Legal Insight
January 2025
Giorgos Kefalas, L.LM. mult, M.Sc.
Summary: The out-of-court mechanism is a debt settlement tool that has undergone successive modifications since its introduction in 2021, primarily to improve debtor arrangements with both public and financial institutions. However, a recent decision (No. 77522 EX 3.6.2024) introduced changes to the computational tool, which could significantly alter the resulting arrangements with public entities.
1. Introduction
As noted in a previous discussion, debt settlement solutions within the out-of-court mechanism are determined using a computational tool (algorithm). The first computational tool considers only the debtor's income and assets to derive a settlement solution. In contrast, the second computational tool—typically used when financial institutions are involved—also takes into account the income and assets of co-debtors (especially guarantors).
Based on this data, the computational tool initially calculates the Maximum Debt Repayment Capacity of the Debtor (MDRCD), which can never be lower than the liquidation value of the debtor’s assets. Specifically, Article 8A of Joint Ministerial Decision (JMD) 67360/10.6.2021 states:
"The repayment capacity or Maximum Debt Repayment Capacity of the Debtor (MDRCD) constitutes the maximum value among: (a) the Net Present Value (NPV) of the MDRCD based on the debtor’s tax records, (b) the NPV of the MDRCD derived from the cash flow of the monthly repayment capacity declared in the application, and (c) the minimum creditor recovery amount, i.e., the amount that each creditor would receive in the event of liquidation of the debtor’s assets."
A major change introduced by the recent JMD No. 77522 concerns the method of calculating repayment capacity based on tax records, which could significantly increase the MDRCD, as explained below.
2. The Change Introduced by JMD No. 77522 in the First Computational Tool
Until the recent amendment by JMD 77522, the basis for calculating a legal entity’s repayment capacity based on tax records was the "Total Profits" or "Loss Balance" field in Tax Form N. It was explicitly stated:
"In cases where the final income amount is negative due to losses, the income considered for the MDRCD calculation of a legal entity through tax records shall be zero."
Thus, until June 2024, the repayment capacity was calculated based on annual profits. If the entity recorded losses in the last fiscal year, a zero amount was taken into account. In such cases, if the entity lacked significant deposits or other financial assets (stocks, bonds, etc.), the repayment capacity was determined based on its assets or its declared monthly repayment capacity.
However, the recent JMD No. 77522 introduced a presumption regarding the available annual income of legal entities. Specifically, it states:
"If the above amount (i.e., the amount derived from the entity's adjusted profits/losses) is lower than 10% of its turnover, the available annual income is adjusted to this percentage."
This means that the legal entity's income, which can be allocated to debt settlement, is now presumed to be at least 10% of its annual turnover, regardless of its actual financial results.
3. The Implemented Change in Practice – A Practical Example
What does this change mean in practice, and how does it affect the final settlement proposal for the debtor – a legal entity? Consider the following example:
A legal entity with total assets valued at €200,000 and bank deposits of €10,000 has recorded losses for the past three years, while its turnover for the last three years was €300,000, €350,000, and €400,000, respectively.
Before the recent change, the computational tool would consider the entity’s losses and thus assume zero income. Consequently, the repayment capacity would be based on the liquidation value of the assets, totaling €210,000 (assets plus deposits), which would then be distributed over time for the settlement proposal.
After the recent change, the computational tool will no longer assume zero income. Instead, under the new presumption, the entity's income for each fiscal year will be considered €30,000, €35,000, and €40,000, respectively (10% of turnover). Therefore, repayment capacity will be calculated based on tax records, with appropriate adjustments per paragraph 5 of Article 8A of JMD 67360 EX 2021:
- For the first year’s installment calculation, the tax data from the last fiscal year will be used.
- For the 2nd to 4th years, the average of the two highest values from the last three years will be used at a 65% rate.
- From the 5th year onwards, the average of the two highest values from the last three years will be applied.
In practice, this recent legislative amendment leads to a significant increase in the annual repayment capacity and, consequently, a reduction in the duration of the settlement under the out-of-court mechanism.
4. Concluding Remarks
While many previous amendments to the out-of-court mechanism tool have contributed to more sustainable settlement proposals for debtors (e.g., reduction of interest rates for both public and financial institution arrangements, exemption from interest charges in cases of full prepayment of the settlement for public debts, etc.), this latest regulation appears to impose a significant burden on legal entity debtors in some cases.
The new presumption—effectively non-rebuttable by the debtor—mandates that the entity must allocate at least 10% of its turnover to debt repayment, regardless of its actual financial condition. This modification will likely lead to settlements with higher monthly installments and shorter repayment periods in many cases.
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