Greece eyes return to investment grade following 13 years of turbulence
As Greece continues its recovery from the sovereign debt crisis, Konstantinos Rachianiotis and Vassilis Stergiou of PotamitisVekris report a heavy restructuring workload after substantial changes to the insolvency framework
Greece is finally one step away from regaining its investment grade rating after 13 years of relegation to junk status, marking a sharp reversal for an economy that was turbulent during the sovereign debt crisis.
Although Greek bonds are already trading as though Greece has regained investment grade, a return to the rating will be extremely significant for the country as it would attract steady demand from a much bigger pool of global investors. Nevertheless, there are still a number of companies that were not able to make it through the financial crisis and thus a substantial workload of restructuring is ongoing.
During 2022, PotamitisVekris was involved in a number of major restructurings, all of them involving a pre-pack sale of the debtor’s business. The most interesting one is the case of Folli Follie (FF), the luxury accessories company, for a number of reasons:
It was the first time that the management of a listed company was removed on the initiative of the Hellenic Capital Market Commission, which was granted the power to do so by means of a legislative amendment following a financial scandal linked to previous FF management. The new management was instructed to proceed to the restructuring of FF’s balance sheet (facing at the same time a hostile controlling shareholder).
It was the first time that a restructuring agreement was approved by an agent appointed by the court and not by the shareholders of the debtor (the majority were, in fact, fighting the transfer of the business).
It was the first restructuring with a significant cross-border element, as FF’s €500 million (approximately $544 million) debt is predominantly held by foreign lenders. FF’s business will be transferred to two newly established special purpose vehicles controlled by a consortium of the lenders.
Economic recovery plans
The main development during recent years is that Greece has adopted a new insolvency framework (see the analysis under “Legislation and policy changes” below), which provides additional tools for restructuring endeavours. One of the most important changes provided for in the new law is that the consent of the Greek authorities (in their capacity as creditors) for a recovery agreement is deemed to be given (and therefore no explicit consent is needed) if certain conditions – that are typically met in most of the big restructurings – are met.
In addition, during the past three to four years, PotamitisVekris has seen a couple of coercive restructurings, which the authors believe will pave the way for an increased number of restructurings of this type, putting additional pressure on the owners/managers of troubled companies that are not cooperative.
Legislation and policy changes
In 2020, Greece adopted a new integrated insolvency framework (Law 4738/2020, as amended, or the Insolvency Law) that encompasses preventative tools, in-court and out-of-court restructuring tools, and liquidation proceedings.
With effect from March 1 2021, the Insolvency Law abolished the Greek Bankruptcy Code (Law 3588/2007), while the out-of-court workout (OCW) and bankruptcy of consumers procedures came into force as of June 1 2021. The Insolvency Law (titled as the Law for the Settlement of Debts and Provision of a Second Chance) overhauls the OCW framework, establishes insolvency proceedings for consumers and streamlines the bankruptcy process.
The changes brought to the Greek insolvency landscape by the Insolvency Law are extensive and profound. The new legislation introduces a unified framework for the settlement of consumer and enterprise debt for the first time in the country's history. The Insolvency Law implemented the recent EU Directive on Restructuring and Insolvency (2019/1023) ahead of all other EU member states. As such, the Insolvency Law shall also help Greece to better participate in the EU banking and capital markets unions.
The philosophy of the Insolvency Law is straightforward: prevention should be available at an early stage and processes and proceedings should be streamlined, transparent and efficient. Failure (bankruptcy) should be followed by a second chance. Assets should be disposed of without delay, at market rates and in a way that protects creditors’ rights. Public interest is best served by the quick restoration of productive means to potentially productive uses.
It is reasonable to expect that the Insolvency Law will enhance the value of debt collateral (and thus improve bank capital positions), by improving the simplicity, efficiency and speed of procedures, while also helping to address Greece’s legacy private debt problem. However, the Insolvency Law’s most important legacy is likely to be the improvement of the country’s entrepreneurial attractiveness. A clear framework for restructuring and bankruptcy is a critical ingredient of a modern capitalist economy and necessary for risk-taking.
Moreover, Greece, by virtue of Law 3858/2010, adopted the UNCITRAL Model Law on Cross-Border Insolvency. Finally, Regulation (EU) 2015/848 (the Recast Insolvency Regulation) is directly applicable in Greece.
The Insolvency Law is a newly introduced piece of legislation which – although not a result of – coincided with the outbreak of COVID-19 and the implementation of government aid packages to tackle the continued economic impact of the pandemic.
During the Greek financial crisis which started in 2010, the provisions of the Bankruptcy Code of 2007 proved inadequate to handle the challenges faced, and many subsequent efforts at complementing or amending the provisions of the Bankruptcy Code also proved inadequate. The urgency of reform was also tied to the large percentage of loans that remain in arrears and the large number of zombie enterprises, entities that have been driven to inactivity (or underground) due to over-indebtedness, without resorting to formal insolvency proceedings. The above-mentioned background, together with the adoption of Directive (EU) 2019/1023, led to the introduction of the Insolvency Law.
