Merger: Protection of Creditors (Article 13 of Law 4601/2019)
Following our previous analysis of the protection of employees in a merger, we examine here another, equally critical, aspect of the procedure. This concerns the protection of creditors of the companies participating in the transformation. The law (Article 13 of Law 4601/2019) provides for a specific protection mechanism for these creditors. The mechanism forms part of the preparatory stage of the merger. It is activated following publication of the draft merger agreement (Article 8).
Purpose
The purpose of the provision is directly connected with the effects of the merger. Upon its completion, particularly in the case of a merger by absorption, the absorbing company succeeds, by universal succession, to the assets and liabilities of the absorbed company. The succession covers all its rights, obligations and legal relationships. As a result, the absorbing company becomes the debtor in respect of the debts of the absorbed companies.
The change in the identity of the debtor is not neutral for creditors. It is combined with the consolidation of the assets and liabilities of the merging companies. It may therefore affect the creditworthiness and solvency of the company that will ultimately fulfil the obligations. Consequently, it may make satisfaction of creditors’ claims more difficult.
For this reason, the legislator provides for a specific protection mechanism. It does not, however, disregard the interest in the safe and orderly completion of the transformation. The provision seeks precisely to balance these interests.
Protected Creditors
The above protection does not apply to all creditors of each participating company. It applies only to those whose claims arose before completion of the publication formalities for the draft merger agreement. At that same point in time, those claims must not have fallen due.
Application of the provision therefore presupposes two elements. First, that the claim arose previously. Second, that it has not yet fallen due.
Conversely, creditors whose claims have fallen due remain outside the scope of this protection because they may resort to the remedies available under general law. Nor are persons who acquired claims after publication protected. Such creditors are considered to have already been aware of the transformation.
It is accepted that the term “claims” is not limited to monetary claims. It may cover any claim that has already arisen and has not yet fallen due under an existing legal relationship. The same approach applies to claims arising from continuing obligations.
Furthermore, the protection afforded by law (Article 13) does not operate solely in favour of creditors of the absorbed company. It also applies to creditors of the absorbing company. More generally, it covers the creditors of all companies participating in the merger.
This choice is explained by the risks that a merger may create in more than one direction. Risk does not arise only where the absorbing company is financially weaker than one of the absorbed companies. It also arises in the reverse situation.
If the absorbing company becomes significantly burdened by the debts of other participating companies, the position of its own creditors may deteriorate. Similarly, where the absorbed companies have different levels of financial strength, the merger may adversely affect the creditors of the stronger companies.
The law (Article 13 §2) reflects this differentiation. It permits the safeguards provided to creditors of the absorbing company to differ from those provided to creditors of the absorbed company or companies.
Bondholders and Holders of Other Securities
As regards bondholders and holders of other securities, the pre-existing provisions were not incorporated into the central provision governing creditors (Article 13). They were transferred to Articles 33 and 34 of Law 4601/2019 because they specifically concern Sociétés Anonymes.
As regards bondholders, Article 13 applies, as is reasonable. An exception applies where they approve the merger, individually or collectively, through a meeting. The relevant decision is taken with a simple quorum and majority.
For holders of other securities, such as founders’ securities or share acquisition securities, a different means of protection is provided. The absorbing company is required to grant them rights at least equivalent to those they held before the merger. This protection is not provided where the holder consents to the modification of their rights.
Conditions for Activating the Protection
A prerequisite for activating the relevant statutory mechanism (Article 13) is that satisfaction of the applicant creditor’s claims is placed at risk.
The creditor must demonstrate, first, the necessity of the measures requested. This is demonstrated on the basis of the financial position of the participating companies. Second, the creditor must demonstrate the inadequacy of the existing safeguards.
It is sufficient that the merger increases the creditor’s credit risk. It is not necessary to establish certain or imminent insolvency of the absorbing company. It is sufficient to demonstrate that the creditor’s position becomes less favourable as a result of the merger.
The assessment is based on factors such as solvency, liquidity and the structure of assets and liabilities. Existing encumbrances over assets and the time at which the claim becomes due are also taken into account.
The burden of substantiating the claim lies with the creditor themselves, already at the extrajudicial stage.
