The New Out-of-Court Mechanism of Law 4738/2020

Legal insight

May 2021

George Kefalas, LL.M. (mult.), Μ.Sc.

(republished from Naftemporiki.gr)

Summary: From 1.6.2021, the new extrajudicial mechanism of Law no. 4738/2020, which is expected to be the first useful tool for dealing with the insolvency of viable companies. In this article, the key points of the new institutional framework are presented in the form of question and answer questions. 

Α. Introduction

About four years ago, the new law was introduced by Law no. 4469/2017, the tool of the out-of-court debt settlement mechanism was introduced in the Greek institutional framework for dealing with corporate insolvency. The legislator's ambition was for the out-of-court mechanism to play a leading role in the restructuring of debts of viable companies. Since then, the above law has undergone several amendments, while maintaining its character.

Recently, Law no. 4738/2020, which consolidated all collective insolvency proceedings into a single text, has significantly reformed the procedure of the out-of-court debt settlement mechanism. The following is a presentation, in the form of questions and answers, of the new arrangements contained in the provisions of Articles 5 to 30 of Law 473838. 4738/2020.

1. Which persons may apply for inclusion in the out-of-court debt adjustment mechanism?

Pursuant to Article 7 of Law No. 473838, the following persons may apply for the right to apply for the right to apply for a voluntary procedure for the enforcement of claims under the voluntary procedure? 4738/2020, natural and legal persons who are bankrupt may apply for inclusion in the out-of-court settlement mechanism. According to para. 1 of Article 76 of the same law, natural persons and legal persons pursuing an economic purpose have bankruptcy capacity. In other words, not only companies and freelancers can file a petition for insolvency, as was provided for under the previous out-of-court mechanism (Law 4469/2017), but also private or public employees. 

The above mentioned persons may submit an application for inclusion even for current or serviced debts, if there is a deterioration of their financial situation by at least 20%. 

2. In which cases is it not allowed to apply for inclusion in the out-of-court debt adjustment mechanism?

An application for inclusion in the out-of-court debt adjustment mechanism is not allowed in the following cases:

A) Where at least 90% of the person's total debts are concentrated in a single financial institution (e.g. a bank or a debt management company).

B) Where the person's total debts to the financial institutions do not exceed EUR 10 000.

C) Where the applicant has already submitted an application for reorganisation or an application for inclusion in the out-of-court debt settlement mechanism under Law No. 4469/2017, if it is a trader, or an application of over-indebted persons under Law No. 3869/2010 or an application for the protection of the main residence under Law No. 4605/2019, in other cases. The above persons may apply for inclusion in the new extrajudicial mechanism of Law No. 4738/2020, provided that they have previously waived the above procedures. 

D) When the applicant has already been subjected to one of the above procedures or to the procedure of Law No. 4307/2014 (Dendias Law) and at least 15 months have not elapsed since the publication of the decision of subordination. 

E) When 12 months have not yet elapsed since the completion of a previous out-of-court debt settlement procedure. 

F) If the applicant is a legal person, if it has been wound up and has been wound up before the submission of the application.

G) Where the applicant, or if the applicant is a legal person, the managing director, manager or partner, has been convicted by final judgment for certain offences (in particular tax evasion, laundering, embezzlement, fraud, defrauding creditors, etc.) to the degree of a felony (except in the case of the offence of fraud against the State or a Social Security Institution, in which case a conviction to the degree of a misdemeanour is sufficient). In particular for directors, managers, managers, partners of legal persons, the offence must have been committed in the performance of their duties. 

3. Which debts can be settled through the out-of-court debt settlement mechanism?

Only arrears owed to financial institutions, the State or social security institutions can be settled through the out-of-court settlement mechanism if the amount owed to the financial institutions exceeds €10,000. Exceptionally, serviced or current debts can also be settled if the applicant proves that his/her financial situation has deteriorated by at least 20% (reduction of income by 20% or maintenance of a stable income and increase of expenses by 20%). 4469/2017, the new out-of-court mechanism cannot be used to settle debts owed to other persons, e.g. to suppliers of the company. 

