Koumentakis

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  • The new Law on Insolvency: Insolvency – the last resort?

    The new Law on Insolvency: Insolvency – the last resort?

    This article completes a section aimed at better understanding the new Law on Insolvency. In this context, we started with its basic provisions and innovations, the necessity, the regulatory scope and its importance. We proceeded to analyzing its individual predictions. Our first stop: the early warning. The out-of-court debt settlement mechanism and the consolidation process followed.

    We close, for the time being, with what we logically expect from every bankruptcy law (and which, in the end, is, in this case, only one of its units): bankruptcy (: articles 75 to 211 of law 4738/2020).

    It is obvious that the exhaustive presentation of the one hundred and thirty six (136) articles goes beyond the purposes and limits of the present. We are therefore limited to the most critical: to highlight, that is, the will of the legislator as to the purpose of the bankruptcy and, consequently, the means of achieving it.

     

    Regarding the purpose and means

    The purpose of bankruptcy is the collective satisfaction of the debtor’s creditors. But by what means is it served?

    Liquidation as a means of collective satisfaction of creditors

    The new Law on Insolvency now highlights liquidation as the only and exclusive possible development of bankruptcy.

    On the contrary, the Bankruptcy Code, after the multi-level amendment it underwent – especially in 2016, it provided for the equivalent alternative possibility of the (bankruptcy) reorganization plan and the satisfaction of the creditors with the maintenance of the business. Creditors could choose one way (liquidation) or the other way (business maintenance). This was, after all, consistent with the choice, inter alia, to “(a) maximize the value of the debtor’s assets, in particular by continuing or reorganizing the business when it is to the benefit of the creditors; b) balance between the liquidation of the insolvency assets and the reorganization of the debtor’s business.”

    The new Law on Insolvency, on the other hand, explicitly and exclusively aims at immediate liquidation, through which the “rapid return of productive means to potentially productive uses” is expected to be achieved. The new Law on Insolvency deprives creditors and debtors of the right to choose to reorganize their business and thus terminate the declared bankruptcy. (As they would try to prevent bankruptcy during the pre-bankruptcy stage of the consolidation and in the context of the known/familiar procedure of “Article 99”).

    The legislator therefore chose not to trust (and further improve) the institution of business reorganization in the event of bankruptcy. It chose, on the contrary, to abolish it. Strong argument pro this decision, we assume, is the small number of reorganization plans that have proven capable of succeeding over time. However, it did not react in the same (drastic) way (and rightly so) to other (to date) low-effectiveness institutions. It sought, for example, to improve (and not abolish) the out-of-court mechanism and thus establish a horizontal Law on Insolvency of automation and of the platform.

    In addition: the legislator did not choose to replace the institution of (insolvency) reorganization with another one. This proves the return to a purely economic reception of the bankruptcy phenomenon, freed from its social and other connotations.

    It is known that the purpose of the law is a traditional tool of interpretation in the hands of its implementer. In this context, it is understood that this shift (: setback) may be of particular value when a case is brought before a judge.

     

    Liquidation as a means

    Under the new Law on Insolvency, the liquidator (who has the right to be nominated by the creditor) proceeds “without delay” to liquidate the assets of the debtor. As long as they have just completed the inventory (assets).

    After the completion of the inventory(s) of the liabilities (“credit check”), the liquidator distributes the proceeds of the liquidation of the assets to the creditors.

    The “innovation” of the new law lies in the following: the liquidator can proceed quickly to the liquidation of the debtor’s property, while the process of verification of the claims against them has not yet been completed. In fact, at a time when the latter has been significantly simplified by the new law. It is a question of whether it is justified (legally).

     

    The two types of liquidation

    As we know, either the debtor’s entire assets (or individual operating totals) or their individual assets are subject to liquidation.

    However, the liquidation of all the debtor’s property is subject to strict conditions. It seems, as a result, to end up in the (easier) liquidation of their personal assets as a rule, and under the status of the new law. In more detail:

    The liquidation of all or of part of the insolvency estate

    In order to liquidate all the debtor’s property or its individually the various operating asset units, a relevant application must be submitted or additional intervention must be exercised. The following persons are entitled to submit them: creditor or creditors of the debtor, who represent at least thirty percent (30%) of the total claims against them. It is clarified that the applicants should include secured creditors representing at least twenty percent (20%) of their category. In addition: such a process starts only when the debtor is a business and bankruptcy is significant. The application / request is decided by the relevant court-in this case the Multi-Member Court of First Instance.

    The “innovation” of the new Law on Insolvency therefore lies in the following: under the status of the Bankruptcy Code, the creditors’ assembly had to decide on the sale of the debtor’s business as a whole (or its individual operating units). This decision would then have to be approved by the rapporteur. If no action was brought against it within the prescribed period (or the action brought within the prescribed period was not upheld), then it could be enforced. Today, this process has been abolished.

     

    The role of the creditors’ assembly

    The creditors’ assembly, however, has the last word: it’s the one to approve (or not) the sale of the debtor’s business as a whole (or its individual operating units). And it has two options:

    First option: to evaluate that the bid submitted in the framework of the necessary public bidding (conducted with the care of the liquidator) is advantageous. In this case, the assembly approves the relevant transaction. This is followed by the conclusion of the relevant transfer agreement.

    Second option: to reject the liquidator’s transaction. Then, unless another decision is made, we are led to the liquidation of the debtor’s assets.

     

    The integration of the provisions of special management regime

    In the case of the liquidation of the entire property of the debtor or of the individual operating units, the legislator now incorporates the provisions of special management regime (Law 4307/2014), with the necessary adjustments of course, in the spirit of the “holistic” venture that undertakes and subsequent abolition of this specific insolvency procedure.

     

    The tax incentives

    Also, regarding the very important tax facilities the new law provides that they cover the “liquidation of Chapter A of the Fifth Part of the Second Book”, without distinction whether it concerns exclusively the liquidation of the entire property of the debtor or individually its operational units (Chapter B of the Fifth Part of the Second Book) (as under the status of the Bankruptcy Code) and / or its individual assets (Chapter C of the Fifth Part of the Second Book). We believe that we accurately assume that the legislator’s intentions is to include both types of liquidation.

     

    The liquidation of individual assets

    In the case of the liquidation of individual assets of the insolvency estate, an (electronic) auction is held instead of the public bidding (now electronic, but without a first bid price).

    However, it is possible that the auction will be fruitless. In this case, the auction is repeated with an (automatically) reduced first offer price. The price is reduced to ¾ of the average value of the estimates of certified appraisers. A derogation is now established from the provisions of the Code of Civil Procedure (to which it otherwise refers) in the sense that there is no longer a court adjudication. In the event of subsequent fruitless auctions, the reduction rests with the rapporteur’s unchallenged decision. If the phenomenon (of the non-appearance of bidders) is repeated again, then there is the possibility of an auction without a first offer price – before the auctioned assets finally end up to the State.

     

    The “facilitation” of the liquidation process

    The new Law on Insolvency brings three main changes in the level of protection provided in this liquidation process:

    (a) Eliminates the possibility of bringing an action against any levy of execution leading to liquidation; and

    (b) Specifies in a specific way who is entitled to file an objection against the ranking list, instead of the general and abstract provision of the Bankruptcy Code on “legal interest”. This option, however, may lead to a restriction of beneficiaries.

    (c) Shortens the deadline within which objections are made before the bankruptcy court-which rules irrevocably.

     

    Liquidations of small value

    The scope of application

    The legislator of the new Law on Insolvency has further improved the framework governing small business bankruptcies (: “liquidations of small value”).

    The idea, moreover, for a shorter and simpler process is well known and was particularly elaborated during the 2016 and 2017 amendments.

    It is known that the business burden (which they undertake) and the financial footprint that the “small” businesses have in our country (and not only), seem inversely proportional to their size. It is therefore appropriate to pay special attention to this chapter of the new law.

    The new law significantly expands the scope of the regulatory framework for liquidations of small value, given that small entities now fall under them, as defined in Article 2 of Law 4308/2014. Small entities, according to this provision, are those that do not exceed the limits of at least two of the following three criteria: (a) Total assets: € 4m, (b) Net turnover: € 8m and (c) Average number of employees: 50 people.

