In November 2008, the European Commission (EC) found state aid granted by the Polish government to two Polish state-controlled shipyards (Stocznia Szczecinska Nowa and Stocznia Gdynia), illegal under EU single market rules and requested its return to the government with accrued interest. The EC decided however to postpone the enforcement of the return of state aid for seven months until 6 June 2009 to allow for the prior public sale of the shipyards’ assets at market price. These arrangements will be implemented pursuant to a special Act on compensation proceedings in entities with significant importance to the Polish shipyard industry dated 19 December 2008, that came into force on 6 January 2009.
The EC’s decision of 6 November 2008 ended a four-year investigation into whether state aid payments made by the Polish government to these shipyards, such as State Treasury guarantees, capital injections, loans, subsidies, tax instalment payments and deferment of the payment of public (tax) liabilities, complied with EU competition rules on rescue and restructuring aid.
An overview of the new Polish legislation
The new Act aims to prevent the bankruptcy of the two named shipyards, which would otherwise have resulted from the immediate return of state aid, and ensure the continuation of shipbuilding activity on the basis of the shipyards’ assets being acquired by purchasers, creditors’ claims being satisfied and the protection of shipyard employees’ rights.
The Act introduces a special administrative out-of-court procedure, separate for each shipyard for the liquidation of the shipyards (Compensation Proceedings), which will be preceded by the public sale of their assets and which will supersede the court conducted bankruptcy proceedings.
Once such Compensation Proceedings are in force, the bankruptcy of the shipyards cannot be declared and any bankruptcy proceedings previously initiated shall be suspended.
Who takes part in the Compensation Proceedings?
Compensation Proceedings are conducted by a compensation manager (zarzadca kompensacji), a special officer appointed by the creditors who fulfils a similar role as a court receiver (syndyk) in bankruptcy proceedings. The proceedings also involve the President of the Polish government-owned Industrial Development Agency (Agencja Rozwoju Przemyslu), who is responsible for the commencement and closing of proceedings, the Minister of State Treasury, who supervises the proceedings, an observer appointed by the Ministry of State Treasury from among candidates approved by the European Commission to monitor the proceedings, and the shipyards themselves.
The Act also vests certain powers with the committee of creditors, a body that has been set up to provide any help required by the compensation manager, control his actions, review any shipyard asset sales plans and review the status of funds received from the sale of assets. It is also entitled to investigate the books and documents of the Compensation Proceedings.
The effect of Compensation Proceedings
This can be described broadly as follows:
- the appointed compensation manager takes over the shipyard management board’s right to administer over the shipyard and dispose of its assets;
- any legal acts undertaken by the shipyard (and not by the compensation manager) with respect to its assets are null and void;
- creating encumbrances over any of the shipyard’s assets to secure the shipyard’s debts is prohibited;
- payment of any of the shipyard’s debts created before the commencement of compensation proceedings is suspended;
- calculation and accrual of interest due from the shipyard is suspended;
- the shipyard cannot enter into new shipbuilding contracts;
- arbitration clauses expire and pending arbitration proceedings are cancelled;
- enforcement proceedings cannot be initiated against the shipyard’s assets and any such pending proceedings are suspended by operation of law;
- the shipyard’s monetary obligations become immediately due and payable;
- non-monetary obligations are transformed by operation of law into payment obligations and become immediately due and payable;
- set-off is permitted provided that the claims of the shipyard and its creditor existed on the date of the commencement of Compensation Proceedings, even if one of the claims is not due and payable; and
- the compensation manager may continue to perform contracts (shipbuilding contracts, in particular) that have not been fully performed on the commencement date of Compensation Proceedings or alternatively renounce such contracts. If a contract is renounced, the shipyard’s creditor is not entitled to demand the return of services already rendered and is only able to claim for payment for obligations performed and losses suffered. The Act expressly allows creditors to demand that the compensation manager makes his intentions clear to existing creditors by responding in writing to any demands from creditors as to whether he intends to continue with the performance of any particular contract or renounce it. If the compensation manager does not issue a written statement within two months, the relevant contract is deemed to have been renounced.
Public sale of assets
A shipyard’s assets will be sold to the highest bidder for a market price in open tender proceedings. Such sale has the same effect as a court execution sale in that it is made free of any security interests or liens over these assets (any encumbrances such as mortgages and pledges automatically expire on a sale of the assets). The sale of assets will not be treated as a new form of state aid granted to the relevant purchasers and will not involve any liability connected with the EC challenged state aid. Once the sale procedure is completed, the shipyards will be liquidated.
Lease of shipyard’s assets prior
The sale of a shipyard’s assets can be preceded by a lease contract (umowa dzierzawy) entered into for a definite period of time if this is economically justified. However, such lease cannot include the entire business of a shipyard and does not provide the lessee(s) with a pre-emption right to purchase the leased assets in tender proceedings.
Satisfaction of creditors
The procedure to be applied to the satisfaction of a shipyard’s creditors is similar to the procedure already provided for under bankruptcy law in Poland. Under both procedures, a secured creditor will have priority over the proceeds received from the sale of the asset subject to security (conducted by a compensation manager in the case of the Compensation Proceedings) as regards other (unsecured) creditors. Any remaining amounts are divided into four categories. If the proceeds are not sufficient to satisfy all claims in full, claims in each category are satisfied after the full satisfaction of claims from higher priority categories, with the ranking of the claims determined by reference to the category in which the claim falls. When proceeds from the assets are not sufficient to satisfy in full all claims in the same category, they are satisfied pro rata.
An uncertain future for Polish shipyards
The new Act provides yet another chance to preserve (at least) some part of the Polish shipyard industry. However, if purchasers of a shipyard’s assets under the new Compensation Proceedings do not decide to continue the shipbuilding business, the outlook for the future of shipbuilding in Poland may be bleak. There may also be a period of uncertainty to be faced by shipowners, and their financiers, whilst the compensation manager determines whether to continue with, possibly loss-making, existing shipbuilding contracts.