Rehabilitation proceedings of legal entities Greek Law 4738/2020

Greek Law No. 4738/2020 (Greek Government Gazette A’ 207/27.10.2020) on Debt settlement and second-chance arrangement (hereinafter, "the Law") - applicable from 01.01.2021 - shall replace the Bankruptcy Code by introducing a common regulatory framework for the treatment of private debt, in harmonization with the provisions of the Directive (EU) 2019/1023 "on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency)”.

Necessity of the Regulation 

The Bankruptcy Code (“BC”), which applied until this day, with the recent amendments of Law 4446/2016, already provided an adequate framework on pre-insolvency procedures with specific and detailed provisions for the rehabilitation proceedings of art. 99 et seq. BC. 

Subject to the Law, the said provisions are improved in order for the regulation to thoroughly meet the requirements of the abovementioned Directive and especially those under Title II on preventive restructuring.

Provisions of the new Law 

Specifically, the following amendments are introduced under Chapter B’ of the pre-insolvency rehabilitation procedure, so that the new regulations are promptly harmonized with the Directive: 

• The principle of creditors’ not being worse-off is broadened and redefined with reference not to the state, at which the creditors were, based on their ranking in the context of the liquidation under 8th Chapter as in force until this day, but with a broader reference to the state at which the creditors would be in case of the debtor’s bankruptcy. Hence, the Law covers creditors, whose claims against the debtor are satisfied subject to the contractual right arising from assets owned by themselves and not by the debtor himself, as in the case of factoring, not being worse-off. 

• Pursuant to article 34 of the Law, the consent percentages of the creditors are amended, so that - for the purposes of a rehabilitation agreement approval - there is a required consent of the creditors that represent on the one hand a percentage of 50% of the claims with special privilege, and on the other hand a percentage of 50% of the rest claims (i.e. the unsecured ones, including those with general privilege). This new provision introduces an explicit creditors’ separation- between those who aim at specific collaterals (creditors with special privilege) and those, whose satisfaction will arise from the debtor’s assets (unsecured creditors and creditors with general privilege), and it also requires a consent of 50% percentage for the rehabilitation agreement approval (based on each claim’s amount) for each creditor’s category. However, given the fact that this new provision could lead to difficulties in practice for the rehabilitation agreement approval, especially when the unsecured creditors do not consent, art. 54 par. 2 provides the alternative of the rehabilitation agreement approval with the consent of the creditors representing 60% of the total claims and more than 50% of the special privileged claims, provided that the further requirements of art. 54 par. 2 par. 2 are met. 

• The Law regulates an issue, that has been raised several times by legal theory, and especially, the issue of the competency for providing approval on rehabilitation agreements, concluded with legal entities. Subject to the new provisions, the competent administrative body shall be either the administrator or, in cases of Société Anonymes, the Board of Directors. This shall also apply even if there is an opposite provision in the debtor’s Articles of Association, provided that - pursuant to the expert’s report - the shareholders or the company members shall not be placed in a worse state than the one they would be in case of bankruptcy, due to the rehabilitation agreement. 

• The common phenomenon of the non-consent by the State and its bodies is dealt by this Law. In order to facilitate the conclusion of rehabilitation agreements, it is stated that State consents to rehabilitation agreements subject to the same terms and private/financial criteria, when the requirements for the approval of a rehabilitation agreement are met and such bodies are expected to be placed in a better state than the one of the bankruptcy scenario. The innovation of the fictitious consent of the State’s bodies is also introduced, under the condition that the specific requirements provided in art. 37 par. 2 are met. 

• With regard to the indicative - until this day- list with provisions of a rehabilitation agreement, the Law introduces restrictions towards the effect of the rehabilitation agreement on labor rights, aiming at the employees’ protection. 

• The submission of an application for the certification of a rehabilitation agreement, as well as the submission of an application for precautionary measures shall not constitute a reason for the termination or the amendment of pending agreements, even in the case that there are contractual rights for the termination, solely and exclusively due to the placement of the debtor under rehabilitation procedure. 

• Moreover, art. 51 of the Law provides the appointment of a special proxy, who will be competent for exercising some or all the powers of the debtor’s company board, as a possible precautionary measure. Such innovation has a practical value, in cases when the debtor does not manage the company pursuant to law and moral principles, until the issuance of a certification decision of the rehabilitation agreement. Especially, in the cases of fraudulent acts or abusive refusal from the debtor’s side to participate in the negotiations towards the conclusion of an agreement, the potential for the delegation of some or all powers to the special proxy is provided without the debtor’s consent. 

• The Law provides the potential of reforming or extending the duration of the precautionary measures, by setting though the maximum duration of precautionary measures to twelve (12) months.

At the same time, the employees’ claims for accrued salaries are explicitly excluded from any suspension of individual persecutions. 

• Pursuant to the new provisions, it is provided that a rehabilitation agreement can be concluded without the debtor’s consent, even if its subject is the transfer of part or the whole business of the debtor, provided that the provisions of art. 32 par. 2 are met, in contrast to the applicable regulatory framework, where this was an exclusive exemption, requiring a relevant consent. 

• For the purposes of settling practical issues relating to the legal consequences of the certification, it is clarified that any seizures, including garnishee orders arising from any regulated by the rehabilitation agreement debts, are lifted, if this is provided in the agreement. 

• The right of all contracting parties for the cancellation of the rehabilitation agreement without a relevant notice is retained, but non-compliance with the terms of the agreement is deleted as a reason for the cancellation and introduced as a reason for the agreement’s termination subject to art. 40 par. 1. It is further clarified that any cancellation of the agreement shall not affect any rights of a third party acting in good faith, that has obtained the assets from the debtor against pecuniary consideration. •Pursuant to art. 65, it is stipulated that the experts shall be included in the Experts Registry subject to the provisions of Chapter C’ of the Law.

Objectives 

The aim of the aforementioned amendments on the applicable until this day - pre-insolvency framework is not only the harmonization of the legislation with the EU Directive, but also the settlement of any setbacks and practical deficiencies relating to the application of the pre-insolvency framework, such as for example the issue of the competency for providing consent in rehabilitation agreements made with legal entities, as well as the common phenomenon of non-consent by the State and its bodies in rehabilitation agreements.

*The present document constitutes one out of three alerts, regarding the context of Law 4738/2020 titled “Debt settlement and second-chance arrangement and other provisions». Please also see and the other related alerts titled “Bankruptcy of natural persons and legal entities” and “Insolvency Practitioners Provisions”.

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