I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY
i Liquidity and state of the financial markets
It has been seven years since 2009 – in this time three memoranda of understanding, hundreds of laws regarding economic adjustment and one-and-a-half years of capital controls have been introduced – yet Greece is still struggling with its financial crisis. Financial figures are largely negative: the GDP is US$235.57 billion, the gross public debt amounts to 176.9 per cent of its GDP and GDP growth is negative, dropping at a rate of -0.5 per cent.
The Greek economy has deteriorated since the end of last year. The absence of serious reforms, political uncertainty and the heavy fiscal measures that have been implemented have decreased Greece’s economic growth and fiscal prospects. The International Monetary Fund (IMF) and other institutions have strongly argued that Greece’s debt is not sustainable and that there should be a debt restructuring. The European institutions are reluctant to proceed with a second debt haircut, partly because of the Treaty of the Functioning of the European Union2 (no bailout clause) and partly because this would demonstrate a special and favourable handling of the Greek debt, in comparison with the handling of other Member States’ debts.
These considerations resulted in a revision of growth estimates, specifically Greece’s projected GDP growth, which is estimated to reach 2.7 per cent in 2017, and a primary surplus target of 1.75 per cent in 2017. Banks are in the same situation. In the past three years, banks have stopped providing financial support, or made it extremely hard to get such help. There is a huge number of non-performing loans (NPLs) and much dispute on how they should be handled. This fact has made it extremely impossible, if not highly unlikely, for small and medium-sized enterprises (SMEs), which dominate the Greek economy, to gain access to financial help from the banks. As the budget of consumers and their economic behaviour are adversely affected, SMEs have no audience to appeal to. The ratio of entities liquidating and incorporating is 2:1. Therefore, business growth is unlikely to happen in the next two years.
ii Impact of specific regional or global events
The final shot at rescuing the Greek economy (as at the time of writing) was in June 2015, when the Prime Minister of Greece, Alexis Tsipras, announced a referendum regarding the approval of the European Institutions’ proposal on the ‘Reforms for the Completion of the Current Programme and Beyond’ and the ‘Preliminary Debt Sustainability Analysis’. Thereafter, the banks immediately closed, and re-opened by imposing capital controls on all domestic and foreign bank transactions.
The imposition of capital controls removed the last hope for legal entities, which was (some) liquidity; huge numbers of exporting enterprises were unable to pay suppliers, employees, taxes and other liabilities. Therefore, SMEs were quickly shown the exit. Moreover, banks stopped almost all funding, both for commercial and household purposes, causing a greater drainage of the Greek market.
It is evident from the above that as long as SMEs are not able to access financial assistance from the banks, the number declaring bankruptcy will be affected. Although restructuring could be a successful solution for these entities, the fact that most of their creditors, which hold a large perecentage of their debt, are banks, alongside the requirement that banks must consent to the restructuring plan, could make it even harder for them to reach a common restructuring scheme. This is explained by the fact that banks are already exposed to NPLs, huge debts and short liquidity, because of the withdrawal of depositors. Thus, they would not be willing to make further sacrifices and discharge enough debt for the SMEs to survive.
At an international level, the IMF has reported3 decreased global growth as a result of the slowdown in emerging markets, China’s turbulences, decreasing commodity prices and changes in the monetary conditions in the United States. These forecasts will minimise the appetite of investors to invest in highly risky investments, such as those of Greece. Risk aversion seems to dominate the current markets and Greece will be affected by such behaviours. On the one hand, Greece’s political instability and weak economy may offer some great chances for investments and profitability; on the other, they create a hostile environment for investors, who are afraid to become entangled with Greek bureaucracy, the unstable tax regime and expensive and lengthy administrative procedures.
iii Market trends in restructuring procedures and techniques
A large number of medium-sized companies proceed with informal and out-of-court restructuring following a mutually agreed scheme with the banks, which take over their management and look for a potential investor. This is heavily applied to outward-looking companies that have increased exports activity, such as those of the aquaculture industry, or those that have good potential to remain sustainable and regain their profitability because of their financial contribution to the Greek market, such as companies in the food industry (mainly supermarkets). Small companies usually apply for a formal restructuring procedure, which is typically a longer and costlier process.
Although the competent authorities do not regularly issue a report regarding the insolvency statistics, the General Secretariat of Commerce recently published some figures referring only to the restructuring procedure and for the period of 2012–2015. According to these statistics,4 the total number of companies that applied under Article 99 amounts to 1,940. Of these companies, 783 (40.3 per cent) were reactivated, 513 (26.44 per cent) were deregistered from the General Commercial Registry (and consequently from the Tax Authorities’ index), 54 (2.78 per cent) remain under the previous provisions of restructuring, 51 (2.62 per cent) were dissolved and liquidated, 534 (27.52 per cent) were declared bankrupt and five (0.25 per cent) were recorded as ‘other status’.
Unfortunately, there are no formal reports regarding the number and course of bankruptcy applications. It is estimated that the time required to resolve insolvency cases is three-and-a-half years, and the recovery rate is 34.9 per cent. More than 16,000 SMEs closed in 2015, while 229,000 SMEs closed within the period 2008–2014. In the first quarter of 2016, only 12,505 businesses were registered and 15,444 were deregistered,5 creating the first negative result (-2.910) since 2012.
iv Formal procedures entered into or exited
In general, the new provisions of the Bankruptcy Code have introduced four basic changes, which are explained in Section III, infra, and can be summarised as follows:
- a a shortening of most of the deadlines concerning both pre-bankruptcy and insolvency proceedings;
- b promotion of internal negotiations between the entity and its creditors regarding the restructuring plan;
- c the introduction of a new role: the insolvency practitioner; and
- d overall modification to the special liquidation procedure.
Regarding the formal procedures exited, it should be noted that the new Bankruptcy Code has abandoned the criterion of present or imminent inability of the debtor to pay its debts as a requirement to file for a restructuring procedure. Instead, the court may, now, initiate such procedure, if it deems that the debtor’s insolvency is probable and could be reversed.
Moreover, the new Bankruptcy Code has modified the special liquidation procedure and abandoned the imposition of quantitative criteria relating to the size of business to be liquidated, as well as the requirement of the investor’s creditworthiness.
