Because of the restrictions imposed by Greek banking legislation2 on market access, the Greek corporate lending market mainly comprises the Greek and foreign credit institutions lawfully operating in Greece. However, a number of statutory and market developments have contributed to the actual or potential activation of other market participants.
On the basis of the above, 2016 was expected to be a year of stability, slight economic activity increase and economic growth following the previous years of deep recession; however, the uncertainties linked to the completion of the second review under the third financial assistance programme have led to an unexpected economy contraction. At the end of December 2016, the non-performing loan (NPL) ratio reached 44.8 per cent of total loans,3 while the deposit withdrawals and capital outflows abroad have increased despite the capital control regime.
Greek systemic banks, which are all within the competence of the European Central Bank (pursuant to the provisions of Regulation (EU) No. 1024/2013) faced, and continued to face, the following severe challenges during the past year:
- a the low levels of outstanding deposits and the high rates of non-performing exposures (NPEs) (despite their slight decrease by the end of 2016) pose a constant credit risk for the Greek systemic banks, hampering the supply of credit to the real economy;
- b a capital controls regime (i.e., restrictions on cash withdrawals, cross-border payments and capital movements and other bank transactions) that has been imposed since July 2015 still applies, albeit with some improvements; and
- c management of NPLs remains the most crucial and challenging issue - despite the reduction of NPEs as a percentage of total exposures (NPE ratio) to 45.2 per cent by June 2017 reaching the amount of €105.1 billion4 - the stock of NPEs remains high.
Against this backdrop, banks kept on refinancing outstanding loans on a stand-alone or syndicated basis, while at the same time corporate debt restructuring projects have been gradually increased during 2016. To the same end, a number of issues (such as limited debt restructuring options, a statutory auction moratorium, lengthy legal procedures, strategic defaulters, preferential claims of the state and pension funds, etc.)5 have been at least to some extent addressed with a view to efficiently managing the NPL issue whereas significant progress has been noted by the BoG so far granting servicing licences to four NPL servicing entities.6
Other than the above, large Greek corporates continue to proceed with the issuance of bonds, which are traded on the Greek stock exchange (Mytilineos, OPAP and Fourlis bonds) as well as on European stock exchanges (Ireland, Luxembourg, etc.).
Finally, international financial institutions, such as the European Investment Bank (EIB) (including the European Investment Fund), the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation, have continued to be active in the Greek corporate lending market, providing either direct loans to Greek corporates or loans and guarantees to Greek banks in their capacity as financial intermediaries for the granting of liquidity and trade finance products in the Greek market.
II LEGAL AND REGULATORY DEVELOPMENTS
The major legal and regulatory developments of the market within 2016 and early 2017 have been:
- a the amendments to the Bankruptcy Code introduced by Law 4446/2016, including important changes to the Greek restructuring and insolvency framework, with the aim of enhancing the preventive restructuring regime as well as all insolvency proceedings;
- b the amendments to the NPL Law (Law 4354/2015) introduced by Law 4389/2016, with the aim of enhancing the transparency of the sale and service of NPLs;
- c the out-of-court debt settlement introduced by Law 4469/2017, with the aim of creating an out-of-court process that will facilitate the settlement of debt with all lenders, including financial institutions, tax and social security authorities;
- d the establishment of a regulatory framework for crowdfunding platforms and the liberalisation of interest rates of corporate bonds introduced by Law 4416/2016.
i Bankruptcy Code amendments
The Greek Bankruptcy Code (Law 3588/2007) (GBC) has undergone a series of reforms in recent years; the rehabilitation procedure as a preventive mechanism for the insolvency of distressed businesses was introduced by Law 4013/2011, followed by significant amendments introduced by Laws 4055/2012, 4072/2012 and 4336/2015 with the aim of expediting the insolvency proceedings, enhancing their effectiveness and encouraging the restructuring of viable businesses.
In December 2016, the GBC was further amended by Law 4446/2016 in an attempt to tackle some of the remaining irregularities and inefficiencies that arose through its application. One significant modification relates to the elimination of the in-court restructuring proceedings, (i.e., the initiation of restructuring negotiations with creditors after the issuance of a formal court order) owing to the ascertained abuse of the legal framework by debtors who solely intended to gain judicial protection (even temporary) with, however, no viable prospect of being efficiently restructured. At the other end, the out-of-court restructuring proceedings (pre-pack) have proven to be more efficient, since the restructuring plan has already been approved by the majority of creditors prior to its submission to the court for ratification.
