debts were rising dramatically," Klukowska said. On Jan. 8, the court ruled Arena.pl bankrupt, and appointed a receiver to handle the sale of the company's assets and ensure the repayment of debts; a painfully slow process of talks, meetings and court-mandated bureaucracy set to run well into 2002. Making headlines Corporate collapses came fast and furious last year. Failed U.S. energy giant Enron made headlines around the world and remains the target of criminal probes looking into shady accounting practices, while closer to home holders of Elektrim's defaulted bonds wrangle with the conglomerate's management over repayment, as judges last month refused to pull the trigger on what would have been Poland's largest bankruptcy in history. The Elektrim saga has overshadowed a slew of corporate failures in Poland. In the first half of 2001, 2,861 Polish companies filed for bankruptcy, up 43% from the previous year, according to the Justice Ministry. While second-half figures won't be available until March, many believe the number of filings will eclipse 2000's total of 4,400. "After 1989, clients were interested in company start-ups, mergers, and so on," said Agnieszka Maj, an associate with the Warsaw branch of Linklaters law firm. "Now, clients with court proceedings related to problems with debtors are most common." 68-year-old law Bankruptcy in Poland is governed by laws that hit the books in 1934; amended several times over with detailed regulations that relate to banks, insurance companies and state-owned ventures. Any business that suspends debt payment can be declared bankrupt, as well as business entities whose assets cannot cover contracted debt. Either way, business partners, bondholders, authorized representatives or liquidators file for bankruptcy proceedings at the economic court in the capital of the given voivodship, or regional administrative district, where the financially strapped firm is headquartered. The law also stresses timeliness in filing bankruptcy. Debtors have two weeks to file from the point debt payment is stopped and current law prescribes penalties, including a two- to five-year ban on any business activity and exclusion for similar periods from a supervisory board position of a joint-stock company. The waiting game After filing, in most cases, the waiting game begins. "It usually takes about six months for the first hearing," said Paweł Świrski, senior associate at the Warsaw office of law firm Baker & McKenzie. "That's why the Elektrim case was surprising not only to the creditors, but also lawyers," he added, noting the 12 days that passed from when shareholders filed to bankrupt the company and the Warsaw Economic Court's subsequent ruling. Most firms, however, don't get the fast-track treatment and instead are often sidelined for months with no word from the court. In some instances, the court makes no ruling on a claim's merit. "I had one case when the court had the creditors waiting while ‘looking into' the matter from April to September, only to decide not to start bankruptcy proceedings," said Olga Sztejnert, an attorney with the Warsaw firm Drzewiecki, Tomaszek i Wspólnicy. "During that time, even if the company wanted to start paying its debts, it couldn't because the court was on the case." Critics of the system say current law fails to protect creditors, which have a limited ability to seize collateral of failed firms. Those same critics say traditional exit processes for debtors - the movement of labor and assets out of one organization to another - is neglected under current law. Claims against bankrupt companies are satisfied under criteria set down in the 1934 law. Employees, court-appointed receivers, outstanding payments to the Treasury Ministry and fees owed to the Social Insurance Administration (ZUS) are given priority in debt payment over creditors in most cases, lawyers say. From that point in the process, debt collection literally becomes a race to the courthouse among creditors. "Even when we apply to secure some of these assets, we are fourth in line of those expecting payment," Sztejnert said. "If we do not apply for this, we would be sixth - meaning we would probably get nothing." Getting to court first doesn't necessarily ensure timely payment either. The recovery of assets by court-appointed receivers is slow, drawn out by the sheer volume of paperwork required by the court, time spent researching assets and endless meetings with the parties owed money. "There was only one case in my professional career that I managed to complete within two years," said a Gdynia-based receiver with 10-plus years of experience who asked not to be named. "Fault lies with the court and our law system. Court sessions are scheduled every three to four months, and the cases are so complicated that they require four to five sessions. Then, sometimes there's an appeal." Creditors tend to fare better in cases involving state-owned firms as opposed to private companies, the receiver said. "(Private) companies just declare bankruptcy too late and they don't have enough assets," he said. "With state-owned companies sometimes I even get to pay sixth (in line for payment) category creditors." Additionally, debtors can avoid paying off creditors altogether by skipping bankruptcy and pushing the court for arraignment proceedings. "Creditors cannot object to this and in doing so (starting arraignment proceedings), it prevents the opening of bankruptcy proceedings," said Linklaters' Maj. "It's a process that may last years." Full court press Meanwhile, lawyers in the bankruptcy scene say that courts' administrative staff is spread too thin, is ill equipped and in some cases lacks proper training to process and manage claims. "Commercial courts still suffer from a lack of resources and training to become more efficient," the European Union's (EU) 2001 accession report reads. The list of ills includes a limited number of judges that hear bankruptcy cases, insiders said. "There are only three judges (that meet for cases deemed more complicated) and it's very difficult to collect them all at the same time," Świrski said of Warsaw's Economic Court. The court has a rotation of four judges that work bankruptcy. After a ruling on the bankruptcy question, one judge is assigned to supervise the process, compounding the situation because of the enormous time demands. "(The judge) has no capacity to decline such assignments," Świrski said. Some also cite a shortage of well-trained judges in the complexities of Poland's bankruptcy procedures. "There's a certain lack of specialization among them and training isn't sufficient," Świrski added. Bankruptcy cases, he said, are "a point at which all commercial matters are centered ... a judge should have a wide range of knowledge of not just the law but also the economic questions involved." Others weren't so quick to point fingers at those handing down the laws. "They are well prepared, and learned, but they do not have the proper equipment due to the financial problems with the budget, which we can do nothing about," Sztejnert said. Officials with Warsaw's Economic Court, as well as its bankruptcy department, declined to be interviewed for this story. "The state's economic situation creates an unfavorable situation for financing the justice system," said an official with Kraków-Śródmieście Economic Court who asked not to be named. New staff is added and needed technology purchased only at the start of the year, he said. The additions haven't kept up with the increased workload. "Most of our unsatisfied needs are connected with the levels of our administrative staff," the official said, whose department processed 244 bankruptcies in 2001, double the number handled the previous year. Reforms on the way As Poland approaches the last leg of its run-up toward EU accession, lawyers and academics are fine-tuning a slate of reforms for the bankruptcy law. Exactly when the 400-plus new articles will replace current law isn't set in stone, as the reforms face legislative scrutiny. When contacted, staff at the Sejm's Committee on Justice and Human Rights said they have yet to receive a proposal from the Justice Ministry. "We'd hope that it becomes binding by the end of the year," Świrski said. Experts say creditors will have improved access to debtors' assets much earlier in the process than allowed under current law. Such assets - including all bonds and securities - will be secured at the start of the bankruptcy process. "State bodies will not have the preferential status that they have right now," Maj said. In other areas, reforms would move Polish law closer to the U.S. model of Chapter 11 protection, which keeps troubled companies in business while reorganizing finances to make payments. At any point in a bankruptcy case, creditors and debtors could opt for restructuring of the company, lawyers said. Reforms, however, don't address the issue of individual persons filing for bankruptcy, which isn't provided for under the law. "Now, the bailiff comes to your house and takes what's needed to satisfy claims," Maj said. "The courts are not ready to administer personal bankruptcies." Individuals aside, the extent to which changes to the law improve the nation's notoriously slow court system is unclear. "Nothing will change if the courts are not made more efficient," the Gdynia receiver said.