Greece: Selected Issues

Abstract

Greece: Selected Issues

Insolvency And Enforcement Issues In Greece1

A. Background

1. The crisis has had a lasting impact on private sector balance sheets and the ability to service debt. As a result of the crisis, GDP contracted by 25 percent, and unemployment has risen sharply to a peak of close to 28 percent in 2013. Corporate turnover has collapsed by a third, property prices have halved, and disposable income has shrunk significantly. Consequently, the non-performing loan ratio (NPLs) has reached the second highest level in the Eurozone, and the amount of uncollected tax and social security claims, at 70 percent of GDP, represents the highest level in the Eurozone. Although private debt relative to GDP is low compared to other European countries, the debt-servicing capacity of businesses is severely constrained due to the collapse in turnover, and this results in severe liquidity constraints and, eventually, in insolvency.

A01ufig1

Non-Performing Loans

(Percent of total loans)

Citation: IMF Staff Country Reports 2017, 041; 10.5089/9781475575743.002.A001

Sources: Bank of Greece; and 2015 EBA report.Note: Data for Greece as of March 2016, data for others as of June 2015.
A01ufig2

Private Sector Arrears

(Percent of GDP)

Citation: IMF Staff Country Reports 2017, 041; 10.5089/9781475575743.002.A001

Sources: EBA 2015 June Report; Eurostat; OECD; and IMF Staff Calculations.1/ For Greece, the figures are estimates at end-September2016 and include social security contribution debt.

2. The enforcement and insolvency system has been largely ineffective in responding to the needs of the economy. The Greek insolvency and creditor rights framework has improved since the onset of the crisis as a result of successive reforms. Nonetheless, it remains underutilized, fragmented, and distortive, and is not supported by an adequate institutional setting. This is because many of the reforms undertaken in recent years were not part of a coordinated and comprehensive NPL resolution strategy, but were instead piecemeal and taken without proper stakeholder consultation and impact analysis. Also, the frequent and uncoordinated reforms have undermined legal predictability and certainty. This situation of distress, if left unaddressed, affects enterprises, households and also financial and public creditors, in that it prevents investment, credit, and consumption from recovering, threatens financial stability with consequences for the public finances.

A01ufig3

Private Debt, 2016:Q2

(Percent of GDP)

Citation: IMF Staff Country Reports 2017, 041; 10.5089/9781475575743.002.A001

Sources: Bank of Greece; Eurostatand IMF staff calculations.Note: Private debt includes outstanding debt, loans, and other accounts payable for nonfinancial corporations and households.1/ As reported by Bank of Greece.2/ Adjusted for taxdebt and SSCdebt.

3. This paper aims at providing an analysis of the evolution, current status, and remaining challenges in the regulation of insolvency and enforcement in Greece. The paper identifies the issues and required actions to achieve a functioning insolvency and debt enforcement system that could contribute to the economic recovery by enabling the restructuring of enterprises and households and by liquidating non-viable enterprises. The remainder of the paper is structured as follows. Section B presents a summary of the reforms and the evolution of the insolvency and enforcement system in Greece. Section C outlines the main challenges for the functionality of the system as it stands today. Finally, Section D concludes with a discussion of recommendations for the improvement of the system.

B. Insolvency and Enforcement in Greece: A Succession of Reforms without the Intended Effects

4. The Greek insolvency and enforcement regime has undergone a series of reforms. It is useful to look at these reforms from a thematic point of view: first, we examine the changes introduced in the business insolvency framework; second, we analyze the adoption of the personal insolvency law and its reform; third, we look at the reform of the individual enforcement regime. Other reforms have also been legislated, seeking alternative and complementary solutions to the over-indebtedness problem: the out-of-court debt restructuring framework represents an alternative to the formal insolvency and enforcement system; and the framework for the sale of non-performing loans by credit institutions must be understood in the context of the current insolvency and enforcement regime, as complementing the NPL resolution strategy.