Another major development that affects the market relates to the protection of the interim financing of the business that is under restructuring. According to the new Article 154 of the GBC, the necessary financial resources that are granted by lenders within a period of six months prior to the submission of the restructuring agreement to the court and up until its ratification with the aim of sustaining the operation of the business, enjoy a superseniority over all other claims, even if the restructuring agreement is for whatever reason not ratified by the court (as a motivation to lenders to participate in the financing of viable businesses).
Pursuant to the new Article 100 paragraph 1 of the GBC, possible obstructive behaviours of debtors are addressed, by enabling creditors to initiate restructuring proceedings without the consent of the debtor. In case the debtor has ceased all payments, creditors representing 60 per cent of the total claims against the debtor (which shall also include at least 40 per cent of the claims of any creditors with security in rem or prenotation of mortgage) may submit a restructuring agreement to the court for ratification.
An important step towards the efficiency of restructuring proceedings' implementation is further introduced by the automatic issuance of a tax and social security clearance certificate irrespective of the existence of debts under restructuring to the Greek state and the Social Security Authorities provided by Article 106c paragraph 3 of the GBC. The issuance of these certificates will allow for the effective implementation of the restructuring agreement (especially the provision of the new financing and the realisation of asset v. debt transactions).
In 2016, the extraordinary procedure of special administration regime introduced by Law 4307/2014, has been implemented for the first time (e.g., Zinon Real Estate SA, Grivalia Properties SA) allowing for the rapid sale of the defaulting party's assets through the public tender for the auction of the debtor's total assets. Within this framework, the process can be initiated solely by creditors representing minimum 40 per cent of the total claims against the debtor including at least one banking institution, and the whole process must be completed within 12 months of the application. DOL (a former news conglomerate) is the most recent and well-known special administration case that has been concluded within 2017.
ii NPL Law amendments
By virtue of the provisions of Law 4354/2015 and BoG ECA 118/19.5.2017, a secondary loan market has been established in Greece to contribute to the resolution of the NPLs issue. Further to the latest statutory amendments introduced to the applicable regime of servicing and selling loan receivables by Laws 4389/2016, 4393/2016 and 4472/2016, the following are the main features of the secondary lending market framework:
- a performing and non-performing (90 days past-due rule) loan receivables (including those guaranteed by the Greek state) may either be sold or outsourced for servicing. Loans secured with a primary residence mortgage or prenotation of mortgage over a real estate with an objective value of up to €140,000 cannot be sold until 31 December 2017, but their servicing can be assigned to third-party eligible servicers. The regime of servicing and selling non-performing loans does not apply for loans granted by the Loans and Consignments Fund (i.e., a state-owned financial institution);
- b the legal framework now clearly provides for three types of operations, namely servicing, acquisition and refinancing:
• servicers, which may only be societes anonyme established in Greece or Greek branches of foreign institutions established in an EEA country, shall operate as special purpose vehicles, which are licensed (the prior opinion of a committee of the Ministry of Finance as a requirement for the issuance of the licence is no longer needed) and supervised by the BoG, and must have capital of at least €100,000, which increases to €4.5 million should they wish to be involved in refinancing operations. Pursuant to the latest amendments introduced by Law 4472/2017, servicers may manage real estate acquired by the beneficiary of the loan provided that it constitutes security of the loan to be serviced. However, servicers are not entitled to acquire by any means the relative real estate;
• buyers are not required to be licensed but need to enter into a servicing agreement with a licensed servicer, otherwise the sale of NPLs transaction will be null and void; buyers may only be societe anonyme companies established in Greece, companies established in an EEA country subject to EU legislation and companies established in non-EEA countries with the exception of non-cooperative jurisdictions and preferential tax jurisdictions, as defined in the Greek Income Tax Code; and
• refinancing operations (of the loans acquired and managed) are strictly considered as banking loans and, therefore, subjected to applicable Greek regulations (e.g., subject to the levy of Law 128/1975 but exempted from stamp duties and from withholding tax applicable on interest);
- c privileges and preferential treatment of banking institutions are maintained after the transfer of the receivables, irrespective of whether the buyer is such an institution; and
- d originators and borrowers shall engage in a 12-month consultation period pursuant to the provisions of the Code of Conduct as a prerequisite for the sale of the receivables, whereas the buyer/servicer will continue the actions already taken prior to the sale without having to repeat these as under the previous regime.
