March 2024
Servicers vs Banks: What ultimately changed with the management of non-performing loans by Servicers?
George Psarakis LL.M. (mult.), PgCert
Legal Insight
October 2021
George Kefalas, LL.M. (mult.), Μ.Sc.
Summary: A credit institution's first action to recover its claim against a debtor is usually the issuance of a payment order, under which it may then initiate enforcement by seizing and auctioning the debtor's assets. Very often, however, the payment order issued contains errors which may lead to its annulment, as well as to the subsequent enforcement acts carried out on the basis of it. This article presents the most important grounds that can be raised for the annulment of a payment order.
1. Introduction
Banks or loan and credit management companies (the so-called "funds" or "servicers") have two options in order to recover their alleged claims from borrowers. The first option is to bring an action before the competent court and obtain a judgment, under which, if it becomes final (i.e. is decided at second instance), they can initiate enforcement proceedings by seizing and auctioning any assets of the debtor. This option has the disadvantage that, particularly in the large courts of first instance in our country, it takes several years before a final judgment is delivered on an action brought. The second option, to which banks resort in the vast majority of cases, is the issuance of a payment order. A payment order is issued at the request of the creditor, without the debtor being heard in principle, and is a fast-track procedure to obtain an enforceable title within only a few months. However, precisely because of the speed and surprise of the debtor, who has not introduced his defence in the whole procedure, the issue of a payment order is subject to very strict conditions, the most basic of which is that the claim and the amount due must be proved by a public or private document which has evidentiary value as defined by law. Consequently, a debtor defending against a payment order may, in addition to the substantive grounds for contesting the bank's claim, also put forward a number of formal grounds which may lead to the annulment of the payment order. In this article we examine errors that are frequently found in payment orders issued by banks or debt management companies and, if raised by the debtor, can lead to their annulment.
2. Reasons for cancelling a payment order
A. Failure to produce original or legally certified documents (contracts, complaints, account movements, contracts for the transfer of the claim) for the issuance of the payment order.
According to the provision of Article 623 of the Code of Civil Procedure (CCP), a payment order may be issued if, among other conditions, the claim and the amount due are proven by a public or private document. The provision defines a document as, in principle, the original document, that is to say, the document bearing the borrower's handwritten signature (in this case). However, according to the provision of Article 449 par. 2 of the CCC: 'Photographs or photocopies of documents have the same evidential value as the original, provided that their accuracy is certified by a person authorised by law to issue copies'. Therefore, the claim and the amount due must be proved by a document produced in original or certified copy. If the creditor produces a simple copy of one of the documents (e.g. the original loan agreement) for the issuance of the payment order, the payment order is cancelled on appeal for lack of documentary evidence of the claim.
In order to facilitate the proof of the banks' claim, the vast majority of banking contracts contain a clause according to which the bank's claim and its amount is proved on the basis of an extract from the bank's commercial books showing the movement of the loan account. According to case law, this clause constitutes a valid procedural contract. This term usually has the following content: "An extract extract extracted from the bank's books or a copy thereof showing the above account or accounts and the balance due is agreed to be full proof of the Bank's claim against the Debtor, counter-evidence being allowed". If, however, this condition is not included in the loan agreement, and the bank, in order to issue the payment order, produces an extract from its commercial books showing the movement of the account, the payment order may be cancelled on appeal for lack of written proof. Similarly, the failure to mention in the application for a payment order the existence of the abovementioned procedural agreement likewise leads to the payment order being invalidated on the basis of a plea in law.
B. Absence of a procedural agreement in the credit/loan agreement on the evidential value of the statements of movements of the loan account.
In order to facilitate the proof of the banks' claim, the vast majority of bank contracts contain a clause stipulating that the bank's claim and its amount is to be proved on the basis of an extract from the bank's commercial books showing the movement of the loan account. According to case law, this clause constitutes a valid procedural contract. This term usually has the following content: "An extract extract extracted from the bank's books or a copy thereof showing the above account or accounts and the balance due is agreed to be full proof of the Bank's claim against the Debtor, counter-evidence being allowed". If, however, this condition is not included in the loan agreement, and the bank, in order to issue the payment order, produces an extract from its commercial books showing the movement of the account, the payment order may be cancelled on appeal for lack of written proof. Similarly, the failure to mention in the application for a payment order the existence of the abovementioned procedural agreement likewise leads to the payment order being invalidated on the basis of a plea in law.
