How to determine the value of the collateral
For creditors with claims secured in kind, the key question is how to determine the value of the collateral. However, there is no consensus in the doctrine on the proper method of determining this value.
An arrangement entered into in the course of restructuring proceedings does not include claims arising out of employment relationships. Neither does it cover claims secured on the debtor’s assets, e.g. by mortgage, pledge, or registered pledge, to the extent that they are covered by the value of the collateral. In order to include in the composition agreement, despite the collateral, the creditor’s consent is required (Art. 151 sec. 2 of the Code of Commercial Companies). or a proposal of full satisfaction (Art. 151 sec. 2a of the Code of Commercial Companies). The second option is available from 1 December 2021.
Making a debt subject to an arrangement means that the debt can be restructured through the arrangement. This usually takes the form of a reduction of its amount or postponement of the repayment date. In the course of the restructuring proceedings, i.e. from the day the proceedings are opened until their final binding conclusion, the debtor is prohibited from settling the claims covered by the arrangement. However, the claims not covered by the arrangement must be paid in accordance with the payment dates.
It is crucial for creditors with claims secured in kind to know how the value of their claims is determined. It affects their voting power when voting on the composition agreement. It also influences the extent to which the claims are covered by the arrangement, and thus the manner in which they are restructured.
Many creditors ask themselves a question how the value of the subject matter of the security, which determines the voting power and the size of the restructured receivables, should be determined and evaluated. This is a subject of discussion among restructuring law practitioners. The dispute centres around an attempt to determine whether the valuation of a debtor’s encumbered property should take into account market value, or whether it should be based on a price obtainable in a forced sale (liquidation value).
VALUE OF THE COLLATERAL OBJECT
The difference between the two values mentioned above can be significant. The value for a forced sale is the amount that can be received from the sale of an item when the seller is under pressure, In the case of a forced sale, the seller is in a forced situation. In contrast, the exposure time of an asset is most often too short to obtain a market price. The market price is the highest rate the buyer is willing to pay and the lowest rate the seller will agree to. The market price is also the most likely price that the seller could receive in the market.
The wording of Article 151(2) of the P.R. refers only to the “value of the subject matter of the security”. It does not specify the method of valuation and therefore does not explicitly indicate either market or liquidation value. Adoption of one or the other concept will translate directly into determining the voting power and the scope of taking up or not taking up a claim. The purpose of the regulation in question is to determine as precisely as possible the voting power of a creditor depending on the proportion of his claim that may not be covered. This can be done by taking into account the most likely amount to be derived from the liquidation of the asset encumbered in rem. Determining the part in which the claim is covered by the value of the collateral is all the more difficult because at the moment of estimation – at the time of drawing up the inventory of claims – the determination of the amount is only a forecast based on the rules relating to the future realization of the collateral in question. The expected sale price is also affected by the type of asset, the timing of the sale, and other circumstances determined by the market in which the transaction will occur.
Therefore, the assessment of the value of the collateral object should be made not on the basis of an abstractly adopted uniform rule for each restructuring proceeding, but taking into account the circumstances of the particular case. Therefore, it cannot be assumed that the only and always correct method will be to indicate the market price or the price that can be obtained in a forced sale.
Restructuring proceedings may be conducted against an insolvent debtor or a debtor at risk of insolvency. The fact whether the debtor against whom restructuring proceedings are conducted is insolvent, or only threatened with insolvency, undoubtedly affects the perspective that should be adopted when valuing its assets. This is followed by the determination of the scope of coverage of receivables secured in kind in the object of collateral. If the debtor is insolvent, it is difficult to assume that the real value of his assets should be determined taking into account market prices.
The most likely result of a failed restructuring will be a declaration of bankruptcy and a forced sale of the collateral object. It will then be conditioned by the framework and economics of the bankruptcy proceedings, and in particular the relatively short period of exposure of the asset. It will be possible to accept an offer that deviates from the price obtainable with a longer search for a buyer. In the case of a debtor that is merely at risk of insolvency, the chance of selling the asset at market price is greater. It seems that the value that the enumerator should take as a basis for drawing up the inventory of claims and determining the voting power of the material creditor should depend on the realities of the particular proceeding and the type of collateral object.
OBJECTION TO THE LIST OF CLAIMS
If a creditor does not agree with the accepted division of an in-kind claim, then in the course of rehabilitation and composition proceedings he may file an objection pursuant to Article 91 clause 1 of the Banking Law. Pursuant to Article 92 clause 2 item 2 of the Banking Law, he will then have to specify both the value of the claim and the amount which, in his opinion, will not be satisfied from the collateral object. The objection may only be proved by documentary evidence or – which will be particularly applicable in this case – by an expert opinion. The dispute will be resolved by the judge-commissioner for the purposes of the restructuring proceedings. The estimation and contents of the list of claims do not have substantive legal effect to the extent that they definitively determine what portion of the claims is covered by the arrangement. This refers to cases where the actual value obtained from the sale of a given asset turns out to be different than originally assumed. In such a case, the unsatisfied portion of the secured claim is restructured as part of the arrangement, irrespective of whether the value obtained under the security was underestimated or overestimated, i.e. irrespective of the values adopted in the list of claims.
There is no consensus in the doctrine as to the correct method of indicating the value of the collateral. The positions are widely argued and it is impossible to exclude any of them. In the author’s opinion, this leads to the conclusion that an entity preparing a list of claims should have a broad view of the realities of the restructuring process and the debtor’s situation, as well as take into account all circumstances that may be specific and peculiar to a given proceeding.