Law 4738/2020 (the “new Law” or “Insolvency Code”), which came into force in part on 1 March 2021 and fully on 1 June 2021, introduced a wholly new regime and abolished the former Law 3588/2007 (the Bankruptcy Code) and integrated into the Greek legal system Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency, and discharge of debt (the EU Restructuring Directive).
The title of the new Law – “Debt settlement and giving a second chance and other provisions” – is not entirely consistent with its contents considering that a major part of the new Law concerns bankruptcy proceedings, while a much smaller part deals with debt settlement and “giving a second chance” provisions. This new legislation aims to fundamentally reform the framework of tackling debtors’ financial inability, creditors’ collective payment, and the debt discharge of any person, natural or legal, who is engaged in an economic activity, regardless of whether this activity is business-related or not.
The new Law comprises five main sections. The first concerns the out-of-court workout; the second refers to pre-insolvency proceedings; the third concerns bankruptcy; the fourth concerns vulnerable distressed debtors; and the fifth regulates general issues (e.g. procedural provisions, publication, penalties).
A new out-of-court workout (OCW) has been incorporated into the Insolvency Code, replacing the previous one regulated by Law 4469/2017, which expired on 30 April 2020. This new version modified the rationale and the function of the pre-existing out-of-court debt settlement mechanism, whose track record was poor. The scope of the new OCW is to provide participating creditors with a functional environment to formulate proposals for the settlement of a debtor’s debts through a haircut or debt restructuring (thereby avoiding the risk of insolvency), either following the debtor’s request or on the creditors’ initiative. The main novelties of the new OCW scheme are as follows:
Consensual restructuring is a “discreet” procedure, flexible, with no publicity, and is usually effective, when a limited number of people is involved (including limited number of creditors). Usually, the procedure starts with an appointment of legal and financial advisors and scheduling meetings between debtor- main creditor/s for analyzing the current financial status and possible restructuring schemes (“rescue plans”). Negotiations take place on a confidential basis. It is often that the debtor and the creditor/s agree on a standstill agreement, suspending any enforcement.
If an agreement is reached, an implementation plan shall be put in place, also designating person/s to supervise and monitor implementation steps. Once the restructuring is agreed, then creditors are bound by the restructuring agreement.
Secured claims
Secured claims are those that are secured by a right in rem over an asset of the debtor. Security is generally divided between security for immovable property and security for movables, which also includes claims such as accounts or shares and intangible property.
Immovable Property
The following types of security are available for immovable property.
Mortgage
This is the basic form of security in relation to immovable property. In order to create a mortgage, a creditor must hold a title provided by law, a final court decision or a notarial deed. A mortgage is perfected by its registration in the competent Land Registry/Cadastral.
Pre-notation of mortgage
This is the most common form of security on real estate property and is created by a court order in the form of an injunction and is perfected by its registration in the competent Land Registry/Cadastral. It can
be viewed as a conditional mortgage that can be converted into a full mortgage upon the debtor’s default and the award of the creditor’s claim by an unappealable judgment/payment order with retroactive effect as of the registration of the pre-notation order. Pre-notations are far more common than mortgages because court fees are significantly lower than the notarial fees that would be payable for the mortgage deed.
Movable Assets
The following types of security are available for movable assets.
Pledge
This is the most common form of security. A pledge on a movable asset ensures the preferential satisfaction of the creditor through a forced sale of that movable asset in execution proceedings. A pledge requires physical delivery of the movable asset to the pledgee.
Floating charge
Pursuant to Article 16 of Law 2844/2000, a floating charge enables the debtor to deal with (and dispose of) the charged assets (as specified in the agreement) in the ordinary course of business until the occurrence of either a default or an agreed event that causes the floating charge to crystallize. Following crystallization, a floating charge becomes a fixed charge (similar to a pledge) attaching to whatever movable assets are available at that time.
Privileged claims
Preferential/general privileged claims include: (a) unpaid employee remuneration incurred in the two years before the bankruptcy was declared and employment termination compensation, regardless of when it occurred, as well as lawyers’ fees that date up to two years before the declaration of bankruptcy, and claims for compensation of salaried lawyers owing to the termination of their contract for a salaried mandate, regardless of the time it arose, (b) claims of the State arising from VAT and its surcharges, (c) social security contributions that arose until the declaration of bankruptcy, (d) other claims of State or local authorities and their surcharges excluding VAT claims.
