New Debt Restructuring Law – amendments to the Law on Developers and provisions on developers’ bankruptcy
On 1 January 2016, the Act of 15 May 2015 – Debt Restructuring Law – was brought into force. The Law is a very extensive and comprehensive act, comprising 456 articles. It regulates the process of voluntary arrangement an insolvent debtor or a debtor endangered by insolvency may enter into with its creditors, the implications of such arrangement, as well as the course of recovery procedures. Accordingly, debt restructuring shall be conducted by way of the following debt restructuring proceedings:
- Voluntary arrangement approval proceeding;
- Voluntary arrangement summary proceeding;
- Voluntary arrangement proceeding;
- Recovery proceeding.
The objective of debt restructuring proceeding is to prevent debtor’s bankruptcy announcement by enabling debt restructuring by way of entering into voluntary arrangements with the creditors, and in the case of recovery proceedings – also by way of deploying recovery measures, with all reasonable rights of the creditors being properly secured.
Also, with the law amendment, the Central Debt Restructuring and Bankruptcy was established.
The Act amends a few dozen laws. Surely, the most numerous group of amendments concerns the Act of 28 February 2003 – Bankruptcy and Recovery Law, including the matters previously regulated by articles 4251 – 4255 of that Act, i.e. developers’ bankruptcy proceedings. This present article concentrates on those very amendments as well as on the amended Act of 16 September 2011 on protecting the rights of purchasers of apartments and houses (hereinafter referred to as: Law on Developers).
The first thing to pay attention to is the fact that the provisions governing developers’ bankruptcy contained in the Bankruptcy and Recovery Law are now significantly extended. The title “Developers’ Bankruptcy Proceedings” in its pervious wording numbered, as mentioned above, five articles, whereas having been amended, it now contains 19 articles (article 425a – article 425s), grouped into five Divisions. Apparently, the most notable change is deleting article 4252 of the Bankruptcy and Recovery Law, according to which, in case of developer’s bankruptcy announcement, the funds deposited in housing escrow accounts, freehold or right of perpetual usufruct concerning the real estate on which the housing development project is undertaken, as well as surcharge payments made by purchasers constitute a separate bankruptcy estate, to be used to satisfy, in the first place, the claims by the purchasers of the apartments and houses under the housing development project. That means that the Legislator returned to the concept of uniform bankruptcy estate, which, according to early comments, will weaken the protection of purchasers of apartments and houses against developers in the event of those latter going bankrupt, and must trigger further amendments to the Law on Developers.
In bankruptcy proceedings, the official receiver shall be able to carry on the bankrupt entity’s development project upon approval by the trustee in bankruptcy. That latter one shall grant approval if, with all reasonable respect, carrying on the development project is economically justifiable and there are chances for its successful completion. The official receiver shall be carrying on the development project of the bankrupt entity, with regard to which, in the earlier recovery proceeding against the bankrupt entity, the purchasers adopted, as provided for in the Debt Restructuring Law, a resolution on entering into voluntary arrangements, and made or secured surcharge payments in the required terms, but the arrangements were not actually entered into, unless the trustee in bankruptcy has granted approval for the development project to be discontinued. If, in the course of the bankruptcy proceeding, grounds are disclosed to agree that carrying on the development project further is not justifiable in any reasonable respect, the trustee in bankruptcy, upon the official receiver’s request, shall grant approval for discontinuation of the development project. Once the resolution by the trustee in bankruptcy on granting approval for the development project to be discontinued becomes final, the official receiver shall accordingly notify the bank keeping the housing escrow account for the development project, as well as the official receiver shall leave an instruction that the funds deposited in the escrow account shall be returned to the purchasers.
The funds generated from the liquidation of the real estate on which the development project was carried out, shall be subject to distribution on general rules. However, upon consent by a mortgage-secured creditor for the purchased housing premises to be separated with no encumbrances, it shall be deemed that the claim of the purchaser of the housing premises, which the consent relates to, shall be privileged before the mortgage encumbrance satisfaction, to the extent defined by the payments made towards the purchase agreement. Purchaser’s claims resultant from the developer agreement rescission shall be satisfied from the funds generated upon the liquidation of the real estate on which the development project is carried on under the same rules as contractual claims under the developer agreement. The purchaser shall be entitled to privileged treatment resultant from the disclosure in the Land and Mortgage Register of the claim under the developer agreement, also when the entry on such claim disclosure has been deleted.
Upon a request by the official receiver, the trustee in bankruptcy shall be able to grant approval for the sale of the real estate on which the development project is carried out to an entrepreneur who undertakes to continue the development project. The purchasing entrepreneur shall bear, together with the bankrupt entrepreneur, joint responsibility for the obligations under the developer agreements concluded in connection with the development project carried out on the real estate, as well for the obligations towards purchasers resultant from claims conversion under such agreements in the course of the debt restructuring proceeding or bankruptcy proceeding, or upon such agreements rescission. Alongside the real estate ownership, the purchasing entrepreneur shall be acquiring the rights vested in the bankrupt entrepreneur under the developer agreements concluded in connection with the development project carried out on the real estate.
The purchasers, constituting at least 20% of the total number of purchasers of the premises within the development project carried out by the bankrupt entrepreneur, shall be entitled to come up with arrangement proposals within thirty days from the date of bankruptcy announcement. Such proposals may cover among others: payment of surcharges by all or some purchasers, sale of the real estate to an entrepreneur capable of taking over the obligations towards the purchasers and undertaking to carry on the development project, determination of other conditions enabling carrying on the development project, exchange of premises between creditors, or exchange of purchased premises for premises not being the subject matter of the developer agreement.
As mentioned above, the catalogue of amendments extends also to the Law on Developers. An additional regulation was adopted, according to which in the event of developer agreement rescission by a purchaser, the amount of pay-out under the bank guarantee shall be decreased by the amount of funds, concerning the purchaser, deposited in the housing escrow account of the entrepreneur acquiring the real estate on which the development project is carried out. Modified is also the requirement for placing in the developer agreement the information on the bank’s approval to have the housing premises separated without encumbrances and the ownership title transferred. A significant amendment concerns entries into the Land and Mortgage Register with purchaser’s claims to have a building erected, housing premises separated, and the ownership title to those premises transferred. Incidentally, a provision was added, according to which article 19 of the Act on Land and Mortgage Registers and on Mortgage is not applicable to such Register entry. The article provides that a claim for transferring the ownership title or right to perpetual usufruct, or establishing a limited property right on real estate may be deleted upon a unilateral request of the owner or perpetual lessee after a year has passed since the relevant entry was made in the Land and Mortgage Register, provided within the term no motion was filed for entering the right the claim refers to. The adopted amendments concern also the wording of the information prospectus sample – modified was the wording of one of the columns in part III of the sample.
