Bank-Led Restructuring in Poland: Bankruptcy and its Alternatives

48 Pages Posted: 20 Apr 2016

Date Written: September 1996

Abstract

Poland has neglected traditional exit processes for problem debtors, partly because of its emphasis on bank conciliation. Now that bank conciliation has expired as an option, Poland should shift its energies to improving corporate governance, fundamental tools of debt collection, and basic bankruptcy and workout processes.

Poland's Enterprise and Bank Restructuring Program, adopted by Parliament in 1993, provided for the resolution of problem loans through workouts, liquidation, or loan sales. Here Gray and Holle examine how formal exit processes (the movement of labor and assets out of one organization into another or into unemployment) work in Poland.

They examine three traditional exit processes - court conciliation, bankruptcy, and the liquidation of state enterprises - and touch briefly on the alternatives of debt repayment and the sale of debt. They also examine how Polish firms slated for downsizing or closure differ from those selected for survival.

Traditional exit processes appear to have worked but with many flaws. Neither bankruptcy nor court conciliation as currently designed gives creditors enough control over firms in financial distress. Both could work much better if redesigned and if supported by better systems of collateral and debt collection. Suggested improvements in design need to be complemented by strong economic policies that give banks and other creditors powerful incentives to use these debt collection mechanisms.

The most problematic of the three exit processes is the liquidation of state enterprises, which is almost entirely controlled by debtors. This process is much slower than bankruptcy, and although on paper it is designed for solvent firms, it is often used to get around bankruptcy and keep debtor management in control of assets for as long as possible. The loophole of state enterprise liquidation must be plugged if other processes are to work. It should be strictly limited to solvent firms or eliminated altogether, because it invites abuse.

Poland has neglected such traditional processes as bankruptcy and workout, partly because of its emphasis on bank conciliation. Now that bank conciliation has expired as an option, Poland should shift its energies to improving traditional, broadly applicable exit and workout processes rather than add new ones for selected types of firms. Special alternatives for selected firms tend to lead those firms to expect lenient treatment and thereby create a moral hazard that could stall further restructuring.

This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger study in the department of Poland's Enterprise and Bank Restructuring Program.

Suggested Citation

Gray, Cheryl W. and Holle, Arnold, Bank-Led Restructuring in Poland: Bankruptcy and its Alternatives (September 1996). Available at SSRN: https://ssrn.com/abstract=623911

Cheryl W. Gray

World Bank ( email )

1818 H Street
Washington, DC 20433
United States
202-473-9188 (Phone)
202-522-1155 (Fax)

Arnold Holle (Contact Author)

The Boston Consulting Group ( email )

J.F. Kennedylaan 100
3741 EH Baarn
Netherlands

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