Protection Against the Imminent Termination of the Loan Agreement - The Prohibition of Termination as an Interim Measure

Legal insight

May 2023

Christina Kapourani, M.Sc. (mult.), Pgcert, PhD Cand.

Abstract - Introduction: Credit institutions (banks and financial institutions in general, as well as leasing companies, factoring companies and loan and credit management companies, etc.), as organizations that have a decisive function in the development of the businesses or individuals financed by them, must take care of the interests of the latter and their general healthy business - financial situation. This is because credit agreements (e.g. mortgage loans, consumer loans with agreed repayments or business loans serviced mainly through a mutual account, etc.) constitute, as is typically said, 'permanent contractual relations of trust' between the borrower and the banks and impose on the latter a duty of loyalty and protection of the interests of their customers - debtors, in order to avoid adverse consequences for the latter. One such adverse consequence is the termination of the credit agreement, which, in essence, following the issue of the necessary enforceable debt instruments (payment orders or final court decisions), signals the start of enforcement proceedings against the borrowers and, in most cases, the loss of their assets (e.g. their main residence, business and industrial property, business receivables, goods, etc.), with the further consequence of financial ruin. Given the above delicate balances, the exercise of the right of termination by the banks should take place in good faith and in accordance with good business practice, as required by more specific provisions of our Civil Code (Articles 178, 179, 200, 281, 288 CC). In the following, we will briefly try to examine the possibilities for the borrower to prevent the termination of the credit agreement by taking injunctive measures in those cases, obviously, where the banking institution is going to do so in violation of express legal provisions or in violation of the good faith that must govern such agreements.  

i. More generally, the prohibition of termination as a precautionary measure to regulate a situation:  

Our legal system provides the borrower with procedural possibilities of protection from an unlawful termination of his credit agreement until the adjudication of his main remedies {such as, e.g, an action to contest the debt due to illegal charges of excessive interest charges, to challenge the banking institution's obligation to renegotiate and to condemn it for this (see our relevant article here) or to recognise the obligation to apply the Code of Conduct for Banks (see our relevant article here), as specifically discussed below and so on}. Thus, from the combination of provisions 731 of the Code of Civil Procedure ("The court is entitled to order as a protective measure the action, omission or forbearance of a certain act by the person against whom the application is directed") and 732 of the same Code, also, ("The court shall be entitled to order as a provisional measure and any measure which in the circumstances is in its discretion appropriate to secure or preserve the right or adjustment of status") it follows that the court has discretion, after considering the circumstances and assessing the urgency of the situation (otherwise the risk of loss of rights and irreparable harm to the applicant), to order provisional provisional measures of interim adjustment of status. Provisional injunctive relief is not a provisional measure with a predetermined content but the framework for taking provisional measures, measures by which, as the decisions of our courts accept, 'a certain situation which has arisen or is tending to arise in the legal relations of the parties is dealt with temporarily, until such time as their legal relations, in respect of which there is an immediate and pressing need, in an urgent case, to activate them until then or to inactivate them, in whole or in part, in order to prevent the creation of irreversible or unbearable consequences for the probable outcome of the main proceedings' (Ibid. MonPATH 5491/2015, MonPATH 195/2017, MonPELev 178/2017, MonPPRod 148/2018, MonPATH 1/2019). One such measure, therefore, is undoubtedly the prohibition of termination of a credit agreement by judicial intervention in the latter at the request of the borrower and the limitation of the lender's rights (as well as that of release from the agreement by termination), when the latter are exercised unlawfully.

ii. Specific cases of prohibition of termination: 

a. In particular, failure by the credit institution to comply with the Code of Conduct for Banks: 

