The Red Loans case: the legalisation of Loan and Credit Management Companies - the first picture from the courtrooms

May 2019

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

Republished from Euro2day

Summary: It is a fact that one of the issues of great concern to Greek citizens in the current period is the "red" loans and in particular the transition to the new reality of Loan and Credit Claims Management Companies. This note refers to two important procedural parameters of the litigation between Management Companies and Borrowers.

It is a fact that one of the issues of great concern to Greek citizens in the current period is the "red" loans and in particular the transition to the new reality of Loan and Credit Management Companies. These companies are now the new administrators of 'red' loans and, within the framework of the powers they have acquired, they have started either the legal recourse or contacts with the debtor in order to identify any possible ground for agreement. The delegation of management is only allowed under the conditions of the law (specifically Law 4354/2015). In this delegation, the bank remains the nominal beneficiary of the loans (claims), but the management company primarily manages them. 

In the context of litigation, two issues are the ones that, to date, are usually raised in courtrooms:

Α. The first issue relates to the possibility for these management companies to appear in a lawsuit initiated by the borrower, for example, challenging the validity of the loan or the validity of the guarantee or the validity of an individual loan term (which may be abusive under consumer protection legislation), etc. The first issue concerns the possibility for these management companies to appear in a lawsuit initiated by the borrower, for example, challenging the validity of the loan or the validity of the guarantee or the validity of an individual loan term (which may be abusive under consumer protection legislation), etc. These proceedings have the peculiarity that they are initiated by the borrower and not by the bank which is defending itself. In these cases, therefore, the management companies that have in the meantime taken over the loans come to defend the banks' position and argue the validity of the loan term or the validity of the charges, the guarantee agreement, etc. However, the law on management companies has not given them the possibility to appear in court as defenders in this type of cases. As a result, if they attempt to appear in court instead of the bank, the latter will consider the appearance as inadmissible and thus automatically accept the borrower's claims (in legal terms, the result is that the bank is 'deserted'). This was confirmed by the unpublished to date decision of the Athens Court of First Instance No. 1596/2019 which ruled, among other things, the following: "Pursuant to paragraph 4 of article 2 of Law 4354/2015, as mentioned above, the said management company is entitled, as a non-beneficiary party, to bring any legal action and to take any other procedural action for the collection of the claims under management, as well as to initiate or participate in pre-bankruptcy reorganization proceedings, bankruptcy insolvency proceedings, debt settlement proceedings and special administration proceedings pursuant to articles 61 of Law No. 4307/2014.This legal capacity under Law 4354/2015 is limited, in the sense that it does not include the entire litigation, but is restricted to the cases mentioned in that provision. [...] Therefore, all the acts carried out by the managing company .... are inadmissible". 

In the case at issue, the guarantor in a loan agreement brought an action against the bank, at a time prior to the entrustment of the loan management to a third company, seeking a declaration that the guarantee agreement it had provided was null and void. In the meantime, however, even after the lawsuit was filed, the management of the disputed loan was assigned to a company under Law 4354/2015 and it was the latter that stood in the bank's place before the court. The Athens Court of First Instance ruled that such representation is not legal since although the management of the disputed loan was entrusted to the said company, it was the bank itself and not the management company that should have been represented in the case. This was mainly because the bank was defending and not attacking. It therefore considered that the guarantor's action was well founded and that the guarantee agreement was invalid because the opposing party, in this case the bank, was not legally represented.

B. A second issue that is raised on several occasions is the possibility for the bank, which has already entrusted the management of the loan to a management company, to pursue its own remedies (actions, etc.) against the borrower. In other words, the question is this: when a credit institution has entrusted the management of the loan to a management company, does it retain the right to bring legal proceedings itself or does it lose it altogether for the sake of the management company, which alone is entitled to bring the borrower into court? In this case, in contrast to the above A. case, the bank is attacking and not defending. The question has arisen in practice because in this period, when a large volume of loans has been 'passed' to management companies, credit institutions in some cases, e.g. in order to meet deadlines, have been in a hurry to bring actions themselves (e.g. to break into fraudulent transfers, etc.). For example: while in October 2018 a borrower is sent a letter informing him of the assignment of the management of his loan to a management company, in December 2018 the credit institution, and not the management company, brings a burglary action claiming that the borrower fraudulently transferred his property to his child. The question the court is asked to answer is: does the credit institution continue to be entitled to bring the action, or does only the management company now have that option? (in legal terms, is the legal capacity of the non-debtor beneficiary exclusive or concomitant?) If it is accepted that only the management company is entitled to bring the action, then the action brought by the bank will be dismissed as inadmissible and therefore, in the event of e.g. the expiry of any time limits, the bank's right will have been lost ('time-barred') in the meantime without any possibility of reassertion.

In conclusion, it must be said that there are many issues that will be raised before our courts in relation to claims management companies, but the answers will take time to be consolidated. For this reason, both parties, borrowers and lenders, should proceed carefully, taking into account the unpredictable factor of the court decision, which sometimes helps to resolve the dispute amicably. 

(for more see here, here and here).