    It is easy to see how huge the number of businesses under it is and what impact it has on the economy.

     

    The “procedures” and the conditions

    In liquidations of small value, the competent bankruptcy court is the District Court, instead of the Multi-Member Court of First Instance, which has jurisdiction over the other liquidations.

    The relevant application is submitted electronically, which is a significant change. It is accepted if no intervention is submitted within thirty (30) days from its publication, ie only with the expiration of the specific time period.

    The (new) presumption of deferral of payment applies in this case, which is determined in 60% of the debtor’s overdue liabilities to the State, Social Security Institutions or credit or financial institutions, instead of the 40% that is for other bankruptcies.

     

    The liquidation of the debtor’s property

    The liquidation in this case concerns, exclusively, the liquidation of the debtor’s individual assets. Neither the business as a whole nor its individual operating units.

    However, in order to determine whether the debtor’s property is sufficient to cover the costs of the proceedings, the following are taken into account: (a) its elements that are free of any burdens and (b) the debtor’s annual income – their reasonable living expenses taken into account. If these are not enough, then no trustee is appointed either. The rapporteur simply orders the entry of the debtor’s name or company name in the Electronic Solvency Register. In this way, the provided consequences come about.

    The existing (general) regulations are simplified. The liquidator enjoys greater freedom. They retain, in this context, the ability to act without the permission of the rapporteur.

     

    The time frame of the whole process and its acceleration

    In the event that after the lapse of one year (instead of three – as under the status of the Bankruptcy Code) from the declaration of the simplified procedure the bankruptcy has not been completed, the liquidator is obliged to submit a report to the rapporteur, explaining the reasons for the delay.

    It should be noted here that the corresponding, general regulation stipulates that after 5 years (instead of 15 as under the Bankruptcy Code) from the declaration of bankruptcy, the results of the termination of the bankruptcy occur automatically (and without any other procedure).

    The speed with which the bankruptcy process unfolds is, of course, an important element. Achieving it, however, requires planning at the level of regulations as well as human resources (rational distribution on the basis of needs and training on the subject of all those involved, in the part of their tasks) as well as infrastructure (digital and non-digital). Otherwise, it will be another empty announcement, another deadline that is not met. Or that, alternatively, it will prove ineffective.

    However, the crucial question is whether special provision (incentives) is taken for small businesses in particular, already at the stage of insolvency prevention. The answer, unfortunately, is no. And in this sense the (proclaimed) “holistic” character of the legislation is affected. With it: the economy and the people.

    We must, therefore, consider it necessary (and accept) that small businesses need special support to turn to (and utilize) the necessary, already legislated, tools to prevent their insolvency.

    An equally urgent need is its prompt processing – when, despite all efforts, it occurs.

     

    Economic over the legal criteria

    The new Law on Insolvency was hastened by the Ministry of Finance, instead of the Ministry of Justice.

    This transfer of powers may mean more than a bureaucratic “portfolio change”. We consider it demonstrates the proposition of the economic criteria being put before the legal ones.

    The rule of law, however, is very important in maintaining a healthy, business-friendly environment: it provides for a rapid, efficient and proper, fair administration of justice.

    It is up to the parties involved to assess whether the legislator is “turning a blind eye” to one side or the other or, alternatively, whether it is rectifying a wrong. Unfortunately: in retrospect.

     

    The use of the tools provided by the new Law on Insolvency is not the duty of the legislator. The legislator is limited to providing them; it has already done so. Now it’s our (: companies, lawyers, syndicates, justice) move. Therefore, it is up to us (to the extent of the competence and involvement of each one) to make the best possible use of them.

    Only then will bankruptcy prove, as businesses and the national economy need, a “transfer station” in the business process. An important station, however, that will provide the entrepreneur with a new route – possibly to turn or revers their situation.

    The bona fide and honest entrepreneur (but also entrepreneurship in general) is entitled (but also deserves) a, substantial, second chance.

    Only then will the second chance prove to be not a simple declaration of the European Union or the Greek legislator.

    Only then will the second chance prove to be a useful tool for reducing the private debt, recovery and development of our national economy.

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (March 07, 2021).

     

    Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

  • The new Law on Insolvency. The Consolidation Process

    The new Law on Insolvency. The Consolidation Process

    In our previous article, we approached the key sections of the new Law on Insolvency. We examined its basic provisions and innovations, its necessity, its regulatory scope and importance. We proceeded mention its specific provisions. We started with the early warning and proceeded to the out-of-court debt settlement mechanism.

    The pace of the legislator, which we follow in our articles, leads us to the thematic unity of the pre-insolvency process of consolidation (articles 31 to 69 of law 4738/2020).

    We focus on its main predictions, the basic points of which we try to highlight.

     

    Introductory remarks

    The pre-insolvency settlement process concerns the well-known “procedure of article 99” (Law 3588/2007). The specific procedure had already been fundamentally reformed (with Law 4446/2016 which replaced articles 99 to 106f and repealed articles 106g to 106k of Law 3588/2007).

    The principle of not worsening the position of creditors remains fundamental under the status of the new law (see article 99 par. 2 of law 3588/2007 and article 31 of law 4738/2020).

    The corresponding regulations (of the consolidation process) extend (only) in articles 99 to 106f of law 3588/2007. Under the new regulatory framework, it occupies a number of articles (: articles 31 to 69 of Law 4738/2020).

    The question arises, whether this is a total (and fundamental) change of what was provided for until today.

    The answer, however, is no.

    The critical changes (some of them positive) that have taken place are limited. The legislator chose, in principle, the reformulation of the relevant chapter in many small articles — as opposed to the fewer and longer ones. This is an option that makes the text of the law more comprehensible and easy to use. On this occasion, the legislator proceeded, as the case may be, to additions and rewording.

     

    Purpose of consolidation

    The purpose of the consolidation process remains the same: the “maintenance, utilization, restructuring and recovery of the company” (see article 99 par. 2 of law 3588/2007 and article 31 of law 4738/2020).

     

    The only collective, pre-insolvency, process

    Unlike in the past, the consolidation process is now the only collective pre-insolvency process. For three main reasons:

    (a) It concerns all creditors

    Non-institutional creditors are excluded from the out-of-court debt settlement mechanism (see Article 5). The suppliers, for example, of the debtor are excluded. It is therefore neither a collective nor, after all, a strictly equal process: preferential treatment is reserved for financial institutions. Instead, the consolidation process concerns all creditors.

    (b) Inability to submit new applications for submission to a special management regime

    From the entry into force of the new law, the option of submitting new applications for submission to a special management regime based on the provisions of articles 68 to 77 of law 4307/2014 (see article 265 par. 1c), which was a pre-insolvency tool of particular value in recent years ceases to exist. The new law uses only the liquidation provisions of the institution of special management and, exclusively, in the stage of insolvency.

    (c) Abolition of inter-insolvency proceedings

    The new law abolishes the institution of the inter-insolvency settlement process with the submission of a consolidation plan (articles 108 et seq. of Law 3588/2007), which ensured a way out of liquidation in case of insolvency. The new law highlights liquidation as the only means of collective satisfaction in the event of insolvency (see Article 75).

    In the light of the above, the pre-insolvency settlement process is the only alternative to collective satisfaction, which does not simply precede the time of insolvency. It aims to prevent it.

     

    Field of application

    The new law expands the scope of the institution of consolidation:

    (a) Regarding those subject to it

    It concerns every person who “carries out a business activity” (and not “every natural or legal person with insolvency capacity”, as defined by article 99 par. 1 of law 3588/2007). The persons engaged in business activity may, under the other conditions of article 32 par. 1, request from the competent court the ratification of the co-submitted consolidation agreement (article 34). Let us not forget, after all, that insolvency is now recognized in every natural person. (It should be noted here that the insolvency capacity is now disconnected from the capacity to practice commercial activities (article 76) – in contrast to the regime of law 3588/2007). Moreover, the integrated directive 2019/1023 also refers to entrepreneurs (see article 2 par. 1 par. 9 of the directive).

