George Kefalas, LL.M. mult. M.Sc.
Summary: The rehabilitation agreement, together with the out-of-court debt settlement mechanism, are the two collective debt settlement procedures provided for the collective resolution of viable firms. In contrast to the out-of-court procedure, the resolution procedure gives the debtor and its consenting creditors a very high degree of flexibility to formulate the terms of the agreement. It is therefore crucial that the terms of the resolution agreement are drafted in such a way as to achieve the maximum benefit for the company. In this article, we focus on the drafting of the terms of the agreement in particular in relation to Public Entities.
In previous articles we have already highlighted the advantages provided to the debtor by the institutional framework of resolution, and we have also presented the two basic principles that govern the process and delimit the possibilities for resolution, namely the principle of equal treatment of creditors in the same position and the principle of collective satisfaction of creditors in the sense of not worsening their position.
In this article we focus in particular on the issues of settlement with Public Entities, namely the Greek State and the Electronic Unified Social Security Institution (e-SIFA), highlighting possible configurations that the resolution agreement can take, always based on the case law of our courts.
It is recalled, however, that for a reorganisation agreement to be ratified by the court, the majority of the creditors required by law must consent (i.e. either 50% of the creditors with collateral security and 50% of the creditors without collateral security or 60% of all creditors, which includes 50% of the creditors with collateral security). Therefore, once the necessary majorities are in place, the specific configurations that the resolution agreement can take, especially with regard to public entities, are crucial.
2. Long-term settlement of debts to public bodies
A long-standing request of public debtors and the e-FSA is the possibility to settle their debts on a long-term basis. In this context, the old extrajudicial (Law 4469/2017) had provided for the possibility to settle debts to public bodies in up to 120 (monthly) instalments, while a corresponding provision was also included in individual legislation that had been adopted (see. The recent revival of the 120 instalments regulation with the Law on the payment of the debt (see also the recent revival of the 120 instalments regulation in the Law on the payment of the debt). The new out-of-court mechanism provides for the possibility to settle debts to the State and the e-FICA in up to 240 instalments. However, the out-of-court mechanism, on the one hand, imposes restrictions on the possibility to write off amounts of basic debt (no amount of basic debt from withheld and imposed taxes, as well as from insurance contributions), while at the same time the arrangement is subject to an interest rate of 3% (following the changes made to the out-of-court mechanism procedure by Law No. 5024/2023).
In contrast, in the context of the reorganisation procedure, there is no upper limit on the number of instalments for the settlement of the debts of public entities (nor of other creditors).
In this respect, the judgment of the Syros Court of First Instance in its decision No 2/2018 is characteristic in this respect, according to which: [...] the regulated surcharges, interest and fees, as well as the amounts established by the Labour Inspectorate as debts to the Hellenic State, the principal amount of ..... in 280 equal, interest-free monthly instalments, with the first instalment to be paid within 60 working days of the signing of the protocol of delivery and receipt of the assets between the applicant and the company under the name of [...]. The above number of instalments, although quite high, is considered by the Court not to infringe the principle of equal treatment of creditors in the same position, since the same provision is made for the EFKA, which, according to the first main intervener, is in the same position as the State. Besides, a large number of instalments has been repeatedly accepted by case law, such as, but not limited to: 140 instalments (PPRath 288-9/2015), 152 instalments (EfPeri 569/2014), 156 instalments (EfThes 2156/2015), 240 instalments (PPRath 109/2018), 250 instalments (PPRath 8/2017), 268 instalments (PPRath 688/2014)."
In addition to the possibility of a long-term arrangement, it has been held that the interest-free arrangement of the debts of the State and the e-EFKA can be agreed upon, provided that the principle of equal treatment of creditors in the same position is not violated. The Athens Court of Appeal decision 5177/2017 was typical: "The claim of the main interveners that creditors are not treated on the basis of the principle of equal treatment, because for the repayment of the applicant's loan obligations to the banks party to the reorganization agreement, the payment of interest at an interest rate of Euribor + 3% is provided for, while for the same, belonging to the category of generally privileged [Greek State and insurance institutions] non-contracting creditors, repayment in 180 monthly instalments without interest, while for the employees of the undertaking repayment is provided for in 18 equal monthly instalments, for the debt of the public utility company in 90 equal instalments and for the suppliers, depending on whether they are necessary for the continued operation of the undertaking or not, in 42 or 60 monthly instalments respectively, is rejected as unfounded. This is because the above categories of creditors are not in the same position, any deviations from the principle of equal treatment under Article 106b(1)(b) of the EC Treaty are not justified. 2(d) of the Civil Code are permitted for an important business or social reason, indicatively, claims of customers of the debtor's business, the non-fulfilment of which would materially damage its reputation or the continuation of the business, as well as labour claims, may receive favourable treatment. In the present case, the abovementioned special arrangement for the immediate repayment of the banks' claims is justified by the fact that those claims are secured by mortgages on the applicant's hotel complex and the continuation of their financing by means of a loan of EUR 600 000 for the further operation of the business is envisaged.