As we have set out in a previous article (see here), the Code of Conduct for Banks (Law 4224/2013, as currently in force after amendments in 2016 and 2021 and with effect from 31.12. 2014) is a set of binding regulations for banking institutions aimed at the out-of-court settlement of loan obligations of companies/households to them (including institutions in liquidation, leasing companies and loan and credit management companies). Under the Code, every banking institution, in the event of a default in the fulfilment of the loan obligations of its borrower-customer, must, before terminating the contract, comply with the Default Resolution Procedure (also known as the DDR). In essence, that is, it must comply with the law and negotiate with the defaulting borrower in a meaningful and good faith manner to identify a viable solution to settle the disputed debt. The steps of the ICM, in brief, include the following actions by the institution: a) contacting the borrower and investigating the reasons for the late payment; b) written notice and seeking financial information from the borrower; c) evaluating financial information; d) submitting a written viable settlement proposal and considering the borrower's counterproposal to reach or not reach a final agreement; e) considering any objections, if any, from the borrower. Thus, a termination that takes place or is "threatened" in the midst of the Code's procedures and when, of course, the borrower is cooperative and has sent his financial data for evaluation and has further responded to any request of the bank, is invalid as contrary to an express provision of law (i.e. the provisions of the Code) or, in any case, to the general provisions on good faith and fair dealing in the performance of contracts (Art. 281, 288, 178 CC), which are specified by the provisions of the CPC. 

On the basis of the above facts and following a judgment of breach of the regulatory scope of the Code, decisions of our courts have prohibited the termination of credit agreements until the conclusion of the negotiation indicated by law in a way that is viable and meaningful for the borrower. The relevant passages at issue are listed: 

- By virtue of Decree No. 7237/2017 decision of the Athens Single Judge Court of First Instance held that the threatened termination of the defendant banking institution which, despite receiving the requested financial data from the applicant borrower company, stated to the latter that it would not make a written proposal for a settlement (as it was obliged to do) and that it would immediately terminate the credit agreement with an open (mutual) account, is contrary to the express mandatory provisions of the Code and, if exercised, would be invalid as contrary to a provision of the law (no. 174 CC). It also obliged the defendant to accept the debtor company's proposed viable arrangement instalment. The decision contained the following essential elements: 'However, although the defendant received as much financial information as required by the Code of Conduct, it informed the applicant on {...} that it would not submit a written proposal for a settlement at all and would immediately terminate the loan agreement. In view of the above facts, the termination, which the defendant is to proceed immediately, will be invalid and, although it will not have any legal effect, will cause the applicant irreparable damage {.....} In view of the foregoing and after weighing the opposing interests of the parties, the court grants the application and prohibits the respondent from terminating the loan agreement at issue until the completion of the Default Resolution Proceedings, orders her to accept a monthly installment of ..... until then, threatens the respondent with a penalty of 100. 000 in the event that the applicant terminates the loan agreement before the conclusion of the Arrears Resolution Procedure and EUR 5 000 for each case of non-acceptance by the applicant of payment of the monthly instalment fixed above, and threatens the second defendant (legal representative) with personal detention for one month in the event of termination of the agreement before the Arrears Resolution Procedure.

- Furthermore, the decision of the Athens Single Judge Court of First Instance No. 2154/2018 ruled that prior compliance with the CDR prior to the termination of credit agreements is mandatory as, otherwise, the termination is invalid due to its contradiction with articles 281 and 288 of the CC, since the requirements and general principles provided for in the CDR are essentially specifications of the principles of good faith and honest commercial relations. On this basis, the termination of a current account agreement was prohibited until the conclusion of the Delays Procedure and the banking institution's response to a request for debt adjustment submitted (as not due) by the applicant company at the request of the defendant institution. The contested passages of the judgment read as follows 'As a result, any exercise of the right of termination by the first of the respondents on the grounds of the applicants' default in payment of their debts before the conclusion of the Delayed Debt Resolution Procedure is likely to be abusive (281 CC) due to the contradictory conduct of the first of the first respondent since she had reasonably created the impression to the applicants that she had complied with the lawful adjustment procedure provided for in the CRA and therefore the aforementioned conduct preceding her in combination with the factual situation that developed in the meantime, created a reasonable belief in the Applicants that it would not proceed to terminate the contractual relations between them before the completion of the steps of the ICI, with the result that any premature exercise by it of its right to terminate the loan agreement would cause onerous consequences for the Applicants and appear to be unjustified and abusive. .... The right of termination arises only after the failure of the ICR or the classification of the applicants as uncooperative borrowers ... the delay in completing the ICR in this case is due solely to the first respondent's unjustified inaction in responding to the applicants' constant pestering and their anxious pleas to find a mutually acceptable and viable solution to settle their debts".

