Lease agreements in restructuring proceedings- a problem or a source of financing for the arrangement?

Leasing is one of the key sources of business financing in Poland, which is steadily gaining in popularity. According to data presented in a report prepared by the Association of Polish Leasing and EY-Parthenon, the Polish leasing sector is the fastest-growing market in the European Union, having grown sixfold over the past 18 years, and its current growth rate exceeds 10% per year.

In 2023, the barrier of PLN 100 billion has been broken through investments financed by leasing in one year, which ranks Poland as the 5th largest market in Europe and the PLN 200 billion barrier in terms of the value of assets in use by leasing company customers. According to the cited report, as much as 62% of SME companies identify leasing as a key source of finance, resulting in a noticeably higher share of leases in the debt structures involved in restructuring proceedings.

The main breakdown includes operating and finance leases based on the option of ownership and the distinction of which party to the contract is entitled to make depreciation deductions from the leased property. It should be emphasised, however, that the classification of a contract for both tax and restructuring proceedings is not decided by its name, but by the conditions it provides for. In Polish law, leasing has been defined on the basis of various acts - the Civil Code, the VAT Act, the PIT and CIT Acts or the Accounting Act, each of which represents its own and not always convergent qualification criteria. Without going into the meanders of individual definitions and their differences on the grounds of the aforementioned acts, it should be pointed out that they result in, that the same lease can meet the conditions of an operating lease for tax purposes and a finance lease for balance sheet purposes. The Restructuring Law also provides for different effects with regard to leasing claims depending on their terms and conditions, limiting, however, the division criterion to the inclusion of the leased item in the fixed assets of the beneficiary debtor within the meaning of the PIT and CIT Act.

In the first case, i.e. if the leased object constitutes a fixed asset at the lessee entrepreneur within the meaning of the PIT and CIT Acts, the entire claim is subject to restructuring proceedings, whereby, for the purposes of calculating the creditor's voting power in the proceedings, the unmatured portion of the claim included in the list of claims shall be reduced by statutory interest, but not higher than 6% per year, za czas od dnia otwarcia postępowania do dnia wymagalności każdego przyszłego świadczenia, najdłużej jednak za dwa lata. Możliwa jest w tym przypadku restrukturyzacja całego zadłużenia wynikającego z umowy.

If, on the other hand, the leased asset does not constitute a fixed asset for the lessee within the meaning of the PIT and CIT Act, only that part of the receivables which relates to periods prior to the date on which the proceedings were opened is subject to restructuring proceedings (in the case of accelerated arrangement, composition and sanctioning proceedings) or the date of arrangement (in the case of proceedings for the approval of an arrangement). Claims arising in subsequent periods are treated as current, not under investigation. Jeśli dzień układowy lub data postanowienia przypada w trakcie okresu rozliczeniowego, np. miesiąca, wierzytelność za ten okres ulega z mocy prawa proporcjonalnemu podziałowi na część traktowaną jako objętą postępowaniem oraz część traktowaną jak wierzytelność bieżąca. W tym przypadku możliwa jest restrukturyzacja jedynie części wymagalnych wierzytelności.

Qualification of a lease agreement in restructuring proceedings also translates into the ability to withhold payment of liabilities and their volume, which, as the experience of PMR Restructuring S.A.'s law firm shows, in many cases is itself an important tool for recovering liquidity. In the accelerated arrangement, composition and sanctioning proceedings, a prohibition is introduced by law against the debtor or the administrator or supervisor fulfilling the benefits of claims that are by law covered by the arrangement as an impermissible action. However, in proceedings for the approval of an arrangement, despite the lack of implementation of an analogous prohibition under restructuring law, one should always bear in mind the provisions of the Criminal Code according to which "who, in the event of imminent insolvency or bankruptcy, being unable to satisfy all his creditors, pays or secures only some of them, and thereby acts to the detriment of the others, shall be subject to a fine, the penalty of restriction of liberty or the penalty of deprivation of liberty for up to 2 years". An example can be used to illustrate the effects of including or not including a leased asset in fixed assets in the context of ongoing liquidity during the proceedings:

