Debt restructuring may be approached using solutions involving an assignment of receivables. In practice, depending on the particular factual situation, assignment may offer an attractive alternative to more traditional restructuring methods.
The main purpose of restructuring using an assignment of receivables is usually for a bank to finally remove troubled loans from its balance sheet, while obtaining the best possible price for the receivables and optimising the treatment available under accounting and tax regulations. In many instances it is not the receivable itself but the security for the receivable that constitutes the greatest asset in the hands of the bank. That was true in the case described below.
The bank’s claim, secured by a mortgage, was already at the stage following execution proceedings on the basis of a bank writ of enforcement. Execution had been conducted against the property which was the subject of the mortgage established in favour of the bank. The bailiff had attached the property and unsuccessfully conducted the first auction. After the first auction, a real estate developer appeared which was interested in acquiring the property that was secured by the mortgage.
For tax reasons, the bank proposed that the transaction be structured as an assignment of receivables. Ultimately the parties wanted to create a situation in which the acquirer of the claim would be in a position to enter the second auction of the property and pay the purchase price for the auctioned property using the claim acquired from the bank. In Poland, this possibility is provided for in Art. 968 of the Civil Procedure Code. Realising the intention of the parties required the creation of a legal structure which would overcome numerous legal challenges facing the parties.
The first difficulty was tied to the tax aspect of the transaction and the status of the acquirer. Because of the tax benefits, banks should insist on making a sale of receivables to a securitisation fund. But in the analysed structure, the acquirer interested in the claim was a special-purpose vehicle from the real estate development industry. Consequently, in order for the bank to obtain the tax benefits, a securitisation fund had to be involved in the transaction to buy the claim from the bank and then resell it to the ultimate acquirer. This structure requires conclusion of a number of agreements among the involved entities, including preliminary agreements and agreements providing for postponement of the dispositive effect of the agreement transferring the claim.
Another undoubted difficulty in the analysed structure is presented by the regulations concerning assignment of claims secured by a mortgage. Under these regulations, a claim secured by a mortgage is effectively transferred to the buyer only upon entry of the acquirer of the claim in the land and mortgage register for the property against which the mortgage was established (a difficulty which is multiplied if the real estate is covered by several land and mortgage registers). In practice this means that until the acquirer is entered in the land and mortgage register, the acquirer may not treat the claim as its own, which has certain consequences, e.g. in the context of execution proceedings. The difficulties related to postponement of the actual transfer of the claim are further complicated by the fact that the analysed structure assumes that the claim is transferred twice, first from the bank to the securitisation fund and then from the fund to the ultimate acquirer. The need to re-register the mortgage twice means that the formal acquisition of the receivable by the ultimate buyer is delayed and it is difficult to determine the timing because it largely depends on the speed with which the land and mortgage register court acts, which the parties have no direct control over. This is particularly sensitive in a case where the auction date is fast approaching and the auction might occur before the mortgage is re-registered in favour of the ultimate buyer. In that case the ultimate buyer could not yet formally present the claim as its own in order to apply it toward the purchase price of the auctioned property.
The next legal challenge was the limitations arising from the fact that execution against the real estate was conducted on the basis of a bank writ of enforcement. This means that the ultimate acquirer wishing to conduct its own execution should obtain a separate writ of enforcement. It cannot base its execution on a bank writ of enforcement because it is not a bank. In this context, the doubt arose whether the ultimate acquirer, after formal re-registration of the mortgage in its favour, would be able to apply the claim toward the price in a situation in which it did not hold its own writ of enforcement (not formally being a party to the execution proceeding).
In light of these challenges, the parties to the transaction decided finally on a solution that provided that during the course of the auction, the ultimate buyer would submit the bank’s claim toward the price for the auctioned property. This possibility is expressly provided for by Art. 968 §2 of the Civil Procedure Code. Because of the lack of re-registration of the mortgage, the claim remained formally on the bank’s balance sheet. Because the bank was the executing creditor holding a writ of enforcement (the bank writ of enforcement with an enforcement clause appended), there was no doubt that the bank’s claim could be applied to the purchase price, and this could also be done without having to wait for re-registration of the mortgage in favour of the ultimate acquirer.
After effective application of the claim toward the price for the auctioned property, the ultimate acquirer became the owner of the property, but the remaining portion of the bank’s claim (in the amount exceeding the price of the auctioned property) ceased to be a mortgage claim (because the mortgage was extinguished by operation of law as a result of sale of the real estate in the execution proceeding) and passed to the ultimate acquirer (via the securitisation fund) automatically under the agreements concluded earlier disposing of the receivable. In consequence, the ultimate acquirer became the owner of the real estate and the creditor of the debtor in the portion of the original claim remaining after application toward the price. Meanwhile, the bank had removed the entire receivable from its balance sheet, obtaining for it the price specified in the assignment agreement, under the optimal tax structure.
Krzysztof Wojdyło, Payment Services Practice, and Marcin Smolarek, Banking & Finance Practice, Wardyński & Partners