    (b) Regarding its scope

    Entrepreneurs have the right to resort to the consolidation process. And this even when there is no “present or threatened failure to fulfill their obligations” (as was required by the previous law). The possibility of insolvency suffices, as long as it can be removed by subjecting them to consolidation (see article 32 par. 2).

     

    Consolidation agreement and the required majority of creditors

    Article 34 is key for the institution of consolidation (see in conjunction with Article 100 of Law 3588/2007). More specifically, Article 34 refers to two possibilities:

    (a) The debtor consents to the consolidation agreement

    In this case, it is necessary for the creditors representing fifty percent (50%) of the preferential claims and fifty percent (50%) of the other claims to agree (§1). Under the regime of Law 3588/2007 the corresponding percentage amounted to sixty percent (60%) of the total receivables, which included forty percent (40%) of any secured or mortgaged receivables (Article 100 par. 1 of Law 3588/2007).

    (b) The debtor does not consent to the consolidation agreement

    Creditors may attempt to ratify a consolidation agreement even if the debtor does not consent. Based on what was in force under the previous law (Law 3588/2007), “forced consolidation” was provided only when the debtor was at the time of concluding the agreement in suspension of payments. The new law provides for three additional new cases (see articles 34, par. 2, b to d). The one we find more “interesting” is the one that the debtor has failed to submit for registration financial statements of at least two (2) consecutive financial years.

     

    Ratification of the consolidation agreement

    Related to Article 34 is Article 54, which deals with the ratification of the consolidation agreement.

    Article 54 introduces, in the context of the integration of Directive 2019/2013, the ” cross–class cram-down mechanism”, which was not provided for under the corresponding article 106b of Law 3588/2007.

    It is therefore possible that unsecured creditors do not consent. In order to avoid (or work around) any possible negative reactions by them, it is provided [under conditions-alternative to the aforementioned majorities (Article 34 §1: 50% & 50%)], that the ratification of an agreement can approved by creditors representing more than sixty percent (60%) of the total claims against the debtor and more than fifty percent (50%) of the preferential claims.

     

    Legislative decisions, beyond the transposition of Directive 2019/1023.

    In addition to the necessary improvements and adjustments under Directive 2019/1023, the legislator has made some additional choices. Indicatively, the following:

    The presumption of the consent of the State and the Public Entities

    The consent of the State and public entities in the consolidation process does not always have to be explicit. With article 37 par. 2, a presumption of their consent to a consolidation agreement is introduced (under certain conditions), even if they do not sign it. With this provision the legislator seeks to solve the problem that arose in practice, of the State and public entities consenting in general “almost never” (see explanatory memorandum on Article 124).

    The lack of responsibility of public servants

    Article 38 establishes the exemption of any public servant from any liability, within the meaning of Article 13a of the Penal Code, who signs the consolidation agreement or votes in favor of it, from any criminal, civil or disciplinary liability. An explicit reference is made to the provisions of article 65 §§1 & 2 of law 4472/2017. It is pointed out, however, that with regard to the other participating executives, namely the financial institutions, the respective provisions of par. 3 and 4 of article 65 of law 4472/2017 are abolished (see article 265 par. 2). The last and only protective provision: the provisions on the violation of the fiduciary obligation of article 390 PC (the activation of which presupposes the submission of a complaint).

    The (brief) reasoning of the relevant court decisions

    Article 93 par. 3 of the Constitution requires court decisions to provide specific and detailed reasoning.

    However, Article 56 of the new Law on Insolvency introduces for the first time (not only in the field of consolidation but also in the legal order in general) the provision that the court decision ratifying the consolidation agreement can contain only a brief reasoning with a simple reference to the chapter of the expert report, from which the contribution of each element required for the ratification of the agreement is obtained (provided that no intervention has been exercised against the ratification of the agreement). The difficulty of reconciling this provision with the right of third-party proceedings against the ratifying decision of a person who did not attend the hearing and was not legally summoned is already apparent (see Article 57).

     

    Out-of-court debt settlement mechanism and consolidation process: Similarities and differences

    Both the out-of-court debt settlement mechanism and the pre-insolvency settlement process are included in the second part of the first book of the new Law on Insolvency, which aims to prevent insolvency. In this sense, it is appropriate to record some prima facie differences between the two institutions.

    The out-of-court debt settlement mechanism is an out-of-court procedure. The pre-insolvency settlement process, on the other hand, is an out-of-court procedure, but requires judicial ratification of the agreement that may be reached (see Articles 33, 54).

    The debtor may be forced to participate in the process of consolidation. On the contrary, the voluntary participation of the latter in the out-of-court mechanism is presupposed as a given (in this case the goal is the general support of the institution by the financial institutions).

    In order for a consolidation process to succeed, among others interim funding is provided (see article 39 par. 1.I) and so are greater margins for the suspension of prosecutions of individuals (see articles 50, 52) etc.

     

    The pre-existing law and the utilization of its provisions

    The Greek legal order already had a sufficient pre-insolvency framework before Law 4738/2020, especially regarding the process of consolidation, according to the legislator (see explanatory memorandum on article 122, law 4738/2020).

    The legislator of law 4738/2020 therefore correctly used the framework of law 3588/2007, which, after all, had been harmonized (with law 4446/2016) with the then under development new EU framework to a great extent. Also, the legislator correctly incorporated in the Greek legal order the finally crystallized regulations of directive 2019/1023, updating the current regime in the missing part.

     

    The balancing of opposing interests

    However, the legislator also attempted some changes in relation to the previous provisions. Changes that concern the theory of law ˙ possibly its implementation as well.

    The legislator chooses (and correctly) a flexible scheme in order to prevent insolvency, providing tools to achieve the elimination of any delays (caused eg by shareholders, according to article 35 par. 3 and 101 of law 3588/2007, and also by the State and / or even by the debtor).

     

    The importance of the institution of consolidation as the only, in essence, tool of collective preventive restructuring is given and accepted by all. It is up to all of us (lawyers of theory and practice, of those who apply the law but also, above all, creditors and debtors – to the extent of each individual’s responsibility), to make the most of this tool – to prevent and deterrent insolvency. Also: the constant effort to utilize and optimize it, e.g. by providing incentives for its use, ensuring guaranteed credible business plans (see Article 43), involvement of continuously trained experts (Articles 65 et seq.) and so on.

    In the event of insufficient utilization of this institution, insolvency will remain the only alternative. Undesirable, of course, for sustainable businesses.

    Let us not forget that every healthy business will sometimes have temporary (more or less significant) financial difficulties. In some cases, those difficulties will have been brought on them by themselves. In some others, the cause of said difficulties will be linked to unexpected phenomena – such as the current health and financial crisis. Providing them with the right tools to overcome them, saving (and why not) multiplying jobs, is, of course, imperative.

    It is a moral and political demand for a socially just development.

    It is, therefore, the duty of all of us.

     

     

     

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (February 21, 2021).

     

    Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

     

  • The new Law on Insolvency (: The Out-of-Court Debt Settlement Mechanism)

    The new Law on Insolvency (: The Out-of-Court Debt Settlement Mechanism)

    We have already found in our previous article that the new Law on Insolvency (: Law 4738/20) has as its central goal the management of the significantly high private debt of our country. We have already identified the basic provisions and innovations of the new law. We understood its regulations regarding the insolvency warning and the early warning. Immediately after the insolvency is established, the activation of the Out-of-Court Debt Settlement Mechanism is provided for, under certain conditions.

    Let’s look at the framework of operation and the basic settings that concern it.

     

    Purpose of the Out-of-Court Mechanism

    The out-of-court mechanism aims to assist the debtor and selected creditors (: Financial Institutions, Public and Social Security Institutions). It provides them (if they choose so) with a functional electronic environment for the formulation of proposals from both sides in order to avoid the risk of insolvency of the debtor (article 5 §1).

     

    The compulsory nature of the process and the binding nature of its results

    Financial institutions (essentially banks) are not required to submit or accept proposals under this procedure. However, results are produced both for all financial institutions and, under certain conditions, for the State and the Social Security Institutions, provided that the financial institutions representing the majority of claims against the specific debtor accept the application and agree to the formulation of a specific proposal for debt settlement.

