The domino effect already visible in the Polish economy forces companies to take urgent actions in light of their worsening financial condition. It is worth learning about the basic means that are legally available to entrepreneurs experiencing financial problems or expecting such problems in the near future.
1. The financial situation in the company is getting worse. What to do?
First of all – an analysis. Remedies will depend on the assessment of the condition of the business and the risks not only in the company itself but also in its environment. The consequences will differ for employees, owners and board members. For instance, other measures will be taken by a company run in the form of a limited liability company and a joint stock company may proceed otherwise. In the former, the members of the management board are personally liable for liabilities to business partners and in the latter they are not. Another example is that you can either save liquidity by standing still with banks and financial institutions or you can stop (temporarily) paying off also other liabilities by initiating restructuring proceedings.
2. What should you pay attention to when analysing the financial condition?
Financial problems are not only high fixed costs, falling revenues or problems with obtaining payment from contractors. You have to look wider. What happens when you lose liquidity? Did the business partners secure the payment? Promissory notes? How about Article 777 of the Code of Civil Procedure? Or maybe personal guarantees from the board, the owners or even their families.
These are important issues. The financial recovery will be different if it will take business partner years to claim payment in court and it will be different in case of using collaterals. And, of course, the guarantees. The company may not pay, but if the business partner can claim payment from us personally, can we risk our own property?
3. Will the company’s assets be lost in case of bankruptcy?
Bankruptcy is the declaration of bankruptcy of our company. The trustee will pay off the creditors from the assets that the company has developed. So, seeing the black clouds on the horizon, is there any way to save the assets? Disposal of assets at risk of insolvency is prohibited (even as a crime) or may be ineffective for the trustee or creditors (the transaction will be ineffective). Therefore, only the disposal of assets before the risk arises is legal (and effective).
4. Is it not allowed to dispose of assets in a difficult financial situation at all?
It is allowed to dispose of assets, but what matters is the purpose for which it is disposed of. If the sale is made to the detriment of the creditors – this is prohibited. However, if the purpose of the sale is to obtain cash for current operations (e.g. fixed costs), in this case it is not only allowed but also advisable – the priority is to save the company (and for this you need cash).
5. The company is losing liquidity. What to do?
You have to remember both to save the company and to protect yourself. If you are a board member, you must file for bankruptcy or open restructuring proceedings in due course. You will save the company itself by “postponing” the payment of liabilities and looking for new revenue. If you are a member of the management board of a limited liability company, think in advance about transforming it into a joint stock company or a limited partnership with a limited liability company. And if you run a business in the form of a sole proprietorship, the transformation into a private limited company is the only real way to ensure that in the event of possible bankruptcy the trustee will not sell your private assets as well.
6. How can I legally delay the payment for my business partners?
You can try to enter into agreements with them to extend payment periods. But you have to talk to each creditor separately and not everyone will agree. Professional creditors (e.g. banks) are sometimes more inclined to delay the payment period. Firstly, they know that it is better to wait for payment than not to receive it at all (in the event of bankruptcy); and secondly, they have greater funding capacity. Smaller creditors often cannot wait for a delayed payment. You can always take advantage of the extension of liabilities by entering into an arrangement with creditors in the restructuring proceedings.
7. What is the arrangement with creditors?
We offer our creditors uniform conditions for repayment of their liabilities. We do not need to talk to each of the creditors separately, as they will all vote for or against the arrangement together. We may offer to postpone the payment itself, reduce the liability (e.g. by 1/3), convert the liabilities into the share capital of our company or combine all options together. To this end, we submit a motion to the court to open the restructuring procedure and after it is opened, the creditors vote our arrangement proposals.
8. Can creditors enforce the payment despite restructuring proceedings?
No, the opening of restructuring proceedings generally precludes enforcement. It does so regardless of what the outcome of the proceedings will be, i.e. whether an arrangement will be reached or the proceedings will be discontinued. The prohibition of enforcement covers the entire period of proceedings until their (final) conclusion. That is, even by opening a proceeding that has no “chance” for an arrangement, the company will be protected against creditors. During this time, the company legally does not pay its creditors. So, if we were planning to postpone the repayment of liabilities only (e.g. until the economic situation improves), the failure to reach the arrangement itself does not cancel out this effect.
9. Are all creditors covered by the arrangement on the same terms?
No. Creditors are divided into the so-called arrangement and off-arrangement creditors. As a rule, employee payments and social security contributions (but not all) are not covered by the arrangement and must be paid on an on-going basis. But liabilities towards business are covered. Also, what is important, taxes are liabilities that are covered by an arrangement proceeding, so it may happen that thanks to the arrangement proceeding we will postpone the necessity of payment to the Tax Office for many months.
A very important principle is to cover with the arrangement not only overdue receivables but also those that are not yet due at the date of the arrangement. On the other hand, all obligations arising after the initiation of the arrangement must be paid on an on-going basis.
10. How much does it cost to initiate a restructuring proceeding?
The court fee for the application to open restructuring proceedings is PLN 1,000. Additionally, together with the application an advance payment for the costs of the proceeding shall be paid – PLN 5,148.07. In addition, the costs will be generated due to the advisory services on drawing up the proposal or accounting services – most of the annexes to the proposal require data to be collected by the accountants and compiled by lawyers. For comparison, the costs of filing for a bankruptcy will be similar – PLN 1,000 for application fee and an advance payment in the amount of PLN 5,148.07.
11. Are there any alternatives to restructuring measures?
Other actions in the situation of worsening the company’s finances may cause further risks. In particular, the liability of board members for the company’s obligations should be borne in mind. Representatives sometimes decide to resign from the board without first filing a bankruptcy motion. The resignation will not prevent liability for debts existing at that time (if they are not repaid in the future, e.g. by subsequent management board). Likewise, the initiation of the company’s liquidation will not protect against liability for debts. But the worst way to deal with a failing company is to sell it (there are still a lot of entities on the market offering to “buy indebted companies”). In the latter case, the argument that “the company is not ours” will in no way protect against liability, because only filing for bankruptcy or opening restructuring proceedings provides protection.