George Kefalas, LL.M. (mult.), Μ.Sc.
Summary: Two recently adopted ministerial decisions have defined details of the debt settlement procedure through the new out-of-court mechanism, in particular the factors taken into account by the so-called first calculation tool (referring in particular to the State and Social Security institutions), through which the automated proposal for the settlement of the applicant's debts is derived. This article presents factors and elements taken into account in the context of the adjustment through the contested institutional framework.
In previous articles we have presented the institutional framework of the new out-of-court debt settlement mechanism, as well as the differences between the current framework and the previous out-of-court mechanism of Law no. 4469/2017 (see here). The new out-of-court mechanism entered into force already on 1.6.2021, so every debtor has the possibility to submit an application via the relevant online platform. However, after the entry into force of the new law, two very important ministerial decisions on the procedure of the out-of-court mechanism were issued, pursuant to article 71 of Law no. 4738/2020. These decisions largely clarify the procedure of the out-of-court mechanism, regulating important technical details, in particular regarding the so-called "computational tool", through which proposals for the settlement of the applicant's debts will be formulated automatically, but also on other issues of this new procedure. This article takes a closer look at the process of the new out-of-court debt settlement mechanism, in particular the issues of the assessment of the applicant's viability and the parameters taken into account by the calculation tool in order to derive the automated debt settlement proposal. The institutional framework was fully crystallised a few days ago with the adoption of the CPR on the conditions for the accession of financial institutions.
2. The condition of the viability of the applicant debtor
According to the provision of Article 5(5)(a), the viability of the debtor's assets is a prerequisite for the viability of the debt. 1 of Law no. 4738/2020: "The out-of-court mechanism is intended to provide the participating creditors with a functional environment for formulating proposals for the settlement of the debtor's debts and avoiding the risk of the debtor's insolvency, at the request of the debtor or on their own initiative." Besides, the procedure of the out-of-court mechanism, as well as the procedure of reorganisation, is included in the second part of Law No. 4738/2020, which is entitled "Insolvency Prevention Procedures". The provision of para. 2 of Article 14 expressly states that, if it is a legal person or a natural person - entrepreneur, the debt restructuring agreement must make the debtor's business viable, while if it is a natural person - non-entrepreneur, it must prevent its insolvency. A very important condition for being subject to the out-of-court procedure is that it must ensure the viability of the subject company. Therefore, companies that are inactive and have no activity cannot be subject to the procedure under Articles 5 et seq. of Law No. 4738/2020.
Furthermore, Ministerial Decision No 66468 EX/2021 defined the factors to be taken into account by the financing bodies, the State and the Social Security bodies in order to assess the viability of the enterprise or the natural person submitting the application. Thus, on the basis of the above decision, where the application is submitted by a natural person - a non-entrepreneur, the following elements are decisive:
- The disposable income.
- The availability of the available resources; the available employment status, e.g. whether the person is employed or unemployed.
- The value of his/her real estate, as shown by the ENFIA certificate or entries in the books of financial institutions, and the value of its liquidation value.
- The amount and type of debt owed to the banking sector, e.g. whether it is owed by a primary debtor or guarantor, whether it is a mortgage or consumer loan, etc.
- The existence of a guarantor, if any, in respect of the person's debts to financial institutions and other lenders.
- The person's debts to other institutions (public authorities, social security institutions, third parties).
- The amount of reasonable living expenses.
- The history of the debtor's previous transactional behaviour, e.g. whether the debtor has previously restructured his/her debts through out-of-court proceedings, reorganisation, over-indebted individuals, etc.
- The ability to repay, as indicated below.
In the case of an enterprise, whether a sole proprietorship or a partnership, further elements are taken into account, such as:
- The financial data of the business (assets, liabilities, equity, turnover, future cash flow).
- A business plan, the preparation of which is compulsory if the company has a turnover of more than EUR 2 500 000 (in accordance with the expected CBA on the accession of financial institutions).
- Financial history, i.e. any previous restructuring and debt rescheduling of the company.
- The situation and prospects of the debtor company's sector of activity.
3. The calculation tool of article 71 of Law No. 4738/2020
Already since the publication of Law no. 4738/2020, Article 71 of the latter provided for the possibility of using, in the context of the out-of-court mechanism, a calculation tool, on the basis of which automated proposals for the restructuring of the applicant's debts would be exported. The recent Joint Ministerial Decision No 67360 EX/2021 clarified the specifications of this computer tool. In summary, the following can be mentioned as regards the calculation tool:
i) If financial institutions are involved in the procedure, it is at their discretion whether to make use of the tool, to submit their own proposal for debt settlement or, finally, not to submit any proposal at all and the procedure is terminated as fruitless. On the contrary, in the case of the bilateral procedure with the State and/or the Social Security Institutions (SSIs), the proposal is extracted through the tool, provided that it is previously considered to ensure the viability of the business or to prevent the insolvency of the individual.
ii) The calculation tool takes into account the income, debts, assets and liabilities of the applicant in order to calculate the Maximum Repayment Capacity (MAPC - the maximum amount that the debtor can repay to all his creditors) and the Residual Repayment Capacity (the maximum amount that the debtor can repay to the creditors that are covered, i.e. financial institutions, the State and the Social Security Fund).
iii) In addition to the NPL, the liquidation value of the debtor's assets and the classification of creditors in the liquidation proceeds under the rules of the Code of Civil Procedure shall be taken into account.
