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)
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.
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.