Indicatively, the decision of the Piraeus Multi-Member Court of First Instance No. 2672/2020 accepted the following in relation to the issue in question: "Accordingly, as regards the first opponent - creditor, the mechanical extracts produced and extracted from the commercial books kept by the defendant have evidentiary value pursuant to Articles 447 and 448§1 of the CCP, as regards their individual entries, but, in so far as it is established that there is no procedural agreement on the proof of the extract from the defendant's commercial books and the account debit balance specified in them, they cannot constitute grounds for the issue of a payment order in respect of the claim in question, as set out in the first (major) recital in the preamble to the plea in law'.
C. Submission of monthly balance update slips as proof of the bank's requirement instead of an extract from the bank's commercial books.
As stated immediately above, the extract from the bank's trading books can be agreed to provide full proof of the existence and amount of the claim. The reason why the commercial registers may by agreement be referred to as evidence which provides full proof, despite the fact that they do not bear the signature of the debtor, is in particular that they are kept in accordance with specific rules laid down by law. In many cases, however, the banks sometimes produce, instead of the extract from the commercial registers, the monthly letters sent to the debtor informing him of the balance of his loan, which, however, cannot be given the evidential value referred to above. In such cases, the payment order may be cancelled on appeal.
Thus, the decision of the Athens Court of First Instance No. 1052/2019 has ruled that: "....the monthly accounts submitted do not constitute extracts extracted from commercial books, it follows in this case that the claim of the defendant awarded by the [...] Payment Order arising from the terminated interest-bearing loan is not proven by public or private documents with legal or contractual evidentiary value. Therefore, in the absence of the procedural requirement of documentary evidence, the order for payment is null and void".
D. Failure to produce a complete extract from the bank's commercial registers.
Very often, despite the fact that the above-mentioned procedural agreement exists and the banks do indeed provide an extract from their commercial books, this extract does not reflect the movement of the loan account from its disbursement to its termination. However, according to the case law of the courts, the statement must show all the debit entries that have taken place under the loan, otherwise the payment order is void.
The decision of the Heraklion Single Judge Court of First Instance No. 273/2018 annulled the contested payment order, accepting that: "...it appears that the full movement of the account is not reflected from the date of the original contract on 18-3-1999, but the first entries begin from 30-12-2008 to 9-8-2011 and subsequently from 15-11-2012 to 21-1-2016. Therefore, on the assumption of the relevant contention of the opponents, the movement of the account is not proved in writing in its entirety, as it is evident that there are entries which are not included in it, though this is required, in accordance with the particulars set out in the main body of this order, for the issuance of a payment order. [...] In the light of the foregoing, the present appeal must be upheld".
Ε. Failure to prove the transfer of the claim from the bank to the special purpose vehicle (in case the management company requested the issuance of the payment order).
Very often the application for a payment order is not submitted by the bank, but by a debt management company, following the transfer of the claim from the bank to a special purpose vehicle or a company acquiring loans and credit claims. In such cases, the management company shall, in order to prove that the transfer of the claim has taken place, provide the summary of the transfer agreement as recorded in the public registers of the Athens Pledge Registry. This is a short summary of 3-4 pages, which reflects very few of the terms of the transfer.
The case law of our courts has repeatedly held that in order to prove the transfer of a claim from a credit institution to a special purpose vehicle or a debt collection company, it is not sufficient to produce only the summary of the relevant transfer agreement, since it does not enable the debtor to obtain knowledge of the terms of the transfer and therefore makes it difficult for him to defend himself.
Indicatively, the Court of Appeal of Western Macedonia, No. 63/2013, ruled on this issue: 2844/2000 of the above Pledging Office, which has been registered in volume ... number ... and 6) The contract for the management of loan business receivables, dated 14.11.2006, No. 106/6.11.2006, drawn up between the applicant and the above Bank and registered in volume ... number ... [...] However, the above documents do not prove in writing that the then applicant and now defendant was authorised to submit the above application, since a complete and certified copy of the assignment agreement drawn up between the defendant and the above Bank, from which the terms of the above agreement would have emerged, was not submitted'.