The reforms of the business insolvency framework

5. The business insolvency law was reformed several times over the last ten years. A major change in orientation in Greek law occurred in 2007, with the passing of the business insolvency law, Law No. 3588/2007. This reform signaled a deep change from a system based on the ancient French Code de commerce to a more modern legal framework for business insolvency, based on two basic procedures: a bankruptcy procedure along the lines of the German Konkurs, and a restructuring procedure, modelled on the conciliation procedure in French law. The law was subsequently reformed in 2010, 2011, 2012, and 2015, as follows:

  • In 2010, Law 3858/2010 incorporated the UNCITRAL Model law on cross-border insolvency, providing a recognition and cooperation mechanism for international insolvencies, according to best international practice.

  • In 2011, Law No. 4013/2011 introduced the rehabilitation procedure as a preventive mechanism for the insolvency of distressed businesses. The process is initiated by the debtor and is designed to address situations of illiquidity by means of a restructuring agreement subscribed by a majority of creditors. The law also included a special liquidation procedure, consisting of a pre-insolvency procedure, designed for large enterprises, which allowed for the sale as a going concern of the distressed enterprise. The special liquidation procedure was barely used at all in practice.

  • In 2012, Laws No. 4055/2012, and No. 4072/2012 introduced significant changes to the structure of the insolvency process: the reforms eliminated the conciliation procedure –which was not effective in providing an alternative to bankruptcy due to its reliance on purely consensual solutions and the opportunities it offered for debtor abuse. A new rehabilitation procedure, including the expedited confirmation of debt restructuring arrangements, was introduced, along with a new procedure for special liquidation.

  • The reforms of the commercial insolvency framework in 2015 (Law No. 4336/2015) streamlined some aspects of the rehabilitation procedures:2 the deadlines to submit claims, verify claims, and object to decisions on recognition of claims were all reduced significantly. The reform also opened the reorganization procedures to debtors likely to become insolvent (without proof of actual or imminent insolvency), and introduced significant changes in the regulation of the automatic stay of creditor actions, limiting its scope and effects.3 In addition, the reform introduced the requirement for the participation of qualified insolvency professionals. However, the regime of insolvency professionals is yet to be developed and implemented via secondary legislation. The law also prohibited automatic termination clauses in contractual relationships in case of debtor insolvency.4 In the approval of reorganization plans, the reform emphasized the importance of the analysis of the compliance of plans with the best interest of creditors’ test (i.e., determining whether all creditors receive, under the plan, at least what they would have received in the potential liquidation of the debtor), rather than focusing on the feasibility of the plan, which depended on the judges’ ability to assess those economic aspects. The protection of new financing was enhanced, including in cases where the restructuring plan is not successful. Finally, the reform of the Code of Civil Procedure had a crucial impact on the insolvency regime, since the ranking of claims applicable to insolvency is the same that applies in civil procedure legislation.

6. The Parliament has approved a new set of amendments in December 2016. The authorities have been aware that the insolvency system can be further improved, and a committee was formed (the “Law Reform Committee”) with the aim to study and provide proposals to improve the law along the following lines:

  • Revision of the preventive restructuring procedure, in order to enhance its potential to rescue viable enterprises, facilitate the continuity of the labor force, and address the abuse of the law by non-viable enterprises.

  • Amendments to the reorganization plan, with a view to increase its effectiveness, mainly by eliminating the initial stage, which consists of an initial examination of the plan.

  • Revisions of the bankruptcy procedure to reduce the time needed for its completion, including a whole reassessment of the timeframe for the process, its multiple steps and ancillary proceedings, and the functions of the court and the rapporteur (delegate judge).

  • Coordination of the law with the projected regime for insolvency administrators.

  • Reform of the provisions of the commercial insolvency law to achieve alignment with the provision establishing discharge of natural persons no later than three years after the date of declaration of bankruptcy.

  • The issue of the obstruction of corporate restructuring by shareholders was also included in the scope of the reform.

These amendments have been included in the Law 4446/2016. The authorities have also passed a Presidential Decree for the regulation of insolvency administrators, and further regulatory instruments are in preparation (see below, section D).