4. How can the procedure of the out-of-court debt adjustment mechanism be started?

The out-of-court procedure can be initiated by either the debtor or the creditors. In the latter case, the financial institutions, the State or the Social Security institutions may issue an invitation to the debtor to submit an application within 45 days. If the debtor, despite the above invitation, does not apply for inclusion, this fact shall be assessed negatively in the event of a subsequent application by the debtor. 

5. How is the debtor's application for inclusion in the out-of-court mechanism submitted and what information does it contain?

The debtor's application for inclusion in the out-of-court mechanism is submitted via the online platform of the Special Secretariat for Private Debt Management (SSSM) and contains at least the following information:

- Full details of the debtor with reference to the turnover (for legal entities) or income (for natural persons) of the last financial year. - A list of all creditors of the debtor with an indication of the amount of the claim of each creditor.

- Full details of the debtor with reference to the turnover (for legal entities) or income (for natural persons) of the last financial year. 

- A list of all creditors of the debtor with an indication of the amount of the claim of each creditor. 

- A list of the debtor's movable and immovable assets with an indication of the market value assessment in respect of movable assets. The value of the immovable property is derived from the recent ENFIA declaration. 

- A full description of the encumbrances and other securities registered on the debtor's assets.

- A declaration by the debtor of any transfer or encumbrance of his assets that has taken place within the last five years prior to the submission of the application. 

6. Upon submission of the application, to which of the debtor's financial assets do creditors gain access?

The submission of the application for inclusion in the out-of-court debt settlement procedure results in the removal of the debtor's banking and tax secrecy. At the same time, creditors are given access to the financial data of the debtor and his/her spouse, partner and dependants. 

7. How does the submission of the application for inclusion in the out-of-court mechanism affect the arrears resolution procedure of the Banking Code of Conduct?

As expressly provided in Article 13 of the Law. 4738/2020, the submission of an application for inclusion in the out-of-court procedure suspends the procedure of the Code of Conduct for Banks. If the out-of-court mechanism is unsuccessful, then the procedure of the Banking Code of Conduct is resumed upon request of the debtor or creditor from the point where it was stopped. 

8. What are the consequences of applying for the out-of-court mechanism?

The submission by the debtor of an application for inclusion in the out-of-court mechanism procedure entails the suspension of the enforcement proceedings against the debtor, as well as his/her prosecution for the offences of non-payment of debts to the State and non-payment of social security contributions. However, this suspension does not cover the holding of any auction scheduled within three months of the submission of the application or any preparatory actions for the auction, such as the imposition of a seizure, by a creditor having a security interest (mortgage, mortgage lien, pledge). Ultimately, therefore, the suspension only covers preparatory acts of the auction carried out by the debtor's creditors who do not have security in rem. 

9. How does the out-of-court procedure proceed after the debtor has filed a petition?

After the debtor has submitted an application, the financial institutions may - but are not obliged to do so - submit a settlement proposal to the debtor. The financial institutions have discretion both as to whether or not to submit a proposal and as to the content of any proposal submitted. If the proposal obtains the required majority, i.e. 60% of the total claims of the financial institutions, which includes 40% of the claims of the financial institutions with collateral security, a debt restructuring agreement is signed. Consequently, now in the new out-of-court system both the quorum and the majority in the voting of the proposal are determined only by the financing institutions and not by the State or the Social Security institutions.

10. On what conditions can a debt settlement agreement be concluded?

The basic condition for the signing of a debt settlement agreement is that the principle of non-deterioration of the creditors' position must be met, i.e. in simple terms, none of the creditors must receive less under the arrangement than they would have received if they had initiated enforcement proceedings against the debtor (see our article on this subject).  In fact, a ministerial decision is expected to be issued that will establish a calculation tool that creditors will be able to use and that will determine the terms of the restructuring agreement. It will essentially be an algorithm which, based on the data of each case (e.g. value of debtor's assets, amount of creditors' claims, collateral held by each creditor, debtor's cash flow, etc.) will calculate what amounts and within what period of time each creditor can receive. 