Unsecured claims
Unsecured claims are those that are not secured by a right in rem or do not enjoy a general privilege.
Subordinated claims
Subordinated claims include, for example, the claims of the shareholders to recover the share capital invested in a bankrupt legal entity. This means that they will be satisfied only in case that all creditors’ claims are paid in full from the bankruptcy proceeds.
According to the Code on Civil Procedure, enforcement proceedings are available to all creditors, including filing applications for obtaining provisional measures. Nonetheless, following a declaration of bankruptcy, the Bankruptcy Code provisions are strictly followed, except for secured creditors which may elect to enforce their securities on particular assets according to the Code on Civil Procedure.
The bankruptcy expenses, the remuneration of the administrator as well as any group creditors’ claims (i.e. those whose claims arose or relate to a time after the insolvency and originate from the administrator’s activity or are connected with parts of the insolvency estate) are deducted from the bankruptcy proceeds before the distribution to the categories of creditors as described above (in 3.1).
Super-seniority claims include: (i) loans or credit and goods or services provided pursuant to a recovery agreement and (ii) loans or credit and goods or services provided during the negotiation period, if provided within the terms of the recovery agreement, regardless of its ratification. In the latter case, loans or credit and goods or services must be provided up to six months before the submission of the recovery application to the bankruptcy court.
Super-seniority claims take precedence over all other claims, including secured claims, when it comes to satisfaction (except in case of secured debts created after 17 January 2018), provided that the collateral was unencumbered before the new security was established.
As per the enforcement of security rights, this is governed by the Code of Civil Procedure. The creditor must have an enforceable title against the debtor in order to initiate enforcement proceedings. Enforceable titles are, among others, a payment order and a final and enforceable judgment. In general terms, a secured creditor has the right to force an auction of its security. The same can be done by any other creditor that proceeds to attach the asset that forms its security; however, the secured creditor is satisfied by priority from the proceeds of that auction.
Enforcement initiated by unsecured creditors is governed by the Code of Civil Procedure. The unsecured creditor must first obtain an enforceable title against the debtor. Once obtained, the creditor can seize the debtor’s assets, auction them, and claim satisfaction from the proceeds.
Before obtaining an enforceable title, unsecured creditors may apply for an interim order for a pre-notation of mortgage over the debtor’s immovable assets or seek a pre-judgment attachment over the debtor’s other assets.
Any debtor, individual or legal entity, engaged in a business activity may be subject to recovery proceedings provided that it is in cessation of payments or in imminent inability to pay its debts as they fall due. Even debtors not facing this situation can be subject to the recovery procedure, provided that the court considers it probable that the debtor will become insolvent, and insolvency can be lifted through the implementation of the recovery procedure. The new Law provides for the ratification of a recovery agreement entered into between the debtor and its creditors. Such an agreement will be ratified by the bankruptcy court if it has the consent of the majority of creditors in each of the two classes formed in accordance with the new Law (more than 50% of the secured claims and more than 50% of the rest of the claims). These classes respectively include secured and all other creditors (including tax, social security and employee claims). The agreement may also be ratified if agreed only among creditors in the event that the debtor is in cessation of payments. Ratification makes the agreement binding on all creditors.
The recovery procedure is guided by two fundamental principles: ensuring no creditor is left worse off and maintaining equal treatment for all creditors. The new Law provides that a recovery agreement can be judicially ratified if it is signed by creditors representing over 50% of secured claims and more than 50% of other claims. If this majority is not achieved, secured creditors holding over 50% of secured claims can cram down on unsecured creditors if they obtain the consent of 60% of all creditors (in terms of the value of their claims). These percentages are based on a list of creditors compiled by an expert and based on the debtor’s books with a reference date not earlier than three months from the date of filing the agreement for ratification.
The agreement can include a rearrangement of the assets and liabilities of the debtor according to the new Law, which provides certain examples as guidance. For example, it mentions the reprioritization of claims but only in favor of new money. If the creditor explicitly consents, a guarantor’s or co-debtor’s
liability is limited to the value of the claim against the debtor, as such claim was reduced in accordance with the ratified recovery agreement.
Even though unknown claims are not taken into account for the calculation of the requisite majorities, the agreement can affect them as well as contingent claims and claims that will arise up to the date of ratification. The new Law expressly exempts claims secured by financial collateral from the effects of a ratified recovery agreement.
