Auction and order of ranking of the debtor's creditors

Legal Insight

March 2024

Vasiliki Tolia, LLM

Summary: The final stage of the forced execution process on monetary claims is the auction. If the debtor has failed, through all means and procedures provided by the Code of Civil Procedure (CCP), to prevent the forced collection of claims against them, either movable or immovable property items of theirs are auctioned with the aim of satisfying their creditors and reducing (or even nullifying) their debts. In this article, we will try to explain how the auction officer acts when called upon to distribute the auction proceeds to the creditors, especially in the most common case in practice - when the latter is insufficient to satisfy the debtor's creditors.

Firstly, not all the debtor's creditors have the right to be satisfied from the auction proceeds, but only:

a. the accelerating creditor, i.e., the creditor who activated the forced execution process, and

b. the declared creditors, namely those creditors who legally declared their claims, in other words, the creditors who informed the auction officer that they too wish to be satisfied from the auction proceeds (articles 972 and 995 paragraph 5 CCP).

When the auction is sufficient to satisfy the accelerating creditor and those creditors who have declared their claims, things are simple. The auction officer will draft a distribution act (and not a ranking table) proceeding to satisfy the creditors (articles 971 and 1006, paragraph 1 CCP), after deducting the execution costs. Similarly, when the auction is insufficient to satisfy the accelerating creditor, but no other creditors have been declared, the auction officer will not draft a ranking table but will allocate the auction proceeds to the accelerating creditor, deducting the execution costs.

However, in most cases, other creditors of the debtor will have been declared, and the auction will not be sufficient to satisfy the claims of those participating in the auction process. It is evident that in this case, the interests of the creditors conflict, as each seeks to maximize the satisfaction of their claim. To resolve these conflicts, the legislator has provided the ranking procedure (articles 974 - 978 CCP, 1006, paragraph 3, and 1007 CCP).

Specifically, and always under the condition that the auction is insufficient to satisfy all creditors, the auction officer ranks the creditors on a list (article 974, subparagraph b' CCP) based on the ranking rules provided by the CCP.

The structuring of the list and the ranking of claims are largely governed by the following four basic rules:

a) The creditors (accelerating and declared) are divided into:

  - Generally privileged - article 975 CCP; the claims of these creditors are ranked preferentially in the distribution of auction proceeds coming from any property item of the debtor (indicatively and not restrictively, these are claims of employees for wages or compensation due to termination of the employment relationship, claims of creditors of the debtor with disabilities, the Public and social insurance entities, etc.),

  - Specially privileged - articles 976 and 1007, paragraph 1 CCP; the claims of these creditors are ranked preferentially in the distribution of auction proceeds coming from a specific property item of the debtor (these are the claims that have been secured by a pledge, mortgage, or prenotation of mortgage on the auctioned object)

  - Super privileged - article 977A CCP (see below when a creditor is super privileged); this article was added by article 176 of law 4512/2018; the enjoyment of super privilege by a creditor constitutes a significant advantage for them, as their full satisfaction takes precedence over every other claim after deducting the execution costs, and 

  - Handwritten creditors – i.e., creditors without privilege,

b) The case of concurrence of various categories of creditors among themselves is regulated (articles 977, paragraphs 1 and 3, and 977A, paragraphs 1 and 2 CCP),

c) The first two categories of creditors are subdivided into subcategories/classes, for which the possibility of concurrence among them is again regulated (articles 977, paragraph 2, and 977A, paragraph 4 CCP), and

d) The way of ranking the creditor whose claim has indeed been declared but is conditional or uncertain is regulated (article 978 CCP). Thus, claims equipped with an enforceable title or proven by public or private documents that possess full probative force are definitively ranked, i.e., they are immediately satisfied (provided, of course, that no objection is raised against the ranking table of article 979.2 CCP). Conversely, conditional or uncertain claims are ranked at random. This means they will be satisfied provided the creditor submits a bank guarantee letter of equal value on first demand from a bank lawfully established in Greece (article 978.1, subparagraph b' CCP). Attention, however, to the following: if, ultimately, the randomly ranked creditor received proceeds from the auction without entitlement, they are obliged to return it, and moreover, with interest. Random allocation also applies to the specially privileged creditor who is equipped with a prenotation of mortgage (article 1007, paragraph 1 infin CCP).

Let's see, therefore, how the auction officer forms the ranking table of creditors after applying the above four basic rules.

