Special liquidation procedure
The much-anticipated amendment to the Bankruptcy Code was introduced as a proposed bill by the Ministry of Regional Development in Spring 2011, but underwent a series of deliberations before being voted on by the legislature. Eventually, on September 15 2011 Law 4013/2011 was enacted, broadly amending pre-bankruptcy proceedings by abolishing the conciliation procedure (former Article 99 of the Bankruptcy Code) and adopting the new recovery procedure. Moreover, as a last-minute addition, the amendment introduced an additional pre-bankruptcy procedure - the special liquidation procedure. This last procedure was not part of the bill presented by the ministry in Spring 2011.
The Bankruptcy Code, adopted in September 2007, provided for a new conciliation procedure, which was inspired by the French procedure de conciliation. Since its introduction the conciliation procedure has proved popular, although there has been scepticism as to potential abusive use, since many debtors appeared to be more interested in being granted a reprieve against enforcement proceedings and delaying forthcoming bankruptcy rather than concluding a conciliation agreement with their creditors. Often by the time the conciliation procedure was completed and the moratorium against enforcement proceedings had lapsed, the debtor had accumulated more debt by trading while insolvent and had lost most of its assets. At an early stage, the government identified many of the conciliation procedure's weaknesses as well as the deteriorating economic environment that would result in more debtors not only ending up in financial hardship, but also failing to make payments. Thus, the government moved to rewrite the provisions of the Bankruptcy Code governing pre-bankruptcy proceedings.
At the last minute, the amendment itself was changed to introduce a new pre-bankruptcy procedure, which until 2007 was set out in Article 46a of Law 1892/90. The procedure considers a sale of the debtor's business to be a going concern while it is still operational. According to the new procedure, a debtor which either has ceased to make payments or is in imminent financial distress (ie, it foresees liquidity problems and a potential default on its payments, resulting in a cessation of payments) can be placed in special liquidation while operating provided that it constitutes an undertaking which, during the previous financial year, fulfilled two out of the three quantitative criteria:
- assets of more than €2.5 million;
- a net turnover of €5 million; and
- on average, 50 employees.
This procedure allows the transfer of the business free of all debts and encumbrances, which remain solely with the debtor. Thus, the purchaser is not exposed to the debtor's liabilities.
Both the debtor and its creditors have legal standing to file for special liquidation provided that they can submit:
- a certification from a bank or financial services company that there is a creditworthy investor interested in purchasing the debtor's assets, and
- a declaration by the proposed liquidator accepting the appointment, proposing a report on the liquidation plan, business continuance, budget and anticipated expenditures, and undertaking that the required funds are available.
Once a debtor has filed for special liquidation, any bankruptcy petition against the debtor is stayed until rejection of the filing or the expiry of the deadline for concluding the sale of the debtor's assets. The sale of the debtor's assets shall cause all pending bankruptcy applications against the debtor to be rejected.
The bankruptcy court will approve the petition and appoint a liquidator to carry out a tender if it estimates that placing the undertaking in special liquidation will improve the probability of maintaining the undertaking and preserving employment.
- assumes the undertaking's management;
- publishes an invitation for the conduct of a public tender for the purchase of the debtor's assets requiring that at least 40% of the tendered purchase price will be paid in cash at the time of the execution of the transfer agreement and the remainder of the purchase price will be paid within five years from such execution date;
- prepares a report proposing acceptance of the most favourable offer; and
- submits the report to the bankruptcy court for ratification.
The bankruptcy court ratifies or rejects the tender process and accepts or rejects the submitted request, but also may apply additional conditions to the sale, especially regarding the grant of security for the deferred portion of the purchase price. It also designates the purchaser or purchasers. Its decision is not subject to appeal. The liquidator then prepares a draft asset transfer agreement.
The purchaser either executes the relevant agreement, accepting any additional terms imported by the court's decision, or rejects it within five working days so that the process may continue with the second-ranked purchaser, and so on.
If the decision does not impose additional terms, the purchaser is obliged to execute the transfer agreement in accordance with the terms stipulated in the offer memorandum and the purchaser's offer. Upon payment of the consideration or of the amount, which has been agreed to be paid immediately, and subject to the grant of security (if any) for the deferred portion of the purchase price, the liquidator prepares either a deed confirming payment or a deed certifying that the purchaser has performed all of its obligations.
The purchaser acquires the assets free of all encumbrances and is not liable for any debt attributed to the debtor. Under the existing proceedings, the period available for the transfer of the assets is 12 months, and may be extended by the bankruptcy court for another six months. The liquidator is obliged to publish an invitation to all creditors to report their claims within 15 working days from the transfer of the undertaking's assets.
The liquidator deducts from the proceeds of the asset transfer any related expenditures, including the undertaking's operational costs during the liquidation. In addition, the liquidator prepares a creditor classification table for the remainder of the proceeds, which are finally distributed according to the distribution provisions set out in the Bankruptcy Code.
Pursuant to the new procedure, as long as no creditor receives less than it would have done through enforcement proceedings or a liquidation bankruptcy, debtors that have an existing or foreseeable inability to satisfy their debts as they become due or debtors that have ceased payments altogether can reach an agreement with their creditors representing a majority of 60% of the total debts (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 debts represented (40% of which should be secured). On judicial ratification, the agreement will bind all creditors (even non-consenting creditors), thus having a cramdown effect based on equal treatment of the creditors of the same class. The new procedure provides for a judicial moratorium on all enforcement actions against the debtor, as well as a moratorium on the transfer of the debtor's immovable property and equipment while the process is ongoing and until ratification of the agreement, whereas under the former conciliation procedure regime the moratorium on the transfer of immovable property and equipment was not automatic, thus allowing many debtors to dispose of almost all of their assets favourably.
The new procedure provides for several alternatives so that it can be implemented effectively by debtors with either a large number of creditors or a few major creditors, and specifically allows for the sale of the debtor's business to a third party or a creditor party.
A debtor can apply to initiate the recovery procedure, in which case the court will provide a period of up to four months for an agreement to be concluded, or will ratify an agreement and submitted to the court along with an application to initiate the procedure.
The new law attempts to remedy some of the problems identified with the conciliation procedure, as follows:
- The law tackles the collective action issue by binding non-consenting creditors. Previously, non-consenting creditors were not bound by the agreement and preserved the claims, thus they were reluctant to enter into an agreement expecting that other creditors would bear the burden of the rescue.
- It deals with the need for an expedited procedure by allowing debtors to reach an agreement before applying for the procedure, thus simultaneously initiating the procedure and ratifying the agreement.
- It aims to improve integrity and identify debtors that can and wish to be rescued. The law provides for stricter scrutiny of the debtor's finances by requiring at the time of initiating the procedure an expert's report conducted by a credit institution or an auditor, and imposing an automatic stay on the transfer of immovable property and equipment.
- The new law deals with shareholder approval, creating the possibility to substitute an abusive negative shareholder vote judicially in case of, for example, a debt for equity swap.
The new law includes some transitional provisions according to which any application to initiate a conciliation procedure filed before the enactment of the new recovery procedure could either follow the old regime or convert to the new procedure. Although the law is definitely a step in the right direction, which remedies many of the problems with the conciliation procedure, it is time to allow the law on pre-bankruptcy procedures to settle and to focus on the need to create a skilled and swift judiciary that will implement these procedures in a timely manner.
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]).