Is the pilot flying with us? – two words about paper bankrupts

Last week, Dziennik Gazeta Prawna published an article in which, together with attorney Jan Saklawski, we draw attention to a serious problem for an important part of the beneficiaries of EU funds, which we were the first to detect, and which boils down to the fact that some of them may be in a state of debt insolvency from 1 January 2016 and should therefore apply for bankruptcy.

„Or journals” or a mere oversight?
The problem, in the broadest terms, boils down to two changes in the law: the first concerning the bankruptcy law, to which (by last year’s Act – Restructuring Law) Article 11(3) was introduced, according to which, for the purpose of calculating an entity’s assets for the purpose of assessing the state of debt insolvency, assets excluded from enforcement under the Code of Civil Procedure, among others, are not taken into account. Meanwhile, the original version of this provision – in the wording proposed by the Sejm (parliamentary print no. 2824) – provided for a much narrower exclusion from assets relating exclusively to sums accumulated in the company social benefits fund and other funds created on the basis of separate regulations.
And the second, chronologically earlier, change carried out in 2014, about which many beneficiaries of EU funds have probably already heard, namely the amendment of Art. 831 § 2 of the Code of Civil Proceedings, as a result of which fixed and intangible assets created as part of the implementation of a project co-financed from European funds were temporarily – until the end of the durability period – excluded from enforcement.
Significantly, while in the case of the second change some semblance of its justification was still created, the first change took place at the last straight line in the Senate and was motivated as a purely technical, clarifying change. Without going into detail – I refer to the article in this regard – both of these changes mean that the beneficiaries of SPV projects have found themselves, or are about to find themselves, in a state of debt insolvency justifying the filing of a bankruptcy petition. The above situation is absurd to the extent that a large part of companies running such projects are in an overwhelmingly good financial condition and regulate their liabilities on an ongoing basis, whereas artificial exclusion of all assets connected with the project, regardless of the share of EU funding in their purchase, has the bizarre consequence of drastically underestimating the value of assets for the purposes of assessing the state of debt insolvency.

One thing is certain, regardless of the reasons for the unfortunate changes, they prove that the over-supply of regulations has already reached such a point that even experienced legislators are losing their way – no one has caught on to the disastrous effect the regulations may have on a number of beneficiaries.

EU regulations once again a pretext for legislative gibberish
In my opinion, the problem lies primarily in the unfortunate amendment to the Civil Procedure Code made in the course of amending the previous implementation act (which, by the way, the Senate legislators in the rush to amend the law probably did not notice), which, seemingly motivated by the provisions of EU law, in fact finds no justification in this law. Therefore, in this post I would like to address the issue of justification of the amendments to the CPC additionally.

The above change was justified by the Minister of Regional Development (justification available at the website of the Sejm of the Republic of Poland – print no. 1881) by the wording of EU regulations (and specifically the so-called General Regulation, i.e. Council Regulation 1083/2006 laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund and repealing Regulation (EC) No 1260/1999) and the resulting from these regulations principle of durability of projects (Article 57 of the General Regulation) and indivisibility of payments to beneficiaries (Article 80 of the General Regulation).

[In accordance with Article 80 of Regulation 1083/2006, Member States shall satisfy themselves that the bodies responsible for making the payments ensure that the beneficiaries receive the total amount of the public contribution as quickly as possible and in full. No amounts shall be deducted or withheld, nor shall any specific charge or other charge with equivalent effect be levied that would reduce these amounts for the beneficiaries. This provision undoubtedly protects the funds in question until they are transferred to the beneficiaries. An analogous solution is also planned for the new EU programming period. However, it is equally important that the funds in question, due to their specific nature and purpose, are also protected after their transfer. This is particularly important in the context of the so-called project sustainability principle expressed in Article 57 of Regulation No 1083/2006, according to which the Member State or managing authority shall ensure that a project retains the contribution from the European Funds only if it does not, within five years of its completion, undergo a substantial modification which is the result of a change in the nature of ownership of an item of infrastructure or the cessation of a productive activity and which affects the nature or implementing conditions of the project or gives to a firm or a public body an undue advantage. Enforcement in this respect may in practice lead to the necessity of returning funds provided to beneficiaries, including by Poland, to the budget of the European Union. It may also lead to the bankruptcy of the beneficiary, which in turn will mean both the discontinuation of project implementation and the impossibility of recovering funds transferred to beneficiaries. As a result, we would not only be dealing with the failure to achieve specific project objectives, especially in the context of the operational programme assumptions and Poland’s socio-economic development, but also with concrete financial losses on the side of the state budget].

Moreover, exempting these assets from enforcement does not add any value for the beneficiaries either – if they have problems which justify the enforcement of these assets by other entities, it is most likely that the sustainability of the project is at risk anyway and exempting a part of the assets from enforcement will not save the situation. On the other hand, it can, and does, have the additional negative effect of making it difficult to obtain financing from financing institutions, which may currently have problems with establishing effective security on the beneficiary’s assets, and undoubtedly have justifiable grounds for approaching the financing of this type of investment with increased caution.

Finally, in my opinion, the EU regulations do not provide any justification for excluding from enforcement not only the EU funds themselves, but also the assets created under the project, which – as is clear from the wording of the provision of Article 831 § 2 of the Code of Civil Procedure – are excluded from enforcement in their entirety regardless of the proportion, if any, in which they were financed from the EU funds – by the way, in the justification of the Act there is no information as to why it was decided to exclude from enforcement, apart from the EU funds themselves, also these assets.

It is worth remembering that this is the umpteenth time that EU regulations have been used as a pretext to unreasonably restrict rights and impose new obligations on beneficiaries and applicants. The instrumental treatment of EU regulations on the occasion of the issue of the so-called implementation system was widely commented upon by the Constitutional Tribunal in the judgment P 1/11.
The peak of irony in the situation under discussion, however, is the sentence contained in the justification of the Act that the changes in question were to prevent bankruptcy of beneficiaries. As it turns out, as a result of negligence, the opposite effect was achieved in the meantime. Of course, it is difficult to expect that overnight the courts will be inundated with bankruptcy petitions filed by the diligent managers of such entities, but the latter should be aware that failure to file such petitions within the statutory deadline may give rise to various risks for them, including criminal liability. In addition, it may turn out that the counterparties of such entities (e.g. creditors or financing institutions) quite by accident have found a completely new weapon to use in negotiations