- Furthermore, in the recent decision of the Athens Court of First Instance, No. 753/2020, the following is stated: "The second defendant (management company) replied with its out-of-court statement of ..... addressed to the first applicant company, refusing to grant it the requested deadline for compliance, stating that it rejects in its entirety the inclusion of the first and second applicant company in the provisions of the Code of Conduct for Banks. In fact, in the above reply, it sent the first applicant a proposal for final settlement of the alleged debt without having first sent, as it was required to do under the provisions of the Code, a proposal for the settlement of the alleged debts of the first applicant to which the first applicant, as a cooperating borrower, would have been entitled to submit a counter-proposal {.....}  It was, therefore, presumed that the petitioners are cooperative borrowers since they have fully responded to every request of both the bank and the managing company and the lending company refuses to apply the CDR and only wishes and desires to settle the impugned debts as soon as possible without cooperation of the parties to reach a viable solution. Thus, it is therefore presumed that the second of the defendants is directly in breach of the provisions of mandatory law (see ECJ) and in clear violation of good faith and business ethics to terminate the legal relations between them, resulting in adverse consequences for the applicant companies and for the guarantors individually {....}  The application is granted and the second of the defendants is ordered to refrain from terminating the contract No. {.......} credit agreement with a mutual account and to suspend the payment of the amount {.....} to the first applicant as due performance of its contractual obligation until a decision has been given on the action brought by {.....} contesting the exact amount of the total debt owed to the first defendant.

- At the level of an interim order, by means of an order of 15.11. 2018 order of the Athens Single Judge Court of First Instance ordered the prohibition of the termination of a credit agreement due to non-compliance with the Code of Conduct for Banks until the decision of the main application in question and following the filing of a lawsuit disputing the debt arising from the loan agreement (due to opaque and excessive interest charges) and a request for the repayment to the borrower of the unduly paid amounts. At the same time, the banking institution was obliged to accept the payment of a monthly amount which had already been paid by the borrower over a long period of time and had been assessed by the latter as viable.

b. The existence of active negotiations and the generally bad faith behaviour of the credit institution: 

Regardless of the formal procedure of the Code of Conduct, however, even in cases where the latter is not applied or has been completed, the general principles of good faith performance of contracts and the trust created in banking transactions govern every credit agreement and bind, above all, the banking institutions, as the strongest parties to the transactions at issue. Thus, before the banking institution is released from the contractual obligation, it must consider every solution for its rescue. The 'threat' of termination without any tolerance, particularly in cases where the institution will not suffer any damage from a justified delay in payment of the debt and where, of course, the damage to the borrower will be significantly greater, can be prevented by the safeguard measure in question. The foregoing is also reflected in the judgment of the Athens Court of First Instance No 1572/2021, which annulled the termination of a credit agreement as abusive because of the abusive conduct of the banking institution, which engaged in contradictory conduct by terminating the agreement suddenly, even though it had previously created a climate of security and confidence in the plaintiffs' active negotiations. As stated in the judgment, "In the event of the bank's creditor's difficulty in meeting its obligations under the credit agreement due to its temporary financial weakness, but which exceeds the limits of its strength, good faith on the part of the bank imposes on it the obligation to tolerate a reasonable delay in the fulfilment of the debtor's performance, particularly where the pursuit of immediate fulfilment of its performance is likely to lead to its complete financial ruin, with no real gain for the bank". In that sense, the bank should, in the event of temporary financial weakness on the part of its customer, refrain from hastily terminating the credit agreement between them, especially where the claims are secured by collateral in rem or personal security and the customer is in direct financial dependence on the bank and does not owe any third party, since the above actions then assume an abusive character.

