Amid the current market uncertainties, distressed asset sales are likely to rise. International investors are looking for efficient solutions, preferably ones that reflect solutions in their home jurisdictions. One popular mechanism is the use of pre-pack sales. A pre-pack sale manages the adverse impact of insolvency proceedings on the distressed company’s business, while reducing the time and cost of such proceedings, and offering greater asset realisation to be distributed among creditors.
Under Polish law, a prepared liquidation, or a “pre-pack”, is a pre-arranged sale of all or part of the debtor’s business, or the assets comprising its substantial part, to a buyer of choice at a pre-arranged price. Pre-packs are negotiated before the company enters formal insolvency proceedings, but the sale is completed after the bankruptcy of the company has been declared and the court has approved the sales terms. Pre-pack sales have the effect of an enforcement sale, which means that the buyer acquires the assets free of any liabilities and encumbrances. Compared to the other types of insolvency proceedings under Polish law (which in some cases can take up to several years), a pre-pack sales’ timeframe is therefore much shorter (on average between 3 to 9 months).
Unlike in certain jurisdictions, as for instance in the UK, where pre-packs have evolved out of market practice, in Poland, pre-pack sales in the form of the so-called prepared liquidation were introduced by the Bankruptcy Act in January 2016. The market warmly received the pre-pack regulations and they have been gaining popularity ever since – in 2016 there were 30 pre-pack applications, while in 2017 – 49, and in 2019 – 51, which accounts for approximately 1/3 of the total number of bankruptcy filings between 2016 and 2019. In 2021, there were 25 applications, the decline in number was associated with the 2019 amendments extending the protection of the secured creditors and the bankrupt entity’s employees.
Who can apply?
Either the creditor that has filed the bankruptcy petition, or the debtor company can apply for a pre-pack sale. The applicant is free to decide whether to request a pre-pack sale concurrently with the bankruptcy petition, or thereafter. In some instances, the debtor company may propose a pre-pack sale as a response to the bankruptcy petition filed by the creditor.
How to apply?
Pre-pack sales are approved by the Polish Court.
When making a pre-pack sales approval request, the applicant should include the proposed terms and conditions of the sales including the price and the proposed buyer. In addition, the request should include:
- a description and a ballpark value of the assets, prepared by a certified valuer; and
- a list of any security interests which, to the best of the requesting party’s knowledge, exist over the assets to be sold, including details of the secured creditors.
To avoid the risk of the trustee opposing any of the sale agreement provisions going forward, a draft of such an agreement may also be included in the court approval request. The proposed buyer also needs to deposit ten percent of the offered price.
The sale can be to an independent third party or to someone connected to the company, but in the latter case, the purchase price may not be lower than the ballpark valuation price determined by the court based on evidence from the court-appointed expert witness.
The sales terms approval request may indicate more than one buyer. If multiple sales terms approval requests have been filed, the temporary court supervisor or the compulsory receiver (see further below) selects the best offer by way of an auction.
Secured creditor protection
The Polish pre-pack sales regulations include certain safeguards for the secured creditors. The court will notify them of the proposed pre-pack sale, and they receive a copy of the sales request.
In other insolvency proceedings, the secured creditor may decide whether their secured assets should be included in the sale. That safeguard is not available in the case of a pre-pack sale if it is more profitable to sell secured assets as part of the pre-pack sale, than it would be to sell those separately. Still, there are some protections because the proceeds from the sale of the encumbered are earmarked for paying the secured creditor.
The court must appoint a temporary court supervisor (in such cases, the business is managed by the debtor) or a compulsory receiver (in which case, the receiver manages the business), in order to prepare the following:
- a financial standing report for the debtor;
- a description and value of the debtor’s assets; and
- the anticipated costs of the bankruptcy proceedings, as well as any other information which could affect the sales terms approval.
The court must approve the sales terms if the offered price is higher than one that could have been obtained in the case of a liquidation, less the costs of proceedings and any other liabilities of the bankruptcy estate. If the offered price is lower, but it approximates the recoveries in a liquidation, the court may approve the sale if it enables the debtor’s business to be preserved or there is an overriding public interest that requires it.
The court must consider the sales terms approval request no earlier than 30 days from the bankruptcy filing date, and no earlier than 14 days from delivering copies of the sales request to the secured creditors. In practice, due to the courts’ caseload, such an approval may take longer than this statutory timeframe.
The sales agreement may be executed only on the terms approved by the court no later than 30 days after the court ruling is rendered final and non-appealable (unless any other date is specified in the approved sales terms). The buyer should pay the purchase price prior to executing the agreement.
The debtor and the creditor that filed the pre-pack sales approval request may challenge the ruling dismissing a request, while the debtor and any creditor may challenge the ruling granting approval.
Until the sales agreement is concluded, there are measures in place to react to any asset value fluctuations. The trustee or the buyer may request that the court set aside or amend the sales terms approval request ruling, if any material facts affecting the sold assets’ value or any new facts transpire once the ruling has been issued.
Enforcement sales effect
Pre-pack sales have the effect of an enforcement sale, which means that the buyer acquires the assets free of any historical debts incurred by the distressed company. The buyer is not liable for the bankrupt company’s tax obligations, including those arising after the company’s bankruptcy has been declared.
The buyer of the bankrupt entity’s enterprise acquires it free of any liens and encumbrances, and it will not be liable for the bankrupt entity’s liabilities. All encumbrances are expunged, except for certain easements, including the right-of-way easement.
The value of any encumbered assets is disclosed in the sales agreement and the purchase monies are used firstly to satisfy the creditors whose claims were secured on these assets, with any residual amount going to the bankruptcy estate.
The buyer of the bankrupt entity’s enterprise takes over all concessions, permits and licenses granted to the bankrupt entity.
In a pre-pack involving a business sale, TUPE (Transfer of Undertakings-Protection of Employment) regulations apply, whereby the buyer, as the new employer, becomes party to the existing employment relationships by operation of law. However, the employees’ rights accrued prior to the bankruptcy declaration do not automatically transfer to the buyer. Such rights can be enforced against the bankruptcy estate, including from the funds obtained from the pre-pack sales.
The introduction of the pre-pack regulations in Poland was much awaited by all the market who saw it as a chance to overcome what can otherwise be cumbersome and prolonged insolvency proceedings.
Although pre-pack sales can be affected much faster than any other bankruptcy proceedings, the average time of 3 to 9 months, is still much longer than the market would wish for. This is due in part to the insolvency courts’ excessive caseloads which affect the timing of approvals. During that time, the enterprise value may change dramatically, but the courts are reluctant to approve any sales terms involving price adjustments mechanisms.
The urge to strike a balance between fast, cost-effective pre-packs and various stakeholders protection, has caused the Polish regulations to be – to a certain extent – less flexible than in other jurisdictions. However, for companies on the verge of bankruptcy, a pre-pack sale might still be one of the best options to consider.