II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK
i Legal entities
Greece has demonstrated a great interest in corporate insolvency law since 2007. The Bankruptcy Code has been updated many times since then, in reflection of the financial challenges faced by Greek corporations. Bankruptcy proceedings can be initiated by or against a merchant, either as an individual or as a legal entity. Corporate Insolvency law in Greece (Law 3588/2007)6 is structured in four main pillars: (i) voluntary liquidation; (ii) involuntary liquidation; (iii) the restructuring procedure; and (iv) special liquidation.
Voluntary liquidation is commenced by the company itself, through its board of directors or a relevant management body. A legal entity must file a bankruptcy petition within 30 days following a present or imminent cessation of payments, in a general and permanent way. A general and permanent inability of the legal entity to satisfy monetary obligations as they become due and payable may be present or imminent; essentially, a foreseeable result of illiquidity. In any case, present or imminent inability must exist at the time of the filing of the bankruptcy petition.
Once the court declares the legal entity bankrupt, the company is placed in receivership. For this, the court appoints an insolvency practitioner (syndic/bankruptcy trustee) to start the liquidation proceedings and manage the legal entity’s assets and liabilities. The court may also appoint the legal entity’s management body (debtor in possession), following the consent of the creditors’ committee, granted that the entity filed for voluntary bankruptcy and such appointment is in the interests of the creditors. The court, moreover, designates the date and place whereby the creditors shall convene before the judge rapporteur7 to compile the list of potential creditors.
The declaration of bankruptcy has the following significant results:
- a the acknowledgment of the entity’s assets existing at the time of filing the bankruptcy petition as ‘non-exempt’ property that is required for liquidation purposes;
- b the requirement that any claims not due at that time become immediately payable; and
- c the suspension of all enforcement actions and proceedings against the entity and its legal representatives.
The entity may also file a reorganisation plan along with its bankruptcy petition, or within four months from its declaration of bankruptcy. The insolvency practitioner may also file a reorganisation plan if the aforementioned deadline has elapsed, within three months of this. The reorganisation plan must provide information regarding the corporation’s financial situation, a description of the current or future measures to be taken to secure satisfaction of creditors, and the creditors’ rights and legal status.
Finally, the court reviews the reorganisation plan and if it is not rejected, either for typical or substantive reasons, it is subjected to the creditors’ approval within three months from the court’s order. Approval of the reorganisation plan requires a majority of 60 per cent of the total claims, which include 40 per cent of secured creditors. Then the reorganisation plan is ratified by the court and has a cramdown effect, thus binding all creditors, regardless of their participation or consent.
Involuntary liquidation is commenced either by any creditor with a relevant legitimate interest, or by the prosecutor for reasons of public interest. The time and procedure of filing are the same as those of the voluntary liquidation. Nonetheless, in the case of involuntary liquidation the court may not order that the entity remains in possession and continues managing the assets to be liquidated.
The restructuring procedure8 is a pre-bankruptcy procedure that aims to restart and ‘rescue’ the company as a going concern, while safeguarding creditors’ best interests. A company either in cessation of payments or under an imminent cessation of payments, or even under a probability of insolvency, estimated as such by the court, may initiate a restructuring procedure, including a ratification of a creditors’ compromise agreement by the court.
The Bankruptcy Code provides that the restructuring plan must be approved at least by the supermajority (60 per cent) of the creditors, which include 40 per cent of secured creditors. It should be noted that, until the recent changes in the Bankruptcy Code, the suspension of all enforcement actions against the company was under the absolute discretion of the court. Now, the court must grant such an order if creditors representing at least 30 per cent of the total claims (which include 20 per cent of secured creditors) declare before the court, either orally or in writing, their participation or intention to participate in the negotiations to conclude a creditors’ compromise agreement.
Moreover, such agreement could be filed directly for ratification to the competent court, as a pre-packaged plan. In the interim, filing of the pre-packaged plan automatically suspends9 all enforcement actions against the company until the court’s ratification. Such suspension may not exceed four months. In any case, under Article 106(h) of the Bankruptcy Code, following the commencement of the restructuring procedure and until the ratification, by the court, of a creditors’ compromise agreement, the restructuring initiation is completed within the same day. Undoubtedly, such ratification has a cramdown effect, thus binding all creditors, regardless of their participation or consent, unless their claims arose following the opening of the restructuring procedure.
Regarding the conditions for the ratification of the restructuring plan, it should be underlined that until recently the court could ratify such plan, if, cumulatively with other conditions, the court determined that the entity would become sustainable upon its ratification. According to the new rules, the court may ratify the restructuring plan regardless of the entity’s sustainability thereafter if it concludes that the following conditions have been met cumulatively:
- a the restructuring plan includes an explicit statement that all participating creditors have agreed to its content;
- b the restructuring plan includes a detailed analysis of the participants’ identity (creditors or not) and their claims, as well as clear reference to those claims whose enforcement may be affected by the restructuring plan; and
- c the restructuring plan along with the business plan is disclosed to all non-participant creditors whose claims may be affected by the restructuring plan.
Special liquidation procedure
Special liquidation procedure is heavily modified in the new Bankruptcy Code. Generally, this procedure envisages the purchase of the company’s assets by a potential investor and thereafter, the commencement for the announcement of claims to be satisfied. In fact, any company in cessation of payments or under an imminent cessation of payments may initiate a special liquidation procedure, regardless of its size. Any creditor may also file for the opening of such procedure if it is signed by creditors representing at least 20 per cent of the total claims.
Furthermore, the requirement of presenting a creditworthy investor is also abolished. Order of the approval of the petition by the court, which shall be issued within one month from the hearing, automatically suspends enforcement of all actions against the company. Rejection of the petition is subject to appeal. Following the approval, the special liquidator shall conduct a draft of the Transfer of Assets Agreement and upon payment of the consideration, issue the invitation for announcement of claims.
Special administration under the Code of Civil Procedure
The Code of Civil Procedure provides that the court may impose a special administration upon the real estate property or even the business of the debtor, following a creditor’s petition. Such an order is issued only if the creditor’s claim is judicially verified and thus, the creditor has obtained a respective decision allowing him to enforce his claim against the debtor.
