The application is made under a supervision of the debtor-appointed licensed restructuring advisor - the court does not verify the grounds for the application - by publishing an announcement in the Official Gazette (Monitor Sądowy i Gospodarczy), Czepukojc and Dlugoborski noted.

Upon publication, the debtor is given four months to reach an agreement with its creditors regarding its restructuring proposal and have it submitted for approval to the court, during which the debtor benefits from various types of protections against its secured and non-secured creditors along with selected contractors, including parties of credit facility agreements and lease agreements, they added.

Moreover, by operation of the Polish COVID-19 crisis legislation, the Polish legislator has lessened the pressure on the directors of insolvent companies in the case of COVID-related insolvencies, noted Czepukojc and Dlugoborski.

On the other hand, new financings in court restructurings were very rare in Poland even prior to the COVID-19 epidemic due to lack of sufficient statutory incentives for new money providers, which has not been changed under the COVID-19 legislation.

Government rides to the rescue 

Along with regulatory arrangements, the Polish government also introduced an anti-COVID-19 financial state aid; which is unprecedented in size and scale, noted Czepukojc and Dlugoborski. UniCredit assessed the package of  financial and other measures announced in Poland being the most generous of packages introduced in the CEE region. However, they noted that debtors in court restructuring proceedings or who have been declared bankrupt do not have access to the aid measures.

In order to address these difficulties the New Chance Policy as a new aid instrument was introduced on July 2020 which, in general, is also available for companies that plan to initiate court procedures, Czepukojc and Dlugoborski noted. This instrument offers three programs: rescue aid, temporary restructuring support and restructuring aid. It will provide the entrepreneurs with liquidity for the time needed to develop a restructuring plan or carry out a smooth liquidation, they said, adding that the project budget for 2020-2021 is a PLN 840 m (USD 221m) and Industrial Development Agency JSC is a project operator.

“It remains to be seen to what extent this program will be utilized by market participants”, according to Czepukojc and Dlugoborski.

Commercial landscape after COVID-19

Prior to March 2020, Poland’s economy was doing very well, growing steadily for the past 28 years, a record high in the EU, Czepukojc and Dlugoborski said.

The liquidity gaps due to the COVID-19 pandemic were filled quickly during the first wave by the state financial aid programs, especially SMEs received substantial financial aid, which can be written off to a large extent in the future, and with specific workplace maintenance measures, Czepukojc and Dlugoborski said.

Corporate reaction to the first phase was about maintaining liquidity, as corporates looked for different sources of additional funding, according to a Poland-based financial advisor. In Q320, we saw more and more companies going down the route of operational restructuring with cost cutting, implementing new operating models in order to adjust better to changing market conditions, noted the financial advisor.

After the first wave, Poland saw an increase of out-of-court and in-court debt restructurings and insolvency proceedings, but the wave hasn't been as high as expected, Czepukojc and Dlugoborski noted.

Overall, the reaction of the government to the pandemic was quick, the financial advisor said. With most of the restrictions lifted in the end of May, the economy started to recover but the second wave appeared to be a surprise for both the government and many businesses, the financial advisor added.

Before the second wave of the pandemic, banks were hopeful to distinguish the companies with pre-existing operational balance sheet issues from the others, but with the second wave arriving, this is delayed, noted Czepukojc and Dlugoborski.  Banks will be focusing how to inject liquidity where the risk is not as high as in the affected sectors, they added.

Banks are still following a wait-and-see strategy, and to the extent possible are trying to assess the situation on a case-by-case basis and see which companies are struggling due to COVID-19 and which had pre-existing issues which were only elevated by the current environment, Czepukojc and Dlugoborski said. “We are expecting more of a case-by-case evaluation by the banks after the second wave of COVID-19 passes”, they added.

Additional liquidity might have hidden some structural problems of the companies. Therefore, in the next couple of months, it will be more apparent who will struggle to meet their financial obligations, the financial advisor noted. Banks allowed moratoria to lots of companies, usually for the payments between May and November. When it ends, many companies may struggle to make repayments in 1Q21, he said.

Recently, having in mind the second wave of the virus, the Polish Government announced a soft lockdown, but a hard lockdown may come soon due to the persistently high COVID-19 incidence rate in Poland. It is not certain that the government would be able to provide an aid package as large as for the first wave, and the second wave might be harder to survive for companies than the first, Czepukojc and Dlugoborski noted.

The Polish government's [anti COVID-19] financial aid package has not been utilized in full and there remains a bit of a headroom, but it remains to be seen if and when will the government release the remaining portion, they added.

On the banking sector side, Polish banks were doing well, with their NPL ratios under control and a well-established NPL market, noted the financial advisor. After COVID-19, within the next 12 to 24 months, there is likely to be an increase in the supply of NPLs, he added.

GetBack prompts retail bonds to fall out of favour   

Aside from the COVID-19 pandemic-related debt restructurings, one of the most high-profile restructuring situations in Poland was GetBack, a debt collection company that kicked off its debt restructuring talks in 2018.

GetBack was a watershed moment for the Polish capital markets and had a huge impact on the debt collection sector and bond market, Czepukojc and Dlugoborski said. Before GetBack, corporate bonds were a very popular way for companies to raise money, and the notes were offered to private investors alongside institutions. After what went down with GetBack, the market for publicly traded corporate bonds suffered greatly, Czepukojc and Dlugoborski added.

GetBack's woes impacted the sentiment of financial markets towards the debt-collection sector, said the financial advisor. With the investors losing trust in the sector, it became harder to get new financing especially for smaller players, he noted.

Poland’s restructuring legal framework 

On 1 January 2016, a widely modified version of Poland’s Bankruptcy Act and the new Restructuring Act - introducing 4 types of Chapter 11-style court restructuring proceedings - came into force.

Before that, flexible and effective court restructuring tools were unavailable to debtors, said Karol Czepukojc and Pawel Dlugoborski.

There were only court reorganization proceedings and bankruptcy proceedings with a rarely-used debt restructuring option, and the former were only available for debtors at risk of insolvency. As a result, successful court restructurings took place very rarely, added Czepukojc and Dlugoborski.

After 2016, court restructurings became much more popular. These routes are available to debtors threatened with insolvency and to already-insolvent creditors, Czepukojc and Dlugoborski noted.

Moreover, restructuring processes are given precedence over bankruptcy. If a restructuring application and a bankruptcy application are submitted at the same time, the court will generally first examine the restructuring application, noted Czepukojc and Dlugoborski, adding that each type of court proceeding offers a different level of protection against creditors’ actions linked with a different level of restrictions on a debtor’s management of its assets.

As for cross-border matters, both the EU Recast Insolvency Regulation and the implemented UNCITRAL Model Law on Cross-Border Insolvency are applicable in Poland. There are also ongoing discussions on a planned scope of implementation of EU Directive on preventive restructuring frameworks.

by Asli  Orbay-Graves

Asli Orbay Assistant Editor Debtwire CEEMEA

Asli Orbay is a reporter working for Debtwire CEEMEA, with a focus on arbitration, litigation and distressed situations. Prior to joining Debtwire, Asli worked as a banking and finance lawyer for Clifford Chance in Istanbul. Asli holds an LLM in international economic and trade law and a she is currently a PhD candidate studying at Brunel University.