On 20 June 2019, the European Parliament and the Council of the European Union adopted a directive on preventive restructuring frameworks, debt discharge and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt (hereinafter referred to as the "EU Directive"), amending Directive 2017/1132/EC (the Restructuring and Insolvency Directive).
As indicated in the preamble to the EU Directive, the adoption of this legal act aims to contribute to the proper functioning of the internal market by eliminating obstacles to the exercise of fundamental freedoms, such as the free movement of capital and the freedom of establishment, which result from differing provisions relating to preventive restructuring, insolvency, and debt discharge in the Member States. The EU Directive thus adopted aims to ensure that businesses and entrepreneurs in financial difficulties have access to effective restructuring, enabling them to continue their business activities. Importantly, the Directive also applies to entrepreneurs who have fallen into insolvency, providing them with a full discharge of their debts within a reasonable timeframe (so-called second chance).
All Member States were obliged to adopt this EU Directive within two years of its issuance, i.e. by 17 July 2021, however, Poland exercised its right to postpone the implementation of the EU Directive until 17 July 2022. The solutions presented below, resulting from the above-mentioned legal act, are not currently in force.
Main assumptions of the EU Directive
Early warning tools
It's not uncommon for entrepreneurs to react far too late to the first signs of a deteriorating financial situation. To address this, the EU Directive introduces early warning tools (EWTs), which are designed to enable entrepreneurs to take action and streamline actions to avoid impending insolvency . Both member states and private entities can activate these early warning mechanisms online, in situations where an entrepreneur has failed to pay tax (tax office) or social security contributions (ZUS). A key issue is how the Polish legislator will implement these alert mechanisms. Will the EU Directive implement a register of tax and social security arrears within the Tax Office and the Social Insurance Institution (ZUS), or will a general register modeled on the National Debt Register (Krajowy Rejestr Zależonych), enabling the search for disclosed bankruptcy, restructuring, and enforcement proceedings, be introduced? At the same time, it is important to consider whether a business should be included in the register if it is one month or three months behind on payments. Considering the nature of early warning mechanisms, which are designed to minimize the likelihood of insolvency, it is reasonable to conclude that the sooner a business detects its financial difficulties, the more effective it will be to restore its financial liquidity. Another issue is who will have access to such a register? While widespread knowledge about the reliability and fulfillment of obligations by contractors is desirable, it may constitute access to sensitive company information and be subsequently exploited by unfair competition.
Another solution proposed in the EU Directive is the provision of advisory services by private or public institutions, as well as encouraging professional entities, i.e. accounting offices and tax authorities, to inform entrepreneurs about unfavorable financial changes taking place in their enterprises, as they know the financial situation of entrepreneurs best.
Preventive restructuring framework
Preventive restructuring is another solution in the EU Directive, the aim of which is to prevent complete insolvency and restore a company's stable financial condition in situations where insolvency is likely . An interesting method for verifying whether a business even meets the criteria for preventive restructuring, namely whether it has a chance of improving its financial situation, is the so-called viability test . EU authorities have left the decisions regarding the obligation to apply this test to the Member States, but the above solution should be considered practical and useful, as the test's result will allow the business to take further steps, without undue delay and without detriment to creditors, to either improve the company's condition or to quickly liquidate it .
The EU Directive does not specify what circumstances will be taken into account when assessing the probable insolvency of an entrepreneur , but taking into account the economic considerations of the enterprise, it would be necessary to examine:
- the source and degree of fulfillment of the entrepreneur’s due obligations – assessing whether the entrepreneur fulfills his obligations regularly;
- if not, whether the delay in which the entrepreneur remains exceeds three months;
- whether the debt poses a real threat to the continued operation of the business;
- whether there are any enforcement proceedings pending against the entrepreneur;
- the number of creditors, as well as the relationships between the creditor and the entrepreneur resulting from their cooperation;
The above-mentioned issues are for illustrative purposes only. If the test results indicate that the entrepreneur has a chance of ensuring the profitability of their business, they will be required to submit an appropriate application. This right is also available to the entrepreneur's creditors and representatives of their employees, subject to the entrepreneur's consent.