It should be mentioned that this procedure is not acknowledged as an insolvency or liquidation procedure, but as an alternative means granted to the creditor to satisfy his or her monetary claim. These provisions are not largely regulated, and thus, initiation of such procedure is not widely recorded. It appears that special administration is more applicable to very small businesses or merchant individuals. Nonetheless, in 201310 a large construction company was the first-ever debtor to be placed under special administration, following the respective petition of a minority creditor. As the court explained in its headnotes, courts may not impose a special administration upon a real estate property or business of the debtor if, among others, there are compelling reasons for not doing so. Compelling reasons are those that render the special administration unprofitable, that the business’s operation and success is closely related to the personal reputation and contribution of its managers or partners, or that the business’s operation falls within the provisions regarding the protection of trade secrets.
ii Insurance companies
On 5 February 2016, the Greek legislator abolished all the provisions11 that applied to Insurance Companies, by virtue of Law 4364/2016 (the Law). The Law is in compliance with Directive 2009/138/EC, regarding the undertaking and operation of insurance and reinsurance companies.
According to the Law, such companies are required, as an integrated part of their business strategy, to maintain tools to proceed with a regular practice of assessing their overall solvency needs. The results of each assessment should be reported to the supervisory authority, which is the Bank of Greece.
The new provisions aim to create a trustworthy environment and minimise unexpected liquidations of insurance companies that have severe financial and social results. In this respect, Article 235 of the Law provides that insurance companies are not subject to the rules of bankruptcy or pre-bankruptcy proceedings. As such, the Bank of Greece is the only competent authority to decide on restructuring measures for an insurance company, including the rise of capital, mandatory transfer of portfolio, suspension of payments to third parties etc., as well as on the winding-up proceedings following the suspension of their licence.
In the case of winding-up, the priority of claims is as follows: (i) employees’ claims arising from employment contracts and employment relationships; (ii) claims of the state arising from due taxes; (iii) pension funds claims; and (iv) claims on assets subject to rights in rem.
iii Credit institutions
According to the new rules on credit institutions, Article 145 Paragraph 1(a) of Law 4261/2014 provides that, subject to the specific provisions of Law 3458/2006 on Restructuring and Liquidation of Credit Institutions, such undertakings are not subject to the rules of bankruptcy or pre-bankruptcy proceedings.
To this extent, Law 3458/2006 provides for a special liquidation procedure that may be voluntary or involuntary. In any case, if the Bank of Greece suspends the licence of a credit institution, then such undertaking is immediately placed under involuntary liquidation.
iv Investment services companies
There is a number of laws applying to investment companies, depending on their nature and the investment services provided. Thus, Law 3606/2007 applies to investment services firms and investment intermediation firms, Law 3371/2005 applies to portfolio investment companies, Law 2367/1995 applies to closed-end investment companies, Law 2778/1999 applies to real estate investment companies, and Laws 2679/1999 and 3283/2004 apply to mutual fund management companies.
In general, investment companies can be declared bankrupt, subject to explicit provisions of the law that require a specific liquidation procedure supervised by the competent authority. In this respect, Article 22 of Law 3606/2007 provides that a bankruptcy proceeding may be suspended if the Hellenic Capital Markets Committee revokes the licence of the company concerned, thus resulting in a main procedure of distribution or segregation of assets, and then to liquidation or bankruptcy.
It should be noted that Article 2 Paragraph 3 of Law 3458/2006 on Restructuring and Liquidation of Credit Institutions, as amended by Law 4335/2015,12 also applies to investment companies that are established in Greece as parent companies and that have subsidiaries in another Member State. It remains to be clarified whether this new amendment, which provides for a restructuring procedure rather than bankruptcy and liquidation, shall be applied to investment companies established in Greece as parent companies that do not have any subsidiaries in the EU area.
v Non-merchant individuals
Individuals that are non-merchants are exempted from bankruptcy proceedings and fall under the protection of Law 3869/2010, which introduced measures to protect financially distressed individuals and households, such as extension of payments, increase of the number of payment installments and deletion of debts. The debtor must file a petition before the Peace Court satisfying all statutory requirements, including a detailed certificate of debts, the status of personal assets and income, and the status of the creditors’ claims. Then, the Peace Court tries to achieve a pre-judicial compromise, but this stage has had a low success rate in practice. The Peace Court, thereafter, issues a preliminary judgment that suspends all enforcement actions against the debtor and orders the way and amount of installments to be paid until the hearing date. The Peace Court’s final order sets out a binding adjustment of the debtor’s debts.
vi Informal methods to restructure companies in financial difficulties
Informal methods applied to restructure companies in Greece usually include the following:
- a An amendment of debt repayment schedule, which is the plainest type of financial restructuring, aimed at making existing debt repayment consistent with the debtor business’s projected cash flows. Such amendment may also be accompanied by an enhancement of lenders’ security and may also include some additional financing to cover urgent needs of the debtor.
- b Standstill agreements, under which, debt repayments to banks and bondholders are suspended over a specified period for the purpose of negotiating and reaching a compromise agreement on the financial and operational restructuring of the debtor. Usually, standstill agreements provide the enhancement of participating lenders’ security and may also include some additional financing to cover urgent needs of the debtor, as well as some changes in the debtor’s management.
- c Restructuring agreements regarding the financial restructuring of the debtor, combined with operational restructuring of the debtor, on the basis of a business plan and a management team approved by the participating lenders. Such agreements include various components, such as (partial) debt-to-equity conversion, the refinancing of the debt that is agreed as sustainable (by the debtor’s business and on the basis of the approved business plan), the taking of a new enhanced participating lenders’ security package and new working capital financing, for supporting or restarting the debtor’s operation and growth. According to the debtor’s financial position and type of business, restructuring may include negotiations with the employees and suppliers and agreement on certain payment arrangements in respect of outstanding amounts, to enable the debtor’s stable operation.
