George Kefalas, LL.M. (mult.), Μ.Sc.
(republished from capital.gr)
The platform of the out-of-court debt settlement mechanism of Law No. 4738/2020 has undoubtedly come a long way since its launch on 1.6.2021, with significant improvements having taken place. Despite the fact that the process has been simplified to a significant extent, it has not been fully understood by debtors wishing to use the platform, while in practice problems still arise, which the debtor cannot diagnose in advance. In this article we simply try to answer some questions from debtors about the procedure and the way to settle debts, as well as problems that may arise in practice when applying.
More than a year ago, on 1.6.2021, the electronic platform of the new out-of-court debt settlement mechanism of the law of Cyprus was launched. 4738/2020. The new platform, even before its launch, had created high expectations among debtors, as it promised arrangements in up to 240 instalments for debts to the State and the Social Insurance Institutions (SSIs) and up to 420 instalments for debts to financial institutions (banks and management companies - servicers), as well as an easy-to-use functional environment for submitting the application.
The reality, however, at least during the first months of operation of the platform, rather disappointed its users, due to the significant operational problems of the platform itself, but also due to the solutions often provided by the computing tool, which did not always satisfy debtors. Thus, entire icons disappeared, correct entries were rejected by the platform as incorrect and corrections were requested, and for months debtors could not click on the option to finalise the application. Today, however, many of the platform's operational problems have been finally resolved, making the application process much more user-friendly. And according to a briefing given by the Minister of Finance on 20.10.2022 before the Standing Committee on Economic Affairs, with the participation of executives of banks and debt management companies, the institution of out-of-court is undergoing continuous work to find ways to increase the participation of debtors and the approvability of settlement proposals.
Based on the statistics published by the Special Secretariat for Private Debt Management (SGMD), the following results emerge: By September 2022, of the total number of applications that have been finally submitted, applications representing 42% have been assessed and a proposal for settlement has been made to 51% of them. A much higher percentage of settlement proposals is made in the bilateral procedure (only with the State and/or with the FIU) than in the multilateral procedure. But also the acceptance of proposals by debtors in the case of bilateral schemes is significantly higher than in the case of multilateral schemes.
In this article we will try to shed light on the out-of-court mechanism process through the answers to some key questions and based on the experience gained from more than one year of operation and use of the platform.
1. In how many instalments can I settle my debts in the new out-of-court mechanism?
The answer to this question depends on many factors. Since the launch of the platform, it has been reported that the regulation can reach 240 instalments, with regard to debts to the State and Unified Social Security Funds (FKA), and 420 instalments, with regard to debts to financial institutions (banks, management companies, etc.). However, while the regulation of debts to public institutions can indeed reach 240 instalments, with regard to financial institutions, there are more specific factors that determine the maximum possible duration of the regulation. Thus:
- Debts of individuals to financial institutions can be regulated in up to 420 instalments, provided that they are secured by a special privilege (mortgage, mortgage lien or pledge).
- Up to 240 instalments are available for legal persons' debts if they are secured by a special privilege and for natural persons' debts if the bank has no security.
- Finally, the debts of legal persons are settled in up to 180 instalments where there is no collateral.
The decisive factor for the maximum duration of the arrangement is therefore (a) whether the debtor is a natural or legal person and (b) whether or not the debt is secured by a special privilege.
2. What will ultimately determine the number of instalments of the arrangement resulting from the platform?
It is not necessary that every debtor who applies to the new out-of-court mechanism will receive a proposal for a settlement with the maximum possible duration, as explained in the question above. Rather, the number of instalments of the proposal is a function of the debtor's ability to repay, as calculated as indicated in the ministerial decisions issued pursuant to Law No. 4738/2020. The repayment capacity can be derived either from the debtor's tax data, or from the amount that the creditor would recover in the event of enforcement (essentially the value of the debtor's property), or, finally, from the amount that the debtor himself declares on the platform that he can pay. Of these three ways of calculating the debtor's ability to repay, the platform will take into account the one that leads to the highest ability to repay. The higher the debtor's ability to repay, the higher the amount of the monthly instalment and the shorter the duration of the arrangement.
