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The Ministry of Regional Development & Competitiveness has put forward proposals to reform the pre-bankruptcy procedure called ‘rehabilitation’. The reform, contained in the proposal for a draft law which has already been made public, primarily relates to replacing the provisions of Chapter VI of Law 3588/2007 (Articles 99 to 106) of the Hellenic Bankruptcy Code.

According to the explanatory memorandum accompanying the draft law, the key disadvantage of the conciliation procedure which applies at present is that the agreement which results from that procedure is not binding on dissenting creditors. That procedure is to be replaced by the concept of ‘rehabilitation’.

The rehabilitation procedure was selected as more effective in bolstering the possibility of saving the business in the pre-bankruptcy stage, before it loses all its value.

The logic underscoring the new provisions is that rescuing the business does not necessary mean rescuing the businessman behind it. That would be contrary to economic logic, since in the case where the business is a success, the businessman enjoys the profits, and must consequently endure the financial consequences of failure as well. Moreover, from a social perspective, rescuing the businessman may also be unfair and detrimental to creditors, who are usually more worthy of protection as they include employees, suppliers, social security funds and so on. It is therefore likely that rescuing the business will entail the businessman losing control over it, just as would happen if the rescue were to take place by transferring the business or by capitalising its debts.

The criteria for initiating the rehabilitation procedure are ensuring (a) the preservation, utilisation, restructuring and recovery of the business and (b) that collective satisfaction of the creditors is not harmed. There is harm to the collective satisfaction of creditors where, on the balance of probabilities, it is considered that creditors who are not parties to the agreement will find themselves in a worse financial position than the one they would find themselves in by seeking compulsory enforcement, or in the case where the debtor has ceased payments.

Bearing those points in mind, the proposed legislative reforms have the following features:

-          Following court approval of the rehabilitation agreement, that agreement will be binding on all creditors and their claims will be regulated by it, even if they are not parties to the agreement or did not vote in favour of the rehabilitation agreement.

-          There is more flexibility when it comes to drafting the rehabilitation agreement than before,  since the debtor and creditors are allowed to reach agreement without any formal negotiating procedure by simply engaging in confidential talks, or alternatively by engaging in formal negotiations in the context of the rehabilitation procedure. In the latter case, there are two options available: either to conclude an agreement directly with creditors or to convene a creditors’ meeting.

-          The rehabilitation procedure can also be applied to a business which is currently unable to settle its cash obligations generally speaking which are due and payable, or faces such a possibility, whereas -on the contrary- at present businesses which have suspended payments cannot initiate the conciliation procedure. Moreover, the competent court is also granted the discretion to bring a business within the scope of the rehabilitation procedure even if there is no current or potential inability to discharge its obligations, if in its view the debtor is facing serious economic problems that could be addressed by recourse to this procedure.

-          Under the new reforms, the scope of the rehabilitation agreement can be to regulate the assets and liabilities of the debtor and certain indicative solutions are proposed about what the agreement should include such as a change in terms and conditions of the debtor’s liabilities; capitalisation of liabilities by issuing shares or holdings in the company; regulating relations between different creditors following approval of the agreement either in their capacity as creditors or, in the case of capitalisation, in their capacity as shareholders or partners; a reduction in the level of claims against the debtor; sale of part of the debtor’s assets to a third party based on any form of legal relationship including leasing or management agreements; transfer of all or part of the debtor’s business to a third party or a creditor’s company; suspension of individual proceedings lodged by creditors for a specific time period after approval of the agreement; and the appointment of a person to supervise enforcement of the terms and conditions of the rehabilitation agreement.

-          If the debtor has ceased payments, the application for inclusion in the rehabilitation procedure will only be accepted if at the same time he submits an application filing for bankruptcy.

-          The application to the court to initiate the rehabilitation procedure must, on penalty of inadmissibility, be accompanied by an expert report prepared by an expert of the debtor’s choice (such as a credit institution lawfully providing services in Greece or an audit firm) to which is attached a list of the debtor’s assets and creditors, with a special reference to documentary credit, analysing the likelihood of the business being rehabilitated and setting out the expert witness’ opinion about the extent to which rehabilitated of the debtor’s business will not harm the collective satisfaction of creditors.

