George Psarakis LL.M. (mult.), PgCert
(republished from naftemporiki.gr)
Summary: The problem of compound interest is well known. It emerged mainly in the 1980s and 1990s and affected thousands of businesses and households whose debt had ballooned excessively, risking the financial destruction of productive units and families. The legislator intervened with three different regulations. The last of these is Law 3259/2004, which is still in force today. However, although the law has been in force since 2004, there are several issues on which there is still controversy, with the result that credit institutions follow their own policy each time, referring borrowers to the courts. In the following article we summarise some of them.
The problem of compound interest is well known. It arose mainly in the 1980s and 1990s and affected thousands of businesses and households whose debt had ballooned excessively, with the risk of financial destruction of productive units and families. The legislator intervened with three different regulations. The last of these is Law 3259/2004, which is still in force today. Under the current Article 39(39)(a) of the Greek Civil Code, which is currently in force, 3232/2004 has been repealed. 5 of Law 3259/2004, the total amount of the debt may not exceed three times (or twice in the case of farmers) the amount of the capital received. The then Minister of Economy and Finance stated when the law was passed in the Parliament: "The issue of the overdraft is typical. The problem, as you know, was created in the early 1980s. And it continued throughout the 80s and 90s and was largely the result of a policy that led to very high interest rates and combined with the frequent compounding of loans, some loans, many loans unfortunately went through the roof. Well, we're solving the issue. For all loans taken out or entered into with commercial banks, the amount of the overdue debt, resulting from the arrangement, cannot exceed three times the original principal amount. This implements one of our key pre-election commitments". In other words, for all loans, irrespective of when they were contracted, a ceiling was introduced on the total amount of the outstanding debt, which cannot exceed three times, or, where applicable, twice, the amount of the capital granted (and, in the case of mutual accounts, twice the amount of the debt as established at the time of the last disbursement), taking into account all payments made. To the extent that the debt exceeds these multiples, it shall be deemed by law to be partially (or even fully) amortised and therefore not paid.
Therefore, in order to identify the maximum amount of any bank claim in a contract, e.g. a mutual account, we proceed with the following calculation: we take as a basis the amount of the debt at the time of the last disbursement and multiply it by a factor of 3. We then deduct any payments that have taken place since the start of the mutual account (or since the time of the last disbursement, according to other case law) and the result is the maximum amount of debt that the credit institution can claim. Anything above this amount is automatically written off.
However, although the law has been in force since 2004, there are several issues on which there is still controversy to this day, with the result that credit institutions follow their own policy each time, referring borrowers to the courts. We summarise some of them:
1. The credit institutions, in several cases, claim that the credit agreements were in the form of a mutual account and not a loan agreement. This is because the double/triple in the case of a simple loan agreement is calculated on the amount paid, whereas in the case of a credit agreement through a current account on the amount due at the time of the last disbursement; the difference between the two cases can therefore be quite large. In the majority of cases, this issue arises in disputes between the Agricultural Bank of Greece and the borrowers. Already a number of court decisions have led us to the conclusion that the ATE contracts at issue are, in most cases, not credit agreements through a mutual account, but simple loan agreements. See, for example, the judgment of the Athens Court of First Instance No 2632/2008, which held that 'the relevant credit agreements were loan agreements and not current account agreements, irrespective of the classification given to them by the parties...'; the above is repeated in the judgment of the Thessaloniki Court of Appeal No 10/2019 and many other judgments. Only recently, the Supreme Court, in its decision No 97/2020, upheld the decision No 4839/2013 of the Athens Court of Appeal, which had ruled the above, confirming the classification of the contracts at issue as loan contracts.
2. At other times, we observe that credit institutions adopted the policy of "recycling" older loans through new financing. In other words, instead of settling an older loan and thus leaving its 'traces' visible in order to check the application of the 2004 law, a new loan was granted, but this loan was coming to repay the old one. In this way, the new loan was taken into account for the purposes of the application of the law on the 'stamp duty', but was in fact used to write off the debt of the old loan, a large part of which contained 'stamp duty'. In other words, if there was a loan that had exceeded three times the original principal amount, instead of 'writing off' the excess, the bank would grant a new loan to repay the old one and then apply a factor of 3 to the disbursed principal amount of the so-called new loan. In this case too, there are several court decisions that have criticised this practice, applying the relevant coefficient to the principal of the original loan rather than the new loan.
3. In some cases, credit institutions claim that borrowers were supposedly required to submit a special application in order for Law 3259/2004 to apply. However, it should be stressed that the application of this law takes place irrespective of the borrower's application (see the relevant Supreme Court decision no. 696/2021: 'Furthermore, it follows from the same above-mentioned provisions that the law has itself regulated independently and fully both the conditions and the amount of the ex lege accelerated adjustment of interest debts. Therefore, the adjustment of the debts is available as of right and no other condition is required for its activation, in particular the timely submission of an application by the debtor to the Bank'). In other words, the write-off is automatic and occurs as soon as the debt exceeds the respective threshold.