- d The above transactions would ideally take place with the participation of existing major shareholders, in the form of new equity contributions (a component that has been quite limited in Greece up until now) or of an investor capable of enhancing further debtor’s management efficiency, capital structure, and credibility in the Greek and international market.
vii Other laws relevant to insolvency and restructuring
The taking and enforcement of security
The security measures available to lenders and the law regarding their enforcement categorises Greece as a ‘creditor-friendly’ jurisdiction. Financial assistance to companies is provided mainly by the banks, which enjoy multiple ways of security measures and a privileged enforcement, in case of insolvency. A bank providing a loan will take a mortgage on the company’s immoveable property or a fixed or floating charge on its moveable property, particularly on its inventory and equipment.
Following the verification of the creditors’ claims, within one month13 from their announcement by the judge rapporteur and the insolvency practitioner, and granted that a reorganisation plan has not been concluded, the insolvency practitioner commences the realisation of the company’s assets (unsecured and secured). First in priority are creditors with general preferred privileges.14 The holder of the security in a specific asset of the company, whether immoveable or moveable, has a specific privilege (second class) and may be satisfied after the general preferred privileges. The third (last) class of priority includes unsecured creditors, who are satisfied after general and specific privileges. Nonetheless, before payments to any of the aforementioned classes, bankruptcy expenses, expenses concerning the management of ‘non-exempt’ property15 and claims of collective creditors16 must be paid in full. Moreover, if the three priority classes coincide, the proceeds are separated as follows: general preferred creditors receive 25 per cent of the proceeds, special preferred creditors receive 65 per cent and unsecured creditors receive 10 per cent.
Duties of directors of companies in financial difficulties
In Greece, the law sets out two different categories of the directors’ duties: the first category concerns the payment of the corporation’s tax liabilities and social security contributions, while the second category concerns the initiation of the bankruptcy proceedings.
With regard to the first category, in case the company fails to withhold, collect or pay income tax, VAT, or its respective share of social security contributions and any surcharges, the directors, administrators, executive managers and directors, as well as syndics/bankruptcy trustees (now insolvency practitioners) of a legal entity are rendered jointly and severally liable for payment of such taxes and contributions.17 This joint and several liability arises at the date of liquidation or merger or acquisition of the liable company. It should be noted though, that in the case of non-payment of withholding taxes (VAT, etc.) and social security contributions, the liability extends to all directors, administrators, etc., regardless of the year or time period of holding their respective office.
A significant provision that should be mentioned is the extension of joint and several liability, arising from due taxes, to shareholders of the company who hold at least 10 per cent of the company’s paid-up share capital,18 within three years prior to dissolution. Similarly, shareholders of 10 per cent are jointly and severally liable for unpaid social security contributions, but without any time limitation.
The second category of duties refers to the prompt and timely initiation of the bankruptcy proceedings by the company’s directors. The Bankruptcy Code envisages the personal liability of directors,19 in case they fail to promptly file a bankruptcy petition, provided that there is present or current inability of the company to pay its liabilities as they become due. This personal liability shall satisfy additional debts incurred by the company, starting from the date such petition should have been filed and until its actual filing.
Similarly, personal liability is attached to the company’s directors if the initiation of the bankruptcy proceedings is a result of a fraudulent or grossly negligent act.20
The importance of the bankruptcy rules, in terms of social and financial consequences, is also evident by the establishment of criminal liability against the company’s directors21 if they defraud creditors, conceal or fraudulently transfer assets of the company, dispose of inventory at very low prices, make false declarations or generally diminish the value of the company’s assets.
Fraudulent exploitation of the company’s assets is also avoided through the annulment of specific transactions that took place in the statutorily determined suspect period. The Bankruptcy Code distinguishes between transactions that must be annulled and transactions that could be annulled.
The insolvency practitioner must proceed with the mandatory annulment of transactions22 that took place by the company within the period of filing the bankruptcy petition and the declaration of bankruptcy (suspect period) and specifically:
- a donations and gratuitous deeds or deeds that resulted in undervalued consideration for the company;
- b payment of debts that were not due and payable;
- c payment of due debts with means other than cash; and
- d imposition of security measures on the company’s assets for pre-existing debts.
On the contrary, the insolvency practitioner may proceed23 with the annulment of transactions, whereby the other party acted in bad faith, knew of the company’s cessation of payments and that such transaction was detrimental to the creditors’ interests.
Similarly, if the company entered into transactions with the intent to defraud creditors or benefit other creditors within five years prior to the declaration of bankruptcy, these transactions may be annulled, provided that the other party knew of the company’s intent.24
Transactions that took place during the execution of a restructuring or reorganisation plan are explicitly exempted from such revocation.25
It should be noted that there are some transactions that are exempted from bankruptcy revocation, even if entered into within the suspect period, specifically:
- a regular business activities and arm’s-length transactions;
- b the provision of services or goods by the company for which counter-consideration was an immediate and equivalent payment in cash;
- c the granting of mortgage in favour of a company – especially a bank – according to Law 17.07/13.08.1923;
- d the granting of pledge in favour of banks, regarding pre-existing claims from loans or open accounts, according to Legislative Decree 4001/1959;
- e the creation of a mortgage or pledge to secure the issuance of bond loans or transfer of claims, according to Law 3156/2003; and
- f the granting of security by Special Purpose Vehicles (SPV) or other third parties in favour of banks, or other third parties to secure claims against the SPV, acting within the scope of a public-private partnership (PPP) agreement, according to Law 3389/2005.
III RECENT LEGAL DEVELOPMENTS
The third memorandum of understanding, as enforced by Law 4336/2015, promulgates a series of changes to the Bankruptcy Code, affecting the rehabilitation of viable debtors and the liquidation process for non-viable debtors, and proposing the establishment of a regulated profession of insolvency practitioners. These modifications are in alignment with the EU Regulation 2015/848 on Insolvency,26 which promotes the rescue of economically viable but distressed businesses and gives a second chance to entrepreneurs. The rationale of ‘rescuing’ instead of ‘punishing’ entrepreneurship pervades the new provisions of the Greek Bankruptcy Code.
