Introduction
Reorganisation plan
Conciliation procedure
Disadvantages of conciliation procedure
New rescue procedure
Comment
Introduction
In September 2007 Greece adopted the Bankruptcy Code (by virtue of Law 3588/07) replacing existing legislation governing bankruptcy, as well as pre-bankruptcy voluntary restructuring and liquidation proceedings (Articles 44-46a of Law 1892/90).
The Bankruptcy Code currently provides for two restructuring mechanisms:
- a pre-bankruptcy voluntary rescue procedure referred to as the 'conciliation procedure' (Articles 99 and following); and
- an alternative rescue procedure called the 'reorganisation plan', which includes a mandatory cramdown on creditors that can reach up to 80% (amended last year to reach up to 90%) of their claims, but requires that the debtor be declared bankrupt before initiating the plan.
Reorganisation plan
The reorganisation plan has so far failed to serve its purpose mainly due to the bankruptcy declaration requirement, which effectively destroys any value as a going concern, since bankruptcy proceedings in Greece are more liquidation oriented and involve time-consuming proceedings. Bankruptcy proceedings, irrespective of whether they lead to liquidation or restructuring, require that the debtor's property be sealed off and an inventory of assets be undertaken; debtor in possession arrangements are possible only upon a decision of the bankruptcy court (although no such decisions have yet been cited, but rather only a decision rejecting such a request).
Conciliation procedure
The conciliation procedure has proved to be very popular, although there has been scepticism as to potentially abusive use. This procedure affords a debtor that foresees upcoming liquidity problems and potential default in its payments with the opportunity to seek an agreement with the majority of its creditors to avoid financial hardship and default.
The aim of the process is to reverse the debtor's financial hardship through debt reduction, refinancing, securitisation or any other measure deemed or agreed necessary. The procedure is initiated by virtue of a court decision appointing a mediator following a petition by the debtor. After a period of four months (previously two months), in cases where an agreement is reached with the majority of creditors, the court will ratify the agreement after judicial review.
A crucial aspect of the conciliation process is that the judge who receives the initial application can impose, as an interim measure, a judicial moratorium on all enforcement actions against the debtor while the conciliation process is ongoing. This not only protects the debtor from further deterioration, but also encourages creditors to communicate with, rather than attack, debtor assets.
Ratification of the agreement offers the debtor a further reprieve from enforcement actions for debts created before completion of the agreement for a maximum period of four years (previously two years). This reprieve covers guarantors and fellow debtors, and includes protection from injunctive measures, as well as a six-month moratorium on bankruptcy petitions.
Disadvantages of conciliation procedure
After a period of three and a half years of intense and often abusive use, this procedure has illustrated two crucial disadvantages:
- Lack of a mandatory cram-down effect on dissenting creditors - the ratified agreement does not bind non-consenting creditors, which has led to a so-called 'collective action problem'. Creditors seem reluctant to participate and become parties to the agreement, hoping that other creditors will eventually bear the burden of rescuing the debtor while they preserve their claims against the debtor in full.
- No shortcut for pre-packs - there are no legal grounds for immediate ratification of pre-packaged agreements between the debtor and its creditors; instead, the law obliges debtors to follow all phases of the conciliation procedure (application for initiating the procedure, appointment of a mediator and application for ratification). This causes undue delays that jeopardise the debtor's viability during the procedure.
Further to these disadvantages, it has also become apparent that in the current economic climate, both social and economic reasons have justified the need for a swift and flexible voluntary pre-bankruptcy proceeding, including:
- employment protection, due to rising national unemployment figures; and
- preservation of the debtor's business as a going concern, since production and operation should not be interrupted; instead they should continue and thus contribute to the national gross domestic product.
Furthermore, it has been acknowledged that focus should be given to the business and to investors looking to finance an illiquid business, rather than to stakeholders. Finally, as explained above, it has become evident that a reorganisation plan (according to Articles 106 and following) that necessitates a bankruptcy judgment is likely to fail and eventually destroy all or any value as a going concern.
New rescue procedure
The Ministry of Regional Development has therefore introduced a proposed new bill that amends and transforms the conciliation procedure into a rescue procedure. The new procedure will offer debtors facing financial hardship (or which have ceased payments altogether) a 'second chance' by virtue of an agreement between the debtor and creditors representing a majority of 60% of the total claims, 40% of which should be secured, or a decision of a creditors' assembly that requires at least a 50% quorum and a majority of 60% of the claims represented, 40% of which should be secured.
On ratification, the agreement will bind all creditors, even non-consenting creditors, and will thus have a cramdown effect based on equal treatment of same-class creditors; in addition, it will ensure that no creditor receives less than it would have in case of a liquidation bankruptcy. The new bill adopts the possibility for a judicial moratorium on all enforcement actions against the debtor while the process is ongoing and until its ratification. This possibility makes the existing conciliation procedure very popular, as it protects debtors from further deterioration, but also encourages creditors to communicate with, rather than attack, the debtor.
The proposed procedure will provide for several alternatives so that it can be implemented effectively by debtors either with a large number of creditors or with few major creditors, debtors that have initiated confidential negotiations with creditors at an early stage or debtors that have ceased payments.
Furthermore, the new bill will attempt to tackle one of the most significant problems concerning restructuring in Greece and Europe – namely, shareholder approval in cases of debt-to-equity transformation, since both national courts as well as the European Court of Justice have held that any capital increases without a decision of the relevant body constitute a violation of EU legislation, the Greek Constitution and Article 1, Protocol 1 to the European Convention on Human Rights regarding the right to property.
Pursuant to the new bill, when shareholder approval cannot be obtained, the bankruptcy court can appoint (in cases that it holds such denial as being abusive) special representatives to exercise shareholders' voting rights. In a way the new bill will adopt a test that measures both creditor claims as well as shareholder equity value based on the potential return in case of liquidation.
Moreover, the new bill will provide that debtors that have reached an agreement with their creditors before the procedure is judicially initiated can file for ratification immediately on satisfying the creditor percentages, thus also allowing for possible pre-pack sales.
Comment
As Greece struggles to deal with its debt, the economy languishes in a deep recession and banks lack liquidity, the new bill seems to have come at a time to offer distressed debtors a second chance. However, it is not yet clear whether the new bill will be implemented as proposed by the Ministry of Regional Development or whether it will undergo further consultation, since there is scepticism over some of its content. The new bill is characterised as ambitious and innovative, but will need to be enforced by a judiciary that is not specialised and experiences delays in setting hearing dates and issuing judgments.
For further information on this topic please contact Ioannis Kontoulas at PotamitisVekris by telephone (+30 210 338 0000), fax (+30 210 338 0020) or email ([email protected]).