4. Sometimes credit institutions claim that the law does not apply to contracts concluded after 2004. However, the Hellenic Bankers Association itself commented in a newsletter on 15/9/2004 as follows: "The law applies to claims arising from loan or credit agreements that will be drawn up after the date of publication of the law (4.8.2004) and also to those that were drawn up at any time before that date".
5. It is also commonly claimed that Law 3259/2004 does not apply to contracts terminated after 2004. That is, if the disputed loan account was in operation after 4/8/2004 and therefore after the time of the enactment of the relevant law, it was not past due at that point in time and therefore the cap rate does not apply. This was also accepted by the decision of the Piraeus Court of First Instance No. 1313/2020, which, however, was finally abolished by the decision of the Piraeus Court of Appeal No. 223/2022, which put the issue on the right footing: even if the loan agreement was terminated after 4/8/2004, the law is applied without exception. However, the credit must have been terminated at least at the time of the appeal before the court, in order for the 2004 law to apply (to have a "total arrears").
6. Sometimes it is also argued that the borrower does not have the status of "farmer" so that the multiplication factor applied is 2 and not 3. This is either because at the time of the application of the law the borrower had changed his profession (or had been inherited by non-farmers, etc.), or because the borrower was a company and not an individual. Both of these arguments of the banks are contradicted by case law: (a) the status of 'farmer' at the time of the conclusion of the loan agreement is relevant and (b) not only natural persons but also legal persons are considered farmers if: their founding act shows that their main activity is agriculture, they own an agricultural holding from which they derive their income and the majority of their share capital/share capital is held by farmers as their main occupation (see judgment No 110/2022 of the Court of Justice of the European Communities, Case C-110/2022, p. 1); and (c) farmers are not only natural persons but also legal persons if: their founding act shows that their main activity is agriculture, they own an agricultural holding from which they derive their income and the majority of their share capital/share capital is held by farmers as their main occupation (see judgment No 110/2022 of the Court of Justice of the European Communities, Case C-110/2022, p. 1). "And for the identity of the legal ground, it must be accepted that legal persons, half (50%) of whose share capital is held by farmers as their main occupation and who meet the other requirements, are also considered farmers. For in cases where the shareholders or partners of a partnership or corporation are only two, each in equal proportion, it is not conceivable that there will be a majority of share capital or partnership shares. Therefore, in accordance with the above provisions, if the legal persons-farmers, whether they are partnerships, capital companies or agricultural cooperatives, etc., also meet the above conditions, at the time of the conclusion of the loan agreements, etc. with the credit institutions, in order to be considered 'farmers in their main occupation', the factor of 2 and not 3 will be taken into account for the re-determination of their debt under these agreements, in accordance with the express provision of Article 39 § 5 of the Law. 3259/2004...").
7. Finally, a key claim put forward by the credit institutions is also that, after multiplying the base amount in the case of the mutual debt (i.e. the amount of the last disbursement) by the correct factor (2 or 3), the amounts paid since the beginning of the credit agreement are not deducted from the base amount, but the amounts paid from the time of the last disbursement onwards. For example, the Piraeus Court of Appeal decision No 223/2022 accepted that any payment made to the credit institution from the start of the agreement is deducted from the base amount. In that case, two mutual accounts were operating with base amounts at the last disbursement of €200,000 and €146,297 respectively. Therefore the total debt amounted to €346,297. However, the payments made by the debtor company since the beginning of the account's operation amounted to €2,844,707, which was more than three times the base amounts, i.e. €1,038,892 (€346,297*3). 000 euros, was considered "deleted" (amortized) and the payment order of the credit institution was cancelled in its entirety (similarly, the decisions of the Single Court of Appeal of Western Macedonia No. 1 and 2/2018 had also ruled). A recent decision, however, of the Supreme Court accepted that in the case of the mutual account only the payments that took place after the last disbursement should be deducted from the total debt, as otherwise these amounts would be deducted twice, once when calculating the debit balance and once when calculating the total debt.
Therefore, we note that after almost twenty years, our case law continues to address the issue of 'interest on arrears'. This will again take on a serious dimension following the rapid increase in the interest rate of the ECB's main refinancing operations and the Euribor, which serve as interest rate benchmarks in loan agreements with variable rate clauses. The increase in interest rates is already inflating the arrears of loans in arrears and it is important that borrowers are aware of the rights conferred on them by law since, as can be seen from the above decisions, the solution is often found in court.