    (Article 5 §2)

    Scope

    An application for out-of-court settlement of debts can be submitted, basically, by any natural and legal person with the capacity to declare bankruptcy (Article 7§1).

    There are some exceptions to this rule. The aforementioned natural and legal persons are not entitled (Article 7§2) to submit a relevant application if (among others):

    (a) 90% of all their debts are due to a financial institution or, alternatively, do not exceed € 10,000

    (b) have taken legal action [e.g. have applied (and have not dropped the application) before a Court for ratification of a resolution agreement or for bankruptcy or have been issued relevant court decisions] or

    (c) have been dissolved or liquidated (in the case of legal persons) or have in the meantime have been convicted for specific criminal offenses).

     

    Application for inclusion in the out-of-court debt settlement

    Initiation of the procedure: of the Debtor or the Creditor (s)?

    The application for out-of-court debt settlement is submitted (article 8§1) by the debtor, electronically, to the Special Secretariat for Private Debt Management through the special Electronic Out-of-Court Debt Settlement Platform (article 29).

    The specific procedure can also be initiated (apart from the debtor) by the State, the Social Security Institutions or the Financial Institutions inviting the debtor to submit the aforementioned application. If the latter does not respond, the procedure is considered terminated (Article 8§2).

     

    The content of the debt settlement application

    The debtor’s application for the out-of-court debts settlement must include a series of elements. Specifically, among others, it must include: details of their creditors, situation of their assets and any burdens on them. Also, their assets which were transferred during the last five years (Article 9).

    This application must be accompanied by details of the debtor’s relatives (spouse, partners, dependent members) and family income (Article 10§1). In the case of a legal entity – debtor, the following elements are required (among others): financial statements, dividends paid, associated legal persons, fees paid to associated natural persons (Article 10§2).

     

    The value of the property included in the application

    The value of the real estate included in the application is considered to be that used for the calculation of ENFIA (in relation to the real estate located in Greece-article 11§1) or their commercial value (in relation to the real estate located abroad-article 11§ 2).

     

    The sharing and cross-referencing of the application details

    Upon submission (or acceptance) of the application by the debtor, permission is granted for the notification to the participating creditors and cross-referencing of the application data and its supporting data. It is important to note that with the submission of the application, the banking and tax secrecy is lifted (article 12§1). The submission of any false information by the debtor interrupts the whole procedure and burdens them with a high default interest rate (Article 12-5).

     

    The consequences of submitting the application

    It is important to note that the submission of the application for out-of-court debt settlement is not an important reason for the termination of long-term contracts (Article 13§2). However, it suspends the procedure of the Code of Ethics of Banks (article 13§1).

     

    Suspension of criminal prosecutions and any levy of execution

    It is possible that the out-of-court procedure will not succeed. During the whole process, however (from the submission of the debtor’s application up to its completion – ie the possible acceptance or rejection by the creditors, the notification of their decision not to submit a proposal on their part or the expiration of two months from its submission), any levy of execution is suspended. The continuation of the execution and the criminal prosecution for debts to the State and Social Security Institutions are also suspended (art. 18).

     

    The restructuring contract

    The (presumed) consent of the State and the Social Security Institutions

    The financial institutions that participate in the process as creditors are entitled (but not obliged) to submit a settlement proposal to the debtor. In case the (possible) proposal of the financial institutions secures: (a) the consent of the debtor, (b) more than 50% of the claims of the financial institutions and (c) the claims of those creditors who have a special privilege (e.g. mortgage note), the relevant contract is concluded between the consenting creditors and the debtor (Article 14-1).

    In case there are debts to the State and / or the Social Security Institutions, the contract can be concluded, but it is subject to their (according to article 21) consent. The consent of the latter is granted after the contract is notified to them (Article 21§2) provided (inter alia-Article 21§2):

    (a) the debtor’s obligations to the State and the Social Security Institutions:

    do not exceed €1.5m

    do not exceed (in value) the sums due to the Financing Institutions.

    (b) the contract meets the requirements of the law (art. 22)

    (c) the content of the restructuring agreement was derived from the tool of the system.

    It should be noted here that, in the latter case (where the content of the restructuring agreement was derived from the computing tool of the system):

    no official shall bear any civil, criminal or disciplinary liability for the signing or acceptance of such agreement

    the signing of the agreement by the State and / or the Social Security Institutions is not required – in fact, their acceptance is presumed with the expiration of fifteen (15) working days from the notification of the proposed agreement to them.

    It should also be noted that there is a case in which the consent of the State is assessed as lawful, even when the content of the restructuring agreement did not arise from the computing tool of the system (or the debt to the State exceeds (in value) the debt to the Financial Institutions. In this case, the consent of the insolvency administrator selected by the Financial Institutions is required, provided that: (a) the position of the State does not worsen (in the event of bankruptcy) and, in addition, (b) the viability of the business or, as the case may be, the solvency of the natural person is ensured (article 21 §3).

     

    Possibility of mediation

    The debtor is entitled, within ten (10) calendar days from the receipt of the proposal of the Financing Bodies, to submit a request for the submission of the entire dispute to mediation – provided the latter consent.

     

    Deadline for concluding the restructuring contract. Negotiations

    In the event that it is not possible to reach the conclusion of a restructuring agreement between the majority of the creditors and the debtor within thirty (30) days from the date of submission of the latter’s request for placement of the dispute in mediation, then the whole procedure is considered terminated (art. 15).

    In any case, the conclusion of the restructuring agreement can take place, basically, within two months from the date of submission of the debtor’s application. If the application is rejected by the Financial Institutions or the two-month period expires (without the conclusion of a contract), the whole procedure (through the out-of-court mechanism) is terminated as fruitless (art. 16).

    The whole negotiation process takes place through the Electronic Platform (art. 17).

     

    Basic restrictions of the contract regarding the State and the Social Security Institutions

    The contract may not provide for more than two hundred and forty (240) monthly installments for the repayment of debts to the State or the Social Security Institutions, a grace period for them or monthly installments of less than fifty (50) euros. Interest and fines are not counted until repayment (and are subject to it). The write-off of these debts presupposes full repayment (Article 21).

     

    Results of the restructuring contract

    Suspension of any levy of execution and criminal prosecutions

    From the moment the restructuring contract is concluded, the levy of execution against the debtor by Financial Institutions, Public and Social Security Institutions is not allowed. In addition: any levy of execution against the debtor is automatically suspended in order to satisfy a claim regulated by the restructuring agreement for its entire duration – and under the condition of the compliance with the contract (art. 19§1 & 23).

    In the event that, at the time of reaching the restructuring agreement, a levy of execution is pending against the debtor for a claim that has been settled, expedited by Financial Institutions, Public and Social Security Institutions, such is suspended (art. 19§2 & 23).

    Respectively, from the entry into force of the restructuring agreement (and under the condition of its implementation) the criminal prosecution for debts to the State and Social Security Institutions is suspended (article 23).

     

    Repayment of creditors’ claims. Non-exemption of guarantors & co-debtors

    With the repayment of the installments of the restructuring contract, the debts of each creditor under it are repaid. But guarantors or co-debtors still owe the excess. Possible creditors’ retention of ownership rights are not affected (Article 26).

     

    Public official’s exemption from liability during the restructuring contract negotiations

    Except in extreme cases (eg bribery) no public official has civil, criminal or disciplinary liability for accepting or recognizing a restructuring agreement or any related action – provided that it has taken place within the law (Article 20) .

     

    Failure of the restructuring agreement

    In the event of a delay of a total of three installments of the contract or 3% of the total debt, any creditor bound by the contract may terminate it. In this case, their original claim is revived, minus the sums already paid (Article 27).

     

    Subsidization of installments

    It is possible to subsidize the repayment of part of the loans secured by a debtor’s main residence, for five (5) years from the date of the application for inclusion in the out-of-court mechanism. Basically if: (a) the debtor’s property is mortgaged, (b) said property is used as their main residence, (c) the total of their debts to the State and the Social Security Institutions exceeds € 20.000, (d) the rest of their debt from the loan does not exceed €135.000 or, under certain conditions, €215.000 and (e) there has been a reduction in their family income (Article 28).

