George Psarakis LL.M. (mult.), PgCert
(republished from www.agronews.gr)
Summary: This note provides legal information on the latest developments regarding the "red" loans of ATE YEE (Agricultural Bank of Greece under Special Liquidation).
By a relevant decision of the Bank of Greece in 2016 (EPATH 182/1/4.4.2016), all credit institutions under special liquidation - "SSS" - passed under the control of the limited liability company "PQH Eniaiaia Special Liquidation S.A." which is a consortium of PwC Business Solutions S.A., Qualco S.A. and Hoist Kredit Aktiebolag. Among these institutions was the Agricultural Bank of Greece S.A. in special liquidation. Several articles have been written about the 'red' loans of ATE and a number of court decisions have been published. However, these issues continue to worry borrowers - mainly agricultural businesses - because in the absence of a uniform, clear and 'clean' policy, solutions are necessarily provided in the courts.
2. Is it possible to negotiate with ATE YEE?
Already since the beginning of 2015, the Code of Conduct for Banks of Law 4224/2013 has been implemented. The object of the Code is the adoption of specific rules in the negotiations between the bank and the borrower for the settlement of loan debts. Specifically, the General Principles of the Code provide that "The Code establishes general principles of conduct and adopts best practices, which aim to strengthen the climate of trust, mutual commitment and the exchange between the borrower and the institution of the necessary information in order for each party to be able to weigh the benefits or consequences of alternatives for the servicing (settlement solutions) or final settlement (final settlement solutions) of loans in arrears with the ultimate aim of achieving the best possible outcome. By decision 221/2/17.3.2017 of the Credit and Insurance Committee of the Bank of Greece ("CICC"), it was now explicitly stipulated that credit and financial institutions in special liquidation, including ATE YEE, apply the Code. The relevant provision has already been passed and in EPATH 221/17.3.2017 where it is stated that "The special liquidator shall make every effort to cooperate with the debtor and guarantors in good faith and using the Code of Conduct, in accordance with the provisions of EPATH 221/2/17.3.2017".
In particular, there is an obligation to initiate the procedure at the initiative of the ATE YEE only for those loans that have not been terminated by 1.1.2017, while for those already terminated, the borrower can trigger the application of the Code by voluntarily sending the ATE YEE the financial data provided. The practical importance of the above decision is that ATE YEE can no longer proceed with the termination of loans without first sending the defaulting borrower the first letter of the Code, informing him of his overdue debts and his obligation to submit his financial data within 15 working days. In summary, after receiving and evaluating the borrower's financial data, the ATE YEE will have to submit a written proposal for debt adjustment, to which the borrower will have the right to submit his own counter-proposal. To this counter-proposal, the ATE YEE is obliged to respond with a second proposal for adjustment. Only after this procedure and the failure to reach a compromise (drafting of a settlement agreement), can the ATE YEE terminate the loan and take legal action to enforce its claim. This, however, only if the refusal to accept the borrower's counter-proposal is justified on the basis of the financial data submitted; otherwise, in the event of an unjustified rejection, any termination may be challenged as abusive.
The possibilities of settling the claims of the ATE YEE are mentioned in the 221/3/17.3.2017 decision of the NCCA. The arrangement agreements that the special liquidator (PQH) can enter into include, but are not limited to, extension of the repayment period, granting of a grace period, agreement of periodic payments, interest rate variation and deduction of interest and costs of receivables from loans in temporary or permanent default. For the selection of any appropriate arrangement solution, certain elements are explicitly defined which the special liquidator must take into account when acting without the consent of the Special Liquidation Committee of the Bank of Greece, i.e. for debt arrangements up to €250,000. The following are typical: the grace period for the payment of the principal of the debt cannot exceed 12 months; arrangements that provide for the possibility to transfer part of the outstanding principal at maturity (balloon payment) are only possible when collateral is provided, the duration of the arrangement can be extended for up to 10 years for business and consumer loans and up to 20 years for mortgages, the conversion of mutual accounts into regular loans can result in an arrangement of up to 10 years, the write-down of the total claim is possible only to the extent that it relates to interest charges, etc. However, it is provided that with the agreement of the Special Liquidation Committee of the Bank of Greece, it is possible to conclude an arrangement where the terms of the arrangement deviate from the above restrictions (e.g. repayment of a business loan in 20 years, write-off of part of the principal, etc.), provided that there is sufficient documentation from the special liquidator that the arrangement leads to beneficial and sustainable results.
