Koumentakis

Tag: bankruptcy law

  • 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.

     

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