3. The treatment of debts arising from any tax audits
It is possible that, in parallel with the reorganisation agreement, an audit will be carried out by a public body, the results of which are not yet known at the time of signing the agreement. It is also possible that after the ratification of the resolution agreement, a tax audit for years prior to the date of ratification of the agreement may follow. It is reasonable to ask what happens in such cases, as the imposition of amounts following an audit may damage the reorganisation of the company.
In this regard, it has been held by the courts that it is a valid clause in the reorganisation agreement that provides for the write-off of debts arising from tax audits in the context of the need to ensure the viability of the company through reorganisation.
Typical in this respect is the decision No 581/2021 of the Patras Court of First Instance, which held that: 'With regard to debts that may arise, be attributed or ascertained to the applicant company from past, current or future tax audits up to the date of signature of the private agreement for the transfer of the business, they will not be attributed and transferred to the new company or assumed by it, but will constitute an obligation of the applicant company, which will be written off at 100% due to the absence of assets [...]. This condition is considered reasonable and necessary in the context of the viability of the new company.
In the same vein, Decision No 5756/2020 of the Multi-Member Court of First Instance of Thessaloniki, which held that: "Moreover, the terms of the reorganization agreement under ratification, which provide that any liabilities of the applicant that may arise from current or future tax audits or audits of insurance entities (always provided that the relevant claims will have arisen by the time the decision to ratify the reorganization agreement is issued) will not be transferred to the new company, but will be fully and completely written off (at 100%), are deemed reasonable and necessary in the context of ensuring the viability of the new company".
4. The claims of the silent creditors
Firstly, silent creditors are defined as creditors whose claim existed before the signing of the reorganisation agreement and the discussion of the validation application before the court, but did not appear in the company's books or other documents brought to the attention of the court, either by mistake or because it was a disputed claim. In the same way as the concept of a hidden creditor, there is also the concept of a hidden claim of an otherwise visible creditor. This concept may include the aforementioned debts arising from any tax or insurance audits.
By way of illustration, as regards hidden creditors, the above-mentioned judgment of the Patras Multi-Member Court of First Instance No 581/2021 considered a valid clause of the reorganisation agreement which provided: "Claims of any hidden creditors of the applicant company, which had already arisen on 31.3.2020 or were to arise during the interim period, but do not appear in the books of the applicant company, will remain as a liability of the applicant, but, given that no assets will remain in the applicant company, they will be written off at 100%".
Similarly, Judgment No 39/2020 of the Edessa Multi-Member Court of First Instance held that: "It should be noted, moreover, that clause 8. 9 of the agreement, according to which, any claims to creditors of any kind, which do not appear in the balance sheet of 31-12- 2019 (hidden creditors), as well as debts, which may arise, be attributed or ascertained to the applicant from past, current or future tax audits and are indicative and not restrictive, the assessment of any taxes, fees or contributions in favour of the State or third parties, income tax, withholding or imposed taxes, value added tax, stamp duty, capital or property tax, extraordinary levy, as well as the imposition of a fine or sanction for violation of the provisions of the CBC, the CFA and the Code of Tax Procedure or of the Law on Tax Administration, the Law on Tax Administration and the Law on Taxes, the Law on Taxes, the Law on Taxes and the Law on Taxes and the Law on Taxes. 2523/1997, in whatever manner they are assessed or collected, as well as any fines, surcharges, interest and other related charges, and which debts relate to any past fiscal year or any period of time until the publication of the court decision, and irrespective of the time during which the audit procedure may have been initiated, shall be written off at a rate of 100 %, it is considered reasonable and necessary in the context of the viability of the new company, since, in order to draw up its business plan and to cover its needs, it must assume specific and visible obligations and not doubtful obligations.
However, other judgments have held that the claims of hidden creditors should be treated in the same way (e.g. same write-off rate, same repayment period, same interest rate) as claims of non-hidden creditors with the same historical and legal basis.
However, as provided for in Joint Ministerial Decision No. 26400 EX 2021 on the content of the Expert's Report: "In case the resolution agreement provides for the limitation or write-off of claims of the State and Public Entities, which have not been established at the time of signing the agreement and do not appear in the debtor's books, it is required to include an explicit and distinct indication in the form of a provision, with an estimate of the repayment possibility based on the projected cash flows of the company in the relevant chapter of the expert's report".
In other words, the expert's plan must provide that the cash flow of the company during the implementation of the reorganisation plan is not sufficient to cover any undisclosed claims of the State and the public authorities.
5. Instead of an epilogue
The institution of reorganisation can be a useful tool for a company wishing to settle its debts in a way that ensures its long-term viability, provided of course that it has the necessary majorities of its creditors on its side. In this article, we have set out possible configurations of the reorganisation agreement, in particular with regard to the company's debts to public bodies, in order to achieve the maximum possible benefit for the company and to enable it to implement its business plan. The institution of reorganisation offers much greater flexibility than the out-of-court mechanism, not only with regard to the settlement of debts owed by public bodies, but by all creditors, the only limit being the principles of non-deterioration of the creditors' position and equal treatment. It is therefore crucial that the terms of the agreement are properly drafted in order to ensure the maximum benefit for the company without jeopardising the validation of the agreement by the court.