The private creditor test is a document prepared as part of restructuring proceedings, which is mandatory in a situation where, during the proceedings or during the implementation of the arrangement, the entrepreneur may be provided with support by the state or using public resources in any form. Although this document is dedicated primarily to public-law creditors, it is also a valuable source of information for other creditors, especially in the context of making decisions regarding the acceptance of arrangement proposals.
In this article, we will try to explain to you what the private creditor test actually is and what its significance is for the broadly understood participants in the proceedings.
What is the private creditor test?
The private creditor test, as defined in the Restructuring Law, is an assessment, prepared in the restructuring proceedings, of the actions of a public creditor planned in the restructuring proceedings and during and as part of the implementation of the arrangement, made in order to determine whether the public creditor behaves in a given case like a private creditor operating under normal market conditions, in particular whether the private creditor would accept the terms of repayment of liabilities provided for in the arrangement proposals.
The key question is therefore whether a private creditor would accept the same conditions repayment of liabilities, which were provided for in the arrangement proposals for the public-law creditor. In practice, this means that the public creditor should make decisions based on market criteria, which is to prevent situations in which public support could lead to unjustified benefits at the expense of other entities operating on the market.
When is the private creditor test prepared and is it mandatory in all proceedings?
The private creditor test is mandatory if, during the proceedings or at the stage of implementation of the arrangement, the debtor may receive support from the state as part of the restructuring proceedings, i.e., in principle, whenever public-law creditors participate in the proceedings. These provisions aim to ensure that all forms of support that may be granted to the entrepreneur are consistent with the principles of state aid and do not lead to distortion of competition on the market. This support may take various forms, including:
- Reduction of liabilities through an arrangement, which means that the entrepreneur's debt may be reduced as a result of an agreement with creditors.
- Spreading the repayment into instalments, which allows the entrepreneur to settle their obligations in a more affordable way, instead of paying the entire amount at once.
- Postponement of the deadline for fulfilling obligations, thanks to which the entrepreneur gains additional time to fulfill his financial obligations.
- Suspension of enforcement proceedings, which is intended to protect the entrepreneur against immediate actions by creditors that could threaten his further activity.
- Granting loans, credits, guarantees or sureties, which may support the financial liquidity of the entrepreneur.
In the context of the above forms of support, the restructuring plan must additionally contain a private creditor test, the purpose of which is to assess whether the support provided during the restructuring proceedings may be considered state aid, and therefore it should be drawn up within the deadlines specified for this document, i.e. as follows:
– in accelerated arrangement proceedings, within 2 weeks of their opening;
– in composition proceedings, within 30 days of their opening;
– in restructuring proceedings, within 30 days of their opening, which period may be extended by the judge-commissioner up to three months in justified cases;
- in the proceedings for approval of the arrangement restructuring plan it is submitted only together with the application for approval of the arrangement – i.e. after the votes have been collected. Due to the fact that the private creditor test is a document necessary for public-law creditors to assess the issue of the occurrence of state aid and they will often not be able to vote without it, it is postulated that the document be delivered to them/made available in the electronic system at the latest together with the ballot papers.
What does the private creditor test involve?
The information capacity of the document is specified in Article 140 paragraph 3 of the Law, according to which the private creditor test includes:
– information on the expected degree of satisfaction of individual public creditors under the arrangement, based on data on the amount of the debtor's liabilities to individual public creditors covered by the arrangement and the content arrangement proposals towards individual public-law creditors;
– information on the expected degree of satisfaction of individual public creditors in bankruptcy proceedings, which would be conducted against the debtor based on an analysis of the value of the debtor’s assets with an indication of encumbrances, the expected amount of costs of bankruptcy proceedings, the category in which individual public creditors would be satisfied in bankruptcy proceedings.
The result of the analysis is an assessment of whether the public creditor's claims will be satisfied to a greater extent in the event of concluding and implementing an arrangement or in bankruptcy proceedings.
Document recipients.
Despite the fact that the Act indicates public-law entities as the dedicated recipients of the private creditor test, practice has shown that this is a document that fulfills an important informational role also for other participants in the proceedings, who can be divided into groups with specific interests and expectations towards the restructuring or bankruptcy process. In addition to public-law entities, the following should be mentioned:
– secured creditors – they have the right to satisfy their claims from the debtor’s assets that have been secured. The key issue is the assessment of the value of the assets secured and the justification for entering into an arrangement. In a situation where the value of the security exceeds the value of the claim, the creditor may not be willing to conclude an arrangement that provides for a lower degree of satisfaction;
– other creditors who do not have security – based on the document, they can assess their chances of satisfying their claims under restructuring proceedings compared to potential bankruptcy proceedings. In the case of restructuring, it is possible to negotiate the terms of repayment and obtain a better position compared to bankruptcy proceedings, which often leads to a significant reduction in the value of satisfaction due to the liquidation discount.
– other creditors who are not covered by the arrangement by operation of law (e.g. employees, FGSP) – based on the analysis, they may decide on the justification for giving consent to the coverage of their receivables by the arrangement. If the debtor is in a difficult financial situation, creditors must consider the consequences of their decision, including the possibility of losing claims and the impact on their further actions in the context of enforcement.
Private Creditor Test Result
Support granted to an entrepreneur that meets the private creditor test does not violate the Community principle of fair competition and is not treated as public aid. The assessment of whether a given support meets the private creditor criteria is objective in nature and is based solely on market principles. For this reason, the issue of public aid in the context of restructuring proceedings only arises when any form of support does not meet the private creditor test. Only in such a case can the support be considered as qualified public aid.
To sum up, these provisions aim to ensure transparency and equality in access to public support and to protect competition rules, which are key to the functioning of markets. These actions also aim to minimize the risk of abuse in the use of public aid, which is particularly important in the context of enterprise restructuring.
