Rehabilitation of a company with write-off of more than 50% of debts to the State and EFKA

Critical points:

- The case concerned a limited liability company active in the trade and distribution of electrical equipment, which had debts of more than €4,000,000 to credit institutions, the State, Social Security institutions and other creditors.

- After assessing the economic data and faced with the problem of the over-indebtedness of this company, we examined all possible alternatives (e.g. individual negotiation with creditors, inclusion in the out-of-court workout mechanism, inclusion in the rehabilitation procedure, etc.) in order to find the most appropriate one based on the profile of the company in question. We took into account, in particular, the fact that the company's debt to the State and the Social Security institutions was high, while at the same time there was at least one main majority creditor (a servicing company for debts arising from credits received by the company - the Servicer), which agreed to a partial write-off of the debts to the State, but also to the company itself, in order to enable the company to stand on its feet and repay its debts (including the loan debts). 

- The correct handling of the case resulted in the settlement of the outstanding debts to the management companies, stemming from credits received by the company, as well as the interest-free settlement of its debts to the State and e-EFKA, with a significant write-off of the relevant debts, through the company's inclusion in the rehabilitation procedure, in accordance with Chapter B of Law No. 4738/2020 - Debt settlement and second chance. 

Background

Due to the Company's reduced turnover in recent years due to a number of external factors (economic crisis, effects of the Covid-19 pandemic, etc.) combined with low liquidity levels and accumulated losses, although the Company did not stop its production activity and did not cease payments, it found itself in a situation of need for restructuring in order to be able to meet its short and long-term financial obligations. In particular, the Company's total liabilities to its creditors, based on the general accounting balance sheet for the reporting year, amounted to more than EUR 4 500 000.00. More specifically, the Company had debts of more than EUR 2,000,000.00 to credit institutions (management companies), more than EUR 800,000.00 to e-EFKA, more than EUR 500,000.00 to the State, while its other debts (approximately EUR 700,000.00) related to other creditors (shareholders, suppliers, etc.).

In the context of the above, we entered into extensive negotiations with the Servicers, given that the Company allegedly owed approximately 1,200,000.00 euros to these specially preferred creditors in order to find a solution that would ensure the preservation and continuation of its business activity and the jobs of its human resources. Following the positive outcome of these negotiations, the Company proceeded with the signing of the rehabilitation agreement, according to which the manner and time of repayment of its debt to its creditors was determined, based on the provisions of Law no. Subsequently, it filed a petition for ratification before the competent Multi-Member Court of First Instance pursuant to Article 31 et seq. of Law No. 4738/2020 for the immediate ratification of the aforementioned rehabilitation agreement.

Strategy

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

- The gathering of the legally required condition of the consent of the Company's creditors, following the positive outcome of the extensive negotiations that took place. In this regard, we ensured the fulfilment of the consent requirements of both the provision of Art. 34 par. 1 ν. 4738/2020, i.e. the consent of creditors representing on the one hand more than fifty percent (50%) of the claims that have a special privilege and on the other hand more than fifty percent (50%) of the other claims of those affected by the reorganization agreement, based on the presumed consent of the State and public entities pursuant to Art. 37 par. 2 of Law. 4738/2020, as well as the fulfilment of the conditions of consent under the provision of Article 37 of Article 4738/2020. 54 par. 2 ν. 4738/2020, i.e. the consent of creditors whose claims represent a percentage equal to or greater than 60% of the Company's total liabilities, including fifty percent (50%) of any claims secured by negotiation, special privilege or lien. Specifically, the reorganization agreement submitted for ratification by the competent court was entered into between the Company and its creditors representing approximately sixty-two percent (62%) of the total claims of the affected creditors and one hundred percent (100%) of the total claims of the creditors secured in fact or by special privilege or lien. 

- The emergence before the judge of the key issue that the ratification of the reorganisation agreement is the only way to ensure the preservation, realisation, restructuring and recovery of the undertaking in question and, therefore, the only way to restore its viability.

- The correct and solid legislative, jurisprudential and bibliographical evidence of compliance in this case with the fundamental principles of equal treatment and of non-deterioration of the position of the creditors of the company, whose claims were subject to the reorganisation agreement, which played a decisive role in the adoption of the judgment confirming our application. In particular, in formulating the content of the agreement, we ensured that none of the non-consenting creditors or creditors whose consent is presumed would be worse off than the position they would be in if the debtor company were to go bankrupt. 

