George Zaouris, Trainee lawyer
Summary: This article analyses legal issues arising from the provision of guarantees by the State to individuals through the Hellenic Development Bank (HDB).
A. What is Hellenic Fund for Entrepreneurship and Development ETEAN SA (and now HDB SA)
The establishment of the institution dates back to 2003, when the Guarantee Fund for Small and Micro Enterprises (TEMPME S.A.), a joint-stock company of the Greek State, was initially established to facilitate the access of small and medium-sized enterprises (SMEs) to the financial market, with a share capital of €240,000,000 co-financed by the EU/EFTA (67%) and the Greek State (33%).
On 17/2/2011 the Parliament passed Law 3912/2011 (Government Gazette A17/17.2.2011) establishing the new state "financial institution", the National Fund for Entrepreneurship and Development, entitled ETEAN S.A., with an initial share capital of 1.7 billion euros, as the universal successor to TEMPME S.A.
The aim of the establishment of this new body was to strengthen and promote the competitiveness of young, mainly small and medium-sized enterprises and SMEs, with modern for the time financial engineering instruments, direct absorption of Community funds and provision of guarantees for loans under the auspices of the State.
Also, under its programmes, it provided guarantee products, such as the programme entitled "Guarantee of low-interest loans to cover the costs of purchasing raw materials, goods and services". This was a product which covered, through a guarantee for 80% of the loan amount, direct needs of enterprises (i.e. the purchase of raw materials, goods and services for the production and sale of products and services by the enterprises), using loans with a 6-year maturity, a grace period of 2 years and an interest rate of EURIBOR 6 months plus a margin of 6%. This programme was aimed at all enterprises and unlisted companies with fewer than 50 employees and an annual turnover of less than EUR 10 million, except those operating in the fisheries and agriculture sectors. The procedure was initiated by an application from the interested party to the Bank, followed by a positive assessment of the application, its dispatch to the EIF and a response to the application within 10 days. Indeed, in this programme (as in similar ones) and, in particular, in Article 10 of the Programme, it is stated that: 'TEMPME S.A. (the former name of ETEAN as mentioned above) reserves in all cases the right of recourse (i.e. the right to take action against natural persons, either debtors or also guarantors on the loan, after the payment - by ETEAN - of the amount of the guarantee to the Bank) in accordance with the provisions of the Civil Code'.
By Law 4608/2019 (Government Gazette A΄ 66/25.4.2019), the founding law of ETEAN SA (Law 3912/2011) was amended and it was transformed under its new name, as the Hellenic Development Bank (HBD), with expanded objectives and responsibilities.
Β. Guarantee liability of natural persons - Reductive liability
Extending the study, it is appropriate to examine what happens in the event that the HDB is called upon to pay the amount of the guarantee of one of the loans for which it has acted as guarantor.
1. But what is, in principle, a guarantee contract?
According to Article 847 of the Civil Code, "Under a guarantee contract, the guarantor assumes responsibility towards the creditor for the payment of the debt".
The guarantee is a heterogeneous and causal contract, since on the one hand the guarantor alone undertakes the main obligation to perform and on the other hand it is intended to secure the creditor for a foreign debt. As a result, it is also an ancillary contract (as opposed to the main contract, that of a loan), since under Article 850 of the Civil Code 'the guarantee presupposes a valid principal debt', while under Article 851 of the Civil Code 'the guarantor is liable for the extent of the principal debt, and in particular for the consequences of the default of the principal debtor'. The decisive time for examining the validity of the principal debt is the time of performance of the guarantor's obligation and not the time when the guarantee is given.
2. What procedure is followed and how are debtors and loan guarantors involved?
If the borrower is not punctual in its obligations and has not repaid a certain number of loan instalments due for the 90 calendar days under this programme, the Bank, if it has complied with the provisions of the Code of Conduct for Banks, which is explicitly applicable to loans guaranteed by the State (Chapter One under A.1 . paragraph 2 of the Code), the Bank can validly terminate the loan and then submit a request for the 'forfeiture' of the guarantee of ETEAN S.A., now EATF, to the General Accounting Office (GAO) in order to repay the amount guaranteed by the latter. Indeed, compliance with the provisions of the Code of Conduct is essential because, in the event of failure to negotiate with the borrower, the termination is invalid, firstly as contrary to the provisions of mandatory law and secondly as abusive under Article 281 of the Civil Code. Moreover, according to an individual reply of the Bank of Greece, the initiation of the Code of Conduct procedure should also be communicated to the guarantor in order to ensure his cooperation and consent where required.