The ratification of a recovery agreement requires the approval of a majority of each of the classes of creditors. The Insolvency Law provides for two classes: secured and all other creditors (including general privileges).
Given that Greece has implemented Directive (EU) 2019/1023, the Insolvency Law also allows the majority of the secured creditors to impose a cross-class cram-down in approving a recovery agreement, if 60% of all creditors (on the basis of the value of claims) consent to the agreement. Dissenting creditors are bound by the agreement if they are treated more favourably than junior creditors and if no class of affected creditors can receive more than the full amount of their claims. In the case of micro-enterprises, the consent of the debtor is also required for the implementation of a cross-class cram-down.
Maximum use of electronic tools, data collection and transparency
There is increased reliance on electronic platforms and automated solutions, in order to:
Ensure faster and broader publicity of all procedural events;
Facilitate the filing of applications, announcements and the conduct of creditor votes where provided;
Facilitate cross-border access; and
Provide greater publicity to auctions (all of which will be e-auctions).
All decisions related to bankruptcy proceedings are published in the Electronic Solvency Registry, and possibly the General Commercial Registry. In addition, the Insolvency Law provides that the Electronic Solvency Registry allows the electronic performance of at least the following actions, which are all publicly available:
The lodging of claims;
The submission of restructuring plans;
An electronic vote, where provided in the law;
Notifications to creditors;
The filing of challenges and appeals;
The publication of court decisions and orders; and
The filing of all the relevant data and information.
Obligation to file for insolvency
The triggering event for a mandatory filing by the debtor is the cessation of payments; upon which, the debtor’s management has 30 days to file for bankruptcy.
According to Article 127 of the Insolvency Law, if the application for insolvency is not filed promptly, the directors responsible for such delay are personally liable for the damages the creditors will suffer due to:
The deterioration of their recovery because of such delay; and
Their commercial relationship with the debtor from the 31st day following the cessation of payments until the filing of the insolvency petition.
Any person inducing the directors to breach their obligation for a prompt filing is jointly liable.
The Insolvency Law also provides that delays due to attempts to conclude a rehabilitation agreement or an OCW settlement are exempted.
The creditors form an assembly, which is one of the bodies of bankruptcy proceedings. Initially, this assembly is formed on the basis of the list that is attached to the bankruptcy petition. Such assembly is restructured initially following the verification of the claims and then following the ruling on creditor objections at the time of the distribution of liquidation proceeds.
The assembly is convened by the reporting judge and is quorate if at least 50% of the value of the claims is present. Decisions are taken by majority. The assembly has the final say on going-concern sales and can ask for an extension of the process.
There is no provision for the reimbursement of creditor expenses for their participation in the assembly. In addition, there is no provision for the constitution of creditor committees.
Creditors are given a bigger say on critical decisions, such as the selection of the administrator and its remuneration, and decisions on whether to accept bids on going-concern sales.
Practice insight/market norms
As mentioned above, the Insolvency Law introduces for the first time the concept of bankruptcy for consumers. Until 2021, only individuals who were merchants could be declared bankrupt. Over-indebted consumers could not file for bankruptcy and they could only file an application under Law 3869/2010 (the Katselis Law), which had proven to be ineffective to address the social, economic and political problem of massive non-performing loans in Greece.
Moreover, bankruptcy was seen as a social and economic stigma for the applicants. This is still difficult to tackle, but the Insolvency Law provides incentives for over-indebted individuals to file for bankruptcy (for example, a bankrupt individual is no longer deprived of their professional licence, and within three years from the declaration of bankruptcy the individual may be discharged from their debts provided that certain conditions are met).
Greece has only recently started to compile statistics on insolvency proceedings. The data available to date provides only a very basic understanding of the frequency of use, and the timeframe for completion, of the respective processes.
One undeniable finding is that bankruptcy proceedings were used very rarely under the Bankruptcy Code of 2007; in fact, there have been fewer than 200 declarations of bankruptcy in Greece for each year between 2015–20, which is very low, especially taking into account that Greece was in the middle of a financial crisis. By contrast, it is estimated that there are currently thousands of zombie companies, entities that are in cessation of payments, but they have not filed for bankruptcy.
However, since the full effectiveness of the Insolvency Law in mid-2021, around 80 recovery applications have been filed, based on the data extracted from Electronic Solvency Register.
More than 2,100 insolvency applications have been submitted during the past two years and at least 700 new bankruptcies have already been declared. It seems that these insolvency applications are mostly related to micro-enterprises and individuals who aim to be discharged of their debts within three years after the declaration of bankruptcy under the Insolvency Law.
The authors’ view is that this trend will continue in the coming years, given that the declaration of bankruptcy is the only way under Greek law for individuals to be discharged of their debts following certain conditions described in the Insolvency Law.