The red loans of the Agricultural Bank of Greece YEE

Legal Insight

April 2017 - upd June 2019

George Psarakis LL.M. (mult.), PgCert

Summary: This note provides legal information on the latest developments regarding the "red" loans of ATE YEE (Agricultural Bank of Greece under Special Liquidation), as well as comments on the way the credit agreements of this banking institution operated in the months prior to its special liquidation.

It has been observed that the Agricultural Bank of Greece (hereinafter 'ATE'), just a few years before it was placed in special liquidation and only non-performing loans were retained in its portfolio, applied abusive terms in the adjustment of interest rates, which we have discussed in detail in an earlier newsletter. In fact, in the years 2002 to 2012, numerous court decisions, as well as Acts of the Governor of the Bank of Greece, had ruled on the invalidity of the conditions that provided for the right to unilaterally adjust the interest rate on the basis of opaque criteria such as "market conditions" or "the cost of money", and already credit institutions had begun to make such adjustment directly dependent on transparent criteria, such as the ECB's intervention rate or Euribor. The same practice can be observed in the loan agreements drawn up by the ATE. Subsequently, however, there have been cases (even in 2010) of loans which, although they were drawn up as variable-rate contracts, the adjustment of which depended strictly on the index, e.g. the interest rate on the euro, the interest rate on the euro and the interest rate on the euro. In the case of the loans, which were strictly linked to a Euribor index, the EIB invited the borrowers to sign additional documents amending the unilateral adjustment of the floating rate, thus setting criteria that were no longer transparent and effectively allowing the Bank to set interest rates as it saw fit. 

In order to understand this change in the revaluation term, the usual formalities before and after the amendment are set out:

Before the amendment

'The loan is fixed at a variable interest rate (total or contractual interest rate), equal to 5.61% (consisting of the sum of the Reference Rate, currently 0.71%, and a margin surcharge of 4.90%) plus the contribution of Law 128/75, currently 0.60%. The Reference Rate, which is agreed to be applicable herein, and whose definition is set out below, is the Euribor period interest rate".

Following the amendment

"The loan shall bear an annual floating interest rate of 6.55% from the date of signature of this agreement, in addition to any applicable contributions imposed by law (currently a contribution under Law 128/75, amounting to 0.60%). The total annual floating interest rate shall consist of the base rate, applicable to this financing category, of 6.55% and the margin of mark-up. [...] The Bank, after re-evaluating the above elements, is entitled to unilaterally increase or decrease the mark-up margin. [...] The Bank has the right to periodically adjust the base rate without the cooperation of the Creditor. The Bank will adjust the interest rate each time, after taking into account and weighing up the cost of money...'.

In this way, the bank in question was able to charge particularly high interest rates in an apparent attempt to maximise its income a few months before it was placed in special administration. It is significant that a loan where a variable annual interest rate of 8 % was stated in the contract was applied to a loan which, following unilateral adjustments on the basis of the abusive clause, which the borrower was unable to monitor, was subject to an interest rate of 15 % and 16 %. If one considers that in the event of default by the borrower, the default interest rate of 2,5 % (which is the maximum that the credit institution can apply and the one that it always applies in practice - PD/TE 2393/1996) is added to the contractual interest rate, it becomes clear that the debt can reach unmanageable levels in a short period of time. 

The above interest rates have been ascertained after a study of account movements either provided by the ATE during the payment order procedure or sent to the borrower at the latter's request. In this way, it is possible to establish to some extent (it is almost impossible to find every applicable interest rate without an expert accounting report or the full and good faith cooperation of the bank) the loss suffered by the borrower as a result of the application of the abusive clause of unilateral unilateral adjustment of the interest rate on the basis of opaque criteria. In this way, the claim that the term in question is invalid is strengthened, since it is made clear to the court that the bank has indeed used the unfair term to its advantage in order to increase its interest rates and thus its income excessively; and in individual actions the adverse effect of the unfair term on the actual economic effect of the contract is of particular importance (unlike in collective actions brought by consumer associations, where a corresponding specific adverse effect is not in principle required). In summary, the recognition of the invalidity of this term may lead to the invalidity of the entire loan agreement or to the recognition that the interest rate clause is invalid in its entirety, and not only the adjustment clause, with the result that the loan is classified as interest-free. In the context of an appeal against a payment order issued by the bank under a corresponding loan agreement, the invalidity of the above clause will lead to the invalidity of the payment order on the ground that it is unenforceable.

By decision 221/2/17.3.2017 of the Credit and Insurance Committee ("CIC") of the Bank of Greece, it was now expressly stipulated that credit and financial institutions under special liquidation, and therefore also ATE YEE, apply the Code of Conduct of Law 4224/2013 (hereinafter "Code"). This provision is particularly important because for several months several borrowers have been in dispute with ATE YEE regarding the application or not of the Code. In particular, ATE YEE claimed that the Code was not applied to its own loans, while the Bank of Greece had informed us since the summer of 2016 that a decision was imminent to explicitly include loans of credit institutions in liquidation in the Code of Conduct. The relevant provision has already been passed and in the NPRAT 221/17.3.2017 where it is stated that "The special liquidator shall make every effort to cooperate with the debtor and the guarantors in good faith and using the Code of Conduct, in accordance with the provisions of the NPRAT 221/2/17.3.2017".