-          Having weighed up on the balance of probabilities that achievement of agreement is possible, the Court will decide to initiate the rehabilitation procedure for a period of no more than 4 months. It is generally possible to appoint a mediator. It is mandatory to appoint a mediator if that is requested by the debtor and the debtor is obliged to request such an appointment if he requests that the creditors’ meeting be convened.

-          The decision of the bankruptcy court to initiate the rehabilitation procedure or a judgement of its presiding judge issued on an application from any party with a legitimate interest may suspend in whole or part individual compulsory enforcement measures involving the debtor’s assets during the rehabilitation procedure. This suspension will cover the debtor’s obligations which had arisen before the application was filed to initiate the rehabilitation procedure, but the court, or its presiding judge, as appropriate, may in exceptional cases extend that suspension order to cover more recent claims as well. During such time as the suspension order is in effect, the statute-barring rules are also suspended in accordance with Article 255 of the Hellenic Civil Code.

-          Using the same procedure, the bankruptcy court, or its presiding judge, as appropriate, may also order any of the other preventative measures specified in Article 10, and in particular an extension of the deadlines for payment of the debtor’s obligations, a prohibition on acts of the debtor which go beyond normal management activities, or beyond a specific amount, and a prohibition on offsets, and on rescission of contracts by third parties.  Exceptions can be made in relation to those preventative measures if there are serious business-related or social grounds. For example these could include payments that need to be made to an important supplier who refuses to make new deliveries if outstanding debts are not settled, or amounts to be paid to creditors which are necessary for the maintenance of the creditor and his family or to pay salaries to his employees.

-          Within 20 days from signing the rehabilitation agreement, an application to have that agreement approved (ratified) by the bankruptcy court must be submitted by the debtor, a creditor or the mediator. If the cessation of payments is not lifted by the time the rehabilitation agreement is to be approved, the bankruptcy court will not grant its approval for the rehabilitation agreement, and if a petition for bankruptcy is pending, the court will declare the debtor bankrupt.

-          The following rules apply in relation to approval of the rehabilitation agreement: Following approval of the rehabilitation agreement, that agreement will be binding on all creditors and their claims will be regulated by it, even if they are not parties to the agreement or did not vote in favour of the rehabilitation agreement. Without prejudice to more specific provisions of Chapter VI of the Bankruptcy Code or the provisions of the agreement, approval of the rehabilitation agreement does not have any impact on personal or real collateral, including mortgage liens, that have been provided in order to secure the claim. Moreover, when the agreement is approved, any prohibition or impediment to issuing cheques which had been imposed on the debtor before the rehabilitation procedure was initiated will be automatically lifted. The judgement approving the rehabilitation agreement is an executable title for the obligations undertaken therein.  Under these new arrangements, approval of the agreement does not result in the suspension or personal or collective compulsory enforcement measures, except to the extent that they are included in and regulated by the rehabilitation agreement.

-          The involvement of the meeting of shareholders or partners in concluding the rehabilitation agreement  is only required when the Companies Law requires that a decision be taken by the meeting in order to fulfil a term of the agreement, as is also the case if the capitalisation of debts is agreed. One innovative aspect of the reform is the ability of the court to replace the will of the shareholders or partners who abusively refuse to assist in reaching a rehabilitation agreement, while similar arrangements also exist for the consent of shareholders in their capacity as creditors where the shareholders have provided financing in the form of loans, credit or guarantees which serve to supplement contributions made to the company.

-          In contrast with the existing provisions, failure to comply with the agreement is no longer an automatic ground for terminating the agreement, and under the new arrangements instead of the agreement automatically terminating, the parties have been granted the option to specify that failure to comply with its terms (or certain specific terms) is a condition precedent or ground for giving notice to terminate the agreement.

-          Moreover,  it is also possible under the terms of the rehabilitation agreement  to set up a societe anonyme by making a contribution in kind of all or part of the claims against the debtor. This will be done pursuant to the terms and conditions laid down in Articles 9 and 9a of Codified Law 2190/1920. That company will then acquire all or part of the debtor’s business in return for settling the claims against the debtor which have been contributed to that company.