    The out-of-court debt settlement mechanism is an important measure to prevent the expansion of private debt. Its provisions are interesting, and so is the logic behind it. However, it focuses on specific categories of creditors: The Financial Institutions, the State and the Social Security Institutions. The fact that it does not extend to all creditors but also the lack of obligation to be subject to its arrangements and facilities can be the elements of its success. However, the correctness of any choices (the legislator’s included) is always evaluated a posteriori.

    The start of the implementation of the new Law on Insolvency was initially determined for 1.1.21. The current conditions of the market not the most appropriate. The stakeholders (Financial Institutions, the State, Insurance Institutions) were not prepared. The (absolutely) necessary for the implementation of the new law fifty three (53) ministerial decisions were impossible to be issue.

    The usual road was taken: The postponement of the start of its implementation.

    Regarding, in particular, the out-of-court debt settlement mechanism, the start of its application was postponed to 1.6.21 (: article 83 of law 4764/20-as well as the provisions for warning debtors of their possible insolvency).

    Hopefully there will be no further postponing.

    The out-of-court mechanism can be an important tool for managing insolvency, tackling private debt, and for the recovering of the economy. Also, for providing the “second chance” that the honourable ones are, after all, entitled to.

    Based on the specific data, while hoping for the success of the specific mechanism and overall project, it is worth wishing for (and supporting) its success.

    However, it is a given that its success is largely left to the banks that will be invited to participate and utilize it.

    Let’s hope that, in practice, they will not “torpedo” it.

     

     

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (January 31, 2021).

     

    Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

  • The new Law on Insolvency (: insolvency warning & early warning)

    The new Law on Insolvency (: insolvency warning & early warning)

    The new Law on Insolvency (Law 4738/20) is not really a law regarding insolvency. Nor does it, in its content, regulate, exclusively, issues related to insolvency. It is titled: “Debt settlement and second chance”. Its central goal is, and rightly so, the management of the inconceivably high Private Debt – which concerned us in our previous article. We have already explored the basic provisions and innovations of the new law. Among them is a completely new institution: the one that concerns the timely warning of the debtors for their possible insolvency. This institution can, under certain conditions, become a useful tool for those debtors who have only limited possibilities and means to understand and manage their insolvency.

    Let us try to approach its individual provisions.

     

    Purpose and tools

    This section of the provisions aims to “establish a procedure for debtors to have access to clear and transparent early warning tools, which can identify circumstances that could lead to insolvency”. This is for the purpose of pointing out to the debtor the need for an immediate and, in particular, timely response (Article 1 §1). It is also known that the more timely the understanding and management of a problematic situation, the greater the chances that its consequences will become reversible.

    The early warning tools provided for include electronic warning mechanisms of the debtor. A provision of consulting services by Borrower Service Centers and Professional Bodies is also included (indicatively: Chambers, Professional Associations, Institutions of Institutional Social Partners) – (article 1 §2).

    The law also provides for the provision of initial information to debtors regarding the above issues through the website of the Special Secretariat for Private Debt Management. Also, for the possibilities, procedures, restructuring measures and their potential debt relief (article 1 §3). It is true, however, that, at least for the time being, the relevant information could only be described as “poor”.

     

    Electronic Warning Mechanism

    Early warning of debtors (both individuals and legal entities) will initially take place through an electronic mechanism, which will be supervised by the Special Secretariat for Private Debt Management. Debtors will be classified, through this, in three levels of insolvency risk. Specifically: (a) low, (b) moderate and (c) high. This mechanism will be activated only upon a relevant request of the interested party – neither on the initiative of a third party nor automatically (Article 2 §1).

    With making the request for activation of the specific electronic mechanism, the interested party will simultaneously be called to give permission to the supervisory authority for the download and processing of any information regarding the content of their request. That is, for the processing of any data that is useful for the determination of the insolvency risk, and the formulation of proposals for its treatment (article 2 §2).

    When the procedure through this mechanism results in a rating for a debtor at a medium or high risk level, the next step follows. This next step differs, depending on the status of the debtor. Specifically, it differs when: (a) The natural persons who do not obtain income from practicing commercial activities or freelancing and (b) The legal and natural persons who obtain such income.

     

    Natural persons who do not earn income from practicing commercial activities or freelancing

    Natural persons in this category, who are classified as moderate or high risk, have the right to contact the competent Borrower Service Center (K.E.Y.D.) or the Borrower Service Office (G.E.Y.D.), depending on the place of their permanent residence (article 3 §1). The specific Centers or, as the case may be, Offices gain access (after authorization of the debtor) to the specific electronic mechanism in order to provide them, free of charge, with:

    (a) information on the legal framework and terms of the contracts they have entered into and, more generally, the debt settlement agreements and their relevant rights and obligations,

    (b) assistance in understanding the terms of any debt settlement that may be offered to them (taking into account their capabilities to repay and understand),

    (c) assistance in the preparation of a family budget with a view, in particular, to the arrangement for the repayment of debts,

    (d) advisory services on the financial management of their household.

     

    Natural and legal persons earning income from practicing commercial activities or freelancing

    The natural and legal persons of the specific category who are classified in a medium or high risk level have the right to address the competent bodies on a case by case basis (article 4 §1). Specifically, they can approach the relevant Professional Chamber or Professional Association or Institute of Institutional Social Partners in order to receive free counseling (and not only) support, in order to avoid the existing risk. More specifically: they are given access to business consulting services, which aim at business support, guidance, encouragement and strengthening of the business thinking and culture of the interested party.

    It is noted, however, that the services to be provided by the aforementioned Bodies cannot replace (of course – even according to the law) any kind of technocratic services needed by any legal and natural person facing temporary or permanent financial difficulties. In any case, the debtor involved will need assistance and services from the appropriate consultants, especially from legal and business ones.

    In other words, the problem of the debtor will, in fact, be possibly to be addressed (completely) with the assistance of the aforementioned Bodies.

     

    Enabling provisions

    The start of the implementation of the new “Law on Insolvency” has been determined for 1.1.2021. This start, however, presupposes a series of ministerial decisions for the activation of its provisions; of course, also in terms of the insolvency warning. Especially with regard to the activation of the provisions of the latter are those concerning (Article 70):

    (a) the procedures, the content of the application, the conditions and the technical details, which constitute the operational specifications of the electronic debtor early warning platform.

    (b) the details of the procedure of the early warning mechanism in the context of the operation of K.E.Y.D. and G.E.Y.D.

    (c) the details of the procedure of the early warning mechanism in the context of the operation of the Professional Bodies.

     

    The institution of early warning of debtors of their possible insolvency is an institution that is new and, without a doubt, very interesting. It is expected to provide significant assistance to those debtors (natural and legal persons) who face (temporary or permanent) financial difficulties.

    However, the start of its implementation presupposes (according to the law) a series of ministerial decisions. Will their issuance be timely?

    But even after the issuance of the necessary ministerial decisions, how much will the companies that face more complex problems be alleviated and helped? When for every issue that concerns them it will be necessary to turn (not inexpensively) to the appropriate legal and business (especially) consultants?

    In any case: This institution is a first, necessary, step. Let us wish for its prompt activation and, above all, for its success.

    After all, everyone is entitled to a “second chance”.

    However, the provision of this “second chance” is still a stepping stone in the effort to restore the multi-stricken and affected national economy.

     

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (January 17, 2021).

     

    Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

  • The New Law on Insolvency: Α Necessity. Scope. Significance

    The New Law on Insolvency: Α Necessity. Scope. Significance

    We experienced a long economic crisis. We already are aware, since the spring, that we have entered a new one – hopefully not deeper. We realized (even the non-economists amongst us) that high public debt creates serious problems not only in the economy but also in the daily lives of each of us. We also realized that private debt is an equal source of legitimate concern in terms of macroeconomic stability. The State perceives, and rightly so, the private debt as equivalently capable of overturning its financial planning. It is therefore obliged to manage it effectively and deal with it successfully. The new Law on Insolvency (as well as any previous relative legislation) is moving in this direction. We have already gone through its basic provisions and innovations. But was its implementation necessary at this stage? Why is this legislation so important? Why does it concern, after all, all of us without exception? Is it coming at the right time?