F. Failure to have the complaint signed by a person representing the bank/management company.
A condition for the issuance of a payment order from a mutual account (but also from an interest-bearing loan in cases where the issuance of the payment order takes place before the expiry of the contractual term of the loan) is the termination of the contract and the presentation of the document thereof before the judge issuing the order. The termination, as an act of the legal person of the bank or the management company, must in principle come from the persons legally representing that legal person, namely, in principle, its Board of Directors or a person authorised to do so.
In most cases, however, the complaint does not come from the board of directors, but from ordinary employees of the bank or management company, without, however, the relevant authorisation being produced, by virtue of which the employee has been granted the corresponding authority.
Such a case was the subject of Judgment No 1990/2020 of the Piraeus Multi-Member Court of First Instance, which held, inter alia, that "The above extrajudicial statement - complaint of 9.5.2013 did not appear to have been signed by the legally competent representative bodies of the defendant, but was signed by S.T. and A.N. [...] During the discussion of the case and up to the end of the case, the defendant did not produce any document proving that the above-mentioned persons had been validly authorised to terminate the loan agreement, or that the defendant itself, through its competent representative bodies, subsequently approved the termination, nor did it, in its presence with its legal representative in court, declare its approval of the termination of the loan agreement in a statement entered in the minutes [... ] Therefore, the above termination of the loan agreement was invalid and did not have any effect, i.e. the relevant contractual clause giving the defendant lender the right to claim immediate payment from the debtor-appellant of the entire principal and interest due and the entire outstanding loan did not become due and payable".
G. Incorrect service of the payment order and automatic loss of its validity after 2 months from its issuance.
In accordance with the provisions of Article 630A of the Code of Civil Procedure: "The order for payment shall be served on the person against whom it is directed within two (2) months of its issue. If service is not effected within the period referred to in the preceding subparagraph, the order for payment shall automatically cease to have effect'. Under that article, the order for payment must be served within two months of its issue, and in due time, on the person against whom it is directed. Therefore, if, for whatever reason, either service is not effected within the two-month period, or service is effected but is not valid, for example because the order for payment was served at a place which has been proved not to be the debtor's domicile, then the court, on appeal, recognises the invalidity of the order for payment.
By example, we refer to the decision of the Athens Court of First Instance No. 5095/2019, which on a similar issue ruled as follows: "In addition, and with regard to the third applicant, it was presumed that the aforementioned payment order was not legally served on him. In particular: The third applicant is a resident of Paleo Faliro, Attica, at [...] which is not disputed. From the certificate no. [...] service report of the bailiff of the Athens Court of Appeal [...] shows that the third applicant was sought for service of the aforementioned payment order at [...] street in Neos Kosmos, Attica, where the registered office of the first applicant and at the same time the place of work of his wife and the second applicant is located, and that the aforementioned contested payment order was served on his behalf on the second applicant's wife in her capacity as a partner (see also: [...] the third applicant was served on his behalf on his wife's second applicant in her capacity as a partner (see also: [...] the third applicant was sought for service of the aforementioned payment order at [...] street in Neos Kosmos, Attica, where the first applicant's registered office is located and at the same time the place of work of his wife and the second applicant). see the text of the above service report). However, the third applicant was in no way believed to be an employee of the first applicant company at the time of the above service and therefore the registered office of the first applicant in the aforementioned street does not constitute the third applicant's place of work and therefore the above payment order was never served on him [...] the contested payment order is deemed to have automatically lost its validity as regards the third applicant under Article 630 A of the Civil Procedure Code'.
H. Annulment of a payment order due to invalid termination of the credit agreement due to the Bank's abusive behaviour.
Banks, as financial institutions that play an important role in the national economy, also have increased duties of due diligence towards borrowers. In particular, since the adoption of the Code of Conduct for Banks (BCC), a comprehensive set of rules has been established which sets out, in stages, the conduct to be followed by credit institutions in the event of a borrower's difficulty in meeting his obligations. In such cases, therefore, banks or management companies must adopt a responsible attitude and, in compliance with the CRA, negotiate in good faith with the borrower in order to find a solution to settle the debt, rather than directly terminating the credit agreement, particularly if the borrower also shows a clear willingness to negotiate a way of settling the debt. The CRA requires them to submit, after assessing the borrower's financial data, a proposal for the settlement of the debt, which must not be pretextual and on which the borrower is expressly entitled to submit a counter-proposal of his own. And if, ignoring the requirements of the CRA, they proceed directly to terminate the contract and take legal action, this termination may be considered abusive, thus invalidating any subsequent payment order (for more information, see also here).
