Bank-Led Restructuring in Poland: Bankruptcy and its Alternatives

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...