The Effort to Negotiate Equally with Credit Institutions

Legal Insight

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

Republished from Euro2Day

Summary: It is common in recent years for borrowers to try to contact the credit institution (or now the Claims Management Company) in the context of finding a compromise solution to deal with "red" loans. This article presents an 'unethical' aspect of this negotiation.

It has become common in recent years for borrowers to try to contact the credit institution (or now the Receivables Management Company) in order to find a compromise solution to deal with 'bad' loans. In the negotiation process, however, several issues of good commercial behaviour arise. Credit institutions sometimes attempt to put pressure on the borrower by threatening to take enforcement measures at the same time as they are negotiating with the borrower. At the same time, i.e. when they are discussing with the borrower the possibilities of settling a loan, they file legal remedies (application for a payment order, etc.) in order to secure the negotiating advantage of having a 'weapon on the table'. At the same time, throughout the 'friendly' discussions, they obtain as much information as possible about the financial situation of the borrower and the guarantors. 

The discussions after the enforcement order has been issued between the borrower and the bank are quite heated, with the former usually being obliged to accept any proposal made by the credit institution, otherwise there is a risk of a forced recovery procedure being initiated. And in the case of a borrower company, the risk of freezing its bank accounts, which may take place within a few hours, is sufficient to weaken it completely in its negotiations. Moreover, this is sometimes conveyed to the company itself in a strong manner, with a detailed description by the bank official responsible of the steps to be taken if there is no settlement agreement as proposed by the credit institution.

Moreover, when it may come to a discussion with the relevant bank officials on the specific issue of the contradictory behaviour on their part, the answer is almost always the same: the judicial department to which the case has been assigned moves independently of the department responsible for handling the loan that has been entrusted with the negotiation. Of course, even if there is indeed a lack of information on the part of the official responsible for the discussions on the loan settlement, this does not justify this contradictory behaviour, since the legal entity of the bank is one and must behave as one.

In fact, recently, the judgments of the Athens Single Judge Court of First Instance (September and December 2019), Nos. 5095/2019 and 6441/2019, which ruled, on the same facts, as follows:

The borrower company started to face difficulties between 2014 and 2015 in repaying a credit it had received with an open mutual account. In the year 2017, this delay became permanent and in early 2018 the borrower submitted a proposal for an arrangement to the creditor bank. The bank replied to that proposal in the negative, but without giving any reasons, and at the same time terminated the credit agreement, demanding repayment of the entire debt. After the termination, the borrower came back with another specific proposal for a settlement, on which discussions with bank officials began. A meeting took place at the offices of the credit institution to discuss the proposed arrangement and individual financial data of the company were requested. However, three days after the financial information was requested and while the parties were in the process of settling the dispute amicably, an application for a payment order was filed on behalf of the bank. In doing so, the court found that the bank had failed to comply with the principles of the Code of Conduct on good faith negotiation. The Athens Court of First Instance held that the bank's act of filing an application for a payment order in the midst of discussions on a settlement constituted an improper exercise of its claim and held that the payment order was invalid. 

It is worth quoting in full the following passages from one of the two judgments, which vividly illustrate the resulting bargaining disparity:

"That is, while the respondent was already in the process of finding a solution to settle the debt from before and knew that the petitioners had instructed a financial adviser to represent them in the best possible way in the whole process, which was being conducted in order to avoid going to court, it filed at the same time the above application for a payment order, which constitutes an aggressive act and the initiation of legal proceedings against the person with whom it is negotiating... [...] It is noted that while the payment order was issued on 17/9/2018, the process of finding a solution continued in the subsequent period until the payment order was notified to the applicants on 13-11-2018, which caused the applicants to protest at a time when all the financial information requested had been gathered. It was further alleged that the process of continued in the subsequent period also, except that after the issuance and service of the above issued payment order, the said process was not participated in on equal terms and the negotiation was under the pressure of the enforcement proceedings."

We would not be fair, however, if we did not mention the other side of the coin: there are practices on the part of borrowers who, taking advantage of the bank's 'cease-fire', in the context of discussions for a compromise solution to the dispute, proceed to expropriate their assets. In this case, the credit institution has the legal means to deal with such unfair acts on the part of its debtor (e.g. burglary actions). Moreover, such practices on the part of the borrowers will come to the fore in any future disputes, making it extremely difficult for them to take legal action.