Despite the above statutory developments that have addressed to some extent the NPL regulatory gap, there are still constraints and impediments, such as delays in the enforcement process, as well as legal inconsistencies with the Greek securitisation legislation (e.g., Law 3156/2004). Recent developments, however (see the NPL securitisation transaction of Attica Bank within its capital restructuring exercise) indicate the necessity of the market to overcome such impediments.
iii Out-of-court debt settlement
By virtue of Law 4469/2017, an out-of-court debt settlement mechanism has been established in a bid to render faster and easier the debt restructuring of both individuals and legal entities. The following are the main features of the out-of-court debt settlement framework:
- a individuals eligible for bankruptcy and any Greek tax resident legal entity that earns income deriving from business activity pursuant to Articles 21 and 47 of the Income Tax Code may submit an application to fall under the scope of Law 4469/2017, provided that:
• on 31 December 2016 they have a loan or credit obligation in arrears (minimum 90 days) towards a financial institution or assessed and outstanding obligations towards the tax authorities or the social security authorities or another legal entity of public law, including local government authorities or they have an obligation that has been subject to an arrangement after 1 July 2016;
• the total amount of their obligations exceed the amount of €20,000;
• the eligibility criteria are met pursuant to Article 3 of Law 4469/2017 (i.e., in at least one fiscal year within the last three prior to the submission of the application either the EBITDA is positive, for debtors maintaining a single-entry bookkeeping system or the EBITDA or the net present position (equity) is positive in case of a double-entry bookkeeping system;
• the obligations to be settled have been generated prior to 31 December 2016;
- b the appointment of an accredited mediator acting as a coordinator in a bid to facilitate the negotiations between the debtor and the creditors;
- c creditors representing at least 50 per cent of all claims against the debtor must participate, in order for the proceeding to commence, whereas 60 per cent of all claims (which shall also include at least 40 per cent of the claims of any creditors with security in rem or prenotation of mortgage) is required for the conclusion of the agreement;
- d for large enterprises the appointment of a financial advisory expert is mandatory in a bid to perform a sustainability review;
- e the out-of-court debt settlement agreement may be submitted to the court for ratification either by the debtor or one of the creditors to the end of imposing its provisions to all creditors even if they do not participate as contracting parties; and
- f a 70-day automatic stay on all individual and collective enforcement actions of creditors participating in the out-of-court debt settlement procedure pursuant to Article 13 of Law 4469/2017, granted after the notification of the completion of the debtor's file to the creditors pursuant to Article 7 and an automatic stay on all individual and collective enforcement actions of creditors participating in the settlement granted after the submission to the court of the agreement and until its ratification.
iv Crowdfunding and corporate bonds
By virtue of Law 4416/2016, a statutory framework has been introduced providing for the effectiveness of existing, or the establishment of alternative, financing tools. More specifically, pursuant to Article 20 of the same law, the interest rates for bond loans offered publicly and bond loans offered through a private placement to qualified investors pursuant to Article 2 paragraph 1 of Law 3401/2005 can be agreed freely, without a maximum cap.
Pursuant to Article 21 of the same Law, the following can be appointed as bondholder agents within the framework of bond loans issued under the provisions of Law 3401/2005: credit institutions, investment firms providing not only underwriting services but also safeguarding services for financial assets for its clients, as well as the central securities depositary.
By virtue of Articles 23 and 24 of the same law, specific legislation relating to crowdfunding has been introduced and its most significant provisions are the following:
- a a public offer may be conducted without a previous release of a prospectus, provided that the following conditions are met:
• the offer takes place exclusively via an electronic platform operated by: (1) investment services societes anonymes that have been granted a licence to provide at least investment services of reception and transmission of orders on behalf of clients and safeguarding services of financial assets; (2) alternative investment funds management societes anonymes licensed to provide investment services of reception and transmission of orders; and (3) credit institutions providing services of reception and transmission of orders; and
• securities offered have a total value less than €500,000, a limit which is estimated per issuer in a time frame of 12 months;
- b participations of private clients pursuant to Article 2 paragraph 8 of Law 3606/2007 may not exceed the amount of €5,000 and the threshold of 10 per cent of their average income as declared in tax declarations in the last three-year period per issuer and the amount of €30,000 per year and platform operator. The monetary thresholds set above may change pursuant to a decision of the Minister of Finance, followed by the proposal of the Hellenic Committee of Capital Markets; and
- c platform operators are obliged to provide minimum information to their clients or their prospective clients relating to the issuer of the offered securities
iv Other developments
On top of the above, the provisions of Directive 2014/49/EU on national deposit guarantee schemes have been transposed into the Greek legal system, by virtue of Law 4370/2016, regulating the Hellenic Deposit and Investment Guarantee Fund as well as setting the framework for easier and faster access to the guaranteed amounts of the deposits.
