Bank-led restructuring in Poland : bankruptcy and its alternatives

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. In this report, the authors 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 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. The most problematic of the three exit processes is the liquidation of state enterprises, which is almost entirely controlled by debtors. It is much slower than bankruptcy and 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.