Personal insolvency

7. The personal insolvency regime was established in 2010, and later reformed in 2013 and 2015. For historical reasons, most Southern European countries lacked a personal insolvency regime before the global financial crisis. In 2010, the authorities enacted the Law No. 3689/2010 (“Katseli Law”), introducing a personal insolvency procedure in Greek law for the first time. This law provided blanket protection to borrowers, including strategic defaulters. It also included a compulsory initial extrajudicial phase that complicated and extended the length of the process without producing any substantial benefit. The law was subsequently reformed as follows:

  • In 2013, the reform eliminated the compulsory extrajudicial phase for personal insolvency. The authorities introduced a forbearance scheme for current debtors called the “Facilitation Program,” (i.e., an extension of maturities for mortgages with minimum payments for four years for debtors who meet low income thresholds or who had suffered income reductions of more than 20 percent since January 2010). This scheme already expired: in any case, it was never used extensively, because banks provided much better restructuring and forbearance conditions than those included in the state scheme.

  • The 2015 amendments5 expanded the scope of the discharge to include tax and social security debts, introduced filters for strategic defaulters by dismissing incomplete filings (if not remedied within a deadline), provided for short deadlines for procedural steps such as hearings, limited the period of the stay of creditor actions, required minimum reasonable payments during the period of the stay consistent with the proposed payment plan, and introduced a streamlined process for debtors with a limited amount of indebtedness and without mortgage debt. The reform also introduced stricter criteria for the protection of primary residences, and transitional provisions to migrate old cases to the revised regime within a short period of time.

8. The changes introduced in late 2015 generated a wave of personal insolvency filings to avoid the application and impact of the new legal regime. Numerous applications were presented in the transitional period, before the new amendments entered into force, due to the perception that the new rules would be more disadvantageous to debtors. This generated a considerable additional backlog of cases (of in total about 200,000 cases), which required the introduction of special measures, such as the increase of judges in charge of personal insolvency cases.

The reforms of the enforcement regime

9. Problems in the enforcement of claims have been a staple of the Greek legal system both before and during the crisis, severely undermining the payment culture. The Greek procedural regime for the enforcement of claims has been characterized by complication and lengthy delays. The basis of the procedural regime, the Code of Civil Procedure, was first adopted in 1967. There were numerous technical reforms of this text, but the legal regime remained inadequate when the economic crisis started. During the crisis, the lack of a robust social protection system prompted the authorities to introduce blanket moratoria on foreclosure to avoid any social consequences of the exercise of creditor rights. A first general moratorium on mortgage enforcement was introduced in 2008, banning home eviction for primary residence and property commercial value up to EUR 200,000. This applied until 2011 and was then extended in 2012. In 2013 (with effects as of January 1, 2014), the blanket moratorium was replaced by a relatively more targeted one, applying to primary residences with a taxable value of the property was below EUR 200,000, the annual net income of the debtor was below EUR 35,000, the total value household assets (including real estate and movable assets) was below EUR 270,000, and the total value of the debtors’ deposits and other financial assets was less than EUR 15,000. The cumulative effect of the repeated and continuous use of broad moratorium schemes increased strategic defaults and undermined the payment culture (IMF, 2013b).

10. The reform of the Code of Civil Procedure (CCP) signaled a fundamental change. In August 2015 the civil procedure regime was overhauled through the Law No. 4335/2015.6 The new CCP, which entered into force on January 1, 2016, provides for the following changes to the enforcement of claims.

  • Debt enforcement procedures have been streamlined in the new regime and made more efficient by eliminating possibilities for appeals and delays.

  • Civil procedure has been transformed from an oral to a written procedure. The enforcement part of the process has been rationalized and simplified, with possibilities for the use of e-justice.

  • Importantly, deadlines of the process are set from the beginning, which helps to improve the predictability of the duration of the process. The law also introduces changes in the rules regarding interim measures: the court can determine a deadline for the filing of the main lawsuit, or otherwise the interim measures are automatically lifted after 60 days. 7

  • Reduction of defenses against enforcement actions. The debtor can only challenge defects in two different points in the process, as opposed to the previous system, which allowed challenges at every point in the process.

  • The auction process for foreclosed real estate has also been streamlined by eliminating possibilities for delays and appeals. Further, the reserve price is determined by the market price and reduced if successive auctions fail. The possibility of an e-auction is enabled.

  • Appeals against court decisions are reduced, and the appealed decisions are enforceable.

