The Protection (?) of the Out-of-Court Mechanism from Auctions and other Enforcement Acts

Legal Insight

November 2021

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

(rebublished from Euro2day)

Summary: In this article we set out some reflections on the issue of protection under the new out-of-court mechanism, with parallels to how our jurisprudence dealt with the issue of the suspension of enforcement actions under the old 2017 out-of-court mechanism.

Since the 1960s until today, various legislative variations have been adopted in the context of collective reorganisation procedures, sometimes with and sometimes without binding effect on non-consenting creditors  (e.g. Law 3562/1956, Law 3562/1956, Law 3562/1956. 1386/1983, ν. In this context, Law 4469/2017 introduced the out-of-court debt settlement mechanism ("old" out-of-court), which was the first attempt at a collective reorganization procedure through an electronic platform where the result of the majority provided for therein would also bind the non-consenting creditors after judicial ratification of the agreement. In the same context, Law 4738/2020 (the new bankruptcy law) was recently adopted, which provides for the new out-of-court debt settlement mechanism, as well as the new reorganisation procedure.

The aim of all these legislative frameworks was and is to reorganise the company through an agreement with the majority of creditors. To this end, two safeguards are usually provided for: (a) protection against enforcement measures during negotiations and (b) compulsory compliance by the minority with the will of the majority of creditors.

Much has been written about the new Out-of-Court Mechanism of Law 4738/2020: the procedure, the debts covered, the persons who can use it, etc. However, one of the issues of most interest to citizens and businesses at this particular time is whether membership of this mechanism provides protection from enforcement actions (auctions, etc.) by creditors and under what conditions. 

The law on the new out-of-court mechanism provides that debtors are protected from enforcement actions with 3 important exceptions: a) automatic protection is not granted from the time of the creation of the application but from the time of its submission ("finalisation", as it is usually referred to), b) protection does not cover the pre-auction procedure of an auction conducted by a creditor with a letter of credit (cf. (b) the protection does not cover the auction proceedings conducted by a creditor (e.g. by the bank that has registered a lien on the debtor's property), i.e. it does not cover acts such as foreclosure, any declaration of continuation of the auction, etc. but only the act of auction; and (c) the protection does not cover the auction scheduled within the three months following the submission of the application. 

As to these exceptions:

The critical point in time, as the law indicates, is the submission of the application. The latter, however, also depends on the EGDICH itself (Special Secretariat for Private Debt Management) which, a few days ago, functionally allowed the submission of corresponding applications ("finalization"). and the relevant intervention of 22/10/2021 by the Plenary of the Presidents of the Greek Lawyers' Associations). What debtors could do until a few days ago was to simply "create" the application, as stated in the relevant CRA (No. 76219 EX 2021), and wait for it to be technically possible to "submit" it. Therefore, in most cases, the only person not responsible for the delay in 'submission' was the debtor himself (this becomes even more pronounced when the failure to submit lasted for more than two months, with the result that, under the relevant ERO, the procedure for creating the application has to be restarted).

At this point we come to ask ourselves: if the mechanism itself is responsible for the late submission of the application and not the debtor, why should the latter not be protected not only from the time of submission but also from the time when the actions for which he is solely responsible have been completed. If, therefore, the delay is due to the omissions or negligence of a creditor or of the mechanism itself, why should the debtor be deprived of the protection of the law? This question is raised by hundreds of debtors who, after the time of creation of their application (i.e. the start, i.e. the submission procedure), saw auctions determined against them, even of their first home, without being able to seek the protection of the law because their application seemed not to have been "finalized"/submitted. Typical is the response of the EAGGF to a relevant question submitted at a workshop and also posted on the Special Secretariat's website: "Question: I have an auction on a property in October and have already submitted my application, which is in the status of "Obtaining Data from Third Party Sources". Do I have the protection provided by law? Answer: The final submission of the application is possible after the data has been obtained from the creditors and the mandatory data has been entered by the applicant. Since currently the platform does not allow for final submission of the application, your application is not considered submitted so the suspension of enforcement measures has not been initiated." In other words, in simple words, although the law is in force and the platform should have been functional from day one, due to technical or other problems, it is impossible to suspend enforcement actions no matter how early you have initiated the procedure (!).

However, there is a difference between the automatic protection provided by the law in question and the protection that can be provided by the competent courts, where each case is examined individually and judicial suspension can indeed be granted if necessary. Indeed, even in the old extrajudicial of the 2017 Act, it was possible, although the automatic statutory protection of 70 (and after 90 days) from the sending of the coordinator's invitation did not exist, for the courts to grant a stay of certain enforcement actions by the courts because they were deemed contrary to the purposes of the Act and abusive (e.g. e.g. see decision no. 2604/2019 of the Athens Court of Appeal where the seizure by a credit institution in the middle of the old out-of-court procedure was presumed invalid even though the automatic suspension of the law did not exist due to the expiry of the 90-day period). It is therefore possible to apply to the courts for a stay of the enforcement proceedings even if the automatic stay has not been triggered by the non-standard 'filing' of the application; the protection becomes even more urgent when (a) the enforcement proceedings have started after the application was created and therefore the pretextual nature of the latter cannot easily be argued and (b) the delay in filing is exclusively linked to the creditors' omissions or to a malfunction of the enforcement system itself. Of course, each case is different and a judicial stay cannot be granted in all cases since if it were so the legislature would have provided for an automatic stay not from the "filing" but from the "creation" of the application. 

After all, the purpose of the suspension is to provide a breathing space for the benefit not only of the debtor but also of the creditors who would otherwise have to engage in a race to the finish. As it was mentioned in the explanatory memorandum of the old extrajudicial mechanism (Law 4469/2017): 'This automatic suspension aims at maintaining the property of the company as it was at the time of the filing of the application and for a reasonable period of time, in order to facilitate negotiations and to strengthen the climate of cooperation and trust between creditors and the debtor, but also between the creditors themselves, without the risk of sudden impairment of the debtor's property on the basis of the forced sale of the debtor's assets, and without the risk of a sudden reduction of the debtor's assets on the basis of the forced sale of the debtor's assets".

Recently, a company was granted temporary protection by the Athens Court of First Instance under the old out-of-court mechanism, where its completion was delayed for reasons that were mainly due to internal procedures of credit institutions and management companies. In this case, there could be no question of 'immunity' of the company through bad faith use of the mechanism, as the legislator of the relevant legislative framework feared, and did not grant an automatic suspension for an unlimited period of time. For these reasons, the Athens Court of First Instance provided temporary protection to the company by prohibiting the termination of its credit agreements while discussions were still taking place, even though the period of automatic statutory suspension had expired. Therefore, in the same way as the courts intervened in the correct application of the old out-of-court mechanism, they will intervene where necessary in the application of the new out-of-court mechanism, correcting any oversights and injustices.