Arrangement modification proceedings
The topics, related to the long-term projection of restructuring plans, received a lot of interest from our clients. It is worth emphasising that the arrangement projected in restructuring proceedings is not the final construction of the – it opens the way for entrepreneurs to make further modifications when financial conditions change. Our observations show that not all entrepreneurs who are currently implementing the arrangement are fully aware of this solution and the benefits it can bring. An approved arrangement is not a “closed” process that must end with the implementation of a negative scenario in the event of financial difficulties. An entrepreneur who notices that their income has significantly decreased during the implementation of the arrangement has the right to submit an application for its modification.
A few words about the article - Listen
In a dedicated space we have posted all the articles on the topic of rearrangement, please take a look at them.
Re-arrangement proceedings part 1
Opening restructuring proceedings is the first step on the way to regaining liquidity and avoiding bankruptcy, and the adoption of the arrangement and its final approval is the moment when the Entrepreneur can finally breathe.
First As a general rule, on this date, the maturity of the debts covered, the manner in which they are to be paid and often also the amount due to the partial cancellation of debts are changed,
Secondly in the case of legal persons, their representatives (Management) absolve themselves from liability for these obligations.
Third what is worth emphasising - such an adopted arrangement does not have to be a final construction, as the law provides for the possibility of its later modification within the framework of the proceedings to modify the arrangement.
The layout designed in the proceedings is a projection, at least several years, the assumptions of which are created during the period of the proceedings, taking into account the possibilities and conditions that are known or foreseeable at this stage. Unfortunately, recent years have shown how much and how quickly it can change the political, economic and administrative environment of business, and due to the outbreak of the war in Ukraine, the Sars Cov-2 pandemic, or unprecedented tax and legal changes, how unpredictable it can be. In light of the above, it is important to, so that entrepreneurs are aware of the existence of a solution that allows for the modification of the arrangement adopted in the restructuring procedure, which is the procedure for the modification of the arrangement.
In our practice, we are increasingly confronted with situations in which we are approached by a client who has an approved layout, often a largely completed one, and who is faced with a threat to its further implementation due to the occurrence of phenomena beyond his control and which he was often unable to foresee.
An example of this is the outbreak of the war in Ukraine, which was mentioned earlier, and the closure of some eastern markets, which disrupted many supply chains, or the outbreak of the pandemic, which completely paralyzed some industries overnight, making it impossible to conduct business. There have also been more mundane examples where the source of funding for part of the arrangement was to be the sale of a property that could not be finalised in the required timeframe, the withdrawal of orders by a major contractor with low diversification of customers, an enforced reduction in business or increased competition in the market.
In each of these cases, clients firstly needed analytical support, which identified possible ways in which the arrangement could be amended to ensure its viability and the time needed to make the required changes to the business and, further, to go through the process of obtaining creditors' approval of the proposed lines of change.
The whole process from the moment it starts proceedings until the final approval of the change in the arrangement it may last from several to even a dozen or so months. According to the practice of PMR Restructuring S.A., in the case of a large entity with an extensive distribution network and complex organisational structure, where more than 400 creditors were subject to proceedings to amend the composition agreement, the entire process from the moment of opening the proceedings to the moment of issuing the decision on approving the amendment to the composition agreement was completed within 13 months.
Proceedings for rearrangement is a solutionof which he should be aware every entrepreneur, and in particular the entrepreneur being in the process of implementing the arrangementThis is a solution that makes the implementation of the agreement more realistic by, for example, adjusting the volume of repayments to the new possibilities and realities of the market, makes it possible to maintain the continuity of the agreement and protects against the negative consequences of its revocation, the most important of which is the loss of the negotiated write-offs and immediate enforceability at the amount prior to the original agreement minus the repayments made.
Proceedings for changing the layout part 2
The second an opportunity for your company
In May this year, an introductory article was published on the PMR Restructuring S.A. website on the issue of proceedings to amend the arrangement.
The topics presented were of interest to you and revealed, that not all entrepreneurs who are in the process of implementing arrangement adopted in the restructuring proceedings are aware of the existence of such a solution and the possibilities and benefits it brings.
It is necessary to start by explaining the consequences of a delay in the implementation of the approved agreement, which may crystallise even in a situation where the entrepreneur will have only one arrears in the payment of the due agreement instalments. In such a case, among other things, the creditor and the supervisor of the implementation of the arrangement have the possibility of filing an application for the revocation of the arrangement, the successful recognition of which results in the loss of all the benefits deriving from it, including the redemption earned, and the entirety of the liabilities becoming immediately due and payable, including interest.