- Entrepreneur X has a lease liability where the monthly instalment is PLN 2 thousand, and as at the date of opening the proceedings, he is in arrears with payment of instalments totalling PLN 6 thousand and 10 instalments not yet due totalling PLN 20 thousand. In the event that the object of the lease is included in fixed assets, entrepreneur X has the option to restructure the entire amount of the liability, i.e. PLN 26 thousand, and repayment is suspended (from the date of the opening of the procedure/arrangement date), natomiast w przypadku gdy przedmiot leasingu nie jest ujęty w środkach trwałych w ramach postępowania przedsiębiorca ma możliwość restrukturyzacji jedynie części wymagalnej zobowiązania, tj. 6 tys. zł, a w toku postępowania zobowiązany będzie terminowo uiszczać raty w wysokości 2 tys. zł miesięcznie.

Khe ability to protect business-critical contracts is another extremely important issue, including leases against termination, with the extent of protection also depending on the terms of the contract. Indeed, the law provides for the termination of key contracts in three cases: jeśli na wypowiedzenie umowy zgodę wyrazi rada wierzycieli, w sytuacji, gdy przedsiębiorca nie wykonuje zobowiązań w części nieobjętej układem lub na skutek innej okoliczności zapisanej w umowie, jeśli zaistniała po dniu otwarcia postępowania. W przypadku ujęcia przedmiotu leasingu w środkach trwałych objęciu układem podlega cała wierzytelność, w świetle czego nie występuje przesłanka niewykonywania zobowiązań bieżących, a ochrona jest istotnie szersza.

A separate issue is the possibility of buying back the leased asset, which is not clearly regulated by law. Most leases provide for the option to buy out/transfer ownership of the leased asset only after all agreed instalments have been paid. This represents a significant complication in the event that the contract is terminated before the agreement is approved, which covers only a part of the contractual claim, as the trader has no possibility of repaying it, and it is only the final agreement which modifies the existing contractual relationship of the parties in a manner different to that regulated by the contract. This often leads, in practice, to the financier refusing the possibility of redemption. Where a modification of the repayment terms under a final agreement occurs before the end of the lease (This is the case when only part of the debt is covered by the arrangement) and the entrepreneur fulfils the agreed terms of the arrangement, the position is that the lessor has no grounds to refuse to sell/transfer the leased property.

The role of the leased object in the implementation of the arrangement is underestimated. It should be noted that it is often the case that it represents a higher value than the amount of the outstanding liability and can be an important source of financing for the arrangement. Restructuring proceedings provide protection of the lease agreement against termination and its adverse consequences, subject to the exclusions outlined above, and provide a tool to secure a demand for transfer of ownership if provided for in the agreement.

In this respect, the example of a client of the law firm PMR Restrukturyzacje S.A. should be cited. - Mogado Sp. z o.o., once one of the largest wholesale distributors of IT equipment and cosmetics. As a result of the withdrawal of one of its main customers, the company lost a significant part of its revenue overnight and was unable to service its running costs, of which leasing contracts accounted for a significant volume. Thanks to a professional analysis of the contracts and an appropriate restructuring strategy, it was possible to maintain and settle the key real estate lease contract and subsequently to transfer its ownership and sale. The transaction price obtained as a result of the measures taken, which was several hundred per cent higher than the leasing liabilities, also made it possible to repay the company's other liabilities and execute the arrangement.

Statement by the CEO of Mogado Ltd. Mr Jacek Mońko:

"The restructuring proceedings allowed the company to be fully indebted and to satisfy its creditors to an extent not possible in bankruptcy proceedings czynniki zupełnie niezależne od działań spółki spowodowały, iż niemal z dnia na dzień znalazła się ona w obliczu poważnego zagrożenia niewypłacalnością, a dzięki skutecznym działaniom i projekcjom przy wsparciu nadzorcy układu kancelarii PMR Restrukturyzacje S.A. udało się szybciej niż przewidywano doprowadzić do stabilizacji, która pozwala ze spokojem już bez bagażu wymagalnych zobowiązań podjąć próbę poszukiwania alternatywnych rynków i nowe otwarcie biznesowe. Wielkie podziękowania dla całego zespołu za sprawą, którego pracy i zaangażowania stało się to możliwe.”