Last but not least, the capital controls regime that has been in place in Greece since 28 June 2015 has loosened, allowing for further corporate transactions.
III TAX CONSIDERATIONS
i General tax considerations
Interest payable on credit facilities granted by credit institutions is not subject to withholding tax; it has been clarified that, under the provisions of the new Greek Income Tax Code, applicable as of 1 January 2014, this exemption also applies to foreign banks.
A 15 per cent withholding tax is levied on interest from bond loans issued by resident companies.7 The same withholding tax rate, pursuant to domestic provisions, is imposed on interest paid or credited for a loan or credit provided by a lender that is not a credit institution.
The above tax treatment should not alter when interest has been paid in the form of proceeds from a guarantee claim or from enforcement of security.
In cases where, under local provisions, interest payable to foreign lenders is subject to the 15 per cent withholding tax, the lower rate among the following shall apply:
- a the rate provided by treaty (if any) for the avoidance of double taxation concluded between Greece and the state of which the foreign lender is a tax resident; or
- b the rate provided by the EU Interest and Royalties Directive, if the relevant statutory conditions are met.
Foreign banks or other lenders do not acquire a permanent establishment in Greece solely because of the granting of a loan to a Greek company or of obtaining a guarantee or security therefrom.
Loans granted by Greek or foreign banks to Greek companies and bond loans in general, as well as securities granted in relation to these, are exempted from Greek stamp duties. However, an annual contribution at the rate of 0.6 per cent is imposed on the average outstanding monthly balance of each loan granted by a Greek or foreign bank to a Greek resident. Loans between banks, loans to the Greek state, loans funded by the EIB, EBRD and IFC, and bond loans are exempt from this contribution.
There are, in principle, no adverse legal consequences for a borrower if some or all of the lenders are organised under the laws of a jurisdiction other than Greece. Thin capitalisation rules exist in Greece, but their application is not affected by the residence of the lenders. Deductibility of interest may be disallowed under special tax anti-avoidance provisions (or the general anti-avoidance provision included in Article 38 of the Code of Tax Procedure).
The 2016 amendments to the NPL legislation have shed some light on the tax treatment of the transactions and players of the secondary lending market. More specifically, interest payments to buyers (or servicers) of receivables are not subject to withholding tax; capital gains from the transfer of receivables is subject to corporate income tax and, therefore, on that basis capital loss should also be recognised; from an indirect tax point of view, the transfer of receivables is exempt from VAT and refinancing operations are not subject to stamp duty but to the 0.6 per cent annual contribution.
Most importantly, the debtors' benefit arising from the write-off of obligations towards credit institutions, buyers and servicers is exempt from income and donation taxes, under specific (time) conditions. It should be noted that this exemption does not extend to intra-group lending.
In addition, pursuant to the newly introduced provisions of Article 43 of Law 4465/2017, the debit and credit risk balance of credit institutions that arises from debt restructuring pursuant to applicable statutory provisions to debt transfers is deductible from their gross income in 20 equal annual instalments. Such debit balance may not exceed the amount of accumulated provisions and other credit risk losses accounted for up to 30 June 2015.
Last but not least, under the terms of the relevant framework, which was amended in 2015, Greek banks are entitled, as of 2017 and under certain circumstances, to convert to final and settled claims against the Greek state the deferred tax assets arising from their debit balances related to debt provisions, debt restructurings or for which deferred tax assets are accounted for their participation in the private sector involvement in the 2012 restructuring of Greek sovereign debt and from accumulated provisions and general losses.
Such claims are recognised without the assumption of future profitability provided by CRD IV and therefore are not deducted from CET1 regulatory capital but are assessed as a 100 per cent weighted asset with a corresponding beneficial effect on the capital position of the credit institution.
The claims are set off against income tax. If no set-off may take place, then the credit institution issues shares that are attributable to the state. Existing shareholders have a pre-emption right to acquire such shares, which become freely transferable, if not acquired by them within a reasonable period.