3. Is the settlement resulting from the out-of-court mechanism interest-free or interest-only?
The regulation achieved through the out-of-court mechanism is intense, both with regard to debts to the State and the Social Security Fund, and with regard to debts to financial institutions. In particular:
- With regard to the debts to the State and FKA, the arrangement bears an interest rate equal to the Euribor quarterly rate plus five (5) percentage points.
- With regard to debts owed to financial institutions, the arrangement shall be subject to an interest rate equal to the quarterly Euribor rate plus 3,25 percentage points for debts covered in whole or in part by a special privilege or 4,5 percentage points for debts not covered by a special privilege.
However, the Ministry of Finance has already announced the reduction of the aforementioned interest rates for debts to financial institutions and, in particular, for secured debts the interest rate will be Euribor quarterly + 2.5%, while for unsecured debts it will be Euribor quarterly + 3%.
Indicatively, on 21.10.2022 the Euribor quarterly rate was 1,543%. However, the participating creditors can reduce the interest rate of the arrangement on in-arrangement debts.
4. The platform has given me an arrangement that I cannot service based on my financial data. Is this possible?
Many debtors often complain, when the platform's proposal is posted, that their financial data do not allow them to service it. This can indeed happen because:
A) For the assessment of the ability to repay based on tax information, the income of the last three years is taken into account, not just the last year.
B) In any case, even if there is no significant ability to repay on the basis of tax data, the calculation tool will take into account the ability to repay on the basis of the value of the debtor's assets.
Thus, it often occurs that debtors who declare low income, but have considerable assets, are required to make instalments under the platform's arrangement proposal that are not covered by their income.
5. What is the "uniqueness" that I have to do under the out-of-court mechanism?
In the new out-of-court mechanism, the settlement proposal arises in principle on the basis of the so-called "computational tool", i.e. an algorithm that takes into account the set of platform elements. However, because the algorithm does not read data, but numbers, an important stage in the submission of the proposal is the process of unique identification. All the assets of the applicant debtor and co-debtors are unique, i.e. real estate (both in the 'Real Estate' column, where ENFIA values are listed, and in the Assets - Creditors column, where values based on the valuation of a financial institution are listed), cars/yachts/aircraft, other movable assets (e.g. It should be noted that the data of the spouse and dependants (who simply consent to the lifting of banking and tax secrecy, except in the case of minor children who do not have a tax identification number) are not unique, but the data of the co-debtors are unique.
It should be noted that the unique identification process is very important and errors in this process can have a decisive impact on the final extracted proposal.
6. How is unique identification done when the co-debtor's petition shows the assets of the primary debtor?
Where the debt is secured by a charge on the real estate of a co-debtor, if the real estate has been assessed by a financial institution, this real estate will appear both in the application of the primary debtor (in the column "Assets - Creditors") and in the application of the co-debtor (in both the column "Real Estate" and the column "Assets - Creditors"). In this case, both the application of the primary debtor and the application of the co-debtor should be assigned the same unique number to the asset during the unique numbering process. For example, if the property in the application of the primary debtor is given the number 20, the number 20 should also be entered in the application of the co-debtor in both columns (Property and Assets - Creditors).
This point needs a lot of attention. Indeed, if a different number is entered in the applications of the primary debtor and the co-debtor, the calculation tool will consider that there are two properties, which will result in an increase in the recovery rate, which directly affects both the possible cancellation of the debt and the ability to repay, hence the duration of the arrangement and the amount of the instalments.
7. What problems can arise in the process of uniqueness?
Problems often arise during the process of uniqueness. For example, the debtor's property may consist of several horizontal properties, but it may have been valued by a credit institution as a single property. This will result in, for example, three entries in the column 'Real estate' (3 horizontal properties) with the corresponding ENFIA value and one entry in the column 'Assets - Creditors' with the value as assessed by the financing institution. In this case, it is impracticable to carry out the unique identification correctly, as three entries cannot be matched with one. In this case, the relevant financing institution should be contacted in order to similarly enter three entries in the platform (in essence, to allocate the value of the item to three entries).