The national legislators have finally realised that a higher rank in insolvency statistics is not a success story. To the contrary, the offering of a second chance through a well-organised and sustainable restructuring plan helps not only the survival of entities but also the safeguarding of jobs, circulation of money, payment of taxes and other liabilities and, most of all, the maintenance of everyday financial regularity.
i Introduction of the insolvency practitioner
As mentioned above, the new Bankruptcy Code provides for a new role: the insolvency practitioner. The insolvency practitioner is responsible for undertaking the duties of the syndic/bankruptcy trustee, mediator, special agent and special liquidator, as these duties are set out in the Bankruptcy Code. Such profession shall be exercised by legal entities and individuals, who are promptly registered in the Insolvency Professionals Registry.
Until recently, only an attorney-at-law with at least five years of experience could be appointed as a syndic/bankruptcy trustee. The provision now aligns with the international practices in the area of bankruptcy and shall be in force from 10 October 2016, following the issuance of a presidential decree setting out the requirements and detailed duties of insolvency practitioners.27
The introduction of the insolvency practitioner was received positively, but there have been some arguments that more time and ongoing education is needed to successfully carry out its role within the updated bankruptcy system.
ii Procedural changes in restructuring
The new Bankruptcy Code has simplified the restructuring procedure and introduced shorter and more internal proceedings, as explained below (see Section IV.ii, infra).
iii General changes in insolvency procedure
The new Bankruptcy Code has reconsidered the contractual right of a party to immediately, and without any formalities, terminate a continuous contract, upon a default event (with cause), such as the bankruptcy of the counterparty. Now, continuous contracts28 may only be immediately terminated ipso jure, or the parties may mutually agree a termination clause that will be effective upon delivery of such notice to the other party. In the latter case, the court reserves its right to decide otherwise on the continuation of such agreement. The court’s decision on that matter will be based on the intrinsic value of the contract for the company, as well as the legitimate interests of both the counterparties and the creditors.
Announcement of creditors, judicial verification of claims and filing of objections
In general, the deadlines29 regarding the judicial review of claims are shortened as follows: (i) the deadline for the announcement of claims is now one month (previously three months) from the publication of the decision declaring bankruptcy to the Bulletin of Judicial Publications of the Jurists’ Pension Fund; (ii) the deadline for the judicial verification of claims is now one month (previously three months), which can be extended by the insolvency practitioner up to two months, only for exigent circumstances; and (iii) the deadline for the filing of objections is now 10 days (previously, the law provided that the filling should be ‘without undue delay’), following completion of the judicial verification of claims, while the hearing must take place within 20 days from such filing.
Summons to the board of directors
The new provisions have abolished the obligation30 of the applicant to summon all the members of the board of directors to the hearing of the petition for declaring the company bankrupt. This is a rational amendment, especially if the petitioner is a third party and not a member of the board of directors, separating thus his position in the proceedings.
Deletion of claims within the scope of a reorganisation plan
The previous version regarding the reorganisation plan provided for a mandatory handling of the repayment procedure towards creditors, according to which there should be a minimum of 10 per cent satisfaction of creditors within three years. Such minimum requirement of creditors’ satisfaction is no longer needed.31 Moreover, in case the parties in the reorganisation plan decide to proceed with a haircut of claims of more than 80 per cent, the law requires that dissenting creditors are guaranteed to receive whatever is statutorily provided32 by the priority rules of the general liquidation procedure.
Priority of claims
By virtue of Law 4336/2015, the listing of the general preferred privileges of the Bankruptcy Code are fully harmonised with those of the Code of Civil Procedure33 regarding enforcement actions. This is a positive amendment as it aims to promote collective enforcement procedures through the declaration of bankruptcy.
Financiers of the troubled entity are given motives to continue investing their money, as financial facility is in the first rank of general preferred privileges, whether the restructuring plan is ratified or not.
The abolishment of super-priority claims, such as due VAT claims of the state34 (including any surcharges), employees’ claims arising within two years from the declaration of bankruptcy35 and pension funds claims,36 which were satisfied in the very first priority, signals a new era in the handling of sensitive social and financial issues. These claims are placed in consequent ranking, leaving a larger percentage of the proceeds for the rest of the privileges.
Moreover, the previous version of the Code of Civil Procedure (which is applied by analogy in the bankruptcy proceedings) regarding priority of claims in case where all classes of creditors coincide, provided that before separation of proceeds into one-third for general preferred claims and two-thirds for special preferred claims, claims from employee relationships arising within two years prior to the declaration of bankruptcy, due VAT claims of the state (including any surcharges) and pension funds claims that arose until the date of the declaration of bankruptcy should be satisfied first (and in such order). These provisions are deemed (implicitly) abolished by the Law 4336/2015, which promulgates that the proceeds are separated as follows: general preferred creditors receive 25 per cent of the proceeds, special preferred creditors 65 per cent and unsecured creditors 10 per cent.
Liquidation of small companies
The new Bankruptcy Code provides for important amendments to the liquidation of small companies. Although the law still identifies small entities as those with total assets amounting up to €100,000, the scope of the provisions is extended to entities that have real estate property as part of their assets. It remains to be clarified whether the valuation of the real estate property shall be capped at €100,000 or exempted from such valuation.
Moreover, the previous version of the law included a second subparagraph that explicitly provided that there is no requirement to appoint a creditors’ committee. This is omitted in the new Code, probably accidentally, and an amendment should be passed to restore that provision.
iv Regulation of NPLs
Another important legal development concerns the regulation of NPLs. As of March 2015, the four systemic banks of Greece held over €112 billion of sub-performing or non-performing loans, representing 42 per cent of all loans held by those banks.37 It is estimated that this will surmount €130 billion in 2016. Thus, the pressure for liquidity and the lack of capital curbed the Greek government’s reluctance to allow the assignment of NPLs and transfers, and finally opened the way for a regulated secondary market for NPLs.38
NPLs shall be managed either by special NPL asset-management companies or purchased and transferred to companies limited by shares that operate in Greece as credit or financial institutions. The previous Articles 2 and 3 of Law 4354/2015 defined NPLs as those loan or credit agreements that became due and unpaid for a period of more than 90 days. Nonetheless, the recent modifications abolished the time threshold and included all credit and loan agreements, without any criteria of failure to perform. The only exemption concerns the sale and transfer of such loans, which shall be effective only upon delivery of a written extrajudicial invitation to the debtor (and guarantor) to settle his or her debt within 12 months prior to such sale and transfer, according to a debt settlement agreement in writing.
