Ongoing problems with non-performing loans (NPLs) in Greece has led to efforts by its Parliament to reform insolvency laws. In December 2015, additional alternative debt restructuring options were introduced in Greece as a stop-gap alternative to bankruptcy, and a new NPL loan management and transfer companies market was established to help credit institutions to clean up their balance sheets. This is relevant to lenders intending to transfer NPLs as well as to investors focused on high-risk (and potentially high-return) acquisition of NPLs.
The first part of this analysis sets out existing alternatives to liquidation in bankruptcy – relevant both to debtors and creditors willing to consider restructuring non-performing debt obligations, or to those focused on a potential transfer of distressed assets. The second part sets out recent developments to resolve the problem with NPLs and is relevant to lenders intending to transfer NPLs as well as to investors looking at high-risk (and potentially high-return) acquisition of these NPLs. The significance of the second part lies in the ability of the newly established NPL management and transfer companies market, to help credit institutions clean up their balance sheets.
In addition to the standard bankruptcy procedure where a company would be wound-up with assets sold on a break-up basis to meet creditor claims, the Greek legal framework governing insolvency includes two types of debt restructuring procedures:
- the first group, consists of insolvency options based on an agreement between the debtor and its creditors that allows the debtor to remain in control of, and manage, its business and assets, comprising (i) the rehabilitation procedure and (ii) the reorganisation procedure
- the second group consists of procedures aimed at the sale of the insolvent business in whole or in part as a going concern, comprising (i) the special liquidation procedure, (ii) the extraordinary procedure for special administration, and (iii) the transfer of a business within the framework of a rehabilitation plan.
Rescue procedures by agreement with creditors
The rehabilitation procedure is governed by articles 99-106ia of the Greek Bankruptcy Code (“BC”). The reorganisation procedure is governed by articles 107-131 of the BC. Both are flexible procedures aimed at maintaining and optimising the insolvent’s business, without a change in its current ownership status. They envisage a settlement of debts which, if successful, avoids the sale of the business or liquidation. Rehabilitiation and reorganization are effected by an agreement between the debtor and its creditors. Court proceedings play an additional role both before (by means of pre-approval) as well as after the agreement (by means of ratification).
Rehabilitation is effective as a contractual procedure prior to bankruptcy, whereas an application for reorganisation may only be filed either simultaneously with a bankruptcy petition, or within four months following a declaration of bankruptcy (the post-bankruptcy procedure). A successful rehabilitation leads to the avoidance of bankruptcy whereas a successful reorganisation procedure leads to the termination of a bankruptcy 1procedure whereby the debtor regains control of the business.
The debtor or the bankruptcy trustee may apply to the competent court to initiate the rehabilitation or reorganisation procedure. In case of a reorganisation, the debtor or the bankruptcy trustee making the application, must submit a reorganisation plan to the court for approval, as the basis for the proposed agreement with creditors. The BC provides for later amendments to the reorganisation plan by the debtor or bankruptcy trustee, in order to increase its chances of approval by the creditors. In rehabilitation, a settlement 2is reached as a result of negotiations between the debtor and its creditors 3together with a separate business plan having the same duration as the settlement agreement.
After filing a petition to enter rehabilitation, a temporary suspension of individual measures for compulsory enforcement against the debtor’s property may be granted by the court 4for the period of the rehabilitation. Similarly, a suspension is effective for the period of a reorganisation as part of the bankruptcy procedure (which runs simultaneously with the reorganisation).
The creditors or debtor may apply to the court for the appointment of a mediator to facilitate a rehabilitation agreement between the debtor and its creditors5, this is not possible in a reorganisation.
Creditor approval of the plan is subject to the same majority in both procedures. In rehabilitation, a creditors’ meeting is not required (in such case creditors can be approached ad hoc) and the plan can be voted for by creditors representing at least 60% of the claims of the creditors, including at least 40% of the claims of any secured creditors (or those with special privilege including those with mortgage pre-notations). However if a creditors’ meeting is convened, a quorum of only 50% of the total creditors’ claims is necessary, and the plan must also be approved by a majority of 60% of the claims of the creditors present at the creditors’ meeting, including at least 40% of the claims of any secured creditors present at the meeting (or those with special privilege including those with mortgage pre-notations). So where a creditors’ meeting is held, the rehabilitation plan may be approved with a narrower majority compared to reorganisation.
The reorganisation settlement approved by the requisite creditors must be ratified by the competent court, before it is then binding on all creditors, even those who voted against it. Similarly, a rehabilitation plan must be ratified by the court and this is then binding on all creditors.