Subject Matter of the Protection
The subject matter of the protection is the provision of appropriate guarantees or, more broadly, adequate safeguards.
The terms “guarantees” used by the law (§§1 & 2) and “measures” (§3) are treated as equivalent. They all refer to any appropriate means of protecting the creditor’s claim.
The list of available means is indicative rather than exhaustive. Depending on the circumstances, adequate security may take the form of a personal or proprietary security interest. Indicatively, it may consist of a guarantee, mortgage or prenotation of mortgage, pledge or assignment of a claim by way of security.
It may also consist of other contractual arrangements that materially improve the prospects of satisfaction of the claim.
The adequacy of the security is assessed specifically in each case. The claim, the financial position of the companies and the risk caused or increased by the merger are taken into account.
Procedure for Exercising the Right to Protection
As regards the procedure, the law (Article 13) does not require a particular statutory form for the creditor’s application. It is accepted that submission in writing or by electronic means is sufficient.
However, the identity of the person making the declaration, the content of the declaration and the time of submission must be ascertainable.
The application must identify the relevant claim. It must also state that the claim has not fallen due. Finally, it must include a request for specific or, at least, appropriate safeguards.
The time limit for exercising the right is thirty (30) days from completion of the publication formalities (Article 8).
If adequate guarantees have not already been provided, the company is required to provide them. This obligation presupposes that the statutory conditions are satisfied.
Judicial Resolution of Disputes
If a dispute arises concerning the protection of creditors (§1), it is resolved judicially. The law (§3) provides for the interested creditor to apply to the competent court (Article 5 §1).
The court hears the matter in accordance with the procedure applicable to interim measures (Articles 682 et seq. of the Greek Code of Civil Procedure).
A dispute may arise where the company refuses to provide safeguards. It may, for example, dispute the claimant’s status as a creditor, the time at which the claim arose or the need for protection.
A dispute may also arise where the company offers security that the creditor considers inappropriate or inadequate.
The judicial application must be filed within the same thirty (30)-day period.
By its decision, the court may order any adequate and appropriate measure to secure the claim. It may not, however, require third parties or shareholders or partners to provide security. It may nevertheless take into account security offered by other intervening parties, provided that it considers such security adequate.
Legal Consequences of Breach of the Procedure
As regards the legal consequences, not every defect in the procedure automatically results in the suspension or invalidity of the merger.
At the same time, a creditor’s application is not always sufficient, in itself, to prevent the merger from proceeding. EU law does, however, require an appropriate system of protection. Creditors must be able to apply to an authority or court and request adequate measures.
In this context, their timely protection may also be pursued through an application for a provisional order. The application may seek suspension of the merger procedure until the application is heard or a decision is issued.
At the same time, during the preventive legality review (Article 17), the competent authority is required to refrain from granting approval where it establishes that a decision on a creditor’s application (§3) is pending.
The substantive consequence of a breach is therefore not the invalidity of the merger. It is the activation of the specific mechanism of judicial protection.
Through this mechanism, adequate measures in favour of the applicant creditor may be sought. Depending on the circumstances, suspension of the procedure may also be requested.
If the defect is not identified during the legality review and causes damage, civil liability may arise. Such liability may be borne by the members of the management body of the merging companies.
Liability of the State under Articles 105–106 of the Introductory Law to the Greek Civil Code for defects in the preventive legality review is also not excluded.
The protection of creditors in a merger does not operate as a deterrent to corporate restructuring. It operates as a necessary safeguard for the security and reliability of the transaction.
When claims are mapped in a timely manner and risks are properly documented, the likelihood of disputes and delays is reduced. At the same time, the confidence of creditors, investors and management in the completion of the transformation is strengthened.
A successful merger is therefore not judged solely by the corporate decision or its registration with the General Commercial Registry (G.E.MI.). It is also judged by the ability of the business to demonstrate that its new financial position remains reliable.
What, however, is the position of shareholders and partners? This will be addressed in our next article.
Managing Partner
Koumentakis and Associates Law Firm
Note: This article forms part of a broader series published by our Law Firm on corporate transformations. In this series, we attempt an article-by-article analysis—always from a business-oriented perspective—of the principal relevant legislation, Law 4601/2019.