IV CREDIT SUPPORT AND SUBORDINATION
The two basic categories of security rights under Greek law are:
- a collateral in personam (mainly guarantees); and
- b collateral in rem (mortgages or prenotation of mortgages over immoveable assets and pledges over moveable assets and rights).
Non-attachable assets or claims are not available to secure lending obligations.
Given that specific establishment, publication and registration requirements may apply depending on each type of either the security or the asset on which the security is granted, different agreements in relation to each type of asset are commonly used. The procedural steps depend on whether a court decision, notarial deed or private agreement is statutorily required for the lawful establishment of the security, as well as whether the decision, agreement or deed has to be registered with a specific authority and meet any publication requirement.
A company may grant a security interest to secure its obligations under a credit facility as a borrower, a guarantor of the obligations of other borrowers or guarantors of obligations, or even as a third party, without the need to be named as a guarantor or co-borrower.
Collateral, in the form of either a mortgage or a prenotation of mortgage, may be taken over real property (land) and plant, as well as all component parts and accessories of the immoveable (i.e., machinery and equipment), which are owned by the security provider and are fixed (or exist) thereto.
According to the provisions of the Greek Civil Code, a mortgage is the right in rem established in favour of a creditor over a person's full ownership (or usufruct) rights on immoveable property (land and buildings) to secure a monetary obligation by means of the creditor's preferential satisfaction.
A prenotation is a type of temporary mortgage, which may be rendered final provided that: (1) a final court decision orders payment of the due and payable claim that is secured by the prenotation; and (2) the prenotation is converted to a mortgage within a period of 90 days from the issuance of the court decision. Given their equal treatment as to enforceability and ranking, prenotation is usually preferred because of the lower costs involved.
As to the procedure, a mortgage may be established bilaterally by means of a notarial deed, or unilaterally by means of a court decision; a prenotation of mortgage is always established by virtue of a court decision (either on a bilateral or a unilateral basis). For the perfection of both types of securities, the court decision or the notarial deed must be registered with the competent land registry or cadastre.
Under both types of security, possession of the real property is not conveyed to the creditor.
Pursuant to special statutory provisions applicable to (prenotations of) mortgages securing claims of credit institutions:
- a said securities are protected from clawback in the event of bankruptcy of the collateral provider;
- b the securities extend to any machinery and equipment that enters the mortgaged plant even after the establishment of the security;
- c the collateral provider is prohibited from removing or transferring the machinery and equipment, without the prior consent of the creditor; and
- d enforcement procedures are facilitated.
Receivables (present or future) may be pledged under the provisions of the Civil Code on the basis of a written agreement, which shall take the form of a notarial deed or a private agreement bearing a certain date (the latter is preferred because of its minimal costs). The agreement is executed between the creditor and the collateral provider and must be notified to the debtors of the pledged receivables to be perfected.
Pledges of current or future business receivables may also be established under the provisions of Articles 11-15 of Law 2844/2000; in addition, collateral security over business receivables may take the form of a floating charge under the provisions of Articles 16-18 of Law 2844/2000, which is established on a group of claims or rights. Such claims or rights are freely collected or disposed of by the security provider, who is, however, obliged to substitute them with similar claims or rights. Finally, claims may be pledged in favour of credit institutions licensed in Greece pursuant to the beneficial provisions of Legislative Decree 17 July 1923.
A pledge over cash deposited in bank accounts is commonly realised in favour of credit institutions under the provisions of either Legislative Decree 17 July 1923 or Law 3301/2004 (the Collateral Law), transposing into Greek law EU Directive 2002/47/EC on financial collateral arrangements. The procedure involves in this case, too, a pledge agreement in the form of a notarial deed or a private agreement bearing a certain date, which is notified to the bank maintaining the accounts.
Shares in companies incorporated in Greece may be pledged as security of claims arising from lending transactions. The pledge is extended to dividends and other monetary or personal rights deriving from the shares, unless otherwise agreed.
A pledge of either bearer or registered shares is realised in accordance with the aforementioned procedure provided by the Civil Code, with the additional requirement of delivery of the share certificates to the pledgee, whose details shall be noted on the share certificates, as well as into the shareholders' book, in the case of registered shares. In the case of dematerialised listed shares, the pledge needs to be registered with the Dematerialised Securities System. Finally, a pledge of listed shares may also be effectuated pursuant to the provisions of the Collateral Law.