  • The new ranking of claims ensures that secured creditors are allocated a priority for 65 percent of the proceeds, while general priorities will receive 25 percent of the proceeds, and unsecured creditors 10 percent. This system is superior to the previous one, which did not protect secured creditors against the potential impact of the super-priorities of public claims, which could absorb entirely the proceeds generated in the sale of collateral. Nonetheless, this ranking and distribution mechanism is not in line with cross country experience (see below, section D and box 2).

The out-of-court framework

11. The problems identified in the legal system and the institutional framework, as well as the severity of the crisis, led to the consideration of out-of-court solutions. In December 2014, the Greek authorities adopted a temporary out-of-court workout law (“Dendias Law”, or “OCW law”) which became effective in early 2015. The Dendias Law reflects many features of international best practices, and included three different mechanisms for debt restructuring and enforcement, with various degrees of court intervention:

  • The first mechanism, involving the settlement of the debts of small businesses and professionals, was purely extrajudicial, and provided for a voluntary, debtor initiated and bank-led process to restructure the business debts of viable debtors who meet certain eligibility criteria (i.e., request must be filed by March 31, 2016 and (a) should not have been filed or withdrawn under the Katseli Law; (b) should not have ceased activities or been dissolved; and (c) should not have been convicted of certain financial crimes). The debtor must be in arrears for more than 90 days on bank debt and must be current under a payment plan with the tax or social security administration. Banks are provided with tax incentives to restructure debt to provide deep writeoffs (at least 50 percent of debts up to EUR 500,000 and if less than 50 percent, the remaining debt should not exceed 75 percent of the debtor’s ‘net asset position’), and the restructuring of the private debt also triggers the inclusion of the debtor in an installment scheme for tax and social security debt. The installment scheme allows the debtor to pay amounts due to tax/social security in up to 100 installments. In addition, for debtors participating in the installment scheme through this process, an additional write-off of 20 percent of surcharges, interest and late fees is also available.

  • The second mechanism, involving the extraordinary procedure for settlement of merchants’ debts, consisted of a hybrid out-of-court restructuring agreement, subject to court confirmation. Upon court confirmation, cram down of all (including dissenting) creditors (if approved by 50.1 percent of the debtor’s creditors as well as secured creditors) creates an expedited, debtor-initiated restructuring procedure (accompanied by an evaluation of viability by its creditors and a chartered auditor’s certificate that the required creditor majority has been met). A provisional stay may be granted for a maximum period of six months. As a prerequisite to debt restructuring by banks, any arrears to tax and social security creditors should be under an installment scheme on which the debtor must be current. Once a plan is approved, creditors may not take any collective enforcement action, including the declaration of insolvency under the Corporate Insolvency Law for 12 months. Financing provided for 12 months after court confirmation of the plan has priority in repayment, even if the plan fails. The best interest test is used to determine whether creditors who are crammed down are entitled to compensation (but such claims do not affect the plan). Labor dues are required to be settled in full but can be split into 12 installments, without interest. Upon plan approval, the debtor is entitled to an additional 20 percent relief on interest, penalties and surcharges on tax and social security debt. If the debtor’s public debt is over EUR 1 million, upon plan approval, the debtor may apply for a write off of 40 percent of surcharges, interest and penalties and pay the balance in 100 equal installments. The tax/social security authorities may decline the debtor’s request but must do so within two months and based on a reasoned opinion.

  • The third mechanism is the extraordinary procedure of special administration, which is a creditor initiated streamlined procedure designed to take control of the debtor’s business and liquidate it through a special administrator and requires court approval. Once confirmed by the court, the special administrator can take control of and liquidate the debtor’s assets over a 12-month period. Assets may be liquidated by the special administrator piecemeal or the business (or parts of it) may be sold as a going concern. During this period, individual enforcement actions by creditors are suspended. If 90 percent of the assets remain unsold after 12 months, the debtor will be liquidated, but if 90 percent of the assets have been sold, the special administrator may continue to dispose of assets. Distributions to creditors would be made in accordance with the provisions of the Civil Procedure Code. The special administrator is only liable for intentional wrongdoing and gross negligence.

