George Psarakis LL.M. (mult.), PgCert
Summary: What do DOL, MEGA, Alpha Grissin, Axon, LAZARIDIS SA, Skaramanga Shipyards, Kypriotis Group and EKTASIS have in common? All of the above companies were confronted with the banks in order to rapidly divest their assets after the use of the "Dendias Law" (Law 4307/2014). This article analyses the conditions for the application of the law and the practice of the Greek courts (case law) to date.
What do DOL, MEGA, Alpha Grissin, Axon, LAZARIDIS S.A., Skaramanga Shipyards, Kypriotis Group and EKTASIS have in common? All of the above companies were confronted with the banks in order to rapidly divest their assets after the use of the "Dendias Law" (Law 4307/2014). In some cases the court decision is expected in the near future (EKTASIS, AXON) while for others the divestment process has already been completed. It should be noted that in four cases the banks' applications were rejected in the first instance (most recently the rejection of the application against Kypriotis Group), with one of the four decisions being overturned in favour of the banks at the Court of Appeal. A "super weapon" in the hands of credit institutions, the "Dendias Law" has been used several times over the last two years to rapidly liquidate business assets, in particular divestment of hotels. The old management is removed immediately upon the issuance of the court order, the management is taken over by a person recommended by the bank, who proceeds to sell the business as a whole or in branches, through a public bidding process, paying off the creditors of the business from the sale price. The logic is that since the old management could not save the company, it is unfair to continue to control it at the expense of its creditors (employees, banks, suppliers, etc.).
The procedure is relatively simple:
1. Creditors holding more than 40% of a company's liabilities, including at least one credit institution, file a petition with the Court of Justice and within a few months a decision is issued to initiate liquidation proceedings, provided that the following conditions, in particular, are met, in turn: a) the company has stopped making payments, or b) for two consecutive years the company's total equity capital has fallen below one tenth (1/10) of the share capital for a public limited company and ½ of the share capital for an incorporated company (from 1/10).
2. After the decision has been issued, an insolvency administrator (a first class accountant, a statutory auditor or a lawyer from the register of insolvency administrators) takes over the management of the company's current affairs and the conduct of the public tender procedure for its assets. The entire procedure must be completed within 12 months of the decision.
3. Thereafter, the proceeds of the sale of the undertaking's assets shall be used to meet its obligations to creditors, including the credit institutions which have initiated the special administration procedure.
Although the procedure is called 'special administration', it is in fact a procedure for the sale, or liquidation, of the assets of the undertaking. The operator of the enterprise loses its assets, leaving an empty 'carcass', while the enterprise itself passes into the hands of another operator. Whereas in other reorganisation procedures, e.g. an application under Article 99 of the Bankruptcy Code, the company continues to operate under the same entity, which may or may not be the one responsible for the insolvency situation in which it finds itself, in the special administration procedure, it is the entity that changes first.
It is only natural that this procedure should be the most aggressive towards strategic defaulters, since it deprives them of immediate, rapid and very effective control of their assets. In fact, once the credit institutions have filed the application, the entity cannot file any reorganisation petition, etc. In other words, as soon as the application for special administration is filed by the banks, all the protection measures available to the entity itself are frozen until a decision is taken on the banks' application.
The positive aspects of the procedure for credit institutions are, inter alia, that:
a) The credit institution is valued as a set of intangible and intangible assets, whereas, for example, in the event of an auction of its individual properties, no price can be given for the clientele of the institution.
b) The special administrator may, prior to the auction, 'communicate' the intended sale, e.g. by advertising it through the media and by promoting the particular value of the business. In the same context, meetings with potential bidders and demonstrations of the assets (through on-site visits, etc.) may take place.
c) In a public bidding procedure there is no first bid price (hence no minimum bid amount) and the administrator is not entitled to declare the bidding procedure ineffective if the bids are not considered advantageous. Indeed, even if only one bid is submitted, a majority of creditors may decide to accept it (subject to formal approval by the court). Therefore, in order to speed up the process, the company can be sold at a lower current value, which may be advantageous for the credit institution in present value terms.
(d) The procedure is completed within a few months, in order to avoid depreciation of the value of the business, unlike other individual enforcement or bankruptcy procedures which take several years.
e) Control of the business now passes to the liquidator, who is a professional insolvency administrator, usually with the assistance of one of the well-known auditing firms. The former operator of the business no longer has any ability to manage the finances etc. of the business. Practices such as temporary cash facilities (loans) to members of the board of directors and the purchase of shares in companies affiliated to the insolvent entity will no longer be possible and, because of the change of administrator, will be easily disclosed.
f) The whole transfer procedure is "premiumised" by various tax exemptions and reliefs, such as a 30% reduction of the statutory fees of lawyers, notaries, bailiffs and mortgage officers and exemption from taxes, fees or duties of the State (except VAT).
So what is the position of companies vis-à-vis this "fast track" liquidation? The optimal response is prevention and the demonstration of real will on the part of the company's operator to solve the problem of over-indebtedness. In particular:
1. The claims of the banks that will be turned against the companies will be from contracts primarily for opening credit with a mutual account or interest-bearing loans. In both cases, there is a wide scope for controlling abusive practices by credit institutions aimed at excessive increase of debt. Especially with regard to variable interest rate clauses, which are not based on precisely defined adjustment criteria. Therefore, if the company contests the amount of the debt in good time, and not pretentiously shortly after or before the application for special administration, the debt will not be considered 'settled' and therefore cannot support the application (since no 'cessation of payments' will be proven). Moreover, the same is also the case for business loans in Swiss francs, where, due to the questioning of the validity of the exchange clause, there is a valid ground to question the amount, and therefore the cleared amount of the claim.
2. If financial statements have not been published for two financial years or the equity capital is less than 1/10 of the company's share capital (in the case of a public limited company), the latter should, prior to the submission of the application by the bank, have already initiated a procedure to remedy the specific problems by publishing the relevant financial statements or by taking decisions (by the General Assembly, in the case of a public limited company) to reorganise the company and possibly increase the equity capital.
3. Before terminating credit agreements, the credit institution is obliged to apply the Code of Conduct by proposing debt settlement solutions. In any case, and beyond the Code, credit institutions are obliged, due to their role in the Greek economy, to try to settle a debt in a conciliatory and good faith manner and not directly terminate it by taking legal action. This is of course provided that the borrower behaves in good faith and honestly. For example, in the case of an application against a hotel in Heraklion, Crete, the application was rejected after the company's objection that the bank did not negotiate in good faith, turning a deaf ear to repeated attempts to settle the debt consensually and rejecting all requests for settlement without any specific justification.
4. In any event, the pretextual taking of initiatives in anticipation of the hearing of the special administration application will not be able to prevent the application from being granted. Similarly, the selective payment of employees and the State will still not be able to prevent the application from being accepted, since the majority of the debts, and in particular bank debts, remain unpaid.
Finally, the 'Dendia' law is indeed a 'super weapon' in the hands of the banks, which is capable of upsetting the hitherto known balance between the credit institution and the indebted company. However, each case is different and therefore each judge (since, despite the importance of these cases, they are decided by single-member courts) must carefully examine not only the letter but also the purpose of the legislator, together with a thorough examination of the sincere intention of the company's operator to settle the problem of over-indebtedness.