It should be borne in mind that the approved layout is not, however, the final construction, which means that these difficulties do not have to end in the realisation of the negative scenario indicated. Any entrepreneur who is currently executing an arrangement and whose income has decreased may file application for opening the proceedings or its modification. Its purpose is to enable such modification of the system that will be feasible and will allow at least the preservation of the benefits developed under the original system of benefits.
The catalogue of possible directions of changes is very wide, the legislator has indicated several possibilities without limiting entrepreneurs in terms of debt restructuring methods, but only defining the framework of their admissibility. The most intuitive, and also the most common in practice, proposals include postponing the date of execution of the existing arrangement, spreading the repayment into instalments, modifying the number of existing instalments, changing their amount or increasing redemption. It is worth noting that an amendment may comprise one or a combination of several of the proposed modalities, e.g. assume at the same time that repayment of the existing arrangement will be postponed for 12 months from the due date of a particular arrangement instalment, the amount of the outstanding debt under the arrangement will be reduced by an additional 20% and repaid in equal instalments, the number of which will be increased to the desired level.
In the course of redesigning the layout, a proposal is also possible within the framework, whose repayment of the arrangement will be taken over by a third party, or will be met from external financing on terms to be determined by them.
In the case of limited companies, the conversion of receivables into shares is an interesting proposition, which causes an extremely beneficial change in the balance sheet structure, where the liability is converted into capital, causing an increase in the parameters required for assessing its financial condition. A solution worth considering, but requiring professional support, so if you are interested, it is worth using an experienced support by recommending the PMR Restructuring team here SA, which has in its portfolio effective implementations of proposals based on conversion.
A liquidation arrangement providing for satisfaction in a variation of the arrangement from the liquidation of the company's assets is also possible. The advantage of this solution is the prospect of obtaining significantly larger amounts to repay creditors than in bankruptcy or enforcement proceedings, because the sale is made on market terms without a discount appropriate for forced liquidation, and the amounts obtained are not reduced by the costs of enforcement by a bailiff or bankruptcy proceedings - and these in the case of economic bankruptcy can be really high. Effective implementation of the liquidation agreement also has the advantage from the point of view of the company that it does not leave it with the "label" of bankrupt.
As already the Restructuring Law Act imposes a certain framework on the freedom of construction of proposals in proceedings for the modification of an arrangement by, inter alia, stipulating that the conditions of restructuring are the same for all creditors, with the legislator permitting their division into groups then identical within the same group and privileging creditors providing financing in the course of implementation of the arrangement. In addition, the Act imposes certain restrictions on the restructuring of Social Insurance Institution (ZUS) claims, secured claims, with respect to public aid received, or employee claims.
When analysing possible scenarios at each stage of the projection, it is important to bear in mind, that the arrangement proposals must anticipate the possibility of being accepted by a qualified majority of creditors, as well as correspond to the real possibility of fulfilling the obligations.
To conclude, an important note – the above content is presented with the reservation “as a rule”, because it has been presented at a certain level of generality facilitating understanding of the essence, without going into the intricacies of exclusions and legal complexities. Restructuring proceedings, as well as proceedings for changing the arrangement, are a product made to measure. The Act defines certain frameworks and a range of possibilities that the skilled restructuring advisor can be tailored to individual situations and needs, which is why any decisions should be preceded by a consultation with a professional.
Proceedings for the modification of the arrangement Part 3
View from the creditor's perspective
We present to you the next part of the reflections on the redesign of theThis time, the creditors are the most important participants in the proceedings, as the fate of the amended agreement, and often also of the debtor's further existence, rests in their hands.
Statistically, the largest number of proceedings for modification of an arrangement are initiated as a result of a reduction in income from the debtor's business in order to obtain the approval of the creditors for such a modification of the method of repayment that will ensure its continued enforceability and at the same time be acceptable to the creditors. During the procedure for changing the arrangement, the previously approved arrangement remains in force and, in principle, should be implemented by the debtor. The phrase "in principle" appears for a reason, because while there are no provisions that would directly allow the debtor to refrain from paying the arrangement installments, in In practice, this happens very often and means that creditors reduction or at least periodic suspension of repayment at least during the proceedings.