12. The “Code of Conduct” for the management of private sector arrears is also part of the trend to find alternative solutions to enforcement of claims. In 2013, the Bank of Greece issued a Code of Conduct for the management of private sector arrears by Greek banks. The spirit of the Code is to assist in finding negotiated solutions to the treatment of non-performing loans. The Code of Conduct includes general principles for the assessment of debtors and finding adequate solutions for the arrears situation. The Code is designed to provide fair treatment to cooperative debtors by establishing an arrears-resolution procedure which covers the following phases: (1) debtor communication, (2) financial information gathering, (3) financial data assessment, (4) proposing solutions and (5) appeals review process. The Code has been reformed in 2016.

The market for non-performing loans

13. The market for non-performing loans has been recently liberalized and represents a complement to the insolvency and enforcement system. The goal of developing the market for loans, including NPLs, is to attract foreign capital; leverage off much needed NPL management platforms and technical expertise through service contracts and joint ventures; and where possible, to remove the non-performing loans from the balance sheets of the banks. After its adoption in December 2015, the law was revisited to correct several technical aspects and to define its scope, extending its coverage to all loans, performing and non-performing, except for mortgage loans over primary residences, under the value of EUR 140,000, which are subject to a moratorium under the law until 2018. The administrative regulations for the law have only been recently put in place, the market has not developed yet, and some practical implications of the sale regime have not been tested. In particular, any underlying problems of the legal framework affect negatively the prices of distressed assets, as NPLs will have to be restructured or enforced by the acquiring entities.

C. Current Challenges in the Insolvency and Enforcement System

14. The reforms to date have not yielded the desired results. Political and economic developments have not provided the necessary stability and support for the development and implementation of the new laws and the reinforcement of the institutions. Moreover, some of the reform amendments are recent and need time to be tested. The result is that late or non-payment is pervasive, both in terms of the average payment term and of the percent of companies with late payments, where Greece tops the cross-country lists (Figures 4 and 5).

A01ufig4

European Payment Risk Index, 2013

(Average payment term in days)

Citation: IMF Staff Country Reports 2017, 041; 10.5089/9781475575743.002.A001

Source: EC.
A01ufig5

Outliers: Percentage of Companies with Late Payments-Related Liquidity Problems, 2013

Citation: IMF Staff Country Reports 2017, 041; 10.5089/9781475575743.002.A001

Source: EC.

15. The business insolvency regime remains underutilized. Although recent reforms have improved the framework, a disconnect remains between the design of the system and its practical operation, in particular as the framework continues to be too complex and expensive considering that about 96.7 percent of businesses in Greece are micro SMEs, and it is those that have the largest problems with servicing debt (Figure 6).8 Official data suggests that the number of insolvency cases bears no relation with the widespread distress in the Greek corporate sector, with bankruptcy procedures having declined relative to the pre-crisis level (Figure 7). This could be explained by the fact that the official statistics are only capturing formal liquidation procedures, rather than pre-insolvency procedures, which are more extensively used, but largely as an opportunity to block creditor actions and gain breathing space for the debtor enterprise. In addition, the liquidation process is highly inefficient. For instance, in the first three months of 2016, the Athens district court—the largest court in Greece—only registered 16 bankruptcy applications.9 There is no real backlog of commercial insolvency cases: most of the cases that remain in the courts for years are those where there is no action that can be taken—typically, asset-less bankruptcy cases. The lack of use of insolvency proceedings points to the paradoxical fact that although there is a high number of commercial debtors who are in a situation of insolvency, they largely remain outside the insolvency system, while the insolvency law is reserved for liquidation cases that are eventually resolved, after a long procedure which takes up to 10 years, with no or little pay out to creditors (see ECB 2016, 64).10 As a result, the insolvency system is not able to perform its fundamental economic function, namely to offer creditors the most efficient means of recovery, which implies the preservation of viable enterprises and the liquidation of those that are not viable, with the consequent redeployment of resources to more productive uses

A01ufig6

Non-Performing Exposure Ratios, 2016:Q2

(Pecent of exposure in each category)

Citation: IMF Staff Country Reports 2017, 041; 10.5089/9781475575743.002.A001

Sources: Bank of Greece; and IMF staff calculations3/ SBPs: small businesses and professionals.
A01ufig7

Insolvency cases in Greece

(Liquidations)

Citation: IMF Staff Country Reports 2017, 041; 10.5089/9781475575743.002.A001

Source: Elstat.