With the request for the "forfeiture" of the guarantee, the Bank needs to provide, among other things, a copy of the account activity, the loan agreement, the legal documents issued in order to proceed with the procedures for the approval of its request and the payment of the guarantee amount. Failure to do so may result in the EATC withdrawing from the contract and failing to meet its obligations. Moreover, under Article 859 of the Civil Code, the EAT, as guarantor, is required to raise any valid objection by the borrower against the bank before paying the amount of the guarantee, otherwise it will not be able to take action against itself or against other guarantors and co-guarantors for the amount in question. For example, if, for example, the credit institution improperly terminated the loan agreement without following the procedure of the Code of Conduct, as we have highlighted above, and the SBA does not raise the relevant objection, since it had been informed by the borrower either by a notice of default or by notification of the latter's claim against the credit institution, then the SBA loses its right of recourse against the borrower.
It should also be noted that under the terms of the Programme Guide, the amount to which 80 % of the guarantee of the EATC applies is the principal/principal balance at the date of termination of the contract by the bank.
Therefore, after the cash confirmation of the debt in the name of the primary debtor by the tax administration, the relevant order by the Board of Directors of E.A.T. and the payment of the amount of the guarantee, E.A.T., where the Civil Code is expressly applicable, is now subrogated (under Article 858 of the Civil Code) to the rights of the creditor for the percentage of the loan which it has satisfied and may take action for recovery either against the primary debtor (Article 858 of the Civil Code) or against the guarantor or guarantors (Article 860 of the Civil Code), if any, who are jointly and severally liable. In other words, it is a legal assignment to the guarantor of all the rights of the original creditor vis-à-vis the primary debtor. On the other hand, a joint and several debt under Article 481 of the Civil Code exists where several debtors owe the same benefit, so that each of them is liable to pay the whole amount, but the creditor is entitled to claim it once from the co-debtor of his own free choice. Unless otherwise agreed, the debt is divided into equal parts, in which case only the share that would have been owed by the co-debtor/guarantor is sought after payment. Therefore, if, for example, there are two other co-sureties and one of them pays the full amount, then it can take action against the other co-surety and the primary debtor, claiming from each of them 1/3 of the amount paid (since in practice the sureties waive their right of action under the loan agreements and are also liable as primary debtors).
In accordance with Article 22 paragraph 7 of Law 3775/2009 on loans guaranteed by the Greek State as currently in force: "[...] the relevant claims of E.T.E.AN. S.A. against the primary debtors of the companies in favour of which its guarantee was guaranteed and forfeited, as well as against any co-guarantors and other co-obligors, become claims of the State. The State shall be subrogated to the rights of the credit institution which granted the loan, the letter of guarantee or the credit in general, both against the primary debtors and against the guarantors and other co-borrowers".
Pursuant to the founding law of ETEAN, i.e. Law 3912/2011, the E.A.T. proceeds, under Article 9 of the law, to the collection of the amount, which, in fact, is considered as public revenue under the provisions of the Public Revenue Collection Code. This automatically implies that, by taking the necessary steps to recover the amount from the debtor, the guarantor or any other co-debtor, the National Revenue Agency will have at its disposal all the privileges established by the KEDE in favour of the State.
Thus, for example, in this programme entitled "Guarantee of low-interest loans to cover the costs of purchasing raw materials, goods and services", the State will be substituted by the percentage of the guarantee of ETEAN SA (80%), after the forfeiture of the guarantee and the confirmation of the debt to the primary debtor company, in the position of the bank both against the primary debtor and against any guarantors.
Therefore, after the forfeiture of the guarantee and the confirmation of the debt by the State, the primary debtor and the guarantors are jointly and severally liable to the State for the amount of the loan paid by ETEAN S.A., i.e. for 80% of the total amount in the case under consideration. Non-payment of this amount, if it exceeds one hundred thousand euros (100,000€), constitutes the crime of non-payment of debts to the State and is punishable by a one-year prison sentence (and a three-year prison sentence if the total debt exceeds two hundred thousand euros - Article 25 of Law No 1882/1990). The remaining amount of the loan is still owed by the primary debtors (and guarantors) and is claimable by the Bank, which may issue a payment order for its collection or bring a lawsuit.
3. Limitation issues
Article 140 of Law 4270/2014 stipulates that "Any claim against the State, other than those for which the provisions of the Code of Tax Procedure (Law 4174/2013, A 170) apply, is barred after five years, unless another general or special provision sets a shorter limitation period". By virtue of the fact that 'the limitation period begins from the time the claim arises and can be enforced in court' (Article 251 of the Civil Code), it is clear that the five-year limitation period for the Bank's claim against ETEAN SA for payment of the amount of the guarantee does not begin before the termination of the loan and the 'forfeiture' of the guarantee, since it is only after the termination that the amount becomes due and can be enforced in court. On the contrary, after the payment and the substitution of ETEAN S.A. in the place of the lending bank, the claims of the State against the debtors, the guarantors and the other co-debtors are time-barred after ten years from the end of the financial year in which, after their strict confirmation, they became due (Article 126(6) of Law 4270/2014). In the narrow sense, i.e. the cash, i.e., the cash confirmation of public revenues according to the Public Revenue Collection Code (PIRC) takes place with the entry of the data contained in the money lists (the supporting documents of the legal titles) in the book of revenues to be collected of the competent tax office.