3. Specific legal framework for the protection of debtors
The above framework for settlements and reconciliations does not apply where there is a specific legislative framework for debt adjustment/settlement. This is the case, for example, in the application of the new Bankruptcy Law (extrajudicial mechanic, bankruptcy, reorganization), the special legislative framework for public guarantee loans or special categories of loans that are subject to mandatory regulation on the basis of regulatory provisions (see, for example, Law 3816/2010, Law 4224/2013, Law 4161/2013). 2(c) of Law 4235/2014 provides for the following: "In any case, however, the amount of the total amounts paid (those already paid and those to be paid) may not exceed 120% of the loan principal, provided that the total of the aforementioned claims of any kind of the Bank arising from the loan does not exceed twice the original principal, and is limited to twice the loan principal received, if the total is more than twice, at the time of the entry into force of this Article". Therefore, the total amount paid by the farmer borrower (both those already paid and those to be paid) cannot in most cases exceed 120% of the loans under the contract in question. Recently, however, a decision of the Athens Court of First Instance, No. 2232/2020, was issued, which rejected a relevant claim with the particularly problematic reasoning that this law only concerns loans and not credits through a mutual account. In any event, the application of the law to interest-bearing loans was implicitly accepted.
4. What are the possibilities of challenging the debt in court?
There are, however, not a few occasions when the loan agreements under which ATE YEE is asserting its claims are rife with defects and abusive - invalid terms. There will also be several occasions when the specific legislative framework for 'panopticon' will be called into question. Finally, there are many other pieces of legislation which protect bank debtors and which also apply to the loans of SIBs. In particular:
Α. Deficiencies in the Loan Agreement - Abusive Terms - Invalid Terms
The legal defects and unfair terms that can be found in a loan agreement are numerous and are due either to a deliberate choice by the credit institution or to the negligence of its employees. For example, there have been cases where, in the absence of an agreement on an essential element of the loan agreement, namely the interest rate, the loan agreement was allegedly not drawn up. What happened was that the responsible official of the EIB did not ensure that the interest rate (base and spread) was entered in the loan agreement. In this case, not only is it not possible to enforce any alleged debt through the procedure of a payment order, but it can be argued that there is no agreement at all due to the lack of concurrence of the declarations of intent in an essential element.
We have also emphasised in an earlier briefing note that a clause allowing the interest rate to be adjusted based on "changes in bank funding conditions" or "the cost of money" is not clear and transparent. The same applies to wording which makes the adjustment dependent on 'changes in the reference rate' or on 'changes in the cost of money' or 'the general level of interest rates'. Moreover, Act No 2501/2002 of the Governor of the Bank of Greece on 'informing persons dealing with credit institutions of the conditions governing their transactions' provided that the minimum obligation on the part of credit institutions for lending transactions also concerns '....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 the main factors, any change in which would have an impact on the interest rate, the period of validity of the reference rate and the general interest rate'.
It has been observed that, only a few years before the Bank was placed in special liquidation and only non-performing loans were kept in its portfolio, the Bank applied abusive conditions to the adjustment of interest rates on a large scale. To illustrate this change in the indexation clause, an example of a loan agreement of the ATE before and after the modification is given:
Before the amendment
'The loan is fixed at a variable interest rate (total or contractual interest rate) of 5,61 % (consisting of the sum of the Reference Rate, currently 0,71 %, and a margin surcharge of 4,90 %) plus the contribution under Law No 128/75, currently 0,60 %. The Reference Rate, which is agreed to be applicable herein, and whose definition is set out below, is the Euribor period interest rate".