Given its purpose (i.e., to be sold), inventory (products) is commonly pledged, under the provisions of Articles 16-18 of Law 2844/2000, in the form of a floating charge over a group of assets (the inventory), which remain in the possession of the security provider, the latter being entitled to dispose, with the concurrent obligation, however, to substitute them with similar assets. A floating charge is perfected by virtue of its registration in the public registers kept with the competent pledge registry.
Finally, as to trademarks registered with the Greek Trademark Office, the relevant pledge agreement shall be registered with the Trademarks Registry.
As to costs, these vary depending on the type of security. In the case of mortgages, notarial fees range from 0.2 per cent to 1 per cent of the security value plus VAT (currently amounting to 24 per cent), and legal fees are also payable if lawyers are involved. In the case of prenotation of mortgage, court fees do not exceed €500. Registration fees for both securities amount to 0.775 per cent of the security value in the case of land registries, or 0.875 per cent in the case of cadastres. Registration of pledges or floating charges falling within the provisions of Law 2844/2000 in the public register kept by the competent pledge registry is burdened with fees equal to 0.775 per cent of the security value. The above security charges are significantly reduced for bond loans issued by Greek companies under the provisions of Law 3156/2003. Registration of the pledge of dematerialised listed shares to the Dematerialised Securities System costs €120 (per issuer and type of share). The fees of court bailiffs for the notification of a security document amount to €35-€95 per service.
Last but not least, challenges to taking effective security are set by:
- a Law 1892/1990, pursuant to which consents shall be obtained as to agreements involving the acquisition, establishment of security or leases of rights in rem on real property within Greek border areas (as well as shares in companies with such real rights) by individuals or legal entities that are not EU or EFTA nationals; and
- b Law 3310/2005, pursuant to which any agreement (including a security document) in respect of rights in shares representing at least 1 per cent of the share capital of a media company or a company taking part to a public tender is null and void, unless the agreement is executed before a notary public and notified to the Greek National Council for Radio and Television.
ii Guarantees and other forms of credit support
Article 23a of Greek Company Law provides that a company is prohibited from guaranteeing the borrowings of associated legal entities, unless the following (quite strict) conditions are cumulatively met:
- a the guarantee serves the company's interests; such an issue is a factual and multidimensional one and therefore has to be examined on a case-by-case basis. If this condition is not met, then the guarantee is considered null and void and directors' liability (including penal) may arise;
- b the company has a right of recourse against the principal debtor (i.e., the associated enterprise in favour of which the guarantee is provided);
- c the general meeting of shareholders (GM) of the guaranteeing company approves the transaction by an increased special quorum and majority; moreover, an approval by the GM, which shareholders representing one-tenth of the paid-up share capital (one-twentieth in the case of listed companies) shall not oppose, is required. The board of directors shall submit to the GM a report confirming satisfaction of the conditions for the lawful granting of the guarantee, and the resolution of the GM shall be registered with the Companies' Registrar and meet the statutory publication requirements; in the case of companies whose financial statements are subject to consolidation, pursuant to Articles 90-109 of the Greek Company Law, the GM approval shall be resolved by a two-thirds majority (increased to 95 per cent majority, if provided on a post-transaction basis); and
- d the claims of the lender in whose favour the guarantee is provided are subordinated to the claims of the company's existing creditors.
Moreover, the provision of the guarantee shall serve the guarantor company's interests.
Finally, lack of corporate power (i.e., total absence of the relevant scope in the company's articles of association) is an issue only to the extent that a guarantee is considered as not serving the attainment of the company's business scope, in which case it is null and void, pursuant to the aforementioned conditions. On this basis, lenders usually require the provision of guarantee to be included in the business scope article of borrower companies' constitutional documents.
Greek financial institutions are not subject to the above regime and may freely guarantee borrowings of members of their groups.
As to negative covenants commonly provided by debtors to creditors, they constitute only contractual obligations of the former to the latter, which may not affect the validity of the rights in rem acquired by third parties.
iii Priorities and subordination
The priority of secured creditors is in principle dependent upon the day of perfection of the security (i.e., its registration in the relevant public register if such a registration is statutorily required). Consequently, secured creditors of a lower class (i.e., perfected at a later date) will be (partially or wholly) satisfied, only if the secured creditors over the same asset of the previous class are fully satisfied. If registered within the same day, security rights share the same ranking and are satisfied on a pro rata basis.