Ι. Annulment of the payment order on the grounds of improper submission of the application for its issuance.
In line with what has been mentioned immediately above, the submission of an application for a payment order while negotiations with the borrower are ongoing may be considered abusive and lead to the invalidity of the payment order. A typical case is the one decided by the decision of the Athens Single Judge Court of First Instance No. 5095/2019: "And while throughout the period from the month of May 2018 a process of finding a solution and re-arrangement of the debt had been initiated, the competent department of the defendant filed on 9-7-2018 at the Athens Court of First Instance its application of 5-7-2018 against the current applicants for a payment order for the amount of 485,912.89 euros from the closing of the above credit agreement. That is, while the defendant was already in the process of finding a solution for the settlement of the debt and knew that the applicants had entrusted a financial advisor to represent them in the best possible way in the whole process, which was being conducted to avoid legal action, she filed the above application for a payment order at the same time, which constitutes an aggressive act and initiation of legal proceedings against the person with whom it is negotiating and in this case the applicants, while further, two days after the filing of the said application, namely on 11-7-2018, the competent department of the respondent continued to send emails and request for information throughout the period until the issuance of the order no. [...] Payment Order".
J. Annulment of a payment order as regards the guarantor due to the release of the guarantor from the guarantee following the renewal of the loan agreement.
In many cases, after the initial credit/loan agreement, additional acts are drawn up, which bring about a very substantial change in the terms of the agreement, for example when the currency of the credit is changed or when the method of servicing the credit is changed from a mutual account to an interest-bearing loan. In such cases, it is accepted in case law that there is such a significant change in the contractual relationship between the debtor and the bank that it is in effect a new contract. This is a case of renewal of the obligation under Article 436 of the Civil Code, whereby the old obligation is extinguished and a new obligation is created, while the renewal also results in the extinguishment of any security granted in connection with the original debt (e.g. guarantee, mortgage lien, etc.). If the guarantor does not sign the additional instrument in question, he is no longer liable, since his liability under the original contract has been extinguished.
Typical is the decision No. 1008/2016 of the Athens Court of Appeal (concerning a change in the currency of the loan after signing an additional deed), which held: "The possibility of granting credit in foreign currency was provided for the first time in the additional deed of 15.3.2001 amending the terms of credit with an open (mutual) account, which was drawn up between the defendant, the primary debtor company and the other of the co-guarantors, and which (additional deed) does not bear the signature of the opposing party and is not covered by the guarantee given by the opposing party. [...] It should be pointed out that the contract, by which it was made possible to operate the contract in a foreign currency, cannot be regarded as an additional contract which merely increases the amount of the credit, since in this case it does not increase the amount of the contract but introduces another type of change, [...] which is substantial, given that the exchange rate of foreign currencies is not fixed and may be affected by factors which are imponderable and not known in advance".
Equally important is the decision of the Court of Appeal of Thessaloniki No 1695/2009 (concerning the conversion of a mutual account into an interest-bearing loan), which held: "It follows from the foregoing that between the debtor company and the defendant Bank [... ], a new contract was concluded for a loan repayable in equal instalments, at a different (increased) interest rate, for which (loan) the loan account number 14811999 was kept, without debit and credit columns, and the proceeds of the disbursed loan were credited on the same day to the current accounts of the existing credit agreement between the parties with an open (current) account, which were reset to zero. The above agreement is completely different from that of the current account, and the transactions under the overdraft facility cannot, by their nature, be serviced by keeping an open account... It was further established that the opposing party did not guarantee in writing the repayment of the new loan agreement [...] Consequently, since the original open account credit agreement ceased to be valid, the opposing party was released from the guarantee agreement (Article 864 CC). In view of all this, the issue of payment order No [...] [...] is invalid".
K. Unfair General Terms and Conditions of Transactions
Banking contracts usually contain terms which are not transparent and by using them the bank usually charges the consumer-borrower illegal fees. The most common terms found in loan contracts that have led to the cancellation of a subsequently issued payment order are the following:
It should be noted that older contracts, especially those drawn up before the onset of the financial crisis, usually have more problematic terms.
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