27 (122) 2016
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Real Estate & Construction

New law on restructuring developers brings greater chance to avoid bankruptcy

By Anna Michalska, restructuring adviser, and Marta Łużyńska, lawyer, FILIPIAKBABICZ Law Firm
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The new Restructuring Law of 15 May 2015 came into force on 1 January 2016.

It excluded restructuring proceedings from the Insolvency and Rehabilitation Law, putting them into a separate law. The aim of the new regulation was to encourage entrepreneurs to initiate restructuring proceedings at an earlier stage of their financial difficulties. Carrying out restructuring measures enables troubled firms to satisfy their creditors to a higher degree than insolvency proceedings, and – importantly for the creditor – allows entrepreneurs to keep the business going and avoid its liquidation. In the new restructuring proceedings, a debtor concludes an arrangement with the creditors, allowing the debtor to restructure its liabilities. Debtors receive protection from the enforcement proceedings, giving them a chance to restructure their business and overcome their financial difficulties.

Restructuring proceedings may be initiated when a business is in the state of imminent insolvency, not just after the insolvency is declared. A precondition to initiating restructuring proceedings can now be a situation which indicates that within a short period of time, a business will not be able to meet its obligations.

Restructuring proceedings should be more desirable for a debtor than bankruptcy, because – in contrast to insolvency proceedings –  it does not lead to liquidation, and allows the entrepreneur to keep the business. This is reflected in the text of the Restructuring Law, which indicates that in the case of a bankruptcy petition and a restructuring petition being filed at the same time, the court will consider the restructuring petition first. Even if the restructuring plan is not executed, the debtor is not automatically declared bankrupt.

Currently the Restructuring Law distinguishes four types of restructuring proceedings:

  • Approval arrangement proceedings

  • Accelerated arrangement proceedings

  •  Arrangement proceedings

  • Rehabilitation proceedings

That diversity allows debtor to adapt the particular kind of proceedings to the businesses current financial situation. Separate proceedings have been set out for different types of business; one of these is the restructuring proceedings for developers.

Developers’ restructuring is carried out under the general provisions of Restructuring Law. It contains specific provisions intended to protect the rights of a buyer of a flat or house. The developer and the buyer are the parties to a developer contract; the developer is the entrepreneur is obliged to establish the right of separate ownership of the accommodation and to transfer it to the buyer. The buyer is obliged to pay the total sale price. These provisions do not, however, include buyers of non-residential premises. Those creditors may only claim satisfaction in accordance with the general principles of the Restructuring Law.

Any restructuring proceedings may be used by the developer. The developer may not use the first restructuring proceedings (approval arrangement) if this arrangement doesn’t include a buyer’s contractual claim, or if the contractual claims is secured on the real estate being  developed. The exemption doesn’t apply to the partial arrangement. (The partial arrangement may be concluded only in the procedure for approval arrangement or accelerated arrangement proceedings). This concerns only some of the debtor’s obligations. In practice, it concerns major creditors’ obligations such as the entities financing the debtor’s business activities, or the main suppliers. The partial arrangement does not involve other creditors. This solution reduces the number of entities involved in the proceedings and negotiations, allowing faster and easier procedures.

Restructuring the developer on the basis of these specific provisions should satisfy purchasers, by transferring to them the ownership of accommodation, and allowing the project to be completed as far as reasonable permissible. This solution breaks the principle of taking into account the collective interests of all the creditors in favour of the purchasers.

Additionally, this specific group of creditors is entitled to submit the arrangement proposals as well. There are some basic methods of restructuring debtor’s obligations, such as  postponing payments, dividing the principle amount into instalments or reducing the payment arrears. And as the group of purchasers has obtained a special position among other creditors, it may also propose additional surcharges to complete the whole development project, with different provisions for the continuation of the development project and new means of financing it. The arrangement proposals may concern the exchange of accommodation between creditors, or to move them alternative accommodation other than the subject of this specific development contract.

The entity being restructured needs to take active measures to improve its financial situation. Developers in this situation should consider looking for a strategic investor, new sources of finance for the project and renegotiating the terms of the credit agreements with the financial institutions, as well as renegotiating the terms of any other contracts which generate costs. It’s also important to identify risks, so as to be able to develop measures to help protect from them should they arise. Basic restructuring measures such as reducing operating costs, employment and salaries should also be taken.

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