Negotiations regarding restructuring plans – debtor in self-management
In the event of initiating preventive restructuring, the entrepreneur (debtor) should retain full or partial control over its assets and business. At the same time, the EU Directive does not prevent member states from appointing a court supervisor if the circumstances of the case require it. However, a court supervisor should be appointed to assist the entrepreneur in negotiations with creditors regarding the stay of enforcement proceedings when it is necessary to approve a restructuring plan despite the objections of a group of creditors, or when creditors request it. The cost of the court supervisor's fee is borne by the creditors.
Suspension of individual enforcement actions
At the same time, to support entrepreneurs during their negotiations regarding a restructuring plan with creditors, individual enforcement actions should be suspended. The directive provides for a stay of enforcement actions against all creditors (total) or against certain creditors or categories of creditors (limited) . The period for which enforcement may be suspended is four months and may be extended by a maximum of 12 months, for example, if significant progress has been made during the negotiations regarding the restructuring plan. Furthermore, entrepreneurs should note that judicial authorities, in order to protect the interests of creditors, may lift the stay of enforcement actions if the negotiations are likely to fail to achieve their intended goal.
Pursuant to Article 6(4) of the EU Directive, Member States may, in strictly defined cases, exclude certain claims or categories of claims from protection against enforcement. These include situations in which enforcement would not pose a threat to the restructuring of the company, as well as situations where the interests of creditors could be harmed by staying individual enforcement actions.
Protection from enforcement actions has positive consequences in other aspects of the restructuring process. Specifically, while individual enforcement actions are suspended, it is possible to suspend the obligation to file a bankruptcy petition, which would otherwise result in the liquidation of the business. This solution should be viewed positively, as it is another step towards maintaining the business's market position.
However, this solution also has its limitations. Member States have the option of waiving the suspension of an entrepreneur's obligation to file for bankruptcy if the entrepreneur is unable to repay its due liabilities.
Creditors are unable to terminate the contract if the entrepreneur negotiates a restructuring plan or files a motion to suspend individual enforcement proceedings
The EU directive provides that if an entrepreneur decides to file an application to open restructuring (preventive) proceedings, the right of creditors to terminate contracts solely due to the fact that negotiations are being conducted or an application to stay individual enforcement actions within the framework of such proceedings should be suspended.
This solution is intended to protect the business, as terminating often strategic contracts with a business experiencing temporary financial difficulties could only threaten the proper functioning of the business and only increase its chances of deepening insolvency. Therefore, creditors' invocation of so-called ipso facto clauses, which authorize the termination of a contract solely on the basis of the business's insolvency, will not be applicable in this situation.
Debt relief and business bans – a second chance for entrepreneurs
The EU directive establishes the principle that insolvent entrepreneurs should have access to at least one type of restructuring procedure that will provide them with complete debt relief. At the same time, the period after which the entrepreneur can obtain complete debt relief should not exceed three years, namely:
a) in the case of proceedings involving a creditor repayment plan – from the date of the decision of the judicial or administrative authority approving the plan or from the commencement of the plan’s implementation;
b) in the case of any other proceedings – from the date of the decision of the judicial or administrative authority concerning the initiation of the proceedings or the establishment of the entrepreneur’s bankruptcy estate.
An exception to the above-mentioned principle is the possibility for Member States to limit or exclude the right to debt relief in a situation where the insolvent entrepreneur acted in bad faith or to the detriment of creditors.
The discharge of debts owed to an insolvent entrepreneur is also linked to a ban on conducting business activity, namely the EU Directive stipulates that if an insolvent entrepreneur has exercised the right to discharge of arrears, any bans on conducting or continuing trade, business, craft or professional activity resulting solely from the entrepreneur's insolvency should cease to apply at the latest at the end of the period for which debt discharge was required.
Summary
In the authors' opinion, extending the deadline for implementing the solutions provided for in this EU Directive disadvantages Polish entrepreneurs. In times of economic crisis, entrepreneurs should be able to take advantage of the innovative solutions provided by the EU Directive, such as early warning tools for the likelihood of entrepreneur insolvency. It is in the interest of both the European Union and Poland to maintain the proper functioning of the entire economy, as every case of an insolvent entrepreneur facing liquidation impacts other entrepreneurs due to the network of connections—often international ones.
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