- The demonstration before the judge of the intention of our client company to act in good faith and lawfully, taking advantage of the second chance offered by the institution of reorganisation, so that, on the one hand, it can recover from the financial difficulties into which it has fallen, mainly as a result of a series of external factors, and, on the other hand, it can continue to contribute to the social and economic life of the country in the future. Indeed, we consider it crucial that the lawyer should be able to present and highlight both the serious legal arguments and the general reality and the particular circumstances of each case, so that the judge before whom each case is heard can draw conclusions and form an opinion on both the manner of action and conduct of the party concerned and, in particular, the impact of the decision he is called upon to deliver. 

- The timely submission to the court hearing the case of a request for a stay of pending or pending measures, individual and collective enforcement measures against the Company, as well as any other preventive measures until the final decision on the application for direct ratification of the rehabilitation agreement pursuant to Art. 50 par. 3 ν. 4738/2020, given the determination of the date of the hearing of the application for direct ratification of the rehabilitation agreement before the competent Court on a date only a few days before the date on which the period of automatic suspension under Art. 50 par. 1 of Law No. 4738/2020.This was done in order to safeguard the interests of our client to the maximum extent possible, preventing the real risk of enforcement measures being taken by the Company's creditors against the Company until the final decision on the above application is issued.

Result

Our aforementioned application for the ratification of the rehabilitation agreement was accepted by the decision of the Kalamata Court of First Instance (No. 11/2023). Under the agreement, in addition to the settlement of the Company's overdue debts to the management companies, stemming from the credits it had received, the Company's debts to the State and the e-EFKA were settled without interest, with a significant debt write-off, rejecting the main interventions of the aforementioned bodies, which requested the rejection of the application. 

In particular, the debts to both the State and the EFKA were settled in 240 interest-free instalments (20 years), with the first instalment payable within 90 working days of the publication of the decision confirming the agreement. It is indicative that through the out-of-court debt settlement mechanism, which is the most widely used debt settlement tool, debts to the State and e-EFKA can be settled in up to 240 instalments, but at an interest rate of 3%. At the same time, the resolution agreement cancelled part of the debts to the State and the e-EFKA, as well as all the debts to these entities that arose from the submission of the resolution application until the publication of the ratification decision, with the total write-off exceeding 50% of the Company's existing debts at the date of submission of the application. Specifically, as regards the e-EFKA, the benefit to the Company from the write-off alone amounts to more than €550,000.00, while its total debts at the time of filing the application amounted to approximately €1,000,000.00. The corresponding amount of the write-off of the debts to the State amounted to more than EUR 650,000.00. The above amounts of the write-off do not include the benefit to the company from the interest-free arrangement of its non-written-off debts. 

It is noted that, taking into account the legal documentation submitted to the court, the court upheld the agreement, considering that it does not violate the principles of equal treatment and non-deterioration of the creditors' position, as the State and e-EFKA, on the one hand, are not in the same position as the financial institutions, so their less favourable treatment is justified, and on the other hand, they would not recover larger amounts through the bankruptcy proceedings than the amounts they would receive with the implementation of the rehabilitation agreement. On the basis of those considerations, the Court rejected the main submissions of the above-mentioned parties seeking the dismissal of the application, on the ground that the write-off and the non-interest-bearing nature of the arrangement were unlawful. 

Conclusion 

The solution to the problem of over-indebtedness of companies is never a one-way street, but requires the adoption of the most appropriate strategy from among the legislative options on offer, in order to adopt the most advantageous one, based on the profile of the company in question. As regards rehabilitation procedure in particular, it is clearly not for all companies. It is particularly appropriate in cases where there are high debts to the State and public bodies, provided that the consent of at least one major majority creditor (e.g. a bank) has been secured in order to achieve the maximum possible debt write-off, as in the present case. This case confirms the fact that correct legislative and case-law documentation, especially in cases where the court is faced with the application of legal concepts (see the principles of equal treatment and non-deterioration of the position of creditors), plays a crucial role in the successful outcome of the case.