Coronavirus affects the solvency of entrepreneurs

Coronavirus affects the solvency of entrepreneurs

The COVID-19 epidemic undeniably affects the Polish and global economy. The tourism industry has become the most exposed to losses, but we can already see that the threat to the supply chain is very dangerous for the liquidity of companies trading in Chinese goods. Imports and exports of goods at the time of the outbreak in Italy, and the steadily increasing numbers of infected people in the rest of Western Europe, will certainly not be without an impact on the financial capacity of Polish companies trading on the Old Continent. Ultimately, the economic slowdown will threaten the solvency of all entrepreneurs in our country.

Obligation to file for bankruptcy

However, entrepreneurs must bear in mind that how much the effects of the current epidemic would not affect them, they are obliged to file an application for bankruptcy if they lose the ability to perform their due monetary obligations. Bankruptcy law creates presumptions which, when examining a company’s liquidity, allow to determine when a state of insolvency occurs. According to Article 11(1a) of the Bankruptcy Law (hereinafter: “p.u.”), a debtor is presumed to have lost the ability to perform its mature monetary obligations if the delay in performing the monetary obligations exceeds three months. Therefore, in general, it can be said that after three months from the failure to settle the second pecuniary obligation, the entrepreneur is already in a state of insolvency.

However, it should be stressed that this is only an ancillary tool to determine the moment of insolvency, as Article 11(1) of the CFR generally indicates that a debtor becomes insolvent if he is no longer able to fulfil his monetary obligations that are due. If, therefore, the trader is already aware at that point that the negative effects of the epidemic on his business are such that he will be unable to meet his obligations, this means that the insolvency has already occurred. In this case there is no justification for demonstrating that insolvency will only occur when the oldest liabilities are more than 3 months past due.

Deadline for filing an application for insolvency

Determining when a state of insolvency arises is essential for the timely filing of an application for bankruptcy. According to Article 21(1) of the Act on Bankruptcy, such a motion should be filed with the court within 30 days from the date on which the grounds for declaring bankruptcy occurred.

In the case of entrepreneurs who are legal persons or other organizational units without legal personality and to whom a separate act grants legal capacity, this obligation rests with anyone who, pursuant to the act, articles of association or statutes, has the right to manage the debtor’s affairs and to represent him/her, alone or together with other persons.

Consequences of failure to file for bankruptcy on time

Failure to submit a timely filing of a bankruptcy petition may be very painful for the entrepreneur. In particular, management staff are exposed to liability for damages to creditors. This liability is regulated by art. 21 p. 3 p.u., art. 299 of the Commercial Companies Code and art. 116 of the Tax Ordinance. In the background, there is also a spectrum of penal responsibility, which is mentioned in art. 586 of the Commercial Companies Code, as well as a possibility of decision on the basis of art. 373 p.u. of the ban on business activity on one’s own account or within a civil partnership, of performing functions in the organs of partnerships, as well as of a representative or a proxy of a natural person conducting business activity within the scope of this activity, a commercial partnership, a state enterprise, a cooperative, a foundation or an association.

Rescue before bankruptcy

Fortunately, the Polish legislator has enabled entrepreneurs in crisis to avoid bankruptcy by taking advantage of the company’s restructuring path. As part of the restructuring proceedings, an arrangement is entered into between the debtor and its creditors which allows for the satisfaction of claims arising before the date of opening of the restructuring proceedings (including interest arising before and during the proceedings).

Importantly, the restructuring path can be used by an entrepreneur who has not yet become insolvent, but only at risk of insolvency. This means that even though there are no grounds for filing for bankruptcy and the entrepreneur anticipates that the economic slowdown caused by COVID-19 may affect its liquidity in the near future, it is already possible to react to the problems that arise in good time.

The opening of restructuring proceedings (accelerated arrangement, arrangement or rehabilitation) or the approval of the arrangement in the proceedings for the approval of the arrangement also makes it possible to avoid any negative consequences of failing to file for bankruptcy on time. It should be noted, however, that in this case it is not enough just to submit a motion (as in the case of the bankruptcy motion), or at least to issue an invalid court decision to open restructuring proceedings or to approve the arrangement in the proceedings to approve the arrangement. This may prove problematic, as many courts postpone all meetings except in urgent cases due to the epidemic. Fortunately, however, according to § 2 point 5(l) of the Ordinance of the Minister of Justice – Regulations of Common Courts, the applications for approval of the agreement in the proceedings for approval of the agreement and opening of restructuring proceedings were considered such cases.

This does not mean, however, that the decision to submit a restructuring application can be delayed, because the preparation of such an application is very time-consuming and unlike other court letters, in addition to a detailed legal analysis also requires an advanced economic analysis of the company.

Benefits of restructuring

In addition to the advantages outlined above of avoiding liability for late filing of an application for bankruptcy, restructuring proceedings also bring various remedies for the economic situation of an enterprise in crisis. The restructuring law provides for four types of restructuring proceedings: the procedure for approval of the arrangement, the accelerated arrangement procedure, the arrangement procedure and the rehabilitation procedure. The choice of a particular type of procedure depends on the individual assessment of each case, so it is difficult to indicate, in abstract terms, which procedure is best suited to the economic crisis caused by the epidemic.

Each of the proceedings, however, brings with it certain benefits, which will allow the entrepreneur to survive the downturn and settle his obligations after the market returns to the right track. First of all, restructuring makes it possible to freeze liabilities which arose before the opening of restructuring proceedings and to repay them on terms and conditions which, in principle, are proposed by the debtor. It may involve, inter alia, partial redemption of liabilities, spread in instalments, deferral of the payment deadline, or conversion of receivables into shares.

Depending on the specific restructuring procedure, the debtor also receives, among other things, protection against enforcement and a guarantee that key contracts for the company’s operations will not be terminated. On the other hand, it is possible for the debtor to terminate unprofitable contracts and to carry out the reduction of employment under the terms of the reduction in the company’s bankruptcy.

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