George Psarakis LL.M. (mult.), PgCert
Summary: Several times firms resort to the assistance of the public sector to strengthen their credit position in order to improve their accessibility to bank financing. The public sector, either itself or through the joint stock company E.T.E.AN S.A. (formerly T.E.M.P.E. S.A.), provides its guarantee in order to make borrowing less costly and, in many cases, feasible. The involvement of the State, however, in bank lending to businesses raises various legal issues which usually come to the surface when the borrower becomes delinquent in the payment of instalments and the loan is terminated
The public sector sometimes wishes to strengthen the creditworthiness of enterprises in order to improve their access to bank financing. This happens either when it wants to strengthen certain sectors of the economy in the context of its economic policy (stimulating growth in certain regions of the country or in certain sectors, promoting the entrepreneurship of small and medium-sized enterprises, etc.), or when, following extraordinary events, it is required to stand by enterprises that have been financially strained in order to restore losses, etc. (e.g. support for businesses after natural disasters, etc.). The State gives its guarantee either itself in application of Law 2322/1995 or through the joint stock company E.T.E.E.AN. S.A. (formerly T.E.M.P.E. S.A.) of which it is the sole shareholder (see Law 3912/2011).
2. OPERATION OF THE CREDIT AGREEMENT
In these agreements, the credit institution grants the credit (either in the form of an interest-bearing loan or a credit through a current account) and the State/ETEAN provides the conditional guarantee. If the borrower defaults, the credit institution has the right to terminate the loan agreement and subsequently claim the amount of the guarantee from the guarantor, the State/TEAN. The specific conditions for forfeiting the State/TEAN guarantee vary from one programme to another. For example, in most State guarantees, the State is obliged to repay the guaranteed debt if the borrower owes two (2) or three (3) consecutive instalments (the usual wording is as follows: "Credit institutions must seek, within the aforementioned period of three (3) months, for which the State covers the interest on arrears with its guarantee, the collection from the primary debtors of the overdue instalment guaranteed by the Greek State, with the same diligence that they show for the loans they grant without the State guarantee"). In the case of ETEAN loans, a 90-day default period is usually set, after which the credit institution may terminate the loan agreement. The credit institution, whether the loan is an interest-bearing loan or a mutual loan agreement, terminates the loan and submits a request for forfeiture of the guarantee to the State Treasury (in the case of a State guarantee) or to the ETEAN (in the case of an ETEAN guarantee).
Before the State pays the amount of the guarantee to the credit institution within the time limit laid down, it shall establish the amount owed by the borrower to the competent tax office. Thereafter, the Public Revenue Office is responsible for collecting the debt and uses the provisions of the Public Revenue Collection Code (CIRC) to carry out enforcement actions against the borrower and any other guarantors (seizure of real estate, seizure in favour of third parties, etc.). Similarly, for loans guaranteed by the ETEAN, when the guarantee is forfeited, the collateral covering the loans guaranteed by the ETEAN operates in favour of the Greek State and collection is carried out, in accordance with the provisions of the KEDE, by the Tax Administration, following the sending by the ETEAN of the list of money and the supporting documents required for the cash confirmation of the debts. It should be noted that the respective money list sent to the competent tax office by the ETEAN should specify in detail the reason for the debt (e.g. the number of the interest-bearing loan agreement) and the amount due in terms of principal, interest, surcharges and expenses (see the "Money List" section of the Tax Code). e.g. Supreme Court decision No. 1247/2015, where a borrower's appeal against the cash confirmation of the Tax Office on a loan guaranteed by the State was upheld due to the lack of an analytical report of charges).
Therefore, in the case of ETAAN's guarantee loans, borrowers will now have the State and not the joint stock company ETEAN S.A. against them. The main differences between the confirmation of the debt by the Tax Office and the conduct of the enforcement procedure through the KEDE instead of the claim by the credit institution are twofold:
a) First, that for amounts over 100,000 euros, non-payment is a criminal offence and in particular the offence of non-payment of debts to the State (Article 25, Law 1882/1990). Although a misdemeanour, with a threatened prison sentence of at least one (1) year - and therefore with the possibility of suspension of the prison sentence or its conversion into a fine - the conviction is sufficient for the corresponding entry to take place in the criminal record of the convicted person.
(b) Secondly, the privileges of the State now apply, on the one hand, to the satisfaction of any auction and, on the other hand, to the execution of specific enforcement acts. For example, the State may seize up to 50% of a salary or pension for amounts between €1,000 and €1,500 and up to 100% for amounts exceeding €1,500 (Article 31 KEDE), while the credit institution may not seize a salary or pension under any circumstances (Article 982 CCP).
