Debt Settlement with a Bank under the Banking Code of Conduct

Critical points:

- The case concerned a dispute between a company active in the textile sector and its creditor bank. The company had received an open account credit from the bank, which in 2013 was converted into an interest-bearing loan. Due to the financial crisis, the company was no longer able to service the loan. Subsequently, the Bank initiated the Banking Code of Conduct proceedings in 2016, but in early 2018 the Bank proposed as a solution the termination of the contract and the forced collection of its claims.

- The proper support of the case resulted, on the one hand, in preventing the termination of the contract and, by extension, the enforcement of the company's property and, on the other hand, in ensuring that the company was able to negotiate its debt with the bank in accordance with the rules and guarantees of the Banking Code of Conduct and ultimately reach a favourable settlement. 

- The company obtained in principle interim protection from the complaint, and the court subsequently obliged the bank to negotiate the settlement of the debt in accordance with the provisions of the Banking Code of Conduct. At the same time, the company brought an action before the competent court challenging both the amount of the debt and the validity of the collateral provided to the bank.

Background

A company active in the textile sector had obtained a credit line from a banking institution in Greece in 2007. The bank's claim was secured by the personal guarantee of the shareholders and a mortgage on the property where the company's factory was located. 

After the onset of the economic crisis, difficulties arose in servicing the credit. The bank then proposed to convert the credit on a mutual account into an interest-bearing loan, an arrangement which further burdened the company, which had to repay part of the capital in addition to the interest. The company was unable to meet its obligations and stopped servicing the loan.

In 2016, the bank initiated the Banking Code of Conduct procedure, asking the company to submit its financial data for evaluation. The company responded to the bank's request, expressly agreed to be subject to the provisions of the Banking Code of Conduct and provided the financial data to the bank. After a long delay, the bank in early 2018 submitted its proposal to the company, which provided for the immediate termination of the contract between them and the initiation of legal proceedings for the recovery of its claim, which had exceeded EUR 1,000,000. 

Strategy

The key points for the successful outcome of the case were as follows:

- The company's immediate reaction to the bank's above proposal. The company immediately sent a letter of formal notice, protesting against the bank's illegal behaviour, while declaring its intention to pay a monthly amount of EUR 2 500 during the negotiations. At the same time, she brought an action before the Court of First Instance seeking an interim injunction prohibiting any change in the factual and legal situation of its relationship with the bank, in essence prohibiting the termination of the loan agreement.  

- After the court granted the interim order with the above content, and in view of the hearing of the application for interim measures, seeking to prohibit the termination of the contract and to require the bank to comply with the Banking Code of Conduct, the company brought a parallel action. In that action, it disputed the amount of its alleged debt to the bank, on the one hand, because of the application of abusive interest rate conditions and, on the other hand, because it had been obliged by the bank to repay a debt of another related company, an act which was outside the scope of its corporate purpose and, secondly, it disputed the validity of the mortgage which the bank had registered on its property as a result of the renewal of the credit agreement and the signing of a new interest-bearing loan agreement.

- Following the issuance of the injunction, which prohibited the bank from terminating the contract and obliged it to comply with the Banking Code of Conduct, the proper conduct of the negotiation led to a favourable settlement solution for the company. 

Outcome

The company fought two court battles. The first was the interim injunction trial, which provided the company with the necessary time to prepare, without worrying about possible termination of the contract and imminent enforcement proceedings. The text of the interim injunction granted stated in particular the following: "Pending the hearing of the application and subject to its discussion, it is provisionally ordered that the legal and factual relationship between the parties shall not be altered in fact and in law, subject to the payment by the applicant within the first ten days of each month of the sum of €4,000". About a month later, the company fought its second battle in the proceedings for interim measures, whereas it had already brought the action in which it contested the amount of the debt and the validity of the mortgage registered by the bank on its business property. The judgment delivered on the application for interim measures states, inter alia: "Therefore, any exercise of the right of termination by the first of the defendants (viz. bank) on the ground of default in payment of their debts before the conclusion of the Arrears Resolution Procedure is likely to be abusive (281 CC) due to the contradictory conduct of the first of the defendants since it had reasonably created the impression to the applicants that it had complied with the statutory adjustment procedure provided for in the CRA and hence the aforesaid conduct of the first of the defendants that preceded it in combination with the actual situation that developed in the meantime, created a reasonable belief in the applicants that it would not terminate the contractual relations between them before the completion of the PPI Stages, with the result that any premature exercise by it of its right to terminate the loan agreement would have a detrimental effect on the applicants and thus appear to be unjustified and abusive'. On that basis, the court ordered the bank to refrain from terminating the loan until all the stages of the Banking Code of Conduct had been completed, on condition that the company paid the sum of EUR 4 000 per month for a debt exceeding EUR 1 000 000. It should be noted that the Banking Code of Conduct provides for a regulated negotiation procedure and obliges the bank to submit a proposal for the settlement of debts, while giving the borrower the opportunity to submit his own counter-proposal, to which the bank is obliged to give a reasoned reply and either reject it or submit a new final proposal. Only if it is not possible to settle the debts can the bank proceed to a final settlement solution. Following the negotiation, the company has obtained a long-term debt settlement on favourable terms and a debt write-off of approximately EUR 220 000. 

Conclusion

The immediate reaction of the borrower to the actions of the bank in question is very important. In this case, the company responded to the bank's final proposal only one day later by way of a letter of formal notice, and two days later submitted the application for an interim injunction to the court. It thus managed to gain an important advantage by not allowing the bank to terminate the contract, which was ultimately obliged to conduct the negotiations properly, also under pressure from the company's claims as reflected in its lawsuit. If the company had delayed, the bank would have proceeded with the termination and the issuance of a payment order, in which case its bargaining power would have been greater, as it would have been able to put pressure on the debtor by initiating enforcement proceedings against its assets.