iv) The repayment capacity of the debtor can be determined according to the CRA in three ways: on the basis of the debtor's tax information, on the basis of the monthly repayment capacity declared by the debtor in his application or on the basis of the creditor's minimum recovery amount. Of these three values, the highest value is taken into account by the calculation tool. In practice, the repayment capacity based on the minimum recovery amount will be taken as the basis. Then, the repayment capacity based on the debtor's tax data will be considered. If the financial results of the last year were not good (e.g. because the debtor's business was closed due to the pandemic), but the debtor expects an increase in the next period, he can declare the monthly repayment capacity that he calculates and it is up to the creditors to judge whether the debtor's declaration is reasonable and realistic.
v) In order to calculate the repayment capacity of the debtor legal person on the basis of its tax data, the income (as the balance of the deduction of tax from the earnings before tax, interest and depreciation), the debtor's cash (as the balance of the deduction of the necessary working capital of the enterprise from the amount of deposits) and the net present value of any readily realisable assets, i.e. any financial instruments of the debtor, shall be taken into account. The necessary working capital is defined as 9% of the turnover of the last year.
In the case of a business - natural person, any income received by the natural person outside the business activity as well as the reasonable family living expenses and the debtor's contribution to them shall be taken into account. Of the resulting amount, 80% is allocated to meet the obligations of the natural person entrepreneur and 20% is foreseen to be allocated for contingencies and extraordinary expenses.
Similarly, the same applies in the case of a natural person who is not a trader. In particular, account is taken of the individual's after-tax income, his/her deposits (minus EUR 2,000 for a one-member household, plus EUR 1,000 for each additional family member up to EUR 5,000), his/her readily liquid assets, and his/her contribution to the reasonable living expenses of the family. As in the case of the natural person - entrepreneur, 80% of the resulting amount is allocated to service obligations, while the remaining 20% is deducted for unforeseen and extraordinary expenses.
Thus, the total of the liquid assets and the income of the person are taken into account for the calculation of the MFI, minus the expenses necessary for his/her survival, i.e. the necessary working capital in the case of the legal person and the reasonable living expenses in the case of the natural person.
Important is the following: On the basis of the methodology described above, the so-called 'first calculation tool' operates, which is the calculation tool used for the arrangements of debts to the State and the tax authorities. By contrast, the so-called 'second calculation tool' is the calculation tool used by the banks, which also takes into account the property and repayment capacity of the applicant's guarantors and other co-debtors.
4.As regards the liquidation value of the debtor's assets
The same EIS also laid down details on the determination of the value of the debtor's assets in the context of the use of the calculation tool. Thus, the calculation tool takes into account, depending on the nature of the asset, the following:
- Real estate assets: the higher of the taxable value as derived from the ENFIA certificate and the commercial value as derived from the entries in the books of the financing institutions is taken into account.
- Movable assets: With regard to movable assets of small value (< €10,000), the value declared by the debtor in his application is taken into account. In the case of high value immovable property (≥ €10 000), the higher of the market value resulting from a report drawn up by a certified valuer within the last 12 months, the value recorded in the books of the financial institution which has insurance on the movable property and the insurable value of the movable property resulting from a valid insurance contract is taken into account.
- Cars, boats, aeroplanes, paintings, collections of works of art, jewellery, etc.: With regard to these assets in particular, account is taken in principle of the value indicated in an insurance policy in force and, if the movable is not insured, the value is determined on the basis of the above in relation to other movable property.
5. Other principles and final proposal submission using the calculator.
Once the NPL and the value of the debtor's assets have been calculated, the claims of all creditors (and not only those whose debts are subject to the out-of-court mechanism) are classified, the final repayment amounts are determined and the instalments to the creditors involved are set. It should be noted that the interest rate of the arrangement used by the automated solution is Euribor + 5% for debts to the State and the social security funds and Euribor + 3.25% for secured claims and Euribor + 4.5% for unsecured claims. The settlement proposal resulting from the calculation tool is always in line with the principle of non-worsening of the position of creditors, i.e. no creditor is placed in a worse position than it would have been in the event of enforcement against the debtor. In particular, as regards the regulation of debts to the State and the Social Security Fund, the more specific rules of Article 22 of Law No. 4738/2020 and Article 3 of the Administrative Instruction No 66468 EX/2021. In summary:
- No basic debt from imposed and withheld taxes and social security contributions shall be written off.
- The write-off of basic debt may in no case exceed 75 %.
- Repayment of debts to the State and the Social Security Fund is made in monthly instalments of at least EUR 50, with interest at Euribor + 5% and up to 240 instalments.
- In the event that there are already regulated debts to the State or the social security funds, the total amount of the regulated debts, as it would have been if the regulation had been terminated and the relevant benefits had been lost, shall be taken into account for the formulation of the restructuring proposal. The loss of the previous arrangement shall only result in the conclusion of a new debt restructuring agreement with the institution concerned.
6. Instead of an epilogue
With the adoption of the ministerial decisions, the new framework for the out-of-court settlement mechanism has now been sufficiently specified so that debtors are now aware of the procedure and its specifications before they submit their application. Therefore, viable debtors can enter the process and expect a settlement proposal that is a function of their ability to repay and the value of their assets, and in the case of the arrangement with the financial institutions, both the assets and the ability to repay of the guarantors/co-debtors. The disadvantage of the whole procedure remains that the participation of the financial institutions in the procedure is at their sole discretion.