Similarly, problems may arise if a property has not been correctly declared in the ENFIA, so that while the status of the property has been correctly recorded by the financing institution (e.g. more entries have been made), the property cannot still be singled out because the recording in the "Immovable property" column is incorrect. In this case, according to the issued ministerial decisions, the relevant modification should first be made in the E9 and ENFIA forms, through taxis, and then the data should be re-investigated, so that they can be retrieved correctly this time.
8. By applying for the out-of-court mechanism, am I protected from aggressive actions by banks and public institutions?
It should be clarified in response to this question that the final submission of the application, not the mere creation of the application, grants the suspension of the enforcement measures of Article 18 of Law No. 4738/2020. Therefore, the mere creation of the application does not imply any form of suspension of enforcement measures on the part of the creditors. In other words, the debtor must have clicked on the "Finalise application" option on the platform in order to obtain the suspension.
9. What is covered by the automatic suspension of Article 18 of Law No. 4738/2020;
The automatic suspension, following finalisation of the application, is limited. The most important points to be mentioned are the following:
- The suspension does not cover an auction scheduled within three months of the finalisation of the application. Thus, if, for example, the auction is scheduled for 15.12 and the application is finalised on 10.10, then the auction in question will take place as normal.
- The suspension does not cover preparatory procedural steps for the auction to be held by creditors in good standing, i.e. creditors with a special privilege. Thus, a bank that has a mortgage on the property of the applicant debtor may proceed to foreclose during the period of the Article 18 suspension. The validity of that attachment could now only be challenged in court, in addition to other reasons, on the basis of abusive conduct on the part of the bank, which, while awaiting a proposal for an arrangement, took that aggressive action.
10. How long after final submission will I receive a proposal for debt adjustment?
According to the provision of Article 16 of Law No. 4738/2020: "If the debt restructuring agreement is not signed within two (2) months from the date of submission of the application, the procedure is considered terminated as unsuccessful. In case a deadline for treatment is set by a competent authority in accordance with paragraph d' of subsection (d) of this paragraph, the procedure shall be deemed to be terminated. 2 of Article 21, the above deadline shall be extended for fifteen (15) working days".
The multilateral procedure is slightly differentiated, where the debtor is given ten days to accept or reject the proposal and fifteen days for the State to raise any objections.
In reality, however, and particularly in the case of an application with several creditors and several financial institutions as participants, this period can be much longer. This is because often the funding agencies, submit treatment requests to themselves, securing a 15-day extension to complete them. These requests are usually concerned with "Correct representation of debts", i.e. the verification by the institution that the details of the debts have been correctly declared. This procedure is provided for in Article 2(2)(a). 2 of the Administrative Instruction 67360 EX 2021/10.6.2021. In this case, the debtor, after the correction on the part of the creditor, should review the application with the correction made and proceed again to finalization. Due to this procedure, therefore, it is likely that the debtor will have to finalise the application more than once.
11. Is there a possibility of suspension beyond the automatic suspension of article 18 of Law No. 4738/2020?
Have court decisions been published in which applications for suspension of enforcement are accepted, because, despite the expiry of the period of time provided for by law, no proposal for settlement has been submitted under the out-of-court mechanism? Thus, for example, the Court of Appeal of Ioannina, in its decision No 157/2022, suspended the auction on the ground that the applicant debtor had submitted his application to the out-of-court mechanism and, despite the lapse of almost three months, no proposal had been submitted by the creditors, nor had his application been rejected. According to the abovementioned judgment: 'The failure to complete the procedure, so that it can be said to have been completed, was not due to the applicants' fault, but to the inability of the electronic platform to manage and process the large number of applications submitted. Moreover, from the application submitted by the applicants, it is presumed that they are eligible, i.e. that they can be subject to the out-of-court settlement of their debts in accordance with the terms of Law no. Whether or not the restructuring agreement will ultimately be signed depends on the proposals made by both the applicants and the creditor. [...] The conditions for suspending the enforcement proceedings brought against them by the defendant in the abovementioned seizure report are therefore fulfilled.
