The Critical Changes in the Legislative Framework of the Out-of-Court Settlement Mechanism and Non Performing Loans

legal insight

January 2024

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

(republished from Euro2day.gr)

Summary: A few days ago Law 5072/2023 was passed in relation to the long-awaited legislative changes to the out-of-court debt settlement mechanism and the law on NPLs. In this note we focus on some crucial points while commenting on some omissions of the legislator. 

A few days ago, Law 5072/2023 was passed, entitled: "Loans: transparency, competition, protection of the vulnerable - Transposition of Directive (EU) 2021/2167, reintroduction of the Heracles programme and other urgent provisions". As they have already been widely reported in the press, we will try to focus on some critical points that have not been particularly highlighted: 

1. The increase in interest rates over the last year has brought to the surface a simple question: why should funds also benefit from this increase, when they themselves are not credit institutions that pass on the cost of money to borrowers? So in the case of companies that purchase loan receivables, there is no reason to link the interest rate to the cost of the interbank market, since they do not borrow on the interbank market and are not required to maintain sufficient capital under banking supervision law. This issue was raised in Parliament during the debate on the bill in the relevant committee (and also in the online consultation). It was unsuccessfully attempted to be addressed by the legislature in Article 21 para. 1 of the new law, where the provision prohibiting Servicer from unilaterally increasing the interest margin was repeated. However, the problem is not with the margin but with the reference rate. Therefore, the funds, apart from buying the red loans at quite low prices, received as a 'gift' the - in the meantime - increase in the reference rate. 

2. The result extracted by the platform of the out-of-court mechanism becomes binding for creditors only when the borrower has received the vulnerable debtor certificate. That is, when, for example, in a 3-member household, the family income does not exceed 14,000 euros. Obviously, this definition of a 'vulnerable debtor' is relatively limited and could be extended, especially in view of changing circumstances due to inflation, etc. Sometimes there are also serious health/disability issues that greatly increase the household's expenditure. This issue, moreover, was one of the main points of censure of the government during the discussion of the bill in the relevant committee of the House. The following also poses a problem: in order for the algorithm's proposal to be binding, a vulnerable debtor's certificate must already have been issued, but this is issued (a) either when the debtor has been declared bankrupt, (b) or when his or her main residence has been seized, (c) or when the restructuring agreement has already been drawn up. Therefore, based on the existing wording of the law, a vulnerable debtor will not be able to apply to join the out-of-court mechanism with the result of the algorithm binding on his creditors before his main residence is seized or a bankruptcy petition is filed against him. 

3. The possibility for the algorithm to include in the arrangement plan a 10% advance payment on the principal of the debt, if the auction is already scheduled. To date, if there was a scheduled auction and therefore an expectation of a short liquidation of a marked property, the Servicers for the suspension usually requested 10-15% of the first offer price of the property. Again, however, it is at the Servicer's discretion whether or not to accept the algorithm's proposal with the 10% down payment. 

4. Under Article 64, the application may also be submitted by the jointly liable person (legal representative, etc.) when the legal entity has been dissolved or has ceased to exist. Compared to what was already in force, the changes are twofold: on the one hand, debts to Social Security Institutions (EFKA etc.) are now included in this arrangement. On the other hand, the application can be submitted by a natural person even if the legal person has not only been dissolved but has also been wound up and has ceased to exist (i.e. has been deleted from the General Commercial Register). Moreover, the result of the algorithm depends on which person (of any number of legal representatives) will submit the application.

5. It has been announced by the government that the mathematical formula of the algorithm will be changed to result in a higher write-off as far as the marked lender is concerned. In this regard, already in December 2021, the Code of Civil Procedure had been amended and it was stipulated that the preference creditor participates only in 65% of the auction and not in 10% of what is reserved for other non-preference creditors. So this change will now be passed on to the out-of-court algorithm. Logical and expected. 

6. With a last-minute amendment, at the suggestion of the Association of Servicers (as a result of the recommendation of its President to the relevant Committee of the House of Representatives), two main additions to the new law took place: a) what was reflected in the decision of the Supreme Court Plenary No. 1/2023 was also clarified in law and b) it was stipulated that in order to prove the management by the Servicers, it is not required to submit the entire sale and management assignment contracts, but a summary of them is sufficient. This addition comes to "close" one last procedural avenue for the debtors as part of their defensive actions.