    Let us attempt to give some initial answers to these important questions.

     

    The total Private Debt in Greece and the need to tame it

    The causes of private debt in Greece are varied. Some are due to our choices (at individual, family and business level) others due to government / political choices and others due to external factors.

    Regardless of the causes, however, one thing is certain: the problem of Private Debt has taken, for a long time now, explosive social and economic dimensions. The ongoing pandemic (and its dramatic consequences) further exacerbated it. As the phenomenon is still ongoing, we are not able to predict, with certainty, the magnitude of the recession. All the more so as international, European and national organizations make forecasts which are often re-evaluated.

    However, what we are able to take into account are the following data: Based on the data available to the Bank of Greece and, more specifically, according to the intervention of the BoG Deputy Governor Mr. Mitrakos on 20.10.20, the total of the country’s private debt (of both individuals and companies) amounts to € 315 billion or 184% of the country’s GDP. In more detail:

    (a) The balance of the total financing (loans, corporate bonds, securitized loans with managers being credit institutions, financing from the BoG) of €147.7 billion of the private sector of the domestic economy (an additional €45.2 billion amounts to General Government funding). More specifically:

    (aa) €73.8 billion is the balance of funding to enterprises (of which: € 67.6 billion to non-financial enterprises and €6.2 billion to insurance enterprises)

    (ab) €65.3 billion of the rest is the funding to households (€ 49.6 billion in housing loans and €15.1 billion in consumer loans)

    (ab) €8.6 billion of the rest is the funding to freelancers, farmers and sole proprietors.

    (b) €106 billion is the debt of individuals to the tax authorities

    (c) €36 billion is the debt of individuals to the insurance funds

    (d) €30 billion is in loans sold by commercial banks outside the banking system

    Taming this dramatically high private debt has been (and still is) a national need: behind these numbers are people – all of us. Of course, the country as well.

    The political scene did not lack efforts and good intentions. However, judging by the outcome, they proved ineffective. The necessity of the drastic management of the problem is more than obvious. Did we not have enough laws already?

     

    The existing institutional framework

    The institutional framework until 31.12.20 is a product of multiple legislative interventions.

    The Greek Insolvency Code, which has existed since 2007, has undergone several amendments in recent years: nine amendments (excluding the most recent on of October 2020) in the last thirteen years.

    During only the last five years, it was revised (in the technical sense of the term) six times: Law 4336/2015 (A’ 94), Law 4446/2016 (AI240), Law 4472/2017 (A’ 74), Law 4491/2017 (A’ 153), Law 4512/2018 (A’ 5), Law 4549/2018 (A’ 105). Related issues were included in the regulatory framework of, among others, Law 4469/2017 (A’ 62), Law 4605/2019 (A’ 52). Also, with the multiple amendments of law 3869/2010, as well as law 4307/2014. Total: innumerable…

    Of course, it is important to note that the above-mentioned reforms (of the last five years) took place in the context of fiscal adjustment or stability programs. This fact is indicative of the importance of the Law on Insolvency in times of economic crisis. Of course, during the current times as well – to a significant extent due to the health crisis.

    But the same fact also suggests something else: the regulations abolished by this law followed at the most part the at the time current European and international best practices.

    However, in order to completely follow [: provisions of Directive (EU) 2019/1023] the existing institutional framework, it had to be adapted.

     

    The Directive (EU) 2019/1023

    The issuance of the Directive (EU) 2019/1023 of the European Parliament and of the Council of 20.6.2019 (which is in force along with Regulation (EU) 2015/848 of 20 May 2015 regarding insolvency proceedings) was the occasion for the new Law on Insolvency.

    The basis for its adoption was, inter alia (recital 7), an attempt to remove uncertainty about insolvency rules in individual Member States. Also, the effort to shorten time-consuming and simplify complex procedures that are a major disincentive to invest and / or initiate business relationships in another member-state. And the effort, lastly, to remove such elements that undermine the proper functioning of the Internal Market.

    It has also been assessed (: recital 11h) that even cases of purely national insolvency cases can affect the functioning of the Internal Market through the so-called domino effect. This is because the insolvency of a debtor can trigger (and indeed triggers) further insolvencies.

    Its goal was:

    (a) Regarding viable businesses and entrepreneurs in financial difficulty: for them to have access to effective national preventive restructuring frameworks that will enable them to continue operating,

    (b) Regarding honest (insolvent or over-indebted) entrepreneurs: to be able to be completely relieved of their debts after a reasonable period of time, so that they can enjoy a second chance; and

    (c) Regarding the improvement of the efficiency of the restructuring and insolvency procedures: their faster completion but also the faster return of the companies to operation.

    This directive follows two main axes:

    Sustainable businesses should be assisted in order to continue to operate (provided that the financial difficulties they may face do not invalidate their viability). This assistance should take place through effective preventive restructuring tools, to which they should have access as soon as possible.

    Unsustainable businesses should enter the liquidation phase as soon as possible to avoid the accumulation of losses. For honest entrepreneurs / debtors who have failed in some of their business activities, the possibility of a (new) beginning should be ensured so that, more experienced now, they can be active, once again, in the business arena.

    It is also worth noting that the spirit of the EU legislator is a spirit of balanced safeguarding of the interests of everyone involved: interested businessman, employees, third parties, financial system, national economy, EU market.

    Prevention of insolvency with tools of early warning and early effective restructuring on the one hand, rapid liquidation but also rapid return to business and real economy on the other.

     

    The necessity (?) Of the adoption of the new legislation

    It is a given that legislative diversity and multiple laws are not beneficial. It is also a given that it does not prove at all useful or proper to deal with related issues by more than one legislation.

    It is also a given that the concentration of the individual legal issues and logical sections in the new Law on Insolvency will prove to be, without a doubt, beneficial. However, the necessity of passing the new legislation is already being discussed. In the scientific community as well.

    It would be desirable, however, (as it is such an important piece of legislation) for it to be scrutinized (openly) by a well-respected law-making committee (but without at all underestimating the scientific status of its authors). It would be preferable that the (final) text goes through the consultation process. The holistic approach of the whole issue and of the individual provisions would also be preferable. It did not happen.

    And even importantly: Most of its delegating provisions unfortunately refer to the incomplete elaboration of this legislation. It raises doubts around the “readiness” of the law to be implemented immediately. And, further, it raises the issue of completeness of the law and compromise with the provision of paragraph 2 of article 3 of 4048/2012 “Regulatory Governance: Principles, Procedures and Means of Good Legislation” (A’34)

    Conclusion: The choice of the comprehensive and holistic approach to the individual issues that the new Law on Insolvency deals with is excellent. However, it would be desirable to follow the course of Good Legislation that the reform of laws and codes of such seriousness requires.

     

    Who and what does the new Law on Insolvency concern?

    As an introduction, let us remember that this law is entitled “Debt Settlement and Provision of a Second Chance”.

    We could say, in purely legal terms, that it is divided into five major sections:

    (a) Insolvency Warning & Early Warning- (Articles 1 to 4)

    (b) Insolvency Prevention Procedures (: Out-of-Court Debt Settlement Mechanism and Bankruptcy Settlement Procedure) – (Articles 5 to 74) and

    (c) Insolvency (Articles 75 to 211)

    (d) Vulnerable Debtors (Articles 212 to 224) and last

    (e) Insolvency Administrators (Articles 225 to 259)

    From the enumeration of the specific sections only a safe conclusion is drawn:

    The new law concerns all those (legal and natural persons- those who do or do not practice commercial activities, households and businesses-regardless of their size) who face financial difficulties-even liquidity issues.

    But it does not only concern them!

    It also concerns every healthy business and entrepreneur who does not face financial problems. This is because some (maybe many – maybe too many) of those with whom they deal will be included in the regulatory scope of this law.

    It also concerns investors who will want to invest in the country.

    It concerns financial institutions and their finances.