Following a ratified rehabilitation plan, a new application cannot be filed for at least three (3) years. There is no such restriction as regards future attempts for reorganization under the BC6.
Creditors participate more actively in the rehabilitation procedure and receive more information compared to reorganisation.
Reorganisation is rarely used as a tool to achieve a sale as a going concern whereas the rehabilitation procedure has been used frequently, as further explained below.
Procedures to achieve going concern sales
In the second group of procedures, it is not the intention to rescue the company by an agreement with creditors. In the case of (i) a transfer of business (article 106θ BC), (ii) a special liquidation (art. 106ια BC) or (iii) an extraordinary procedure for special administration (articles 68-77 of Law 4307/2014), the purpose is to sell the business and assets in in order to satisfy creditor claims.
Special liquidation and special administration, involve the appointment of a special liquidator or special administrator to manage the sale of a company’s business and assets in order to meet its debts. A transfer of business according to article 106θ BC differs from special liquidation and special administration since it is initiated by the debtor company via a court application for rehabilitation, for the purpose of achieving an agreement between the debtor and its creditors (binding all creditors once ratified by the court) as to the sale of the business and assets to meet its debts.
In contrast, special liquidation and special administration are non-contractual procedures. The creditors may apply to the competent court for the appointment of a special liquidator or a special administrator. An application for special administration requires the support of creditors holding at least 40 % of the total claims whereas an application for special liquidation requires the support of only 20% of the total claims7. The debtor company may also apply for the appointment of a special liquidator. Following an appointment by the court, the liquidator or administrator undertakes the management of the company and the authority of its board of directors ceases.
A transfer of business through an approved rehabilitation plan does not require any public tender procedure, and can include a hive down to an established SPV. A public tender is required for sales of any part of the business via the special liquidation or special administration procedures.
The new procedures have not yet been used extensively.
Management of non-performing loans (NPLs) (art. 1-3 of Law 4354/2015)
In addition to alternative insolvency procedures, law 4354/2015 introduced a procedure for the management of NPLs, or their transfer. A core element of the new regime is the introduction of two novel company types in the Greek legal framework: (a) companies for the management of non-performing loans (NPL management companies) and (b) companies for the transfer of claims from non-performing loans (NPL transfer companies).
NPL management companies are permitted to manage claims from loans and/or credits that have been non-performing for a period exceeding ninety (90) days. When a group of claims against the same debtor is being managed by an NPL management company, this can include claims from both non-performing and performing loans. Management may include a variety of services, such as claims collection, legal & accounting supervision, conduct of negotiations and conclusion of settlement agreements with debtors. A copy of any settlement agreement with creditors of NPLs must be sent to the Bank of Greece. NPL management companies are permitted to initiate legal proceedings and proceed with any other judicial measures for the collection of debts, and may initiate or participate in pre-bankruptcy rehabilitation and bankruptcy procedures.
Credit institutions licensed by the Bank of Greece, Greek branches of foreign credit institutions and special purpose companies of art.10 of law 3156/2003 may alternatively transfer outright NPLs that have been non- performing for a period exceeding ninety (90) days to NPL transfer companies (together with any performing loans with the same debtor). Claims can still be transferred to other credit and financial institutions as well as to NPL transfer companies.
Both the debtor and the guarantor must receive an invitation by means of an extrajudicial notice twelve (12) months before the transfer, to settle their obligation, but no such notification is required for disputed claims, awarded claims and claims against debtors who are considered to be non-cooperative according to the provisions of the Banking Code of Conduct.
Until February 15, 2016 the provisions regarding NPL transfers will not apply to consumer loans, loans secured by mortgage on a primary debtor’s residence, loans to SMEs or loans guaranteed by the Greek State. This standstill period is to regulate a smooth transition from the current security enforcement environment (dominated by credit institutions) to a security enforcement period (where the NPL transfer companies also participate).
Law 4354/2015 regulates the NPL management companies and the NPL transfer companies, by introducing requirements in relation to their legal nature, capital and scope of business. NPL transfer and NPL management companies are supervised, as regards licensing and reporting, by the Bank of Greece and are subject to an annual charge for the BoG’s supervision expenses. Both company types will take the form of Societe Anonyme (or a European Economic Area - EEA equivalent company type) with their registered seat either in Greece or in another European Economic Area member state, having established a branch in Greece. An additional paid-up share capital requirement of €100,000 exists for companies that purchase claims from non-performing loans and/or credits.