5.1. The first action is to calculate and deduct from the auction the execution costs, simultaneously determining the beneficiary of each cost, depending on who incurred each expense (e.g., to the accelerating creditor, to a judicial bailiff, to the auction officer themselves, etc.).

5.2. Then, following the amendments brought by law 4512/2018, it must be determined whether among the creditors (accelerating and declared) there exists any super privileged creditor. This, in order to decide which of the two methods of drafting the table to follow. If a super privilege is found, the creditors will be ranked in the order provided by article 977A CCP, whereas if no super privilege is found, the creditors will be ranked in the order provided by article 977 CCP.

5.3. Thus, in the case of the existence of a super privileged claim among the creditors - even just one -, i.e., a claim that i) was generated after the entry into force of article 977A CCP (17.01.2018) and ii) was secured by a pledge, mortgage, or prenotation of mortgage on a property item of the debtor that was unencumbered up to that time, the ranking order based on article 977A CCP is as follows:

a) If there exist labor claims from unpaid wages (only, however, claims from non-payment of wages and not general claims from the provision of dependent labor, as opposed to what the general privilege of the 3rd class of article 975 CCP provides) from dependent labor that arose before the day of the auction, they will be satisfied first and fully, even if thereafter the auction is insufficient to satisfy the remaining creditors. They are satisfied first, however, with a temporal and quantitative limitation: the super privilege applies only to the unpaid wages up to six months and up to the amount that equals per month of owed wage and per employee to the legal minimum wage of an employee over 25 years old by 275% (paragraph 2 of article 977A CCP).

b) Subsequently, the specially privileged creditors of the 1st and 2nd class of article 976 CCP are ranked, namely the claims that arose from expenses for the preservation of the item and the claims that are secured by a pledge, mortgage, and prenotation of mortgage. Again, their satisfaction will be complete, meaning that subsequent creditors in the ranking will not be satisfied if these specific privileged creditors are not fully satisfied. If there are more specially privileged creditors of different classes (e.g., one creditor belongs to the 1st class of article 976 CCP and has a claim from expenses for the preservation of the item, and another creditor belongs to the 2nd class of article 976 CCP being secured by a pledge), the creditor of the 1st class takes precedence in satisfaction. If there are more creditors of the 1st class, they are satisfied proportionally, i.e., according to the amount of their claims (found by a simple rule of three). If there are more creditors of the 2nd class, the one who first acquired the real right of the pledge or mortgage or prenotation of mortgage according to substantive law takes precedence (principle of chronological priority).

c) Then, under the condition that there is remaining auction proceeds, the specially privileged creditors of the 3rd class of article 976 CCP, i.e., the claims that arose from the production and harvesting of fruits, and the generally privileged creditors of article 975 CCP, some of whom we mentioned indicatively above, are ranked. If creditors from both of the above categories exist, they are satisfied proportionally. If, however, there are creditors from more classes of article 975 CCP (e.g., a labor claim creditor not covered by the super privilege and the Public as a creditor), the order in which the classes are listed in article 975 CCP is followed. The previous class takes precedence over the next. If there are creditors of the same class of article 975 CCP (e.g., more labor claim creditors without super privilege), they are satisfied proportionally as above.

d) Finally, the handwritten creditors, i.e., creditors without privilege, are ranked. It's not certain they will be satisfied. Only if there are remaining auction proceeds.

5.4. The second possible scenario – and overwhelmingly more common for the time being, given that the entry into force of article 977A CCP is temporally placed on 17.01.2018 - is that among the creditors, no super privileged claim is found. Then, the formation of the ranking table will take place based on article 977 CCP. In this case, the landscape is entirely different, as the legislator's intention is for all creditors to receive something from the auction. Thus, the CCP provides for various percentages of satisfaction, depending on the categories and classes of creditors that concur. Specifically:

a) If generally privileged creditors of article 975 CCP (some mentioned above indicatively) and specially privileged creditors of the 3rd class of article 976 CCP, i.e., claims that arose from the production and harvesting of fruits, concur, the generally privileged creditors are satisfied first and, if there are remaining auction proceeds, the special privilege of the 3rd class of article 976 CCP is satisfied (here the difference between the two systems of creditor ranking introduced by articles 977 and 977A CCP is already apparent, as article 977A CCP, as mentioned above, provides for the proportional satisfaction of these categories of creditors).