The regulation of NPLs sets out the requirements for the establishment and operation of the eligible companies. For a Special NPLs Asset Management Company to acquire permission to manage NPLs, it must file with the Bank of Greece, among others, a business plan, a detailed report of the methods and procedures to be adopted for such management and questionnaires that assess its ability and suitability to deal with the restructuring of NPLs.
A management company must have a minimum share capital of €100,000, and if it wishes to finance new loans or credit agreements, a share capital of €4.5 million. The sale and transfer of NPLs is effective upon a written agreement by the parties, which shall be published in the respective books of the Registry of Pledges and promptly announced to the interested debtor (and guarantor).
It should be noted that the sale and transfer of NPLs shall have an income taxation on the goodwill, borne by the acquiring company, while the management of the NPLs shall have a VAT taxation of 24 per cent.
v Restructuring of municipalities and communities
Until 2014, municipalities and communities (M&Cs), as entities of public interest, could not declare bankruptcy. But the long-term financial crisis challenged their economic independency and sustainability and led to the introduction of Article 174 of Law 4270/2014 on the Restructuring of Municipalities and Communities. The idea of this law is to closely watch the financial performance of M&Cs, alert their management bodies and impose restructuring measures in accordance with a respective plan.
The Financial Independency Observatory of M&Cs (the Observatory) is entitled to report to the Ministry of Internal Affairs as well as M&Cs, the latter’s deviation of more than 10 per cent of the budgetary targets and provide with guidelines and methods to overcome such deviation. In case the Observatory concludes that an M&C is incapable of drafting a preliminary balanced budget or fraudulently records false financial data, it is also entitled to draft a report of its financial situation and propose restructuring measures, in accordance with a restructuring plan. Moreover, M&Cs may apply for a voluntary restructuring,39 which is reviewed (rejected or approved) by the Observatory and the Minister of Internal Affairs.
The measures of a restructuring plan may include:
- a suspension of recruitments;
- b voluntary or involuntary transfer of employees;
- c realisation of mandatory expenses;
- d increase of municipal taxes, fees and contributions; and
- e granting of a loan by the Deposits and Loans Fund.
IV SIGNIFICANT TRANSACTIONS, KEY DEVELOPMENTS AND MOST ACTIVE INDUSTRIES
i Value and significance of the transactions
MJ Maillis Group
A significant restructuring deal that was concluded recently is the MJ Maillis Group restructuring. It was a substantial restructuring deal, not only because of its size (€250 million of restructured debt), but also because of the multi-jurisdictional presence of the MJ Maillis Group, its international group of creditors, the participation of an international investor that acquired the group through the deal, and the deal’s successful outcome (post-transaction, the Maillis Group is consistently improving its performance), which made it a landmark case for restructuring in Greece.
The deal entailed the conclusion and implementation of a second financial restructuring (further to one that had been concluded and implemented in 2011 between the debtor and a big group of Greek and foreign-company creditors). The restructuring solution was based on the proposal of an internationally active private investor (HIG). The deal comprised a number of components, starting with the acquisition by the investor (through a Luxembourg-established SPV, funded for such purpose by HIG) of all 2011 restructuring lenders’ equity and quasi-equity; a consequent takeover-bid process, as Maillis SA was listed on the ATHEX; a subsequent squeeze-out process, which was followed by the delisting of MJ Maillis SA from ATHEX; and finally a debt-to-equity conversion debt-forgiveness and debt push-up (€25 million of debt was pushed up at the level of the investor’s SPV, making the debtor’s balance sheet restructuring more substantial), resulting in a total debt reduction of €177 million, which led the company to sustainable debt level and enhanced (positive) equity level.
More specifically, the debt restructuring agreements included a new restructuring deed, a new €10 million working capital bond facility programme, along with supplemental agreements relating to existing €16 million Super Senior and Senior (€83.3 million and US$69.4 million) bond programmes and an inter-creditor agreement, which were amended and restated along with the relevant security package comprising all kinds of security agreements on security assets in 10 jurisdictions, while the total number of jurisdictions involved (where participating subsidiaries of the group exist) was 12 – Greece, Italy, Germany, Poland, Canada, the United States, Romania, the United Kingdom, Spain, Belgium, France and Luxembourg. In addition, the investor’s SPV took up part of Maillis SA’s debt through a new €25 million syndicated loan facility. As mentioned, the deal included a mandatory takeover bid, filing and approval of an information memorandum and delisting from ATHEX, and corporate actions of Maillis SA and Maillis Group’s participating subsidiaries for the implementation of the new restructuring agreements and the closing of the transaction. Furthermore, certain amendments of the company’s Articles of Incorporation, the election of a new board of directors, the appointment of a new Chief Restructuring Officer, as well as the change of the top management of the group (CEO and CFO) were also part of the restructuring process.
Dias Aquaculture SA and Selonda
The restructuring of Dias Aquaculture (Dias) was one of the first that occurred in the fish farm industry. Dias applied for a pre-pack deal, which included a transfer of Dias’ business to Selonda Aquaculture SA. In particular, Dias contributed in kind its total assets, amounting to €69 million, and part of its liabilities, amounting to €29.6 million, to Selonda’s share capital. A part of Dias’ liabilities, which constituted 81.95 per cent of its total liabilities would not be contributed to Selonda; instead, it remained within Dias’s financial statements and was covered with the acquisition of 41,261,980 shares issued by Selonda, in accordance with its share capital increase of €12.4 million. The newly issued shares were subsequently transferred by Dias to its creditors, on a pro rata basis, for their satisfaction. It should be noted that Selonda itself had also applied for a restructuring plan, which resulted in haircut of its debts held by the banks, amounting to €50 million. Selonda is now managed and operated by a new management appointed by the participating banks, which is seeking an interested investor to buy out Selonda.