Recently, the Athens Court of First Instance granted a temporary injunction pending the completion of the out-of-court mechanism of Law No. 4738/2020 to a company, which, although it had created its application, had not managed to submit it definitively, because a financial institution had not made the correct recording of the assets of the company and the co-debtors on the platform, so that the application could not be submitted definitively.
13. If I do not upload a necessary document and the application is finalised, can I upload it at a later stage?
First of all, it is noted that, in the context of the simplification of the application procedure to the out-of-court debt settlement mechanism of Law no. 4738/2020, the legislator has already abolished many of the mandatory documents to be submitted. Thus, legal entities are now not required to post declarations of dividend payments or other transactions with shareholders or partners, any transfer of real estate within the last five (5) years from the date of filing the application or a list of persons paid by the debtor. Even the business plan, which until recently was mandatory for legal entities with a turnover of more than EUR 2,500,000.00 or debts of more than EUR 5,000,000.00, is now optional. This information is now only submitted at the request of a creditor after the application has been finalised.
Finally, the certificate of judicial solvency does not have to be posted with the submission of the application, but can be produced within 3 months from the final submission, provided that the debtor submits an affidavit with the same content as the aforementioned certificate, as well as the submitted application to the competent court for the issuance of the said certificate.
Based on the above, the number of documents to be posted before the final submission of the application has been significantly reduced, with the most important remaining the valuation of the value of any movable property if it is more than EUR 10,000. This amount should be calculated per category of movable property e.g. 'stocks'.
In this case, even after the final submission of the application, the debtor will still have to correct the error, following a request for correction by a creditor, and indeed within the tight deadline of 5 days. In practice, this means the following: First, the debtor, even after the final submission of the application, should regularly review the declared email address and the platform for any submitted correction requests. Secondly, it is advisable for the debtor to comply from the outset with the provisions of the law to the letter, so as not to be asked to make corrections afterwards, and indeed, within such a short period of time.
14. Is it possible for the debtor to counter-propose to the proposal that will result from the platform?
No, there is no possibility of a counter-proposal on the part of the debtor. The possibility for the parties to submit a proposal and counter-proposal is only provided for in the procedure of the Code of Conduct for Banks, which is, however, a purely bilateral procedure that only applies to credit institutions and loan and credit management companies. Under the out-of-court procedure, the debtor's only option is, within ten (10) days of receiving a proposal, to submit a request for mediation, which, however, must be accepted by the majority of financial institutions. The mediation shall last for 30 days, shall be conducted in accordance with the provisions of Law no. 4640/2019 and can lead to a personalized and personally tailored plan for debt adjustment and repayment. Therefore, provided that the necessary majority of financial institutions consent, negotiations between the debtor and creditors can indeed take place after the proposal of the calculation tool is submitted.
Instead of an epilogue
The platform of the out-of-court mechanism is certainly a useful tool for the settlement of debts towards public entities and banks. However, the platform's operational failures and complexity on the one hand, and the reluctance of some creditors on the other, have meant that it has not yet produced the expected results. These issues, as emerged from the discussion on 20. 10.2022 before the Parliament's Standing Committee on Economic Affairs, seem to have been perceived and to resolve them, pressure is being exerted on financial institutions to support more solutions through the platform, but also amendments to the procedure are being considered that will result in an increase in out-of-court settlements. Important in this context is the announcement of the operation in the future of a digital platform of the Special Secretariat for Private Debt Management (my-egdixlive), for the resolution of issues of debtors wishing to apply to the out-of-court mechanism, and the announced reduction of interest rate margins in arrangements with financial institutions.