16. In contrast, the personal insolvency framework has been over- and misused. More than 200,000 applications for personal insolvency have been filed in six years under the new framework (i.e., about 2 percent of Greece’s population). The wave of applications has flooded the system and has led to a paralysis of the system, with debtors receiving a payment moratorium as a result of the backlog that is expected to last up to 15 years. This problem is exacerbated by the insufficient guidance to judges and the design problems preceding the 2015 law (such as the requirement that the debtor pays a minimum or no payments at all pending a court hearing). The system appears prone to abuse, with debtors who do not qualify applying anyway as a way to avoid creditor actions for a long time until the case is heard.11 Thus, instead of providing a second chance for individuals who are experiencing over-indebtedness so that they can return to productive activity, the system appears to be used to fend off creditor actions and preserve assets. This does not provide a lasting solution to the indebtedness problem for either creditors or debtors, while absorbing judicial and administrative resources.

17. The enforcement system is ineffective. The repeated moratoria have undermined the payment culture, and the enforcement regime has traditionally been extremely defective, with long and costly procedures resulting in low recoveries. Collateral enforcement is lengthy due to the fact that most mortgages are not properly registered in the land register/cadaster (rather than just pre-notated), in large part due to expenses such as notarial fees and excessive transfer taxes.12 Moreover, a land register or cadaster spanning the whole territory of Greece is lacking. Finally, foreclosures have been rare (due to formal and informal moratoria) and, when they have occurred, they have been lengthy and costly, with little pay out to the secured creditors due to the superiority of public creditors (see ECB 2016, 63). The adoption of the Code of Civil Procedure represented an opportunity to improve the system significantly, although so far its application has been limited, and the use (and misuse) of procedures that stay creditor actions continue undermining the possibilities of timely and efficient enforcement in Greece.

18. Out-of-court approaches have not been successful so far. The Dendias Law did not achieve its objectives (Figure 8). Despite the use of advanced legal techniques, drawing on input form financial and legal experts and comprehensive stakeholder consultation, there were several important obstacles that prevented the use of the law. First, the law required a debtor to already use one of the installment schemes for tax debt, and thus did not offer an appropriate way of combining the restructuring of financial and public claims (tax and social security claims) in a unified and equitable manner. This is because the law offered no incentives for private creditors (e.g., banks) to engage in debt restructuring, given that public creditors were protected, and private creditors would have needed to bear larger losses. Second, the set of tax incentives for debt restructuring was insufficient. Third, the implementing regulations were insufficiently adopted; thus, no standard forms or templates as well as engagement protocols were adopted. Finally, the OCW law came into force at a time of high political instability, which undermined the incentives for parties to use the OCW process due to the political and economic uncertainty and further complicated dissemination to the public.

A01ufig8

Use of the OCW law

(Debt restructuring of SMEs and professionals)

Citation: IMF Staff Country Reports 2017, 041; 10.5089/9781475575743.002.A001

Source: MoJ.

19. Other legal obstacles complicate the debt restructuring process:

  • Unlike most other EU countries, in Greece secured creditors are less protected and public creditors (tax and social security) are most protected (see Box 2), even after the Code of Civil Procedures has been reformed. Overprotection of the public interest has consequences – secured creditors will lend less, demand higher interest rates, and higher value of collateral-, and unsecured creditors—especially suppliers—suffer the impact of priorities that reduce significantly their possibilities of recovery. The complex relationship between public claims and private claims (secured and unsecured) adds to the difficulties in an already complex debt resolution process.

  • The tax and social security authorities have little to no capacity to engage in meaningful debt restructuring. Moreover, public creditors are reluctant to engage in meaningful debt restructuring, due to their concern for criminal liability, as the write-down of public debt could be included within the scope of the criminal offence of dishonest administration. This concern for liability also affects bank officials, as there is a risk that the same interpretation of the crime of dishonest administration be applied to the restructuring activities of banks recapitalized with public funds, and bank officials could face both civil and criminal liability.

