Financial Security Agreements of Law 3301/2004

Legal Insight

Febryary 2023

Daphne Sfyri, LL.M

Summary: In order to finance a business and boost its liquidity, it needs capital. However, the traditional collateral granted by debtors to credit institutions, such as the registration of a mortgage on the debtor's real estate, sometimes leaves certain gaps, both legal and temporal, in the liquidation process. In order to give even greater powers to creditors and especially to credit institutions, in 2004 the legislator, in compliance with European legislation, adopted the institution of financial security, which was introduced in the Greek legal order through Law 3301/2004 and constitutes a "over-insurance" of the creditor. This institution ensures that the creditor will be immediately satisfied by the object of the financial security contracted, while a number of important privileges are given to the creditor vis-à-vis both the debtor and the other creditors of the latter.

1. Introduction

Law 3301/2004, as amended by Law 4021/2011, regulates the establishment and operation of financial collateral arrangements and incorporated into Greek law the European Directive 2002/47/EC, which was amended and supplemented by Directive 2009/44/EC. This law created, as will be shown below, a peculiar legislative regime, which facilitates the creation of a pledge on cash or financial instruments and establishes additional and unusual for our legal system powers of the creditor (borrower) for the use and immediate liquidation of the object of the financial collateral. 

2. Who is covered by financial security (the subjective scope of application of Law 3301/2004)

Law 3301/2004 applies only when both the debtor (secured party) and the creditor (secured party) have one of the characteristics defined in Article 1 and, in particular, when both the creditor (secured party) and the debtor (secured party) are (indicatively) public authorities, central banks, credit institutions, investment service providers, etc. Law 3301/2004 also applies when only one of the contracting parties has the status provided for by the law (see Article 1 of Law 3301/2004) and the other party is a legal person. Therefore, it follows from the above that the more specific provisions of this Act do not apply when one of the contracting parties is a natural person. The above condition is a mandatory law (ius cogens) and therefore cannot be waived by any different agreement between the parties.

3. When can financial security be applied (objective scope of application of Law 3301/2004)

The financial security provided must consist of cash, financial instruments (shares, bonds, mutual fund shares, other securities traded on the capital market) or credit claims. However, instruments of payment, such as cheques, and securities which cannot be transferred, such as restricted shares or securities whose disposal is prohibited by law, the articles of association or the issuer, are excluded from the scope of the financial collateral. In particular, it is questionable whether shares in public limited companies which are not listed on a stock exchange can also be the subject of financial collateral.  

4. What are the benefits of financial collateral security?

As already mentioned, the reason why the institution of financial security was introduced is to protect the interests of creditors by giving them several privileges and flexibility.

First of all, it should be emphasized that the issue of the type of financial collateral agreement was regulated in an innovative way compared to the existing Greek legal order for collateral security (see, for example, 1211, 1247 CC). In particular, the law stipulated that the observance of a specific constituent form is not required for the valid establishment of a financial collateral agreement in any form. Simply put, the creation of the financial collateral can be easily completed without significant costs by a simple private document, as no notarial document, as required by the law for the registration of a mortgage, nor, for example, a court decision, as required by the law for the registration of a mortgage notice, is required for the valid creation of the financial collateral.

However, Law 3301/2004 covers financial collateral from the time of its creation and provided that its creation is "certified" in writing, i.e. by a simple Private Agreement. Therefore, the provisions of Articles 1-10 of Law 3301/2004 recognise the following privileges of the creditor (borrower), provided that the agreement to provide financial security is evidenced in writing (even by electronic means):

a. Right to use the security (Article 5 of Law 3301/2004): if expressly provided for in the financial security agreement, the lender (borrower) acquires the right to use the (provided) security, but also the obligation to replace it with equivalent security no later than on the day of the fulfilment of the relevant financial obligations or its netting or its use for the fulfilment of the financial obligations assumed. More specifically, under the agreement, the parties are free to agree on whether or not to grant the lender (borrower) the right to use the financial collateral. In this way, the parties agree that the lender (borrower) may 'use' the object of the security up to a degree to be determined. For example, the right to pledge the object of the security or to encumber the title with security or even the right to dispose of the title in full ownership may be granted, while in the case of shares it may be agreed that the lender (borrower) may participate in the general meeting of the company or even receive dividends. In fact, although the law does not define the content of the concept of "right of use", it is accepted that if it is generally agreed that the right of use is granted to the securityholder, the latter will be able to exercise the rights embodied in the securities, including the right to vote. It is also stated that the creditor (secured creditor) can use/spend the cash money delivered to him as security by the debtor (secured creditor), but he has to return the cash money if the debtor (secured creditor) fulfils his obligations.

