During the SARS-CoV-2 pandemic, many in the business community are considering a business conversion, company merger or division. Such measures are usually dictated by the need to cut down on business costs, limit the liability of business partners, protect private assets, and protect the business against an uncertain future. How do reorganization processes affect the support granted to businesses in the form of subsidies from the Polish Development Fund (PFR)?
SUMMARY:
- The consequences of business conversion, contribution-in-kind, consolidation and division processes have not been provided for in PFR documentation regarding the principles of granting subsidies to micro-, small and mid-sized enterprises.
- In the absence of specific provisions in the terms and conditions and contracts with PFR, these processes should be governed by general principles according to which the rule of continuation or universal succession should apply.
- The characteristics of the specific reorganization processes, as well as the qualification criteria for the subsidy, leave some room for interpretative doubts in this regard, which have not been clearly resolved by PFR.
Uncertainty among businesses which received PFR subsidies
The enterprises which received PFR subsidies within the framework of the so-called Financial Shield, whether micro-, small or mid-sized, will be obliged to repay some or all of the funding. In the case of micro-enterprises, to hold on to the subsidy (up to 75%) they need to stay in business over a 12-month period after the subsidy was granted and maintain employment. Small and mid-sized enterprises are subject to an additional condition, i.e. recording a cash loss on sales amounting to more than 25% of the subsidy amount. Business conversions, as well as contributions in kind, consolidations and divisions may be regarded as events affecting business operations, earnings and employment. Admittedly, the Terms and Conditions for participation in the government programme “Financial Shield of the Polish Development Fund for SMEs” stipulate that:
any change of status regarding the beneficiary’s compliance with programme terms and conditions after the signing date of the subsidy agreement does not constitute grounds for changing the status of compliance or non-compliance with programme terms and conditions.
Nevertheless, the distinctive nature of reorganization processes may give rise to significant doubt in the enterprise with regard to the repayment of the PFR subsidy.
Corporate conversion in the context of PFR subsidies
The process of converting from one type of company/partnership into another under article 551 et seq. of the Code of Commercial Partnerships and Companies appears to raise the least doubt in the context of PFR subsidies. While the entity subject to conversion is struck off from the KRS register, the conversion itself follows the principle of continuation. The operations of the converted entity are continued in their entirety in an altered legal form. This principle is upheld in civil, administrative, and also labour law. Moreover, a business conversion in principle does not affect profit/loss figures. Likewise, the entity’s identification numbers (NIP and REGON) remain the same. What changes, then, is only the legal form of doing business and business name. The situation is similar in the case of incorporation by a sole proprietor (converting into a limited liability company or a joint-stock company), except that the business’s identification numbers NIP and REGON are also subject to change. In our opinion, such a conversion thus constitutes a continuation of the rights and obligations arising from the subsidy agreement with PFR.
Contributions in kind
On the other hand, PFR has spoken against a business conversion involving a contribution in kind of a sole proprietor’s enterprise into a company. This is because in such a case the company into which the enterprise was transferred in kind is not regarded as a continuator of the operations carried out previously by the sole proprietor. PFR interprets such a situation as a discontinuation of the undertaking’s business activity, even though de facto its operations are fully continued within the framework of the company into which the contribution was made. In light of the above, you need to be aware that making a contribution in kind involving an enterprise comprising a PFR subsidy may give rise to an obligation to repay 100% of the subsidy.
Consolidations and divisions
The highest level of doubt is associated with business consolidation and division processes. On the one hand, these processes are governed by the principle of universal succession, under which the acquiring company or the newly formed entity arising from a consolidation or division becomes the legal successor of the acquired or divided company. On the other hand, though, these processes entail consequences which may be viewed as ambiguous by PFR and business operators. Notably, this includes the balance-sheet consequences of consolidation and division processes, which may affect the companies’ profit and loss figures. For now, we do not know how PFR will interpret and apply the principle of universal succession in consolidations and divisions in the context of the obligation to show a specific cash loss on sales.
IMPORTANT
It is particularly unclear whether PFR will take into account the fact of consolidation or division when checking the amount of loss.
Additionally, consolidations and divisions often involve a transfer of a labour establishment or a part thereof to a new employer. Formally speaking, such a transfer of a labour establishment entails a change of employment figures, both on the part of the former and new employer. Yet, article 23¹ of the Labour Code provides for a special treatment of a transfer of a labour establishment. The company acquiring a labour establishment is to be regarded as a successor of the former employer, who continues the performance of the rights and obligations towards the employees previously employed in the acquired or divided entity. Within the framework of the processes discussed here, one company may also formally terminate operations which are continued by another company (e.g. in a merger by acquisition, the acquired company is struck off the KRS register). However, strictly speaking, in consolidation or division processes we are not dealing with a termination of operations by the companies involved in the process, because the operations of a given entity are continued by its legal successor by operation of law.
PFR has not taken a definitive position on the consequences of consolidations and divisions in the context of the subsidies granted. When responding to enquiries from business operators, PFR indicates that the subsidy agreement does not affect the principle of universal succession, which may be interpreted as meaning that PFR is open to reorganization processes involving company consolidations and divisions. Importantly, having regard to the significant interpretative doubts and the absence of a clear position from PFR, it is prudent to proceed with caution and analyse the consequences of a particular reorganization procedure. As a precaution of sorts, it may be advisable to submit an enquiry to PFR, while remembering that PFR does not provide legal advice and any response from them in this scope will not be binding on the applicant.
The danger of having to repay a higher portion of the subsidy than planned may definitely delay business decisions to proceed with certain reorganization processes. For a significant majority, this will effectively delay decisions which could facilitate ongoing business operations during a crisis.
AUTHOR: Magdalena Bilicka, Specialist at Grant Thornton Legal
