Unconstitutional Enforcement Privileges
On April 14, 2015 the Polish Constitutional Tribunal has analyzed the constitutional status of bank enforcement titles (“BETs”). The idea behind BETs is quite simple – create a shortcut for banks to accelerate the debt collection process by skipping court proceedings for payment. On the basis of debtor’s (or third party collateral provider’s) declaration on submission to enforcement made usually along with execution of the loan facility agreement, the creditor (being specifically a bank) may, in case of debtor’s default, issue a BET allowing it, after being granted an enforcement clause, to turn directly to a court bailiff with a view to start collection activities. Despite the fact that Polish law allows to expedite the debt collection on the basis of a submission to enforcement, BETs may be issued solely on the basis of a debtor’s written declaration, whereas a standard submission to enforcement requires the execution of a notarial deed which involves the payment of notarial fees. Consequently, banks have an exclusive access to fast enforcement without increasing borrowing costs.
The Tribunal found the privilege inconsistent with the constitutional principle of equal treatment. The violation of the Constitution was based on multiple dimensions of the discussed mechanism – it encroaches not only on the position of other creditors, but disrupts a delicate balance of lender and borrower under a loan agreement, as well. Consequently, the provisions of the Banking Law dated August 29, 1997 pertaining to BETs were repealed by the Tribunal, effective as of August 1, 2016 and hence no BET can be issued after that date. Until then, the legislature has time to create new mechanisms substituting BETs, yet conforming to the Constitution.
Impact on Debt Market
As it was raised by the Tribunal, Polish law offers alternative institutions to BETs. One of them is the above-mentioned notary declaration on submission to enforcement, yet it involves additional costs which may be seen as unattractive from the perspective of overall costs of various categories of loans, notably consumer loans. Another way is to make the debtor fill in a blank promissory note which is costless, but requires court proceedings (in a form of proceedings by writ of payment) before passing to enforcement. As a result, unless a legislative change occurs, the alternate scenarios are the rise of borrowing prices or higher demand for collection services.
From the practical perspective, the BETs were deeply rooted in the banking practice in Poland and their elimination from available enforcement mechanisms will revolutionize collection procedures of banks’ debts. It is more likely than not that Polish banks will tend to more eagerly put distressed debt portfolios on the market, especially in relation to consumer and mortgage loans, whose borrowing costs may be significantly affected by notarial fees. Polish securitization funds may also be used more frequently as the banks’ selling distressed loans to such entities enjoy a special treatment under the Polish CIT rules. Therefore, we expect a further growth of structures involving the investors’ use of securitization funds for the acquisition of distressed loans and their subsequent servicing by professional collection firms.