b. Immediate and without formalities satisfaction of the creditor's claim (Article 4 of Law. 3301/2004): If the debtor is ultimately unable to satisfy the creditor (secured creditor) or in any other case that "entails compulsory enforcement", the creditor (secured creditor) may satisfy its claim (a) on financial instruments, by selling and transferring the financial instruments or acquiring ownership of them from the creditor (secured creditor) and setting off the price or value against the relevant financial obligations, (b) on cash, by using it to extinguish all or part of the related financial liabilities; and (c) on receivables, by selling and assigning or acquiring the receivables from the policyholder and offsetting the price or value against the related financial liabilities. Simply put, the lender (policyholder) has the ability to economically exploit the object of the financial collateral (i.e. the shares, cash, receivables, etc.) by selling or expensing it. For example, suppose that a financial collateral has been legally established on the shares of debtor X in a joint stock company Ψ. If debtor X fails to repay the debt according to the agreed terms, the lender (security holder) can sell the shares of company Ψ (without any other formulation) and set off the consideration received from the sale against the debt. 

It should be noted that the lender (borrower) may in this case acquire the financial collateral only if this has been expressly agreed in the financial collateral agreement and if a specific valuation method has been expressly provided for in order to avoid arbitrariness on the part of the lender (borrower). It should be stressed that this institution did not apply a number of provisions of the Civil Code and the Code of Civil Procedure and therefore the 'liquidation' of the financial collateral does not require (a) prior notification of the intention to liquidate, (b) a court decision/decision of an administrative authority, (c) the liquidation to be carried out by public auction or any other legally defined way and (d) the expiry of any time limit. Indeed, the liquidation procedure is not affected by the opening of any collective proceedings (bankruptcy, reorganisation, special liquidation). In other words, to put it even more simply, in the common securities of our Civil Code, the recovery procedure takes several months and requires the issue of court decisions (or, in general, enforceable titles). Even then, however, the creditor cannot directly acquire the object given as security unless he himself participates in a possible auction. In financial collateral, on the other hand, the borrower (creditor) can be satisfied directly with the object given as collateral without even a court order being issued and, if expressly agreed in the agreement between the parties, can even acquire the object of the collateral himself (!).

It is therefore a fast, simple and informal procedure for the recovery of the claim, because, upon the occurrence of an event of default involving enforcement, the creditor (the collateral taker) is automatically entitled to seek satisfaction of his claim in respect of any security. For example, for the liquidation of the provided pledge on shares, no prior notification - a notice to the security provider to pay the claim or the issuance of a court order of set-off is required. It is sufficient for the (lender) policyholder to establish the occurrence of such an event of default. In other words, judicial officers, notaries and bailiffs (!) have no involvement, as one might reasonably expect on the basis of our Civil Code and the Code of Civil Procedure alone. There is, of course, still the possibility that this procedure could be abused by the borrower-creditor, given that it is prudently uncontrolled.

c. Protection of the creditor against bankruptcy (Article 8 of Law 3301/2004): financial security agreements are valid even if they were concluded during the suspect period before the declaration of bankruptcy of the insurer and until the publication of the court decision or administrative act opening bankruptcy proceedings or the liquidation and reorganisation of the insurer. They shall apply even if they were made after the publication of those decisions but within the same day and if the policyholder proves that he was not aware of them and was not required to be aware of them. This further means that the retroactivity of the effects of the declaration of bankruptcy by the bankruptcy revocation does not affect the validity of financial collateral arrangements. However, it is clarified that if the above agreement between debtor (borrower) and creditor (collateral provider) was entered into in collusion, then the other creditors of the debtor may challenge it and request its revocation in court and in accordance with the applicable legislation.

5. Applicable law

Article 9 of Law 3301/2004 provides that the applicable law in any matter arising from a security over securities in book-entry form is the substantive law of the country in which the relevant account is held, to the exclusion of the private international law of that country. The law of that country applies exclusively to the following issues: (a) the legal nature of the rights arising from the provision of security over book-entry securities; (b) the fulfilment of the formal and procedural requirements of the security agreement so that the agreement is enforceable against third parties; (c) the rights of bona fide third parties; and (d) the procedure for the liquidation of book-entry securities.

6. Instead of an epilogue

The financial collateral arrangement, as is readily apparent, reduces the credit risk in transactions, makes the position of the lender more secure and facilitates the raising of funds by companies - legal entities even of reduced solvency (since financial collateral 'shields' credit). The institution of financial collateral has thus created a web of provisions that has increased legal certainty for the creditor and supported the needs of modern financial market practices for the conclusion of collateral agreements with a foreign element in cross-border transactions. In any event, however, it cannot be denied that it grants very large and uncontrolled powers to the borrower-creditor, who is already in a dominant position in relation to the collateral provider-debtor, to use and immediately liquidate the object of the financial collateral, which directly and unjustifiably disturbs the balance of the parties involved.