3. ISSUES ARISING FROM INVALID TERMINATION BY THE CREDIT INSTITUTION
Sometimes credit institutions are under the mistaken impression that because there is a guarantee from the State/ETEAN, they must immediately terminate loans when an issue of late payment arises. However, loans guaranteed by the State/ETEAN are also credit agreements which are primarily governed by the Civil Code and to which the recent Code of Conduct of the Bank of Greece applies. As regards loans guaranteed by ETEAN, the Code applies without any differentiation since the guarantor is a public limited company. As regards loans guaranteed by the State, according to the now explicit provision of the Code following its recent revision, 'for the purpose of finding solutions for settlement or final settlement, the provisions of the present Code shall also apply to loans guaranteed by the Greek State' (see Chapter One under A.1. paragraph 2 of the Code). Indeed, according to an individual reply of the Bank of Greece, the initiation of the Code of Conduct procedure should also be communicated to the guarantor in order to ensure its cooperation and consent where required.
The application of the Code also to these loans means that the bank cannot terminate the loan before following the foreseen process of consultation and negotiation with the borrower. We have reported in detail on this procedure in an earlier briefing note, to which we refer. The termination of loan agreements without prior compliance with the procedure provided for in the Code of Conduct is invalid as contrary to the provisions of mandatory law on the one hand, and as abusive under the provisions of Article 281 of the Civil Code on the other. As a legal writer states in a recent article: "Banks are obliged, because of the coercive nature of the rules adopted, to initiate this formal, complicated and costly negotiation procedure, giving the debtor a second chance to cure the grounds for termination".
4. ISSUES ARISING FROM THE CONTESTATION OF SPECIFIC DEBTS AND THE VALIDITY OF LOAN TERMS
Issues can also be raised in these loans from the point of view of the unfairness of the loan terms. For example, a term that allows the interest rate to be adjusted on the basis of 'changes in the financing conditions of banks' or 'the cost of money' is not clear and transparent. The same applies to wording that makes the adjustment conditional on 'changes in the reference rate' or on 'changes in the cost of money' or 'the general level of interest rates'. The same applies to a clause stating that the interest rate on the loan 'will be variable and will be based on the reference rate of the European Central Bank' or stating that 'the interest rate will be equal to the bank's current own funds lending rate'. In addition, a contractual term which defines the criteria for the variation of the interest rate on the basis of 'market risk', 'general product risk' and 'market and competitive conditions' has also been found to be abusive because it is vague. Moreover, Act No 2501/2002 of the Governor of the Bank of Greece (Government Gazette A 277/2002) on 'informing persons dealing with credit institutions of the conditions governing their transactions' provided that the minimum obligation on the part of credit institutions in respect of lending transactions also applies to '.... in the case of variable-rate loan agreements, the general reference rate clearly defined on the basis of the prevailing money market rates, its periods of validity, and information on key factors, the possible change of which will affect the total cost of the corresponding loan (such as European Central Bank intervention rates)'. Subsequently, the Bank of Greece clarified in writing (No 53/2003) that in the case of variable rate contracts 'it is possible to use more than one reference rate, accessible to the trading public, and that the contribution of the above key parameters to the change in the interest rate can be determined either at a fixed level or with a specific range of variation'. Subsequently, by Decision No 178/2004 of the Banking and Credit Committee, the Bank of Greece, in application of the above-mentioned PTE 2501/2002, clarified that 'the change in the variable interest rate is linked exclusively to indicators of a general and widely accessible interest rate nature, such as ECB intervention rates, Euribor, bond yields, short-term securities, etc., which must be specified in the contract. The contract shall also explicitly specify how the contractual interest rate is to be adjusted, as follows: (i) as a maximum multiple of the current change in the interest rate index; or (ii) as the resulting sum of the amount of the interest rate index plus a margin determined up to a maximum limit'.
Therefore, by way of illustration, in all of the above cases, the loan agreement contains an abusive, and therefore invalid, interest rate variation clause, thus raising the issue of an incorrect calculation of interest. In fact, the total invalidity of the loan agreement can be argued on the basis that the interest rate clause is so essential for the operation of the entire agreement that it cannot operate independently in any case without it (this reasoning was initially confirmed by the decision number 6733/2007 of the Athens Court of First Instance regarding an unfair interest rate calculation clause based on a period of 360 days instead of 365: 'On the other hand, the defendant's alternative claim that the invalidity of part (of the clause in question) of the contract cannot result in the invalidity of the contract as a whole and that the debt at issue should be determined on the basis of the 365-day calculation must be rejected, on the one hand, as unlawful, in so far as it seeks to rely on the provision of Article 181 of the Civil Code, since it is not possible in this case for the contract at issue to be valid after the removal of the abovementioned clause, since that clause has a material effect on the entire legal transaction in this case. ..").