ii Restructuring techniques used
As normal methods of restructuring are not enough to save distressed companies in the Greek crisis environment, debtors and their creditors are led to more complicated solutions, depending on the nature and size of their business. In particular, large companies that were listed in the Athens Stock Exchange preferred to go private, through acquisition by an interested investor. A greater percentage of medium-sized companies resorted to techniques such as debt-to-equity conversion and debt-forgiveness agreements. In such cases, the banks, which usually hold the largest percentage of their debts, take over their management, proceed with drastic restructuring measures and then search for an interested buyer. Restructured companies – especially those with increased exports – are able to obtain new working capital financing. More advanced tools like a debt push-up, or even the creation of new group structures with lower debt levels or the consolidation of existing players in each sector, are also used to rescue viable businesses and recover part of the existing debt.
iii Distressed industries and market trends
The industries of construction, textiles, electric appliance stores and supermarkets have suffered the most severe financial losses within the Greek market. The reasons for such distress can be explained by the fact that all of them are capital-intensive industries, with high running costs, squeezed profit margins and, in addition, are overleveraged (through abundant financing provided to them before the crisis). Profit margins have decreased even more now that companies have limited access to working capital finance. Moreover, the recent changes in the income tax code, the real estate property taxation and the increase of VAT up to 24 per cent have significantly diminished the spending capacity of Greek consumers.
iv The restructuring plan
Among the changes implemented in 2015 regarding the restructuring procedure, there are two major modifications.
The first one concerns the procedure to grant a temporary stay on enforcement actions against the debtor, in the case of a restructuring before the court or a pre-pack deal. Regarding the restructuring before the court, the previous version of the law provided that such stay on proceedings was granted at the discretion of the court. According to the new rules,40 the stay shall be granted in any case if creditors representing at least 30 per cent of the total claims (of which 20 per cent are secured creditors) declare before the court, either orally or in writing, their participation or intention to participate in the negotiations to conclude in a creditors’ compromise agreement. Regarding the pre-pack deal, the new Bankruptcy Code provides that the court orders an automatic stay on proceedings from the date of filing the restructuring plan until the court’s ratification, and for a maximum period of four months.
The second concerns the procedure by the court to ratify the restructuring plan. Previously, the court could ratify the restructuring plan if, in addition to other conditions, it had determined that the entity would become sustainable upon ratification of the restructuring plan. According to the new rules, the court may ratify the restructuring plan regardless of the entity’s sustainability thereafter, if it concludes that the following conditions have been met cumulatively: (i) the restructuring plan includes an explicit statement that all participating creditors have agreed to its content; (ii) the restructuring plan includes a detailed analysis of the participants’ identity (creditors or not) and their claims as well as a clear reference to those claims, whose enforcement may be affected by the restructuring plan; and (iii) the restructuring plan along with the business plan is disclosed to all non-participants creditors, whose claims may be affected by the restructuring plan.
v The pre-pack deal
Since its implementation in 2011, the pre-pack deal has a distinctive position within the scope of bankruptcy law. First of all, it offers a good chance to the interested parties to find a mutually acceptable solution. The fact that a pre-pack deal can be filed before the court, which immediately decides upon the opening and closure of such procedure, has a double importance as it eliminates the delays in the commencement of the entity’s refinancing and invests in the entity’s continuity as a going concern. The recent changes that extend the circumstances under which an entity can file for a restructuring procedure, including the case of probable insolvency, demonstrate a clear legislative intent to facilitate further business rescue.
There have been some reservations on the pre-pack deal, mainly focusing on potential ‘cloudy’ negotiations, the partial or significantly diminished satisfaction of unsecured creditors or the impairment of the entity’s value.
Despite those reservations, the case of the pre-pack deal was and continues to be successful in Greece, overturning those who believed that debtors and creditors cannot reach an amicable solution. The point that a restructuring plan does not only promote the interests of the creditors but mainly helps an entity stay alive, pay taxes, recruit and make a business plan, is well received.
It should be noted that in a country where bankruptcy was considered a social stigma for many years – the ultimate nightmare of a successful businessman – the idea of the pre-pack deal demolished many prejudices. The legislator has given room to the interested parties to find a way out and act in both personal and public interests.
The principles of unity and universality41 pervade the rationale of the Greek law,42 which is applied in insolvency proceedings that are initiated in Greece. The EU Regulation 1346/2000, and all later amendments, were integrated to the Greek insolvency laws in May 2002. Similarly, the UNCITRAL Model Law on Cross-Border Insolvency was implemented almost in its entirety through Law 3858/2010.
Nonetheless, Greek jurisprudence on international insolvency cases is very poor. In fact, there are two main cases43 that were successfully tried before the Greek courts, regarding the recognition of a foreign decision and the initiation of secondary bankruptcy proceedings.
Many provisions of the EU Regulation have superseded any bilateral or multilateral agreements on insolvency proceedings or recognition of foreign decisions. Unlike France and Italy, Greece has not signed any respective agreements, and thus, the EU Regulation 1346/2000 remains in full force.
According to Article 81 of the Treaty of the European Union and Articles 7 and 35 of Law 3858/2010 on Cross-Border Insolvency, the Greek courts must cooperate with foreign courts or foreign insolvency administrators directly or through such administrators. Similarly, the Greek courts are entitled to communicate directly, request information or judicial assistance from foreign courts or foreign insolvency administrators or coordinate cross-border insolvency proceedings with other participant Member States. Although these provisions stand for a considerable time period, no respective cases have been reported.
A recent development in the European Union concerns the abolishment of the EU Regulation 1346/2000 on 26 June 2017. Any and all insolvency proceedings commencing thereafter shall be governed by the EU Regulation 2015/848. Many novelties of the EU Regulation 2015/848 have already been implemented in the Greek Bankruptcy Code through Law 4336/2016, such as the introduction of the insolvency practitioner and the rescue of viable companies. Other novelties, such as the Registry of Insolvency, the interconnection with the respective registries of other Member States, publication to another Member State and the cooperation of insolvency practitioners both in main and secondary insolvency proceedings may be either implemented through further amendments to the Greek Bankruptcy Code, or the new regulation shall be directly applied to cross-border insolvency cases.