    It concerns, in the end, the country and each of us.

     

    Conditions of drafting and the “rush” to start implementing the new Law on Insolvency

    The new Law on Insolvency is not “just another law”.

    It is a very important piece of legislation with consequences on many levels in the economic spectrum of each place it is applied. Of course, with consequences on the national economy as well.

    With the pretext of alignment with Directive (EU) 2019/1023, its authors proceeded to a complete re-approximation of completely recent (and in fact modernized) regulations. It is noteworthy that this (overall) rapprochement took place between the consultation stage of the bill (of a different bill) and its submission for voting. The timing of the entry into force of such an important piece of legislation raises questions. Let us remember the law on SAs (: Law 4548/18). It was published in the Government Gazette on 13.6.18 and its entry into force was set for the first day of the following year (: 1.1.2019).

    What is the point of the rush for the new Law on Insolvency?

    A reasonable proposal has been made to postpone its entry into force for the new judicial year. Among other things, because an important part of the reform is now shouldered by the District Courts, whose serving judges have at the same time been in charge of settling the pending cases of Law 3869/2010 until 15.06.2021. Familiarity with the new framework and the preservation of necessary human resources are factors that should be taken into account.

    It will be easy, once again, to accuse for all evil the slow-moving Justice.

    But it will also be unfair, as the choices and the relevant responsibility will be borne, exclusively, by the legislature. Even if the executive authority comes forward and demands the impossible.

    The new Law on Insolvency is a crucial piece of legislation for the national economy.

    To assist its (absolutely necessary) revitalization but also its recovery.

    To assist the (desirable) development of the country.

    The circumstances under which it was drafted raise concerns.

    Respectively, the suffocating deadlines until the beginning of its implementation.

    Let us hope that the specific choices will not be to the detriment of the (aspiring) goals of its authors but also of the needs of our national economy.

     

     

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (January 3, 2021).

     

    Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

  • The new Law on Insolvency (basic provisions and innovations)

    The new Law on Insolvency (basic provisions and innovations)

    The new Law on Insolvency (Law 4738/20) is an extremely important piece of legislation. It will enter into force in just a few days (: January 1, 2021) – two months after its publication. And this, despite its length and complexity (: 265 provisions – not simple in their content & 81 pages in the Government Gazette). The fact that we are experiencing an unprecedented and multifaceted (of course economic) crisis does not seem to be a sufficient reason to move the starting point of its implementation. Possibly rightly so. But maybe not. A great debate has begun (scientific, political, business, social) on the various issues it regulates. Indicatively: on the necessity of another relevant piece of legislation closer to the other nine of the last thirteen years˙ on the validity and truthfulness of the characteristics and qualities attributed to it by its proponents˙ on its usefulness and value˙ on whom, in the end, it concerns. And on so much more. In order to reflect on the relevant matters, it is worth exploring the new law’s basic provisions and innovations.

    Let’s focus on the most important amongst them:

    Aggregated (and holistic?) Approach

    Legislative provisions for the management of private debt were scattered throughout various laws. It was not, of course, inspired by a single “culture” and logic. The new Law on Insolvency seeks to address this extremely important issue “holistically”. This is an ambitious goal, indeed. But several questions arise regarding whether it achieved said goal or not.

    The new law, in fact, brings together all the relevant regulations. Specifically: those concerning warning mechanisms in respect of insolvency and prevention procedures (Articles 1 to 30), the pre-insolvency settlement procedure (Articles 31 to 74), insolvency (Articles 75 to 211), enhancement of efficiency and monitoring clauses (Articles 212) – 216), vulnerable debtors (Articles 218 to 226) but also insolvency administrators (Articles 227 to 259). The law ends with common, authorizing and transitional provisions (Articles 260 to 265).

    However, some accuse the law of violating the principles of good governance, given the plethora of authorizing provisions (in derogation from Article 3 §2 of Law 4048/2012 “Regulatory Governance: Principles, Procedures and Means of Good Legislation”).

     

    The establishing of a precautionary mechanism for early warning

    Such a preventive mechanism (Articles 1 to 4) is, in fact, being introduced for the first time in our country.

    Within the framework of this specific, precautionary mechanism, procedures are introduced to inform and support debtors (natural and legal persons) to cover or restructure their debts.

    Its main goal is the timely warning and support of debtors to avoid being involved in insolvency proceedings. In addition: to avoid violent and unintentional liquidation of their assets. Moreover, Directive 2019/1023, which is rendered national law, has the same (ambitious) objective (see also recital 22 of the Directive).

    On the other hand, however, several questions arise. Indicatively: regarding the lack of regulations of the specific mechanism, the lack of functional connection with the other tools and provisions of the legislation, the lack of incentives for joining its regulations and / or sanctions from its avoidance, the real possibility of its timely activation and so on.

     

    Creating outlets for debtors who are proven to be in financial difficulty or weakness.

    In general

    It is possible for those debtors who are proven to be in financial difficulty or unable to manage their debts:

    (a) to settle, if they can, their debts (: Article 5 et seq.) or

    (b) to be alleviated from their debts through the liquidation of all their assets, in order to have a “second chance” (: Articles 192 et seq.).

     

    Especially with regard to the “second chance”

    The truly “new” provision that this legislation seeks to introduce is the ability of the debtor to settle quickly, definitively (and at the lowest possible cost) the issue of their excess debt.

    To ensure, in other words, that their debts will not burden or follow them for life. Also, that they will not be transferred to their heirs and from those to theirs. And, finally, that other (not at fault) members of the insolvent’s family will not have to be involved because they, just because of their relationship to the debtor, cannot operate under their own name.

    This very important problem generated due to excess debt does not only concern the families of the debtor. It concerns the society and national economy as well.

    This legislation introduces new elements, but in an institution which has been greatly improved in the context of the recent restructuring of the Insolvency Code. It should be noted, in this context, that the insolvent is now presumed to be in good faith, without having to wait for a relevant court decision. It is also important that the deadline after which the discharge occurs was shortened. Respectively, that the exemption to debts from certain intentional offenses has been extended. However, the issue of debt relief due to the issuance of postdated checks is still pending regarding the debts to the State.

     

    Introduction of an integrated and automated framework and system for dealing with insolvency

    In general

    The specific legislation provides for a specific out-of-court mechanism for settling the debts of natural and legal persons (articles 5 et seq.). This confidential procedure is conducted through a specific electronic platform (Articles 8 et seq. & 29). It provides the possibility of restructuring (and/or reduction/”haircut”) of debts. A prerequisite is the decision of the majority of the financial institutions involved (Article 14). The provision that its implementation becomes mandatory for both the State and the insurance funds if the proposal for settling is the adoption of the proposal that results from the computing tool of the relevant system is of particular interest (article 21 et seq.). The procedure lasts for a maximum period of two months, during which the compulsory liquidation of the debtor’s property is suspended (Articles 13, 16, 18).

    This extrajudicial mechanism is undoubtedly a tool that has the conditions to become efficient. As long as the creditors provide the necessary support. More precisely: the banking institutions. The example of the pre-existing out-of-court mechanism, which did not yield the desired results, is unfortunately well known to everyone. Respectively, the reasons for this unfortunate development are well known (eg: digitized bureaucracy, heavy mechanism, gutlessness of the public sector, but mainly the reluctance of the banks).

    It should be noted that an important difference between the two mechanisms is that the newly established mechanism does not include debts of third parties, e.g. suppliers — as was the case under the previous regime (which creates a lacking, at least in part, scope).

     

    The potential results of the relevant process

    Within the aforementioned two months it is possible:

    (a) for no regulation proposal to be submitted by financial institutions (Article 5)

    (b) for an agreement to be reached (Article 19) or, finally,

    (c) for the debtor to reject the restructure proposed by the financial institutions (Article 16 et seq.).