5. THE RISK OF PAYMENT BY THE PUBLIC/PRIVATE SECTOR DESPITE THE EXISTENCE OF VALID OBJECTIONS ON THE PART OF THE BORROWER
Even if the above is true, there is always the risk that the guarantor, the State/ETEAN, will accept as legitimate the forfeiture of the guarantee and that the issue of accelerated enforcement by the State through the competent tax authority will arise, as mentioned above. Although payment by the guarantor is sometimes quite late (e.g. ETEAN paid only in July 2016 guarantee debts of 238. 400 Euro to credit institutions from 2012 guarantee deposits), the enforcement procedure under the CEDA will start regardless of whether or not the State/ETEAN is paid by the State (with regard to the State guarantee loans, the recovery procedure under the CEDA proceeds before the payment of the guaranteed amount by the State to the credit institution - with regard to the EIB guarantee loans, the payment order from the EIB's Board of Directors must have been issued beforehand).
However, according to the provision of Article 859 of the Civil Code, the guarantor who satisfied the lender is deprived of the right of recourse (i.e. to claim from the borrower the money paid to the lender) if he failed to raise valid objections of the borrower that he knew or ought to have known (i.e. also objections concerning the enforceability of the alleged debt or its maturity). In this respect, if the borrower makes known to the State/ETEAN the reasons for its justified refusal to repay the loan and if those reasons are not admissibly raised by the State/ETEAN vis-à-vis the credit institution, then it is released from any liability vis-à-vis the State/ETEAN (the opposite view is also supported here, especially for State guarantee loans). To give an example: if the credit institution terminates a State guarantee contract with the ETEAN without complying with the provisions of the Code of Conduct (see above), the question of the invalidity/abusiveness of the termination arises. The borrower should notify the State/ETEAN of this objection by means of an extrajudicial statement or even by means of an appropriate legal remedy (e.g. an action for recognition of the invalidity of the termination against the credit institution and notified to the State/ETEAN). Once the State/ETEAN has knowledge of this objection, it is obliged to raise it against the credit institution before repaying the guaranteed amount. Otherwise it risks losing its right of recourse against the borrower.
6. ISSUES ARISING FROM THE RENEWAL OF THE PUBLIC/PRIVATE GUARANTEE
Public guarantees are usually of indefinite duration. However, there are some guarantees that are given for a limited period of time (e.g. guarantees under the 'Temporary Support Framework'), as is also the case with all EIB guarantees. A guarantee for a limited period of time means that the guarantee is only valid for as long as agreed between the State/ EIB and the credit institution. If this period has elapsed and the credit institution does not take legal action against the borrower within one (1) month, the guarantor is released from its liability (see Article 866 of the Civil Code). Therefore, if the guarantee has been provided for a period of time until 31/12/2016, the credit institution, in order to keep the guarantee liability of the State/ETEAN active, must terminate the loan and take appropriate legal action (lawsuit, etc.) until 31/1/2017.
In any case, in order to deal with guarantees of limited duration, the legislator sometimes comes along and renews their duration through legislative intervention. For example, in the field of certain guarantees of the ETEAN that expired in 2014, with the amendment (article 46 of Law 4277/2014, Government Gazette A 156/1.8.2014) of article 22 of Law No. 3775/2009, a renewal until 10.8.2019 was introduced. This implies the legislator's purpose to provide a second chance to companies whose loans were guaranteed by ETEAN S.A. and which were still being affected by the economic recession. This conclusion is confirmed by the explanatory memorandum to the above amendment: "With the adoption of this provision and the relevant Joint Ministerial Decision to be issued subsequently, the conditions are created for extending the deadline for repayment of loans by enterprises that had been included in the programmes of the former TEMPME SA and the current ETEAN SA". However, the relevant procedure for extending the deadline, as adopted each time, is exclusively in the hands of the credit institutions that have granted the loans, since such arrangements can be agreed only with the assistance of the lending bank, since, according to ETEAN's operating rules, it negotiates only with credit institutions and not directly with borrowers. The borrower himself should therefore submit his loan arrangement proposal to the credit institution - in the context, inter alia, of the Code of Conduct - and the latter should then contact ETEAN to extend the guarantee period. Moreover, if it is not possible to extend the guarantee of the State/ETEAN, this cannot be a reason for refusing to comply with the Code of Conduct or to negotiate (with a view to extending the duration of the loan agreement, etc.) because the bank can obtain other collateral than the State/ETEAN guarantee. In other words, it is contrary to good faith and commercial practice for the borrower to request an extension of the repayment period by providing sufficient additional collateral and for the credit institution to refuse, citing the impossibility of extending the State/ETEAN guarantee.