VI FUTURE DEVELOPMENTS
The huge accumulation of debt by SMEs led to the introduction of a debt settlement scheme that would help them rearrange those debts, following a ratification of the respective plan by the court. In this respect, Law 4307/2014 provided that SMEs with business cycle amounting to €2.5 million, as of the fiscal year of 2013, are eligible to apply, until 30 June 2016, for a debt settlement petition, granted that they failed to repay loan agreements for more than 90 days or that they could not obtain a tax or social security clearance because of unpaid taxes or contributions. An important condition that falls within the scope of this Law, is that the company has not filed for a bankruptcy or pre-bankruptcy proceeding, and has not dissolved, liquidated or terminated its operations. It is expected that the current deadline for applications shall be extended for some more months.
Finally, there is an intent of both the Greek government and the European institutions to further help the sustainability and restructuring of the four Greek systemic banks, by providing them with even more privileges or enforcement measures against their debtors. As mentioned above, the super-priority claims of employees, VAT claims and pension funds claims have been abolished. On the other hand, financial facility of the distressed company is ranked at the top of the priority claims, granting more incentives to financiers to further invest their money in such companies. It is likely that the law will enhance the priority of the banks’ claims, as well as of the parties that have acquired such claims in accordance with the NPLs Law.
1 Dorotheos Samoladas is a partner and Christina Kalogeropoulou is an associate at Sarantitis Law Firm.
2 Article 125 of the TFEU.
3 See: www.imf.org/external/pubs/ft/weo/2016/update/01/pdf/0116.pdf.
4 The General Secretariat of Commerce and the Ministry of Justice furnished these statistics to the Greek Parliament, following a respective question under the rules of parliamentary review by one of its members and were republished in the press.
5 See: www.taxheaven.gr/news/news/view/id/29475.
6 As amended by Laws 3858/2010, 4013/2011, 4055/2012, 4072/2012 and 4336/2015.
7 Judge rapporteur means the judge that is in charge of a particular case, incumbent to present the insolvency case before the general meeting of the court.
8 Article 99 of the Bankruptcy Code.
9 Article 106(b) of the Bankruptcy Code.
10 Decision No. 5461/2014 of the Single Member Court of Appeals of Athens.
11 The old provision is the Legislative Decree 400/1970, as amended by the Presidential Decree 332/2003.
12 Article 2 of Law 4335/2016.
13 Such deadline can be extended by the judge rapporteur for up to two months, only in exigent circumstances, because of the amount and nature of the claims as well as the number of the creditors. Article 93 Paragraph 1, L 3588/2007.
14 General privileges, mainly, include: financing of the debtor for its continuing operations, claims arising from the contribution of goods and services to the debtor, based on the restructuring plan; if the debtor is an individual (an insolvent merchant); costs and expenses for his or her funeral, hospitalisation, daily necessaries; claims from dependent employment agreement, periodical fees for services that arose within two years prior to the filing of bankruptcy, lawyers’ fees, value added tax claims, taxes, pension funds’ claims; and any claims of the state and the prefectures.
15 ‘Non-exempt’ property refers to the bankrupt company’s assets as of the date of the bankruptcy’s declaration. ‘Exempt’ property refers to such company’s assets that are statutorily exempted from liquidation, such as necessaries, family rights, the debtor’s personality and his ability to work, rights that are strictly connected to his person (such as the right to use his name, to accept or waive inheritance rights, etc.).
16 Collective creditors are those creditors that their claims arose out of the insolvency practitioner’s actions in connection to the bankruptcy proceedings.
17 Article 50 of Law 4174/2013 and 31 of Law 4321/2015.
18 Listed companies are exempted from such liability extension.
19 Article 98 Paragraph 1 of Law 3588/2007.
20 Article 98 Paragraph 2 of Law 3588/2007.
21 Article 176 Paragraph 1 of Law 3588/2007.
22 Article 42 of Law 3588/2007.
23 Article 43 of Law 3588/2007.
24 Article 44 of Law 3588/2007.
25 Article 45(e) of Law 3588/2007.
26 The new EU Regulation 2015/848 on insolvency shall be effective from 26 June 2017.
27 Article 13 of Law 4378/2016.
28 Financial and credit agreements are exempted from these provisions, and any termination clause therein is applied in its entirety, Article 31, second indent of Law 3588/2007.
29 Articles 90, 93 and 95 of Law 3588/2007, respectively.
30 Previous Article 96, second indent of Law 3855/2007.
31 Previous Article 110 of Law 3855/2007.
32 Bearing in mind that consenting creditors are usually the banks and dissenting creditors the unsecured ones, then dissenting creditors must receive 10 per cent of the liquidation proceeds.
33 Article 154 of the Bankruptcy Code and 975 of the Code of Civil Procedure.
34 Article 33 par. 2 of Law 4141/2013.
35 Article 31 of Law 1545/1985.
36 Article 41 of Law 3863/2010.
37 Deloitte, Deleveraging Europe 2015–2016, page 41; www2.deloitte.com/content/dam/Deloitte/at/Documents/finance/deleveraging-europe-2015-2016.pdf.
38 Law 4354/2015, as recently modified by Article 70 of Law 4389/2016.
39 So far, two municipalities have applied for restructuring: the Municipality of Salamina and Gortynia in Crete.
40 Article 103, Paragraph 1a of Law 3588/2007.
41 Unity and universality mean that the insolvency procedure, whether of individuals or legal entities, is one and the applicable law is that of the jurisdiction, where such procedure was initiated and any creditor, regardless of his/her residence, may participate therein.
42 Both the Greek Bankruptcy Code and the Greek Civil Procedure Code incorporate these principles. In particular, Article 780 of the Civil Procedure Code provides the requirements, regarding the recognition of foreign judicial decisions; (i) the decision must apply substantive law, that according to the Greek Private International Rules is applicable, (ii) the decision must have been issued by the competent jurisdiction, in accordance with the substantive law of the jurisdiction applied, and (iii) the decision must not be contrary to moral usage or public order. To the contrary, the EU Regulation 1346/2000 provides for a more simplified recognition procedure, according to which the declaration of bankruptcy from the competent foreign courts is automatically recognized in other foreign courts, starting from the date of such declaration’s legal effects. The only exceptions to the automatic recognition are those of public order and individual rights.
43 Decision No. 494/2014 of the Single Member Court of First Instance in Kos and Decision No. 437/2013 of the Multi-Member Court of First Instance in Athens.