For the purposes of applying the Code in respect of the above institutions, certain amendments and additions to the Code are introduced (for a detailed presentation of the Code, please refer to our earlier briefing note). In particular, there is an obligation to initiate the procedure at the initiative of the ATE YEE only for those loans that have not been terminated by 1.1.2017, while for those already terminated, the borrower may trigger the application of the Code by voluntarily sending the required financial data to the ATE YEE. Also, for the application of the Code to these credit institutions in special liquidation, the proposals for regulation provided for in Annex 2 of the Code do not apply. This means that the regulation solutions are limited and adapted to the law of special liquidation, which requires a more rapid repayment of claims. 

The practical importance of the above decision is that the ATE YEE can no longer proceed with the termination of loans without first sending the defaulting borrower the first letter of the Code, informing him of his arrears and his obligation to submit his financial data within 15 working days. In summary, after receiving and evaluating the borrower's financial data, the ATE YEE will have to submit a written proposal for debt adjustment, to which the borrower will have the right to submit his own counter-proposal. To this counter-proposal, the ATE YEE is obliged to respond with a second settlement proposal, which either constitutes a new proposal, improved on the first proposal, or a reasoned refusal of the borrower's counter-proposal and adherence to its first proposal. Only after this procedure and the failure to reach a compromise (drafting of a settlement agreement) can the ATE YEE proceed to terminate the loan and pursue its claim in court. This, however, only if the refusal of the borrower's counter-proposal is justified on the basis of the financial data submitted; otherwise, in the event of an unjustified refusal, any termination may be challenged as abusive. The Code procedure, moreover, takes several months from its initiation and gives the borrower time to thoroughly examine the disputed loan agreements in order to identify any abusive and illegal charges and, by extension, to ascertain the exact amount of the debt he is attempting to settle.

It should also be noted that in the event of an unjustified interruption of negotiations under the Code or failure to comply with the Code's procedures, the borrower may bring an action against ATE YEE, requesting that it be ordered to comply with the Code under the threat of personal detention of its legal representative and a fine (under Article 946 of the Code of Civil Procedure). In this context, it may apply for an injunction to temporarily prohibit the termination of the credit agreement. 

The possibilities of settling the claims of ATE YEE are mentioned in the 221/3/17.3.2017 decision of the NCCA. The possibilities of arrangement that the special liquidator may enter into include, but are not limited to, extension of the repayment period, granting of a grace period, agreement of periodic payments, change of interest rate and deduction of interest and costs of receivables from loans in temporary or definitive default. For the selection of any appropriate arrangement solution, certain elements are explicitly defined which the special liquidator must take into account when acting without the consent of the Special Liquidation Committee of the Bank of Greece, i.e. for debt arrangements up to €250,000. The following are typical: the grace period for the payment of the principal of the debt cannot exceed 12 months; arrangements that provide for the possibility to transfer part of the outstanding principal at maturity (balloon payment) are only possible when collateral is provided, the duration of the arrangement may be extended for a period of up to 10 years for business and consumer loans and up to 20 years for mortgages; the payment by the debtor of part of the total amount due is a precondition for the arrangement to be concluded (attention: it is not, however, a prerequisite for the submission of a proposal by the credit institution under the Code), the conversion of mutual accounts into regular loans may result in a maximum of 10 years of regulation, the reduction of the total claim is possible only to the extent that it relates to extra-judicial interest, etc. However, it is provided that with the agreement of the Special Liquidation Committee of the Bank of Greece, it is possible to conclude an arrangement where the terms of the arrangement deviate from the above restrictions (e.g. repayment of a business loan in 20 years, write-off of part of the principal, etc.), provided that there is sufficient documentation from the special liquidator that the arrangement leads to beneficial and sustainable results.

Moreover, with regard to litigation that may be initiated by borrowers against the AIFMR, and in the light of the provisions providing for the suspension of legal proceedings and injunctions against credit institutions in special liquidation, we would like to note that this suspension concerns the creditors of credit institutions in special liquidation, and not their debtors, such as the borrowers, and therefore there is no prohibition on bringing legal proceedings against the ATE YEE.

Finally, from our already 4 years of experience on aggressive moves on the part of ATE YEE we can observe the following: 

α) There are cases where ATE YEE proceeds to issue a payment order, but without the necessary procedural requirements being met (e.g. the correct procedural convention on the evidential value of the commercial books in the credit agreement is not in place). In such cases it is easy for the borrower to obtain the annulment of the payment order.

b) In other cases where the ATE YEI proceeds by filing a lawsuit in the ordinary procedure, deficiencies are identified in the definition of the remedy due to the lack of evidence that, although not necessary when filing the application for a payment order, is essential when filing the lawsuit. In such cases, the pleadings shall be dismissed as indefinite. 

c) It is important to stress that these difficulties of the ATE YEE, which are mainly due to the antiquity of its contractual texts (difficulty in finding documents, illegal transaction terms, lack of mention of necessary conditions on the basis of recent case law, lack of full loan movement cards, etc.), may ultimately lead to a beneficial compromise with the borrower.

(For more see here)