4 Appeals Court Decisions that turn the forced collection of red loans by Servicers

Legal Insight

August 2022

George Psarakis LL.M. (mult.), PgCert

(republished from  Euro2day)

In the last few weeks, 4 decisions were published by the largest Courts of Appeal of our country, Athens (1858/2022, 3577/2022), Thessaloniki (494/2022) and Piraeus (467/2022), on an issue that concerns the majority of debtors of "red loans" (already since July 2021, the decision no. 909/2021 decision of the Supreme Court, which agreed with the above decisions but only at the level of reasoning and not at the level of resolving a specific dispute). Simply put, it was held that Servicers managing loans transferred through securitisation under the 2003 Act cannot proceed with enforcement actions (foreclosures, auctions, etc.) but neither can they issue payment orders or bring lawsuits. In particular, as stated in the decision of the Thessaloniki Court of Appeal No 494/2022: "The law, in the case of the transfer of claims for the purpose of securitisation as defined in Law no. 3156/2003, does not confer on the management company (with which the acquisition company is contracting) the status of a non-entitled or non-obligated party, even indirectly and without any express wording, so that the latter, as a non-entitled party, may, in accordance with the legislator's concession, bring actions and other legal remedies before the courts for the rights of the acquisition company, seeking legal protection in its own name, as it expressly does for the management companies under Law 3156/2003. 4354/2015 in Article 2 § 4 thereof". Moreover, in 2003, the possibility for Servicers to proceed with enforcement actions etc. was not provided for. because apparently the purpose of the legislator at that time was not the rapid collection of "red" loans but the financing of companies through the sale of receivables. Therefore, the above appellate decisions hold that when the Funds make use of the 2003 Act to purchase receivables, bypassing the stricter requirements of the 2015 Act, they must also bear the limited possibilities of judicial collection under the relevant law. 

We started months ago, in May 2021, where we wrote an article on "The paradox of the (non-)implementation of the law on "red" loans" (see here): 

In 2003, the Parliament passed a law concerning, among other things, the "securitisation of receivables" (Law 3156/2003). The aim was to adopt a framework for the financing of companies through the sale of their receivables. So instead of a company taking out a bond loan, for example, it sells part of its receivables to third-party investors. The law has since then been used almost exclusively by credit institutions for the pure purpose of restructuring their balance sheets. This law did not, of course, concern 'red loans'. On the contrary, in 2015, the procedures for passing the law on 'red' loans in Parliament began. MPs raise objections and proposals always in relation to the protection of borrowers, fearing an aggressive approach of foreign funds, etc. To this end, a special regulation is being adopted, including a special regulation on the obligation of the credit institution to negotiate with the borrower prior to the sale. Seven years after the adoption of the law on transfers of 'red' loans, practice has shown that the largest overwhelming volume of overdue loans is sold under the 2003 law instead of the 2015 law. But why do credit institutions prefer this 2003 law, which is already 19 years old, to the newer 2015 law, which was adopted specifically for this issue? Apart from some tax issues, a key reason for preference is the absence in the 2003 law of a requirement for a prior out-of-court invitation to the borrower and the guarantor before the sale of the loan to settle their debts. In other words, the very provision that Parliament passed to protect the borrower, mitigating the political cost of the then publicity about the sale of loans to funds, etc., is in practice being circumvented by credit institutions and funds. 

However, while the credit institutions and the Funds tried, with the assistance of their advisors, to circumvent the strict requirements of the 2015 law by using the 2003 law, the courts now come and "punish" this practice by depriving the Servicers of the 2003 law of any power to carry out enforcement actions. 

We had repeated the above in a recent article (see here), where we had mentioned the following: "The third issue that arises, and it is quite serious, is that of the possibility for Servicers to carry out enforcement actions (foreclosure, etc.) themselves on behalf of the respective Funds, when the transfer of the loan receivables has not taken place under the Red Loan Law of 2015 (Law 4354/2015), but under the Securitisation of Receivables Law of 2003 (Law 3156/2003). [...] If we accept this view, a serious problem is created in thousands of enforcement and accelerated auctions, since most transfers of "red loans" have not taken place under the 2015 law but under the 2003 law. Simply put i.e., if we accept the above view, in most cases the foreclosure of e.g. a property cannot be carried out by the Servicer but only by the Fund itself".

The question that naturally comes to the mind of every reader is this: and now what; will the loans transferred under the 2003 Act not be able to be forcibly collected through foreclosure etc.? There are three possibilities:

a) either at the level of the Supreme Court, and within the next few months, the opposite view will be supported (after all, there are already decisions of the Courts of First Instance published in 2022 that do not accept the positions of the above appellate decisions), 

b) either the Funds will change their strategy and the enforcement actions will be carried out by the Funds themselves by giving instructions to their lawyers (because these Court of Appeal decisions state that Servicers cannot carry out enforcement actions, but the Funds themselves can - in this case, however, major management problems arise), 

c) either the 2003 Law will be amended to add non-party powers to the management companies there as well (however, for the enforcement actions, the validity of which is still pending in court, it is doubtful whether the law can 'cure' them retroactively). 

Of course, until this issue is resolved, all enforcement actions on behalf of Servicers of loans transferred under the 2003 Act are pending and their validity will depend on which court hears the relevant appeal each time.