Crisis or no Crisis? The Outlook for Poland in 2012 and its Insolvency Market | In Principle

An article by Michał Barłowski, a senior partner at Wardyński & Partners who heads the Bankruptcy and Restructuring Practice Group, first published in the Q1 2012 issue of INSOL World.

The turn of a new year is always a time to look back and plan ahead, trying to predict what the future may bring. Many economists have made projections on how the Polish economy will grow in the year 2012.

Will Poland still remain a “green island” amid the European financial gloom? Most economists think so, although they predict that the pace of growth will be lower than in the previous year. This may be attributed to the global situation, but mostly to the situation in the Eurozone taking its toll on the Polish economy. Many London-based bankers think GDP growth may average 2.5%, down from 4.1 % for 2011.

The inflation rate is expected to be between 2.5% and 3.5% and the Polish currency might be weaker against the Euro in the first part of 2012 but should regain strength over the second half of the year. A decisive factor here too will be the situation in the Eurozone. The Polish state deficit is to fall by almost a half from 5.65 % to 3% and this may be at least partly attributed to higher revenues, resulting from increased social insurance premiums, higher excise on diesel fuel, as well as lower spending planned by the government.

The macroeconomic outlook is positive, but it is also worth looking at some microeconomic factors, in particular those effects which may be attributed to changes in law – in this case, changes introduced to the Polish insolvency law.

This year an act dealing with protection of consumers against the bankruptcy of developers will come into force, The Law on protection of the purchaser of a flat or detached house (“NL”) (Journal of Laws 2011.232.1377), which will introduce new provisions to the existing law (“BRL”), which deals only with the bankruptcy of developers¹. Poland is one of the last EU member states to introduce provisions into its legal system provisions aimed at protection of nonprofessionals, i.e. against bankruptcies of developers. This type of regulation has been awaited for a long time, as the default of a developer results in financial hardship for a consumer who may have used lifetime savings or obtained credit to finance the acquisition of a flat or a house.

The BRL, like the insolvency laws in many other EU member states, treats secured creditors preferentially by allowing them to be satisfied from the object upon which the rights in rem are established, and in consequence leaves the non-secured creditors, including consumers, queuing in line for any insolvency dividend following the statutory ranking of claims.

In the worst case examples, this usually left the average men and women on the street with no return, as the professional players received a dividend from the secured assets and any proceeds from the sale of the remaining assets were distributed among creditors with higher priority (among others: costs incurred in the insolvency proceedings, pensions, taxes, health insurance premiums) than nonsecured claims, including those from contracts entered into by consumers with developers.

But with effect from 29th April 2012, it will be different with the entrance into force of the NL, which introduces some fundamental changes to the BRL. Any payments which will be made by the consumer to the developer will reflect the pace at which the construction process takes place and these need to be made via an escrow account, where the bank will release any instalment owing to the developer only after checking that the given stage of construction has been reached as per agenda agreed in the contract. To this end, banks will have to use the services of construction experts who will check the construction progress on their behalf. The payments must go through one of four types of escrow accounts that the developer needs to make available as a protection measure to the consumer, three of which must have a bank guarantee or an insurance policy securing the repayment of the price for the property in case of a bankruptcy filing by the developer.

Next, one of the new fundamental obligations imposed on developers is the preparation of an information memorandum for each development. This a detailed document in which a developer must provide information (under pain of criminal responsibility) on the development and the developer itself. The requirements cover the real estate, including such items as the title to the property, information from the zoning plan, any charges established on the property, whether the construction permit has been issued at the stage of publication or not, information on the building itself and the surrounding and neighboring plots, what kind of construction/activity takes place there. The document must also include details about the developer, such as its accounts for the past two years, or consolidated accounts if the investment is done via a new company.

Under the NL, each development will form a separate bankruptcy estate, so there may be several insolvency estates within one bankruptcy proceeding managed by the same official receiver. The insolvency development estate will be composed not only of the real property “under construction”, but also of the sums registered on the escrow accounts. After the declaration of bankruptcy, a meeting of purchasers may decide to make additional payments to this development estate, which will allow the completion of the construction process, i.e. performance and execution of the terms of the initial agreements entered into by the consumers with the developer, as if no bankruptcy has been declared. The NL has also introduced a new body in the bankruptcy proceedings – a general meeting of purchasers (which reflects the concept of a creditors’ meeting under the general rules).

It needs to be seen how the NL will work within the framework of the existing BRL, but having followed the legislative process and comments in jurisprudence, it is clear that there are numerous deficiencies, so the rosy picture drawn on the improved status of consumers may not stand the test of time. Irrespective of the legal problems which may arise, there is also a concern as to a possible breach of constitutional rights by the NL, which favors one group of creditors at the cost of others.

Moving on to the microeconomic consequences, some predict that the introduction of this act may cause new real estate prices to go up by 10%. The market effect is difficult to assess, as in the current difficult economic conditions real estate prices are under pressure, especially since loans are not as freely available as before. The new obligation imposed by the NL (preparation of information memorandums, publications, covering notary and transfer of title costs, cost of opening of escrow accounts, including the issue of bank guarantees or insurance policies, etc.) will certainly result in an increase in operating costs for the developers, as under the NL these are to be borne by developers. We may thus see another increase in 2012 in the number of bankruptcies, which rose from 655 in 2010 to 723 in 2011.

Michał Barłowski, Bankruptcy and Restructuring Practice, Wardyński & Partners