George Kefalas, LL.M. (mult.), Μ.Sc.
Summary: According to Law 4738/2020, reorganization was reintroduced as the main institution for corporate debt restructuring, especially due to the great flexibility in terms of the possibility of debt restructuring and debt cancellation, provided that the majority of creditors agree, as required by the law. However, there are limits to the possibilities for restructuring, based on the principles of non-deterioration of the position of creditors and the principle of equal treatment of creditors, which is under consideration here.
The law 4738/2020 (new Insolvency Code), as well as the previous Insolvency Code, stipulates that the ratification of the reorganisation agreement requires, on the one hand, that the principle of non-aggression of the position of non-consenting creditors is not worsened and, on the other hand, that the principle of equal treatment between these creditors is respected. The first of these principles has already been mentioned in a previous article (see here) and could be summarised in the following sentence: no creditor (other than those who object to the reorganisation agreement) can be placed by the agreement in a worse position than they would be in if the company were to go bankrupt and its assets were liquidated.
The second of these principles, which is the subject of this article, requires equal treatment of creditors (who again do not consent) who are in the same position. For example, can a company agree to repay the banks at interest and the State at interest? Can it agree that its suppliers will be paid in full while part of its debts to the EFKA will be written off? Or that it will grant a mortgage lien in favour of only one credit institution and no other creditor? These and other related questions will be addressed in this article.
2. Which creditors are in the "same position"
According to par. 3 of article 54 of Law No. 4738/2020: 'The court shall confirm the reorganisation agreement if, in addition to the conditions set out in par. 1 or 2, as the case may be, the following cumulative conditions are met: [...] (d) The reorganisation agreement treats creditors in the same position on the basis of the principle of equal treatment'.
The concept of 'equal treatment' is easy to understand. Indeed, if, for example, there were two creditors in exactly the same position (e.g. two unsecured suppliers equally important for the operation of the company, both of whom had the same amount of debt owed to the company), it is obvious that equal treatment would require that the exact same terms of repayment of the debt be agreed for both of them.
The interpretatively difficult and ultimately differentiating factor is to decide when two creditors are in the same position - so they should be treated the same - and when they are in different positions - so their treatment may vary.
The law itself, however, explicitly mentions some cases where a departure from equal treatment is permitted, stating that: "Deviations from the principle of equal treatment between creditors are permitted for an important business or social reason specifically set out in the court's decision or if the affected creditor consents to the deviation. By way of example, favourable treatment may be accorded to claims of creditors of the debtor's business, the non-fulfilment of which would materially harm the reputation of the debtor or the continuation of the business, claims the payment of which is necessary for the maintenance of the creditor and his family, and labour claims.
The courts have repeatedly ruled on the conformity of terms of reorganisation agreements with the principle of equal treatment of creditors, thereby defining which terms can be compatible with a reorganisation and which cannot.
3. Equal treatment of creditors through the case law of the courts
Knowledge of the correct application of the principle in question - as well as of the principle of no deterioration in the position of creditors - is very important for the formulation of the terms of the reorganisation agreement. The following is a case study of permissible deviations of the agreement from this principle, i.e. cases where discriminatory treatment of a creditor has been found to be justified:
a) Secured and unsecured creditors
It is generally accepted that creditors who have a special privilege in enforcement (i.e. whose claim is secured by a mortgage, mortgage lien or pledge) are in a different position from those who have a general privilege (e.g. the State or the National Insurance Fund), as well as from unsecured creditors (so-called 'insolvent' creditors). Thus, for example, it is generally accepted that creditors who have a special privilege in enforcement (i.e. whose claim is secured by a mortgage, mortgage lien or pledge) are in a different position from those who have a general privilege (e.g. the State or the National Insurance Fund), as well as from unsecured creditors (so-called 'insolvent' creditors). 5177/2017 of the Athens Court of Appeal ruled that the clause providing for interest-bearing repayment of debts to banks and interest-free repayment of debts to the State and the EFKA did not violate the principle of equal treatment of creditors because the banks "are effectively secured by mortgages on the applicant's hotel complex".
Similarly, in judgment No 132/2020 of the Court of First Instance of Nafplio, it was held that the preferential treatment of credit institutions and employees in relation to the claims of farmers was justified because credit institutions have a special privilege (mortgage notes) and employees have a general privilege of a higher order than farmers.
In the same vein, the Rethymnon Court of First Instance decision No 11/2020 considered a valid term of the reorganisation agreement which provided for repayment of the banks' claims in 10 years, while the claims of the State and EFKA in 15 years, 'since there is no question of unequal treatment between EFKA, which belongs to the category of generally privileged creditors, and the contracting financial institutions, which are creditors with letters of credit'.
