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.