Recent developments on business loan transfers to funds and when they are considered invalid

Legal Insight

June 2024

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

(republication from Euro2day.gr)

Summary: About a year ago, we wrote that even after the Plenary Session of the Supreme Court (ΟλΑΠ) 1/2023, procedural issues in the compulsory collection of "non-performing" loans remained due to various deficiencies in the securitization process. Consequently, decisions favorable to borrowers continued to be issued. However, these decisions will gradually diminish since all the gaps we mentioned back then have now been addressed, either by the servicers themselves or by the legislator. In this article, we publish for the first time a legal trend from the Athens Court of First Instance that deems the transfers of business loans invalid when the assignment occurred before the termination of the mutual credit contract.

We had written about a year ago (see here) that even after the Plenary Session of the Supreme Court (ΟλΑΠ) 1/2023, procedural issues in the compulsory collection of "non-performing" loans remained due to various deficiencies in the securitization process.

In this context, for example, the recent decision No. 769/2024 of the Multi-Member Court of First Instance of Athens annulled an issued payment order (as mentioned in the media).

However, these decisions will gradually diminish since all the gaps we mentioned back then have now been addressed, either by the servicers themselves (e.g., the issue of linking claims to the management contract) or by the legislator (see Law 5072/2023 passed at the end of last year, etc.). For example, in the case of the aforementioned decision No. 769/2024, the payment order was annulled because there was no link between the loan claim and the management contract, and the published summary of the management contract within the framework of securitization based on the 2003 law did not include all the elements required by the 2015 law.

For the first issue, we have said before (see here) that servicers have already started to resolve it since 2022, when its intensity became apparent, by making supplementary references in the collateral registry, while for the second, Law 5072/2023 was passed, which provides (Article 115) that for securitizations, the 2003 law management contract is sufficient and no other elements are required.

The latest, indeed particularly critical case law trend that has begun to form poses serious problems for the business plans of servicers. The question is whether it is permissible to transfer a business loan operating within a mutual credit account (ΑΑΛ) before it is terminated.

Thousands of such loan transfers have occurred before the mutual credit contract was terminated because the "closing" of the account is undertaken by the servicer at a later stage (by serving the termination notice to the debtor, etc.).

In recent months, a series of decisions (by multi-member and single-member panels) from the Athens Court of First Instance have accepted the following: the assignment/transfer of a loan operating within a mutual credit account is not valid before the contract is terminated. This is because the nature of the relationship created between the parties (i.e., the bank and the debtor) in the case of an active mutual credit account does not allow the change of the creditor's identity without the debtor's consent.

The reasoning of these decisions usually states: "Based on the above, it is proven that at the time the transfer took place, the above credit agreement with an open mutual credit account had not been terminated, nor had the maintained account been closed. Therefore, the transfer of the resulting claim against the first and second plaintiffs is invalid, as, according to the legal reasoning herein, the subject of the transfer or management contract can only be the claim for the final balance of the mutual credit account..."

This judgment has the following consequences:

a) The servicer cannot carry out enforcement actions (seizures, auctions), nor even notify the debtor for collection, as the claim does not belong to the Fund but to the bank that purportedly sold it.

b) Any termination by the servicer is invalid as the right of termination was never transferred to them, due to the invalidity of the transfer contract.

c) The bank, which continues to hold the claim, having recognized the invalidity of the transfer, would have ceased to undertake legal collection actions (filing lawsuits, etc.) due to the impression that the transfer was valid, resulting in potential issues of claim limitation periods, etc.

This issue is already pending before the Athens Court of Appeals, and a decision is expected within 2025. It is evident that this legal trend represents a significant blow to the securitization process of business loans and may create serious problems for servicers' teams.

What is certain is that debtors now have a rather strong tool in their arsenal, enhancing their negotiating position, as all other legal arguments, as mentioned above, have been largely deactivated, mainly due to relevant legislative changes.