Following the amendment
"The loan shall bear an annual floating interest rate of 6.55% from the date of signature of this agreement, in addition to any applicable contributions imposed by law (currently a contribution under Law 128/75, amounting to 0.60%). The total annual floating interest rate shall consist of the base rate, applicable to this financing category, of 6.55% and the margin of mark-up. [...] The Bank, after re-evaluating the above elements, is entitled to unilaterally increase or decrease the mark-up margin. [...] The Bank has the right to periodically adjust the base rate without the cooperation of the Creditor. The Bank will adjust the interest rate each time, after taking into account and weighing up the cost of money...'.
In this way, the bank in question was able to charge particularly high interest rates in an apparent attempt to maximise its income a few months before it was placed in special administration. It is significant that a loan where a variable annual interest rate of 8 % was stated in the contract was applied to a loan which, following unilateral adjustments on the basis of the abusive clause, which the borrower was unable to monitor, was subject to an interest rate of 15 % and 16 %. If one considers that in the event of default by the borrower, the default interest rate of 2,5 % (which is the maximum that the credit institution can apply and the one that it always applies in practice - PD/TE 2393/1996) is added to the contractual interest rate, it becomes clear that the debt can reach unmanageable levels in a short period of time. Recently, for example, it was decided in judgment no. 3312/2020 of the Athens Court of First Instance for a loan of ATE YEE that we handled, that a corresponding interest rate fixing clause is abusive and therefore invalid: "This clause is held invalid as being abusive, on the one hand, to the extent that it provides for non-reasonable criteria for the adjustment of the applicable interest rate, since its content implies that the Bank's decision, taken without the effect of reasonable criteria for changing the contractual interest rate provided in advance, is sufficient for this purpose, such as the 'risk assumed by the holder', 'general product risk', 'market and competitive conditions', always combined with the condition of a change in the European Central Bank's main intervention rate, as shown in the above-mentioned major point (I6).
Β. Specific legal framework for 'pawnbrokers'
At the same time, because of the generally old nature of the credit agreements in question, questions often arise as to whether the debt should be recalculated on the basis of the legal provisions on 'floor rates'. 5 of Law 3259/2004, the total amount of the debt may not exceed twice the amount of the capital received in each case. The provisions of Law 3259/2004 'generally consist of limiting the total debt to twice or three times (for farmers) the capital paid and deducting from this amount the payments already made' and '... the limitation of the total debt ... covers not only debts already due, but also debts arising from loan or credit agreements concluded after the entry into force of Article 39 above ...'. In other words, for all loans, irrespective of when they were contracted, a ceiling was introduced on the total outstanding debt, which may not exceed three times or, where appropriate, twice the amount of the capital granted, from which all payments, not only those made up to 4 August 2004 but also those made thereafter, are then deducted. To the extent that the amount owed exceeds these multiples, it shall be deemed to be partially (or even fully) written off by law.
The purpose of the provision of Article 39 of Law 3259/2004 is to address more effectively the problem that had arisen due to the excessive burden of debtors with multiple debts in relation to their original debt, due to the combination of high interest rates and the frequency with which overdue debts are compounded. Therefore, the debt of a farmer or an agricultural enterprise (not only natural persons but also legal entities that are primarily farmers, therefore both partnerships and limited liability companies or agricultural cooperatives etc. - Plenary Session of the Supreme Court 4/2014) cannot exceed twice the amount of the paid capital by deducting from this amount the payments that have already been made.