The object of the proceeding is to preserve the going concern (but not necessarily the entity of the debtor) in order to preserve value for the benefit of creditors as well as jobs, and to minimize disruption to the market (e.g. to suppliers and other counterparties).
Interim and new financing can be provided to a debtor in a recovery proceeding for the purpose of preserving its viability or keeping it as a going concern. The value of claims is an issue in the agreement, while the economic interest of a creditor is critical to assessing whether the no creditor worse off test imposed by law is respected in any given case. Creditors may be called to vote on a proposed agreement, but the usual process is for the necessary majority approval to be reflected in the executed agreement, which is then filed for ratification. The procedure concludes with the ratification; however, the agreement can set conditions precedent for its coming into effect (e.g. the approval by the debtor’s shareholders of debt capitalization).
The application is followed (in principle after two months) by a hearing in which other stakeholders may intervene. The waiting period for issuance of the ratification decision varies but is usually not less than six months. If the recovery agreement is ratified, then its provisions apply to all creditors, even those that dissent (including the cramming down of the unsecured as a class if they dissent but the majority requirements for ratification are otherwise satisfied).
Under the new Law, the consent of the Greek State and social security funds to the recovery agreement may be deemed to be given, even if they do not sign the agreement, under certain conditions (i.e., the debt to each public law entity is less than EUR15 million, the “no creditor worse off” principle is respected, and the total debt owed to public law entities is less than the total debt owed to private creditors).
Prior to the filing of a recovery agreement for ratification, the debtor (with the support of at least 20% of the creditors in terms of the value of their claims and upon a showing that the protection is necessary as a matter of urgency) can ask for a suspension of enforcement actions. Such a suspension may be provided for up to four months and can be further extended to a maximum total duration of six months. Upon the filing, provided that another recovery agreement has not been filed previously, the debtor is entitled to an automatic suspension of four months that can be further extended (usually to the date of issuance of the decision on the ratification application).
The recovery agreement ends when its provisions are implemented in full (such as transfer of assets, repayment of rescheduled claims, etc.). The involvement of the bankruptcy court in the ratification of the recovery agreement is critical in order to rule that the recovery agreement and the business plan, if implemented, will restore the viability of the debtor. The fairness or equal treatment of creditors test is one of the two major tests for the ratification of a recovery agreement. Whether an agreement provides all creditors in the same position with the same treatment, except for discrepancies dictated by important
commercial or social reasons, is up to the judgment of the bankruptcy court that is vested with the ratification of a recovery agreement.
Failure to observe the terms of the contract is subject to the rules applicable to contractual default, including as may be provided under the contract itself.
The new Law provides that the non-performance of the debtor in accordance with the recovery agreement may be set as a condition subsequent to the agreement or a termination right to each creditor. In any case, if the debtor defaults in relation to a specific obligation, the non-defaulting counterparty may exercise its individual rights under the law and the contract (e.g. repudiation and termination) and the creditor’s claims revert to their initial amount, as they were before the ratification of the recovery agreement, reduced by the amounts that they have already received.
A debtor can apply to be declared bankrupt in the event that it faces imminent cessation of payments, while filing becomes mandatory in the event of an actual cessation of payments. The debtor’s cessation of payments is a necessary prerequisite for a bankruptcy filing by a creditor.
If the application is accepted, then the total of the debtor’s assets will constitute the bankruptcy estate and will be liquidated for the satisfaction of its creditors’ claims. Bankruptcies are divided into large and small categories regardless of whether the debtor is a merchant or a consumer, a legal person or an individual. For natural persons the categorization is based on the value of the debtor’s assets. If the debtor is a legal entity and cumulatively meets the criteria of a microenterprise, it will be subject to the small-scale bankruptcy procedure.
Small-scale bankruptcies are tried by the magistrates’ court while larger scale bankruptcies are tried by the multi-member court of first instance, in each case in the appropriate venue. However, as of 16 September 2024 magistrates’ courts have been abolished and the single-member court of first instance has exclusive jurisdiction over small-scale bankruptcies. For enterprises, venue is determined by reference to the center of main interest (COMI), while for consumers the venue is their place of residence.
