How to overcome the deadlock

SOLUTION 1: CONTINUATION OF THE INVESTMENT UNDER BANKRUPTCY OR RESTRUCTURING PROCEEDINGS

Under restructuring or bankruptcy proceedings it is possible to continue the development of property. Its aim is to complete the investment and hand the premises over to their buyers. In such a case at least by some buyers will have to make additional payments which will finance the project.

Naturally, such additional payments are not part of the bankruptcy estate and are, therefore, exempt from the execution of other debtors’ claims. This is important if, for example, the concluded arrangement is not executed. With respect to the latter, the buyers will be able to influence its shape.

If the arrangement is not concluded, a receiver may continue the investment and may use the afore-mentioned additional payments. A receiver should decide whether to do this or not on the basis of an economic evaluation of a given project.

SOLUTION 2: CONTINUATION OF THE INVESTMENT BY A NEW DEVELOPER (IN LIEU OF THE BANKRUPT ENTITY)

This solution could work in a situation where the developer did not manage to sell a significant part of the premises in a given project before the commencement of bankruptcy proceedings. For this reason a different developer may acquire the investment in the course of bankruptcy or restructuring proceedings and profit form such an investment by selling the premises for which the initial developer did not find buyers.

This solution is also beneficial to those who bought and paid for the premises when the initial developer was still in business. After the new developer takes over the property form the bankrupt entity it will also take over the liabilities of the bankrupt under the development agreements concluded with the buyers.

SOLUTION 3: LIQUIDATION OF PROPERTY AND SATISFACTION OF CREDITORS

In the case of properties whose construction is not yet at an advanced stage when the bankruptcy proceedings are initiated, the best solution is liquidation of the property.

This approach allows for the satisfaction of the buyer to the extent consistent with his or her claims and the value of the entire property.

Amounts obtained as a result of liquidation of property on which the development project is carried out are divided in accordance with general principles of law (i.e. a claim entered in the land and mortgage register has priority), whereas if a creditor whose claims are secured by a mortgage consents to the housing unit being entered in a separate land and mortgage register without any encumbrances it is deemed that the claim of a buyer will have priority over the mortgage to the extent that he or she made payments under the agreement.

EXPERT COMMENTARY

Leszek Rydzewski, a lawyer, partner, head of the financial institutions and restructuring department at FKA Furtek Komosa Aleksandrowicz

Marta Bosiak, a lawyer at the property law department at FKA Furtek Komosa Aleksandrowicz

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).

So what to do when a developer declares bankruptcy? There are three basic possibilities and the solution most favourable for the buyers should be chosen. 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.

Bartosz Sierakowski, from the law firm Zimmermann i Wspólnicy

From the point of view of the developer the key change is the legislator’s desire to implement the policy of a “new chance”. One of the main assumptions of restructuring law is the implementation of effective measures to restructure the debtor’s business and prevent its liquidation. The new law provides for numerous measures which allow for an arrangement with the creditors to be concluded, in particular by applying one of the four new restructuring procedures. In many cases this solution will be much more favourable to the creditors, including home buyers, and will also preserve jobs and allow for continuous enforcement of agreements (especially if an arrangement which makes it possible to continue an investment project is concluded). It should be remembered that the objective of restructuring law is to allow the debtor to resume its business, but it does not forget about the creditors, who actually benefit from the new solutions. For this reason the Act provides for a few alternative solutions to the problems resulting from the developer’s insolvency, which altogether constitute a complex system of protection for its clients and take into account the need to grant special rights to this particular group of creditors. The most far reaching solution is the one which gives equal status to home buyers and mortgage creditors, provided that the bank has previously promised to entered the premises in a separate land and mortgage register without any encumbrances. In such a case the buyer, even if he or she does not obtain the ownership title to the premises, has a real chance to recover at least some of the invested funds.

Nevertheless, it is impossible to state clearly that the new law, regardless of the circumstances of a given case, fully protects the buyers and will result in the developer regaining its capacity to carry out investment projects in the future. There is still risk that the insolvency of the developer will be so serious that despite the steps taken the claims of its creditors will not be satisfied. It is in the interest of the developer, therefore, to apply the measures introduced by restructuring law already when apparently temporal financial problems occur. However, at this stage the new law should be viewed positively. Although, it is only its responsible practical application that will allow for a full and actual restructuring of the developer. The key issue here is a quick reaction to problems with financial liquidity.