It is necessary to start by explaining the consequences of a delay in the implementation of the approved agreement, which may crystallise even in a situation where the entrepreneur will have only one arrears in the payment of the due agreement instalments. In such a case, among other things, the creditor and the supervisor of the implementation of the arrangement have the possibility of filing an application for the revocation of the arrangement, the successful recognition of which results in the loss of all the benefits deriving from it, including the redemption earned, and the entirety of the liabilities becoming immediately due and payable, including interest.
The creditor is therefore in a coercive situation, which requires an individual assessment of the balance of benefits and costs and the decisions of which he will also be the ultimate beneficiary.
On the one hand, he may disagree with the decision of the debtor (creditor or supervisor of the implementation of the arrangement - (as all these entities are entitled to submit an application for a variation of the arrangement) to conduct the variation procedure. The first moment of expressing such disapproval is the issuance of the decision to open the arrangement, or more precisely the announcement of this fact, as from the date of the announcement the creditor has seven days to lodge a complaint against the said decision.
On the other hand, it may turn out that the proposed developments will ultimately be more beneficial to the creditor than alternative scenarios, such as bankruptcy proceedings or forced enforcement.
Proceedings for the change of arrangement covers all creditorswho had the right to vote at the creditors' meeting at which the arrangement was adopted, and whose claims were disputed at the time of voting on the original arrangementand, after the adoption of the arrangement, have been established by a final court decision or a final administrative decision. On the other hand, creditors whose claims have been fully satisfied do not have the right to participate. Therefore, if a creditor was entitled to vote on the original arrangement (even if he did not exercise this right) and his claim has not been paid in full, he is included in the proceedings by operation of law, which means that any decision to accept the arrangement taken with the participation of a majority of creditors (50%+1) holding more than 2/3 of the voting creditors' claims, as required by law, will also be binding on him.
You often ask whether you have to declare your participation in the proceedings in some way - we answer - 'no'. In these proceedings, creditors do not declare their claims and their eligibility to participate in the proceedings is determined by the court supervisor by including them in the list of creditors entitled to vote on the arrangement. According to the Restructuring Law, such a list should be prepared within two weeks of the date of opening the proceedings to change the arrangement and placed in the proceedings files. Verification of whether and in what amount the claim has been included in the proceedings can be made by contacting the court supervisor directly or by verifying the list of creditors in the proceedings files kept in the National Register of Debtors, and for this purpose it is necessary to submit a prior application for access to the proceedings files. If any discrepancies are revealed, it is worth reporting them to the court supervisor, and such information can also be submitted to the proceedings files via the aforementioned National Register of Indebted Persons.
The most important moment for the debtor, but also from the perspective of the creditors, is the date of the creditors' meeting to vote on change of arrangement, of which they must be notified at least three weeks before the set date. Together with the notice, the arrangement proposals, ballot papers, instructions on how to vote and possibly other documents (e.g. the Restructuring Plan) that should enable a decision to be taken are provided. At this stage, a doubt may arise as to the amount disclosed on the ballot that entitles one to vote on the arrangement, as this is not the amount outstanding under the current arrangement. Voting power in these proceedings is determined as the difference between the amount the creditor voted on the original arrangement and the amount of repayments made.
At this point, a few words about arrangement proposals – taking into account the reasons most often underlying the change in the arrangement, i.e. a reduction in income, one can most often expect additional write-off, postponement or extension of the repayment period. There are, of course, proposals that provide for some compensation, e.g. in the form of additional interest or an increase in the value of the repayment as a whole to compensate for the lost benefits during the period of postponement, but the opening of proceedings for the modification of the arrangement is always associated with certain, to put it mildly, 'inconveniences'. It is extremely difficult for creditors to make a decision in the circumstances of a coercive situation, often under the influence of strong emotions, requiring time commitment, analysis of extensive documentation, sometimes in the absence of a full picture of the procedure. It can lead to a decision that will ultimately have negative consequences for the creditor himself.
Therefore, it is worth remembering that a creditor can also benefit from the support of a restructuring advisor who, as an entity having full knowledge of restructuring and bankruptcy proceedings will be able to fully analyse the debtor's situation, assess the feasibility of the submitted arrangement proposals, consider appropriate steps in the course of the proceedings and recommend a decision that will be best from the point of view of protecting and securing the creditor's interests.
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