The same judgement was reached in Decision No. 233/2019 of the Athens Court of First Instance, in which: 'The claim of [... ] EFKA's claim that the reorganisation agreement to be ratified violates the [principle of equal treatment of creditors], because it [EFKA] will be partially repaid in full and with a reduction of additional fees, while the banks will be paid in full, must be rejected as unlawful, because the principle of equal treatment applies to creditors in the same position, which is not the case here, since the banks are specifically preferred creditors of the applicant, since they hold security over assets of both the applicant and its shareholders, while the State and the EFKA are generally preferred creditors of the applicant'.
b) A serious social reason (in particular with regard to labour claims)
According to an explicit provision of the law, deviations from the principle of equal treatment of creditors are permitted if there is a good social reason, and the law itself mentions the example of labour claims as an example. Thus the judgment in Case No. 132/2020 of the Court of First Instance of Nafplio, ruled that an agreement providing for a one-off repayment of the employees' claims and repayment of the claims of the Greek State in 12 monthly instalments was justified because 'there is a serious social reason for the one-off repayment of the claims of the applicant's employees, as the financial viability of the applicants and their families is directly at stake, while the payment of the claims in instalments to the main intervener will not cause it any corresponding damage or threaten its viability'.
c) Business reasons
As mentioned above, business reasons may justify deviations from the principle of equal treatment of creditors. Indicative is the decision No. 20/2017 of the Court of First Instance of Corinth, which held that: "[...] the principle of equal treatment is in no way violated: the term of the agreement under which the claims of non-consenting suppliers with balances of less than EUR 100,000 will be repaid in full is imperative for both business and social reasons, as these non-contracting creditors for whom no reduction is provided are suppliers of the applicant, the maintenance of cooperation with whom is necessary for the continuation of the operation of the applicant's business".
d) Continued cooperation with "critical suppliers"
Very often companies maintain partnerships with several suppliers, some of which are more important for the continued operation of the business and others less so. It has been held in case law that the criticality of maintaining cooperation with a key supplier justifies discriminatory preferential treatment of that supplier over others. Thus, according to the decision No. 185/2016 of the Athens Court of First Instance, the principle of equal treatment of creditors is not violated by the distinction of creditors' suppliers with critical and non-critical "taking into account that the latter are suppliers that do not supply products absolutely critical for the continuation of the business activity or that the applicant could easily find another supplier for the supply of the same products or that the continuation of cooperation with them is not expected. In other words, different treatment for them on business grounds is justified.
e) The provision of new financing by banks
Another reason that has been found to justify more favourable treatment of credit institutions than other creditors is the possible continuation of the financing of the firm in reorganisation, in which case the deviation from equal treatment is justified on the basis of an important business reason.
f) the need for the creditor's involvement in the ratification of the reorganisation agreement
The fact that a creditor's consent is necessary in order to obtain the necessary majority to ratify the reorganisation agreement has also been found to justify discriminatory treatment in favour of a creditor. In this regard, the Athens Court of First Instance decision No 289/2015 held that: 'In particular, the more favourable treatment of the creditor banks [...] is justified for serious business reasons. In particular, these are the applicant's main creditors, without whose consent the final agreement could not have been reached'.
A similar judgment was made in the judgment of the Syros Court of First Instance No 2/2018, which, in relation to the clause providing for preferential treatment in favour of EFKA, held that: 'That provision cannot be considered to constitute a breach of the principle of equal treatment of other generally preferential creditors and of creditors on a letter of credit, since EFKA, as stated above, is the largest creditor of the applicant [...] and therefore without its participation it would not have been possible to collect the 60% of the claims and [...] the agreement could not have been concluded'.
g) The need to ensure the viability of the business
Lastly, some decisions, in order to justify the less favourable treatment, in particular for the State and the EFKA, are satisfied with the fact that such less favourable treatment is necessary for the rescue of the firm. Indicative is the decision 37/2018 of the Court of First Instance of Alexandroupolis, in which: "Therefore, in the present case, which provides for the repayment of the entire outstanding capital, with capitalization of the surcharges, without interest, to EFKA and ETEAEP, this Court finds that in this way the principle of equal treatment of creditors is not violated, because of the above-mentioned important business reason, namely the rescue of the applicant company's business".
4. Instead of an epilogue
The principle of equal treatment, together with the principle of non-deterioration of the creditors' position, are the two basic principles that set limits to the freedom to formulate the content of the reorganisation agreement. On the basis of the above, it can be concluded that more favourable terms can be agreed for the benefit of the banks that have a security interest, for the benefit of the firm's main supplier necessary for the firm's continued operation, for the benefit of the employees or for the benefit of its main creditor, whose consent is necessary to ratify the agreement. The correct application of these two principles is crucial for the final ratification of the agreement by the court.