Separate regulations governing restructuring and bankruptcy proceedings conducted with respect to a developer in the light of the amendment of restructuring law

12.2015

FKA Facts Commentaries Analysis

Facts

The new Restructuring Law of 15 May 2015 (“RL”), which comes into force on 1 January 2016, introduces changes also with respect to the regulation of restructuring and bankruptcy of developers. Instead of current solutions in force since 2012, the preferred objective, apart from the transfer of ownership to premises, is now the payment of a monetary amount resulting from the security of the buyer’s claim by an entry into the land and mortgage register.

Pursuant to the Act on the Protection of Rights of the Buyer of a Housing Unit or Single-Family Home, as of 29 April 2012 new, separate regulations governing the bankruptcy and restructuring of developers were introduced to the Bankruptcy and Rehabilitation Law. The legislator intended to introduce those separate proceedings to provide necessary protection of the claims of housing unit or single-family home buyers resulting from development agreements, in the case of the developer’s bankruptcy or restructuring. However, there are several gaps in those provisions, which caused legal uncertainty, and their ability to fulfil their basic objective has been frequently questioned. The latest changes, which will come into force on 1 January 2016, recognise the necessity to depart from the excessive protection of the buyer’s right to acquire a housing unit, which can be exercised only if the development project continues, and instead focus on the protection of the right to the value of the housing unit, which can be exercised both by way of a transfer of ownership to the housing unit and – if the property is liquidated – by a payment of a monetary amount resulting from the fact that the buyer’s claim is secured by an entry into the land and mortgage register.

Commentaries

The legislator basis the new regulation governing bankruptcy and restructuring of developers on the increased flexibility of measures aimed at the protection of buyers’ rights, whose selection will depend on the assessment of the situation in a given case. The objective of the amendment is to balance the interests of the buyers and the remaining creditors by granting buyers a position analogous to the situation of the creditors whose claims are secured. Most importantly, the issue of collision has been resolved between the rights of buyers and the rights of a mortgage creditor following the prior tempore potior iure principle, applied in accordance with the priority of entry into the land and mortgage register (which in practice means the priority of the bank financing the developer’s project, but in compliance with the bank’s obligations towards the buyer which pays the amounts due under the agreement with the developer).

The assumptions and objectives of the amendment will be implemented as part of three procedures selected depending on the situation in a given case:

  • continuation of a development project under bankruptcy or restructuring proceedings;
  • transfer and continuation of a development project by another developer which assumes the obligations towards unit buyers;
  • liquidation of property and satisfaction of the buyers on the terms analogous to the ones applicable to secured creditors.   

Continuation of a development project:

  • under bankruptcy or restructuring proceedings;

Arrangement, as the basic method of continuing a development project, will be subject to conclusion under restructuring proceedings and, in a limited scope, under bankruptcy proceedings. Buyers will be able to influence its shape by being entitled to submit arrangement proposals and by obligatory division of creditors into groups, with the buyers forming a separate group, with the possibility to divide it further (e.g. considering the progress of works or a given stage of the development project). The amendment also allows for diversification of buyers depending on whether they have made any additional payments or not. If a situation where a buyer is obliged to make an additional payment against his or her will is excluded, measures which increase the probability of the buyers actually making declared additional payments are introduced. Under restructuring proceedings, when a debtor remains in charge of managing its business, if the arrangement is approved, the buyer’s written vote, including an obligation to make additional payments in accordance with the arrangement proposals, including a copy of a final court decision approving the arrangement, constitutes an execution title against the buyer who voted to support the arrangement. Under reorganisation proceedings (described in a newsletter entitled “New rules for restructuring debtors” of January 2015, as a new type of proceedings which are supposed to enable a debtor to perform actions aimed at the improvement of its economic situation in order to restore its capacity to perform its obligations, and at the same time protect it against enforcement, as well as to conclude an arrangement after a list of claims is prepared and approved), where a debtor is deprived of the right to manage its assets, and under bankruptcy proceedings an initial vote of the buyers on arrangement proposals applicable to them will take place. The result of the initial vote is binding upon the arrangement concluded thereafter if the buyers make the declared additional payments (to the administrator or the receiver) or secure such payments, in the amount sufficient to finance the continuation of the project. If the reorganisation proceedings are discontinued and a simplified motion for bankruptcy is filed, additional payments made under reorganisation proceedings will be transferred to the receiver under bankruptcy proceedings. Additional payments are not part of the reorganisation or bankruptcy estate, are excluded from execution against a developer, and if the investment is not continued they are reimbursed to the buyers. Under bankruptcy proceedings the investment may be continued by the receiver, which will, among other factors, depend on: (i) the assessment of the economic situation of a given project, (ii) resolution on the continuance or discontinuance of the project adopted under reorganisation proceedings, and (iii) additional payments or lack thereof. A similar situation will occur with respect to bankruptcy proceedings if an arrangement is not concluded. In such a cease the previously made additional payments may be used for the continuance of the development project by the receiver under bankruptcy proceeding

  • by a new investor;

But how to proceed in cases when most housing units in a given development project have not been sold yet? Such an investment may be acquired and continued by a new investor. A project may be acquired by a new investor both as part of an arrangement (under restructuring or bankruptcy proceedings) or under bankruptcy proceedings. In the case of an arrangement, an irrevocable declaration of the investor, which after the arrangement is approved will be sufficient to conclude an agreement for the sale of property on which the investment is carried out, will be attached to arrangement proposals. A novelty with respect to the sale of property under bankruptcy proceedings is the introduction of a special sales procedure where encumbrances on the property are upheld and the new investor assumes the obligations of the bankrupt entity under development agreements as well as those resulting from a transformation or withdrawal from such agreements.

  •  Liquidation of real property and satisfaction of the buyers

The fact that a mechanism protecting the rights of the buyer in the case of liquidation of the property on which the development project is carried out has been introduced, should be viewed positively. It aims at the protection of the buyer’s right to a particular part of the property’s value, to the extent consistent with his or her claim and the value of the entire property. A construction analogous to a limited right in rem has been used in this case, where the buyer is satisfied on the basis of an obligatory entry of his or her claim in the land and mortgage register. The issue of collision of the rights of buyers with the rights of the mortgage creditor has been resolved as well by applying the principle of priority of entry in the land and mortgage register (prior tempore potior iure). Liquidation of property on which the development project is carried out will be also possible under general principles governing bankruptcy or restructuring proceedings.

Analysis

So what to do when a developer declares bankruptcy? There are three basic solutions: 1) continuation of the construction by the receiver or another developer; 2) satisfaction from escrow accounts (if any); 3) adoption of a resolution on a liquidation arrangement.

A judge commissioner convenes and holds a meeting of the buyers. If the investment is at an advanced stage, the most favourable solution for the buyers is a decision to continue the investment, provided that the proposal to continue the construction by the receiver is consistent with their financial capacities. If additional payments turn out to be significant, it is best to adopt a resolution on a liquidation arrangement, i.e. on the satisfaction of buyers by liquidating the developer’s assets in a manner provided for in the arrangement. After liquidation of the developer’s assets the amount obtained from the sale is divided between buyers of premises in accordance with the rules provided for in the arrangement. However, if the investment is not yet advanced and there are funds on the escrow account, the best solution would be to satisfy the buyers from the accounts. It is important to remember that buyers will form a separate group of creditors which nevertheless forms part of a greater whole – one of the groups of creditors under restructuring and bankruptcy proceedings. They will be able to influence the course and shape of the proceedings, but they will still be obliged to cooperate with the other creditors.