Particular reference should be made to the allegations usually made by the ATE YEE that i.e. the credit agreements were in the form of a mutual account and not a loan agreement. This is a point that the ATE has been trying hard to argue in court in order to influence the determination of the maximum amount under the 2004 Act: the double in the case of a simple loan agreement is calculated on the amounts paid by the ATE, whereas in the case of a credit agreement through a current account on the amount due at the time of the last disbursement; the difference between the two cases can therefore be quite large. A number of court decisions have already led us to the conclusion that the ATE contracts at issue do not in most cases constitute credit agreements through a current account, but simple loan agreements. (in particular, e.g. the judgment in Case No. 2632/2008 of the Athens Court of First Instance held that 'the relevant credit agreements were loan agreements and not mutual account agreements, irrespective of the classification given to them by the parties, since, there was no provision that the relevant letters of credit would lose their autonomy and the defendant bank's claim would arise from the resulting balance, and the open current account referred to therein for monitoring the loans in the debtor's sub-account had the meaning of a simple current account, since the keeping of an account which, according to the rules of accounting, shows the partial payments made by each party, of which the payments made by one party constitute payments against the claims arising from the payments made by the other party, which are created because their transactions were not settled immediately, does not constitute a current account but is in the nature of a simple transfer account'; the same is repeated in the judgment in Case C-152/99 (1 ). 10/2019 of the Thessaloniki Court of Appeal and many other decisions. Only recently, the Supreme Court, in its decision No 97/2020, upheld the decision No 4839/2013 of the Athens Trial Court of Appeal, which had ruled on the above, confirming the classification of the contracts in question as loan contracts).
As to what is usually claimed by ATE YEE that the borrowers allegedly had to apply for the application of Law 3259/2004, it should be stressed that the application of this law takes place independently of the borrower's application (see the relevant decision of the Supreme Court: "Furthermore, it follows from the same provisions cited above that the law itself regulated independently and completely both the conditions and the amount of the ex lege accelerated adjustment of interest debts. Therefore, the adjustment of the debts is available as of right and no other condition is required for its activation, in particular the timely submission of an application by the debtor to the Bank'). In other words, the write-off is automatic and occurs as soon as the debt exceeds the respective threshold.
C. Prescription issues
It happens quite often in the case of ATE YEE loans that limitation issues arise. This is because the earlier arrangements in particular were made in the form of interest-bearing loans (the ATE collected all the old debts and signed a 'arrangement' contract with the borrower, under which the debt was agreed to be repaid in individual - annual or monthly - instalments). However, the limitation period for each instalment of an interest-bearing loan is not 20 years, as is the case with the general limitation period for claims arising from the loan, but 5 years. It is only after the loan is terminated that the limitation period becomes 20 years. However, the following paradox occurs with ATE loans: sometimes, due to the workload of the credit institution, the right of termination is not exercised in time and sometimes the relevant contracts do not even contain a clause granting the bank the right to terminate. One such case, for example, where no such termination clause was provided for by the credit institution, was that of the settlements made on the basis of the conditions laid down in Decision No 4216/B/269/07.02.2001 of the Minister of National Economy and Finance on the settlement of debts of livestock and poultry enterprises for their reorganisation. In these contracts there was no provision for termination of the loan but only an obligation to pay the individual annual instalments. The provision in an earlier law extending the limitation period for all claims of the ATE to 20 years has already been declared unconstitutional.
4. Final remarks
Finally, therefore, as regards the loans of ATE YEE, it may be necessary to resolve the dispute through legal proceedings. YEI Credit Institutions, including ATE YEI, will find it difficult to accept the existence of illegal charges, abusive terms or even the application of the specific legislative framework for "panopticon" loans, citing e.g. the lack of consumer status on the part of the borrower, the lack of agricultural status with regard to the above application of Law 4235/2014, etc. In fact, the discretion of the special administrator (PQH) to draw up compromises, as noted above, is limited compared to the administrations of the credit institutions in operation, making it even more difficult to reach a beneficial compromise between a borrower, who raises valid objections to the debt, and the credit institution.