As mentioned in Section II, supra, the Code of Civil Procedure provides for the order of priority that applies to the allocation of enforcement proceeds from the auction of a specific asset in the event of multiple creditors participating in the relevant proceedings with claims that are higher than the auction proceeds.
Greek laws do not include rules on subordination agreements between lenders, who are free to agree by contract the order of priority and the method of sharing proceeds among them in the event of debt acceleration. However, the aforementioned order of priority set by law will obligatorily be followed in the event, due to enforcement or bankruptcy, of a distribution of liquidation proceeds by the competent body of the auction procedure, notwithstanding subordination agreements between lenders (which may, of course, be subsequently followed).
However, the following securities offer a safe harbour from the mandatory priority and statutory subordination provisions:
- a a pledge of claims under the provisions of Legislative Decree 17 July 1923 where the credit institution arguably acquires full ownership thereof and is entitled to liquidate the claim, with the obligation to refund to the borrower any amount exceeding its secured claim; and
- b financial collateral arrangements under the provisions of the Collateral Law, which provide for the satisfaction of the creditor through sale, set-off or application of the financial instruments or cash in discharge of the relevant obligations.
V LEGAL RESERVATIONS AND OPINIONS PRACTICE
As to financial assistance, pursuant to Article 16a of the Greek Company Law, a company (other than a credit institution) is prohibited from providing guarantees or giving security to support borrowings incurred to finance the direct or indirect acquisition of shares in the company by any third party (other than the employees of either the company or an associated company) unless: the general meeting of shareholders provides its prior consent to the guarantee or security by an increased quorum and majority, on the basis of a board of directors, report on the reasons for, and the company's interest in, approving the transaction - as well as an auditor's report if members of the board of directors of the issuing or parent company are directly or indirectly contracting parties to the relevant transaction; and the secured amount, which shall appear in a non-distributable reserve as long as the security is outstanding, does not cause the company's own funds to fall below the aggregate amount of share capital and non-distributable reserves.
In cases of bankruptcy, the court usually imposes a temporary moratorium on individual and collective enforcement actions (i.e., prohibiting the lender from commencing or continuing enforcement procedures against the debtor who has been declared bankrupt).
In addition, a security agreement is subject to the clawback provisions of the Greek bankruptcy code8 (security agreements are in principle protected from clawback if established by virtue of the provisions of the Collateral Law or Law 4112/1929, and if carried out in the framework of a reconciliation plan).
Finally, the Greek bankruptcy code provides that creditors with a real security on an asset of the bankruptcy estate are satisfied solely by the liquidation of the asset, with an option, however, to waive their security and be satisfied by the whole bankruptcy estate, in which case their claims are subordinated pursuant to the Greek bankruptcy code provisions. Securities under the Collateral Law are in principle not affected by the bankruptcy proceeding.
During bankruptcy proceedings, the same order of priority of payments applies as that mentioned in Section II, supra.
As to foreign governing laws and judgments, Greek courts recognise and enforce:
- a contracts that have a foreign governing law on the basis of the provisions of the Rome Convention on the law applicable to contractual obligations and Regulation (EC) No. 593/2008, whichever is applicable, subject to: rights in rem, which are governed by the law applicable pursuant to the conflict of law rules; Greek public order; and overriding mandatory provisions; and
- b a foreign judgment without re-examination of the case, pursuant to the applicable provisions of EU regulations, in the case of judgments from other EU Member States (e.g., Regulations (EC) No 44/2001 or No. 805/2004, or Regulation (EU) No. 1215/2012); bilateral international conventions; and the relevant provisions of the Greek Code of Civil Procedure.
However, Greek courts may deny recognition in the event that the foreign judgment is not an enforceable title or res judicata in the foreign country; it is issued by a foreign court not having jurisdiction under Greek law; it violates Greek public order; the defendant was deprived of the right to a fair trial; or the foreign judgment is contrary to a Greek judgment that is res judicata for the same issue and parties.