     

    The process of the recovery of businesses

    In recent years, a significant effort has been made to de-stigmatize not only insolvency but also the process of the recovery of businesses. Anyone who heard of “Article 99” thought that “the patient” was “dying”. Even when it wasn’t like that…

    The process of recovery is already becoming unified and modernized based on what Directive 2019/1023 provides. Businesses can resort to it in order to avoid insolvency and its adverse consequences. The consent of two categories of creditors is required (representing at least 50% of the claims of each of their respective categories – Article 34):

    (a) those who have special privileges (eg collaterals) and

    (b) others (who do not have special privileges)

    However, if an agreement is reached with the above categories of creditors representing at least 60% of the total claims – between which there are more than 50% of those with special privileges – said agreement is ratified by the court. And that, even if the majority of the other creditors does not agree – provided, however, that some additional conditions are met (Article 54). Minority creditors are bound by the above agreement, provided that two basic conditions are met (Article 54:)

    (a) the non – deterioration of their position; and

    (b) equal treatment of creditors belonging to the same category – unless there are serious ́ commercial or social reasons.

    It is noted, however, that from the submission of the application to the competent court for the ratification of the relevant agreement and until the issuance of a decision on it, there is a suspension of the prosecution measures of the creditors (article 50 et seq.). However, employees are excluded from the (general) suspension of the prosecution measures against the debtors and can claim, without hindrance, all the debts due to them(Article 52).

     

    Insolvency-In General

    If the debt restructuring is not achieved, the debtor’s insolvency procedure follows (Articles 75 et seq.). Insolvency affects legal entities. However, it also concerns natural persons – regardless of the existence (or not) of their commercial status (Article 76). It is noted that the possibility of insolvency of natural persons who do non operate on a commercial capacity is a new regulation. It can be proclaimed, under certain conditions, even after their death. Insolvency initiates the process of collective satisfaction of creditors, with the possibility of relieving the debtor of their debts.

     

    Legal persons

    With regard to legal entities, the decision to declare insolvency dictates the liquidation of either the company (as a whole) or of its individual assets (Articles 75, 79, 158 et seq., Etc.). If it is decided to sell the company as a whole but such sale is not achieved within 18 months, its individual assets are sold (Article 161).

     

    Natural persons

    In addition to the insolvency of natural persons who do not operate commercially, another new regulation is introduced. Specifically, in order for their final exoneration to take place:

    (a) their assets are sold (Article 92)

    and, if the price of the sale is not sufficient,

    (b) they must contribute with their income that is in excess of the sum of their reasonable living expenses (Article 92).

    The systematization and simplification of the relevant procedures. The innovations.

    same direction as the 2016 reform).

    Key requirement: to complete them as soon as possible. In this context, a number of innovations are provided for. Indicatively:

    (a) the introduction of quantitative criteria that make it easier to determine the cessation of payments (Article 77) – [a criterion which is already being discussed, in the light of the current, particularly difficult, economic situation],

    (b) the spontaneous and irrevocable termination of employment contracts by the declaration of insolvency (Articles 103 & 109) – [discussed likewise],

    (c) the use of electronic media to ensure transparency and publicity (inter alia: Articles 84, 143 and 212 et seq.),

    (d) the abolition of the production of supporting documents (which will now be retrieved electronically – indicatively Article 214),

    (e) the immediate commencement of liquidation proceedings (indicatively Article 157)

    (f) the automatic adjustment of the first bid price in the auction procedures, if they prove to be infertile (Article 164) – [regulation which is also expected to be introduced in the Code of Civil Procedure],

    (g) improvements in the institution of insolvency administrators (Articles 227 et seq., indicatively 230),

    (h) the introduction of simplified procedures for “small scale” bankruptcies, so that the procedures for insolvency, liquidation and collective satisfaction of creditors can be moved and completed quickly, an institution which has been significantly improved by the current regime and concerns, particularly large business (for example: Articles 172 et seq., in particular 173, 176, 178),

    (i) the automatic cessation of the insolvency proceedings after the lapse of five (5) years from its declaration and the recovery of the individual prosecution measures (: article 191 §3). [While according to the existing law (article 166 par. 3 law 3588/2007), the cessation of insolvency proceedings took place after the lapse of ten (10) years from the creditors’ union or the lapse of fifteen (15) years from its proclamation].

     

    Exoneration as a consequence of insolvency

    In general

    The release of debtors from their obligations is inextricably linked to insolvency (Article 192 et seq.) In the spirit of the Directive 2019/1023, which is about to be incorporated.

    The release comes extremely soon. Basically, in three (3) years – and in some cases in just one (1) year (Article 192). An exception is the possibility of fraudulent insolvency and concealment of assets by debtors (Article 193), in which case the debtor, as inexcusable, does not enjoy the relevant right.

    In case the debtors do not have assets, their exemption will occur in three years. However, in this case they have to pay the excess out of their income, after deducting a sum equal to their reasonable living expenses (Article 192).

     

    Strategic defaulters

    Those who will be determined as “strategic defaulters” will not be exonerated (Articles 193, 194). However, in order to investigate this specific possibility, special audits are carried out for the detection of hidden assets both in Greece and abroad (Articles 196, 214).

     

    The responsibility of the members of the administration of the legal entities that go bankrupt

    An old and serious problem concerning the members of the administration of bankrupt legal entities is addressed for the first time. Specifically: the problem of their liability for the debts of the company, even after its insolvency. The new institutional framework exempts these persons within three years from the filing of the insolvency application or within two years from its declaration (whichever is earlier – Article 195).

     

    In General

    Utilization of production units

    The insolvency proceedings that are currently in place are basically endless. The production units of companies under restructuring or insolvency remained closed and, often, inactive for years or, in practice, forever. The acceleration of the relevant procedures is aiming at the faster entry of investors in them (a targeting, after all, of the 2016 reform as well). Of course, the return of these companies to productive operation is (also) for the benefit of the national economy.

     

    Non-performing loans

    Non-performing loans have been and continue to be a “scourge” for banks and for the economy. The new regulations help the optimal and faster management of the whole problem for the benefit, in this case as well, of the national economy.

     

    Financial intermediation

    The specific institution, which is used internationally (also in the field of out-of-court settlement of private disputes), is utilized (Article 15 et seq.).

     

    Technology

    Technology is being used to a significant degree. New electronic and automated procedures are introduced, which promote transparency and eliminate bureaucracy (paragraph 212 et seq.). This is, after all, a section of Directive 2019/1023.

     

    Insolvency Administrators

    Improvements are being made to the institution in order to further support the insolvency process. (ind. 227 et seq.).

    The institution of Insolvency Administrators was introduced in 2015 to replace that of insolvency trustees. The reason was the multiple problems created, among others, by the inadequacy of the latter, the lack of transparency, the problems with their fees. Today, the institution of Insolvency Administrators has not received the expected recognition. Probably because the number of new bankruptcies is small. However, it will undoubtedly resolve issues of transparency and efficiency, despite the fact that the provision that they proposed by creditors when they apply for insolvency raises some reservations (see Article 137).

     

    Socially Vulnerable Groups

    Provisions are made to protect those who belong to socially vulnerable groups from their lenders. For example, installments of their loans are subsidized (article 28) but also the entitled eligible housing allowance continues to be paid to the Acquisition and Leaseback Agency (article 223).

    This section of provisions (the one referring to the Socially Vulnerable Groups) has, for now, become one of the most controversial ones of all the legislation. The reactions that are recorded are many and from almost all sides.

     

    The new law will be, from 01.01.2021, the new weapon in our quiver for the management of the (unbearable and multi-layered problematic) Private Debt of our country.

     

    Some are already raising concerns about the need for such legislation – especially at this time. They cite, in particular, the fact that we are in the midst of an ongoing pandemic and the consequent deterioration of the economic environment. Also, that both at European and international level there is a suspension of insolvency provisions – let alone those that have such characteristics as the above.

    Others would characterize as “inappropriate time” the start of its implementation on 1.1.2021, purely in terms of preparation and lack of knowledge of those immediately involved.

    Some others have already assessed the time of its entry into force as perfectly suitable and appropriate.

    We are left to see who will prove to be right.

    But law is applied by the society: in it its just (or unjust) nature is reflected. The society will make, in this case as well, the final evaluation.

    In any case: Let us hope that the new law achieves its goals.

    All of them.

    It is, after all, a national need.-

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper and makthes.gr (December 13, 2020).

     

    Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

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