b) If generally privileged creditors of article 975 CCP and specially privileged creditors of the 1st and 2nd class of article 976 CCP concur, i.e., the claims that arose from expenses for the preservation of the item and the claims that are secured by a pledge, mortgage, and prenotation of mortgage, then 2/3 of the auction proceeds satisfy the said special privileges and 1/3 satisfies the general privileges. Whatever remains, after satisfying one of the two above categories of creditors, is allocated for the satisfaction of the other category. Then, the specially privileged creditors of the 3rd class of article 976 CCP are satisfied – if they exist and if there are remaining auction proceeds -, i.e., claims that arose from the production and harvesting of fruits (combined application of sections a' and b', paragraph 1, article 977 CCP).

c) If more classes of creditors concur, either from the generally privileged of article 975 CCP (e.g., labor claims and claims of farmers from the sale of agricultural products) or from the specially privileged of article 976 CCP (e.g., claims from expenses for the preservation of the item and claims secured by mortgage), the order in which the classes are presented in these two articles of the CCP is followed. The previous class takes precedence over the next.

d) If creditors of the same class of article 975 CCP (e.g., more claims from farmers) or the 1st or 3rd class of article 976 CCP concur, they are satisfied proportionally as mentioned above. Conversely, if more creditors of the 2nd class of article 976 CCP concur (e.g., more claims secured by mortgage on the auctioned real estate), the one who first acquired the real right of the pledge or mortgage or prenotation of mortgage according to substantive law takes precedence.

e) If generally privileged creditors of article 975 CCP and handwritten creditors concur, the first are satisfied from 70% of the auction proceeds, and the latter from 30%. The handwritten creditors are satisfied from 30% proportionally as mentioned above. The generally privileged, if they are of more classes, are satisfied from 70% of the auction proceeds in the order the classes are provided in article 975 CCP, and if they are of the same class, they are satisfied proportionally.

f) If specially privileged creditors of article 976 CCP and handwritten creditors concur, the first are satisfied from 90% of the auction proceeds, and the latter from 10%. The handwritten creditors are satisfied from 10% proportionally as mentioned above. The specially privileged, if they are of more classes, are satisfied from 90% of the auction proceeds in the order the classes are provided in article 976 CCP, specifically if they are of the 1st or 3rd class, they are satisfied proportionally, and if they are more of the 2nd class, the one who first acquired the substantive law right of the pledge or mortgage or prenotation of mortgage takes precedence.

g) If specially privileged creditors of article 976 CCP, generally privileged creditors of article 975 CCP, and handwritten creditors concur, the first are satisfied from 65% of the auction proceeds, the second from 25%, and the third from 10%. The handwritten creditors are satisfied from 10% proportionally as mentioned above. From 25%, the generally privileged creditors will be satisfied among themselves according to the distinctions made above. From 65%, the specially privileged creditors will be satisfied among themselves, likewise, according to the distinctions made above. Whatever remains from 25% or 65% is allocated for the satisfaction, respectively, either of 25% or 65%. If the generally and specially privileged creditors are fully satisfied, whatever remains is allocated for the satisfaction of the handwritten creditors. Lastly, if there is a remaining balance from the 10% of the auction proceeds corresponding to the handwritten creditors, it is allocated for the satisfaction of the generally privileged creditors in 1/3 of the remainder and the specially privileged creditors in 2/3 of the remainder.

h) If there is a surplus from the auction proceeds, it is generally allocated for the satisfaction of that creditor whose claim was not fully satisfied and if there still remains a surplus after satisfying the accelerating and all declared creditors, it is given to the debtor.

6. Concluding Remarks: From the detailed presentation above, it is evident that law 4512/2018 now establishes two parallel and distinct systems for the ranking of creditors (accelerating and declared), namely the system of article 977 CCP and that of article 977A CCP, which over time will prevail considering that more and more auctions will be conducted based on claims that arose after 17.01.2018. These two systems clearly reflect different legal policy considerations. Through article 977 CCP, an attempt was made, among other things, to ensure a certain amount (10%) from the auction proceeds for the benefit of handwritten creditors, indirectly making handwritten claims privileged against general and special privileges. On the other hand, with article 977A CCP, the legislator strengthens the position of creditors secured by real security interests by ranking them preferentially, accepting simultaneously the possibility that the satisfaction of generally privileged and handwritten creditors may be nullified. The super privilege for labor claims provided by paragraph 2 of article 977A CCP is not deemed capable of overturning the enhancement of real security, as it is, as mentioned, temporally and quantitatively limited, with a clearly narrower scope than the general privilege of the 3rd class of article 975 CCP. Time will tell whether the legislator will remain with this choice or abandon it through yet another amendment of the creditor ranking system, which in recent years it has frequently opted to modify.