11. On what terms the State and the Social Security Institutions accept the debt restructuring agreement.

The State and the Social Security institutions accept the debt restructuring agreement under the following conditions:

Α) The contract has been approved by the requisite majority of the financing institutions.

B) The claims of the State and the Social Security Institutions do not exceed EUR 1 500 000.

C) The total of the claims of the financing institutions against the debtor exceeds the total of the claims of the State and the Social Security institutions in value.

(D) The State or the Social Security institutions must not receive under the contract less than the amounts they would receive if they were to initiate enforcement proceedings against the debtor.

E) The repayment of the amounts to the State or Social Security institutions may be made in up to 240 monthly instalments (instead of the 120 monthly instalments provided for in the previous out-of-court mechanism) in cash of at least EUR 50 each, and the granting of a grace period is prohibited. 

Under the same terms and conditions, the State or the Social Security institutions may enter into a bilateral arrangement with the debtor, even if the required majority of the financial institutions do not agree.

12. Can a debt to the State or Social Security institutions be written off?

As in the previous out-of-court mechanism, claims against the State and Social Security Institutions for interest, surcharges and fines can be written off. At the same time, even a basic debt to the State can be written off, but basic debts from withholding taxes (e.g. payroll tax, business fees, interest or dividends) or imposed taxes (e.g. VAT) cannot be written off, nor can debts from social security contributions. 

13. How does the restructuring agreement affect any co-debtors or guarantors?

A debt restructuring agreement concluded between creditors and the debtor does not in principle affect any co-debtors or guarantors, who remain liable on the same terms. In other words, even if the debt restructuring agreement provides for a partial write-off of the debt, the guarantor remains liable for the total amount of the debt as it would have been without the write-off. Therefore, they should also apply in parallel in order to have their own debts settled.

14. What is the consequence in the event of a breach of the terms of the debt restructuring agreement?

In the event that the debtor is in default of the payments provided for in the debt restructuring agreement, with the result that the total amount unpaid exceeds the value of three instalments or 3% of the total amount due, any creditor may terminate the agreement, resulting in the loss of the arrangement as far as that creditor is concerned. The debt restructuring agreement shall remain in force and binding on creditors who have not terminated it. 

15. How long does the out-of-court procedure have to be completed?

According to Article 16 of the Law, if no contract is signed between the debtor and creditors within two months of the debtor's application, the procedure is considered to be terminated as fruitless. The proceedings may be terminated earlier if the creditors reject the debtor's application or refuse to make a proposal to the debtor. The law, however, provides for the possibility of issuing a Ministerial Decision providing for the possibility of extending the time limit where the failure to comply with the time limit is not due to the fault of the party requesting it.

16. What is the instalment subsidy scheme?

Debtors who have either settled their debts or have not been in arrears for a period of more than 90 days may, under certain conditions, receive a subsidy for the repayment of loans secured by a mortgage lien or mortgage on their main residence. This subsidy is granted for five years and ranges from EUR 70 to EUR 210, depending on the debtor's family situation. The main conditions for receiving the allowance are as follows:

- The balance of his/her loan debt does not exceed 135,000 euros, increased by 20,000 euros for each additional member of his/her family, up to a maximum of 215,000 euros. 

- The loan has not been terminated or no year has elapsed since the termination. 

- There has been a reduction in the family income as specifically provided for by law and the debtor fulfils the conditions for the payment of the housing benefit, which are related to the amount of his monthly income, his real estate and his bank deposits. 

Β. Instead of an epilogue

The nature of the out-of-court debt settlement mechanism changed significantly with Law No. 4738/2020. The out-of-court procedure is now, alongside the individual procedure of the Code of Conduct for Banks, the first tool that a viable debtor wishing to have his or her debt settled can use. The value of recourse to it can be great. This short procedure may indeed lead to a compromise solution, and if the creditors refuse to make a proposal or if they make completely unrealistic proposals, this will be taken into account by the court in any subsequent dispute between the debtor and one or more of the creditors.

(for the differences between the old and the new out-of-court settlement mechanism see here)