A bankruptcy petition will include the nomination of an administrator (except for applications filed by the debtor, containing a statement that the placement of an administrator who accepts their appointment was not possible; in the latter case, the petition will be heard even without such a nomination) as well as the acceptance of such appointment by the nominee. The person nominated for that function must be an insolvency professional. At the petition hearing, other stakeholders may object to the nomination and nominate other professionals. The court is expected to defer to the nomination made by the largest creditor but has the discretion to appoint another person if they are more suitable in its reasoned opinion.
For bankruptcies of larger enterprises, the bankruptcy petition, if supported by 30% of the creditors in terms of the value of their claims, including 20% of the secured creditors, may include an application to sell the debtor’s business as a going concern (this may also be done in more than one constituent part, at the administrator’s discretion, subject to approval by the creditors’ assembly). In all other cases, a declaration of bankruptcy leads to the sale of the debtor’s assets piecemeal.
A going-concern liquidation is a public sale conducted by the administrator, on the e-auction platform provided for by law, that has no minimum price. The highest bid is then submitted to the approval of the creditor’s assembly. The assembly may decide to seek an improved offer or ask for the sale to be repeated.
Assets that remain unsold after the lapse of 18 months are then sold piecemeal. A piecemeal sale is always conducted on the e-auction platform (by a notary public) at a minimum price per lot (set by two certified valuers or one, depending on the value of the assets being liquidated). If the auction fails to produce a qualifying bid, the price is automatically reduced to ¾ of the original price and a repeat action is held 20 business days after the first one. If that auction is also unsuccessful, then there is a third attempt at a minimum price set at ½ of the original. If that also fails to produce a qualifying bid, the administrator is given four months to attempt to secure a negotiated sale at a price to be approved by the court. If that also fails, then there is a final auction at no minimum and any unsold assets revert to the debtor or are handed over to the State.
The debtor cannot participate in the auction or public sale – there is no provision for credit bidding. The purchase price at all auctions is payable in cash. A pre-negotiated sale transaction is not possible in a bankruptcy liquidation. However, creditors that wish to effect pre-negotiated sales may opt for a recovery agreement as opposed to a bankruptcy petition in order to do so.
Once installed, the administrator will conduct an inventory of the assets and call for the announcement of creditors’ claims. The administrator is charged with the verification of such claims on the basis of the evidence received from the debtor (such as books and records) or such evidence as it may receive from the debtors upon its request. The verification table drafted by the administrator will then be used for the purposes of distributing liquidation proceeds and it will be subject to objections and corrections at a hearing to be held at a later point (indeed, more than once, depending on how the assets are liquidated). There is no express exclusion of contingent claims from the verification process.
Creditors are entitled to a semester report by the administrator. In addition, the creditors’ assembly may compel the administrator to provide it with additional information.
The proceeds of liquidation are distributed to the creditors in one or more distributions until all assets have been disposed of. At that time, the administrator will give a final accounting to the creditors’ assembly, which can release the administrator from any liability for the conduct of the process. The process ends in a court decision or upon the lapse of five years from the date of declaration for larger bankruptcies or 12 months for the small-scale bankruptcies. For larger bankruptcies, the five-year term may be extended by the court if there are pending decisions on creditor objections relating to the distribution of proceeds, or by a decision of the creditors’ assembly, on one occasion and for up to two more years.
Law 3858/2010, which implemented most of the UNCITRAL Model Law on Cross-Border Insolvency, introduced the prospect of recognition of foreign insolvency proceedings as well as co-operation between Greek courts, foreign courts, and liquidators in different jurisdictions. The European Insolvency Regulation (Regulation EU 2015/848) is directly applicable in Greece. Governing law as well as the treatment of foreign decisions or rulings are determined by Law 3858/2010 or the European Insolvency Regulation, as may be applicable.
The insolvency procedures provided under Greek law may be followed by a foreign company, provided that its center of main interest is in Greece. In line with EU regulation on insolvency proceedings, the Bankruptcy Code provides that the center of main interest of a debtor is the place where the debtor usually exercises the administration of its interests and is therefore identifiable by third parties. For legal persons, it is presumed, until the opposite is proven, that its center of main interest is the place of its registered seat.
EU Regulation 848/2015 provides for cooperation with foreign courts and bankruptcy administrators in case of foreign insolvency proceedings (especially in case of insolvency proceedings involving groups of companies).
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