Besides the above, it is common practice for the following reservations to be included in legal opinions issued under Greek laws:
- a waiver of rights and claims arising from gross negligence or fraudulent or wilful misconduct is null and void;
- b the borrower of a monetary loan has in no case the obligation to pay, because of its default as to repayment, any indemnity other than statutory or contractually agreed (default) interest; in this respect, it has been ruled that a defaulting party is not liable to default interest where the events or circumstances giving rise to the same were outside its sphere of influence (force majeure);
- c applications for interim relief may be heard by the courts in the country (if competent) notwithstanding any provisions to the contrary;
- d a court of the country (if competent) may, at the request of a person concerned, reduce damages or penalties to their proper measure;
- e it is within the discretion of a court of the country (if competent), in cases of breach, to order specific performance or award damages;
- f contracting parties are required to mitigate their losses; failure to do so may reduce or extinguish altogether the amount of losses to which they would otherwise have been entitled; and
- g pursuant to Greek jurisprudence, irrespective of the fact that lending by credit institutions is not subject to statutory interest limitations applicable to non-banking lending transactions, a counterparty to a banking lending transaction is not deprived from the right to argue and prove that an interest rate in excess of the non-banking maximum interest rate is abusive.
VI LOAN TRADING
The transfer of an existing lender's rights and obligations arising from a loan agreement is allowed, unless otherwise provided by applicable contractual provisions. Such a transfer is commonly effectuated under the assignment and transfer of rights provisions of the Civil Code. To be perfected, the transfer shall be notified to the debtors (borrower and guarantor). Any security (in rem or in personam) rights are also transferred to the new lender.
Further to the above assignment route, loan receivables may be transferred:
- a in the quite efficient structure of a securitisation transaction pursuant to the provisions of Law 3156/2013; or
- b under the provisions of Law 4354/2015, which establishes a secondary loan market in Greece (see Section II, supra).
VII OUTLOOK AND CONCLUSIONS
The Greek lending market needs to get ahead of the wider economic crisis of the country, as well as of the liquidity problems faced by its major players (i.e., the Greek banks). Furthermore, the economy needs to break the barriers imposed by the capital controls regime. In addition, the market needs to resolve the NPL issue on a more consistent basis. Some legislative measures have been adopted in the areas of restructuring enforcement, bankruptcy and establishment of a secondary lending market, but their positive contribution has not yet been adequately proven. Within this framework, it seems that, in one way or another, the existing statutory limitations to market access have to be removed.
1 George N Kerameus is a founding partner at KPP Law Firm.
2 See Article 9(2) of Law 4261/2014 (on access to the activity of credit institutions and prudential supervision thereof (transposition of Directive 2013/36/EU)), pursuant to which the business of granting loans or other credits may only be exercised with the issuance of a prior special licence issued by the Bank of Greece (BoG). Loans or other credits between associated enterprises or granted to individuals or legal entities by enterprises for the sale or provision by the latter to the former of their goods or services are exempted from the above general prohibition.
3 Bank of Greece, Overview of the Greek Financial System, January 2017 available online at www.bankofgreece.gr/BogEkdoseis/OVERVIEW_OF_THE_GREEK_FINANCIAL_SYSTEM_Jan_2017_en.pdf.
4 Bank of Greece, Report on Operational Targets for Non-Performing Exposures, June 2017 available online at www.bankofgreece.gr/BogEkdoseis/Report_Operational_Targets_for_NPEs_EN_clean_Final_June_2017.pdf.
5 See Ilias Pkaskovitis, member of the BoG General Council and SSM Supervisory Board, EBRD/BoG Workshop, ‘Greek banks after recapitalisation: the agenda for NPL resolution', (Athens, 10 March 2016).
6 Cepal (Aktua Hellas) (a joint venture between Alpha Bank and Spanish servicer Aktua), Financial Planning Services (a Eurobank subsidiary and Pillarstone Greece, a subsidiary of the US-based KKR fund) and Thea Artemis (an ATTICA Bank subsidiary) have received a non-performing loans management licence by the BoG, and another 10 applications have been filed with the BoG.
7 Under the Income Tax Code provisions, the exemption of non-resident companies without a permanent establishment in Greece from any withholding tax on interest from bond loans issued by resident companies no longer applies (it applied until 31 December 2013).
8 According to the Greek bankruptcy code, transactions (i.e., donations or other transactions with disproportionately small consideration, payments of non-outstanding debts and establishment of in rem securities) held during the suspect period are subject to clawback, upon request of the bankruptcy administrator or a creditor. The suspect (preference) period is determined by the bankruptcy court and may not start earlier than two years from the date of issuance of the court decision declaring bankruptcy. Furthermore, transactions carried out within a period of five years preceding the declaration of bankruptcy are conditionally subject to clawback.