How the satisfaction test will work
The satisfaction test is a new institution of restructuring law, introduced by Directive 2019/1023
A draft amendment to the Bankruptcy and Restructuring Law recently appeared on the pages of the Government Legislation Center. It provides for the introduction of a new institution, the so-called satisfaction test (proposed Article 10a p.r.). The name is not a literal translation of the content of Directive 2019/1023. However, it is the Polish equivalent of the best-interests-of-creditors test institution regulated therein, referred to in recital 52 and Article 2(1) para. 6 of the directive. In the Polish language version of the EU act, the indicated phrase is translated as: the criterion of protection of the best interests of creditors. It is worth bearing in mind, therefore, that the term satisfaction test itself does not appear directly in the provisions of the directive.
The idea of the satisfaction test
In concept, the purpose of the new institution is simple. The satisfaction test is a simulation by which one can check whether any of the creditors opposing the arrangement are harmed by it. This would be the case if they obtained a higher satisfaction in the event of liquidation or sale of the company in its entirety, or implementation of yet another scenario. Thus, through this test, creditors will be able to assess what the economic alternative to the arrangement is. This, in turn, will make it easier for them to make a rational decision when voting.
Our legislature has decided to implement the test in a version in which the arrangement proposed in the proceedings will be compared with the bankruptcy proceedings, both in the option of selling the enterprise in its entirety and selling it in pieces. This is the option explicitly indicated in Article 2 (1) para. 6 of the directive. From the point of view of the practical course of the proceedings, it seems the most reasonable. After all, a failed restructuring very often ends with creditors filing simplified bankruptcy petitions.
The result of the test will be positive if every creditor involved in the proceedings and covered by the arrangement is satisfied to a higher degree than in the eventual bankruptcy proceedings. This is particularly important in view of the proposed changes to the grounds for refusal to approve an arrangement. At issue is Article 165(2) of the P.R., which is to read: “the court shall refuse to approve the arrangement if any creditor who voted against the arrangement and raised objections would be worse off as a result of the arrangement than if the bankruptcy proceedings were carried out or if the restructuring proceedings were terminated without accepting the arrangement.”
In practice, this means that a negative result of the test provided for in Article 10a p.r. would, in principle, negate the advisability of putting the arrangement in question to a vote. Theoretically, one would have to obtain 100 percent support from creditors. Even one active creditor opposing the arrangement will result in a refusal to approve the arrangement.
The proposed satisfaction test is to consist of two elements:
- valuation of the debtor’s business and assets in the context of restructuring and bankruptcy,
- simulation of bankruptcy proceedings and comparison of the results with the proposed arrangement.
With a high degree of probability, it can be assumed that most restructuring advisors will be able to handle the simulation indicated in the second point on their own (reminiscent of the “private creditor test” drafted so far). However, a far more difficult challenge is to conduct a professional valuation of the company. All the more so because it does not involve estimation, as in inventory. Rather, no one doubts that the ability to prepare a business valuation goes well beyond the statutory competence required of advisors. Nor is it verified in any way as part of the procedure for obtaining a license. It will therefore require widespread reliance by advisors on the assistance of appraisers. This, in turn, will raise the cost of the procedure. For this reason, Article 10a p.r. does not apply to micro-entrepreneurs.
The test is to be filed by the administrator/court supervisor within 30 days before the date of convening the creditors’ meeting or starting the procedure of voting on the arrangement without convening the meeting. Creditors may file objections to it. However, they do not have to be taken into account. Thus, a dispute over any defects in the test will ultimately be resolved by the court as part of the procedure for approving the arrangement.
The necessity of drawing up the test in advance also raises the question of the consequences of changing the arrangement proposals. Such a change can be made at a stage much later than the date of drawing up the test – for example, at the creditors’ meeting itself. Should the administrator/supervisor then update the test?
Advantages and disadvantages of the new regulation
The expected disadvantages of the satisfaction test are primarily:
- an increase in the cost of ongoing proceedings (each valuation is an additional cost),
- and a likely increase in the duration of proceedings (in the case of large or complex companies, no one is likely to prepare a valuation in 2-3 weeks).
In addition, a possible dispute over the correctness of the satisfaction test moves to the stage of approving the arrangement. Here, the result of the test is de facto decisive for the implementation of the new premise of refusal to approve the arrangement (proposed Article 165(2) p.r.). Given that the court cannot appoint an expert (Article 196 p.r. remains unchanged), it is difficult to imagine the course of such a dispute. After all, knowledge of the methods and assessment of the correctness of the company’s valuation is not within the competence of the courts. One may wonder how the practice of using in such a case the assistance of an “opinion prepared by an entity designated by the court”, which is not an expert, will develop.
The advantage of the proposed solution will certainly be to increase the transparency of the proceedings and to provide creditors with a document that clearly shows what the alternative to the proposed arrangement is. However, this is not a groundbreaking solution. Until now, these functions were performed by the “private creditor test.” Since tax liabilities in bankruptcy are in the same category as virtually all private creditors (Cat II), the private creditor test reflected the possible level of satisfaction of all creditors, not just public creditors.