Will the state help small businesses avoid bankruptcy?

PMR team

February 15, 2017

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The state will be able to support a failing small or medium-sized company when it loses more than half of its capital due to business losses. This is, in a nutshell, the condition under which the facilities of the Restructuring Law will be available to entrepreneurs in the SME sector.

It is to be introduced by an amendment, the draft of which has already been submitted for consultations and inter-ministerial agreements. It has been proposed that after adoption, the amendment enter into force 14 days after publication in the Journal of Laws. The draft was created in the Ministry of Justice (MS) and is a response to the reservations of the European Commission (EC) raised during the notification of the aid program providing aid for the rescue and restructuring of small and medium-sized enterprises. This program consists of the aforementioned act and the regulation of the Minister of State Treasury from 2015 on public aid granted for both of these purposes.

Without waiting for notification

Such support from public money is provided for in the Restructuring Law in force in Poland since 1 January 2016, but its provisions are not fully in line with EU guidelines. Their amendment will allow public aid to be granted for restructuring of companies in difficulty without the need for individual notification to the EC. You have to wait a long time for this acceptance. According to MS, such a procedure lasts 15 months and in practice means that it is impossible to carry out effective restructuring with state support.

- The proposed amendment does not introduce an exemption from individual notification, but makes it possible to apply this exemption in practice. This is therefore an important change, as small and medium-sized entrepreneurs will not have to submit an application to the European Commission and wait more than a year for it to be processed. If this had been necessary, the possibility for these companies to receive aid would have been purely theoretical, as it would have involved too much cost and waiting time, which such companies could realistically not survive, says Magdalena Kasiarz-Lewandowska, lawyer at EY Law.

According to the current regulations, aid public for restructuring may be granted if the amount of uncovered losses exceeds the supplementary capital and 50 percent of the share capital in a capital company or limited joint-stock partnership and if the amount of uncovered losses exceeds 50 percent of the value of all shares in a partnership.

According to the EU guidelines, the sum of retained losses and all other elements of own funds must be a negative amount exceeding half of the subscribed share capital and, in the case of a partnership, more than half of the capital must be lost through losses. The proposed amendment adopts for all types of companies the same way of calculating the indicator relevant for the granting of state aid. The basic assumption is that an entrepreneur eligible for support has lost more than half of its capital. The draft clarifies that it is specifically a situation where the sum of retained earnings (losses), net profit (loss) for a given financial year, supplementary capital, revaluation capital and other reserve capital (funds) is negative and its absolute value is higher than 50 per cent of the share capital (fund).

Preferential funding

State aid without the need for notification means significant companies obtain preferential financing for their operations during restructuring proceedings, especially since it is very difficult for small and medium-sized enterprises to obtain any additional financing, which is one of the main reasons for restructuring failures.

— All companies undergoing restructuring have financing problems, but small ones complain about difficult access to it - admits Maciej Pietrzak, restructuring advisor and proxy at PMR Restrukturyzacje. - Their problem is not important for e.g. the financing creditor, so it is usually more radical, less willing to negotiate and conciliate. Public aid would be invaluable for saving instead Polish enterprises and the jobs they create - adds the advisor from PMR Restrukturyzacje. In his opinion, the planned changes increase the possibility of financing restructuring activities in the SME sector. - This is a necessary condition. There is no restructuring without financing, just as there is no effective treatment for patients without money for medicines — says Maciej Pietrzak.