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Shareholder loans under the amended Bankruptcy Law

Systemic amendments to Poland’s Bankruptcy & Recovery Law enter into force on 1 January 2016.

The main goal of the amendment is to create separate restructuring proceedings governed by the new Restructuring Law. Restructuring proceedings are to replace the former bankruptcy proceedings involving conclusion of an arrangement, as well as recovery proceedings, currently conducted under the Bankruptcy & Recovery Law. Unlike now, it will be possible to conduct restructuring proceedings with respect to entities threatened with insolvency as well as entities that are already insolvent. Conclusion of arrangements will be governed by the Restructuring Law, while what is left of the bankruptcy regulations will rechristened the Bankruptcy Law.

But this amendment also introduces a number of other equally important changes. One of them is an entirely new approach to the treatment of loans by shareholders to companies that are subsequently declared bankrupt.

Art. 14 §3 of the Commercial Companies Code currently provides that a shareholder’s claim under a loan made to a company is automatically converted to a capital contribution to the company if the company is declared bankrupt within two years after conclusion of the loan agreement. Upon entry into force of the amendment, this provision will be repealed, and it will be possible for shareholders to seek repayment of the principal and interest on loans made to the company within five years before the company is declared bankrupt, but in a separate, lowest priority of satisfaction.

Under the new state of the law, the treatment of shareholder loans secured by collateral raises certain doubts.

Under the new Bankruptcy Law, proceeds from the liquidation of collateral are to be applied first to satisfy the creditors secured by the collateral. But with the repeal of Commercial Companies Code Art. 14 §3 and, under the new wording of the Bankruptcy Law, the lack of express provisions concerning shareholder loans secured by collateral, it is not entirely clear whether the privileged treatment of secured claims will apply also to secured loans by shareholders, or the rule relegating claims under shareholder loans to the last priority for satisfaction should be regarded as a specific derogation from the general rules on satisfaction of secured claims.

In our own view, what is decisive in interpreting the amended Bankruptcy Law is that it does not expressly exclude shareholders who made secured loans to the company from privileged treatment when it comes to distribution of the proceeds from sale of the collateral. Thus, from 1 January 2016 as well, the Bankruptcy Law should be interpreted unequivocally as permitting shareholders who made secured loans to the company to enjoy the same privilege as other secured creditors to be satisfied first out of the proceeds of the collateral.

It is relevant in this respect that from 1 January 2016 the Bankruptcy Law will contain an amended and comprehensive set of rules governing avoidance of transactions by the debtor prior to declaration of bankruptcy that could hypothetically be injurious to creditors (the clawback rules in Art. 127–131 of the Bankruptcy Law as amended). Under the new law, these are the rules that will protect creditors against actions taken by the debtor when providing security for shareholder loans, if that was detrimental to the creditors.

All of this means that security for shareholder loans will remain effective against the bankruptcy estate only if granting the security passes the tests imposed by the clawback rules. If the security passes those tests, it means that establishing the security was not detrimental to creditors and thus there is no reason a shareholder cannot enjoy the same privileged treatment as other secured creditors to be satisfied first out of the proceeds of the collateral.

But the ultimate answer to this legal issue will be determined as the new Bankruptcy Law and Restructuring Law are applied in practice.

Krzysztof Libiszewski, Piotr Wcisło, Corporate and M&A Practice, Wardyński & Partners

 

Systemic amendments to Poland’s Bankruptcy & Recovery Law enter into force on 1 January 2016.

The main goal of the amendment is to create separate restructuring proceedings governed by the new Restructuring Law. Restructuring proceedings are to replace the former bankruptcy proceedings involving conclusion of an arrangement, as well as recovery proceedings, currently conducted under the Bankruptcy & Recovery Law. Unlike now, it will be possible to conduct restructuring proceedings with respect to entities threatened with insolvency as well as entities that are already insolvent. Conclusion of arrangements will be governed by the Restructuring Law, while what is left of the bankruptcy regulations will rechristened the Bankruptcy Law.

But this amendment also introduces a number of other equally important changes. One of them is an entirely new approach to the treatment of loans by shareholders to companies that are subsequently declared bankrupt.

Art. 14 §3 of the Commercial Companies Code currently provides that a shareholder’s claim under a loan made to a company is automatically converted to a capital contribution to the company if the company is declared bankrupt within two years after conclusion of the loan agreement. Upon entry into force of the amendment, this provision will be repealed, and it will be possible for shareholders to seek repayment of the principal and interest on loans made to the company within five years before the company is declared bankrupt, but in a separate, lowest priority of satisfaction.

Under the new state of the law, the treatment of shareholder loans secured by collateral raises certain doubts.

Under the new Bankruptcy Law, proceeds from the liquidation of collateral are to be applied first to satisfy the creditors secured by the collateral. But with the repeal of Commercial Companies Code Art. 14 §3 and, under the new wording of the Bankruptcy Law, the lack of express provisions concerning shareholder loans secured by collateral, it is not entirely clear whether the privileged treatment of secured claims will apply also to secured loans by shareholders, or the rule relegating claims under shareholder loans to the last priority for satisfaction should be regarded as a specific derogation from the general rules on satisfaction of secured claims.

In our own view, what is decisive in interpreting the amended Bankruptcy Law is that it does not expressly exclude shareholders who made secured loans to the company from privileged treatment when it comes to distribution of the proceeds from sale of the collateral. Thus, from 1 January 2016 as well, the Bankruptcy Law should be interpreted unequivocally as permitting shareholders who made secured loans to the company to enjoy the same privilege as other secured creditors to be satisfied first out of the proceeds of the collateral.

It is relevant in this respect that from 1 January 2016 the Bankruptcy Law will contain an amended and comprehensive set of rules governing avoidance of transactions by the debtor prior to declaration of bankruptcy that could hypothetically be injurious to creditors (the clawback rules in Art. 127–131 of the Bankruptcy Law as amended). Under the new law, these are the rules that will protect creditors against actions taken by the debtor when providing security for shareholder loans, if that was detrimental to the creditors.

All of this means that security for shareholder loans will remain effective against the bankruptcy estate only if granting the security passes the tests imposed by the clawback rules. If the security passes those tests, it means that establishing the security was not detrimental to creditors and thus there is no reason a shareholder cannot enjoy the same privileged treatment as other secured creditors to be satisfied first out of the proceeds of the collateral.

But the ultimate answer to this legal issue will be determined as the new Bankruptcy Law and Restructuring Law are applied in practice.

Krzysztof Libiszewski, Piotr Wcisło, Corporate and M&A Practice, Wardyński & Partners