c. An active out-of-court debt settlement procedure:

As we have set out in an earlier article (see our related articles here), Law 4738/2020 (the new bankruptcy code) provided for a new special procedure for out-of-court debt settlement (both against banks and the public sector). The extrajudicial mechanism law provides, on the one hand, for the protection of debtors from enforcement actions (with the more specific exceptions thereof in which protection a) is not provided from the time of the creation of the application but from the time of its final submission, (b) does not cover the pre-auction procedure carried out by a creditor with a mortgage lien but the auction itself and (c) if the auction is determined after the first three months after the final submission of the application), but does not provide for protection (irrespective of whether or not the application is finally submitted) against the non-termination of credit agreements, with the undeniable adverse consequences, particularly for businesses. This legislative loophole should be filled by the courts, which, assessing the debtor's situation and his efforts to join the mechanism (irrespective of the final submission - which, in many cases, is beyond the debtor's control and intentions), will grant interim judicial protection by temporarily regulating the situation in question with a prohibition on terminating contracts, i.e. keeping the debtor's credit relations intact until the completion of the platform's procedures. Thus, recently, the Athens Court of First Instance, by its order of 25.1.2023, prohibited the termination of the credit agreements of a company until the completion of the out-of-court mechanism procedure of the law. 4738/2020, even before the final submission of the application, but after the creation of the application (see also here for more).

iii. The 'risk' element for the granting of the measure: 

The element of risk of loss of rights or irreparable harm to the applicant is necessary for the granting of any protective measure (art. 682 of the Code of Civil Procedure). The same is true of the prohibition on the termination of credit agreements as a measure of interim relief. Therefore, in order to prohibit the termination of the contract by a court and thus limit such an important right of the lending bank, it is necessary to assess the damage that the borrower would suffer if the contested right were exercised and enforcement proceedings initiated as a result. On this basis, the courts will in particular examine the risk of: loss of property used as a residence by the borrowers, loss of property used to house the business activities of the borrowing companies and the consequent cessation of activity with further consequences for employees and suppliers, loss of cooperation with the State, forfeiture of letters of guarantee, registration in databases of negative financial behaviour held by companies such as Tiresias SA, and so on.

Below are targeted passages from judgments of the Athens Court of First Instance in assessing the risk. The Court of First Instance makes the following judgements: 

"There is an imminent risk in view of the fact that any termination of the above loan agreement by the first of the respondents will have disastrous consequences for the applicants inasmuch as enforcement proceedings will be initiated against them for the entire debt, making the entire amount of the debt due, the settlement of which they wish to negotiate and reach a mutually beneficial solution, while the only asset of the first applicant, including its business activity, will be seized".

"The termination of the disputed credit agreement, although it does not produce legal effects, will cause irreparable damage to the applicant, because the economic operation of the applicant's business will be severely affected, since the defendant will demand the immediate repayment of the entire debt and will seek its satisfaction by accelerating enforcement, while it and the guarantors will be registered in the databases of financial behaviour (Tiresias, Infobank, etc. etc)". 

iv.  In lieu of an epilogue: 

It follows from the above that banking institutions, which are, undoubtedly, the strong parties to a credit agreement, often fail to comply with explicit legal requirements and principles, with the result that the rights of borrowers-debtors are called into question. Furthermore, the legislator leaves gaps in its legislative work which require immediate judicial attention in order to achieve effective protection for the borrower-debtor. There are, however, legislative tools which, if used appropriately, can lead to a further comprehensive 'shielding' of the latter as the weaker party to a credit agreement - so as to prevent the liquidation of property at a time when there is a possibility of a viable phased settlement, especially in the aftermath of the economic and pandemic crisis when the need to support healthy entrepreneurship is more urgent than ever.