  • Obstructive shareholders can prevent the effective restructuring of companies. The treatment of shareholders in Greek insolvency law allows the owners of the business to retain control and influence crucial decisions in the restructuring process, even when their economic interest is non-existent due to the fact that there is no value in equity in the insolvent company. Shareholders have their legal powers intact, and can undermine numerous debt restructuring strategies –for instance, the use of debt/equity swaps– and obtain advantages from creditors, thanks to the “nuisance value” of their position. The authorities are aware of the importance of this issue and have introduced amendments to the insolvency law to disenfranchise shareholders in the restructuring process when the company is insolvent.

20. Lack of adequate implementation has thwarted the effectiveness of reforms. In some cases, this has been due to lack of secondary legislation (e.g. the OCW law, electronic auctions under the CCP). In other cases, it has proved difficult to enforce the strict deadlines provided for in the law. For example, while the new CCP has been in force since January 1st, 2016, due to the lawyers’ protest, it has only been applied as of September 2016. The courts will need to make an effort in training, adapting to the new procedure, and establishing the adequate infrastructure. Lack of coordination and expertise have also contributed to implementation problems. For instance, the government council for private debt, established in 2014 and intended to play a coordinating role among government stakeholders, met only rarely provided only infrequently input into the debt restructuring reform process. This was not only due to resource constraints, lack of management capability, and lack of expertise, but also to weak reform ownership and frequent changes in governments. Finally, the supporting infrastructure for debt restructuring remains weak. Debt counseling services are yet to become operational, social safety nets are inadequate, and the supportive data infrastructure is incomplete (e.g., public registers, the credit register).

21. Significant problems in the institutional framework have also affected the functionality of the insolvency and enforcement system:

  • The limited capacity of the judicial system has been an issue since the beginning of the crisis. The delays in litigation are endemic, courts lack adequate technology and data systems, and the support bureaucracy is highly inefficient. The court system is also overburdened because of the high appeal rate: reportedly, more than 50 percent of judicial decisions are appealed, which consumes additional judicial resources in the resolution of disputes.

  • The insolvency and creditor rights framework is supported by an inadequate institutional setting. The court system is fragmented, not centrally managed and operated, and lacks the necessary supportive data systems. Moreover, judges lack specialization and expertise. For instance, judges deal with all types of cases (civil and criminal cases) and need to rotate every two years in their position, not enabling specialization. Training of the judiciary is also lacking. There is a lack of competent auxiliary staff, proper systems for case management, and adequate infrastructure. Additional judicial resources have been allocated to address the backlog in personal insolvency cases.

  • The insolvency profession has not been regulated. Beyond lawyers, which have been frequently on strike, there is no professionally organized cohort of insolvency professionals, which weakens the application of the insolvency framework. The 2015 reforms of the business insolvency law introduced a new regime for the regulation of insolvency administrators. However, this regime is yet to developed by secondary legislation and then put into practice.

The Greek Court System for Enforcement and Insolvency

The Greek court system does not have specialized courts or judges for enforcement and/or insolvency matters except for the three major districts. Insolvency and enforcement matters are dealt with by the civil courts (dealing with all types of matters of civil and commercial issues from family matters to commercial disputes and IP disputes) that consist of three levels of courts: first, the magistrate courts (formerly peace courts are 154 in the country) and courts of first instance (about 63 courts); second, the civil court of appeals (about 19 Courts of Appeal courts (including 4 newly established courts); and third, one Cassation Court (Supreme Court of Areios Pagos). Enforcement and corporate insolvency matters are dealt with by the first instance courts, while cases under the Katseli law are dealt with by the magistrate courts. There are currently about 880 judges in magistrate courts; this number has been increased by 194 (judges for household insolvency cases) in 2016. The number of first instance judges is 807. The number of court of appeals judges is 459 and the number of cassation court judges is 61.

The judiciary is self-administered but not centrally managed Judicial appointments are made independently from the Executive (except for the most senior positions). All organizational matters (including promotions and assignments) are decided by the Supreme Judicial Council (consisting of the Supreme Court presidents and elected common judges). For instance, magistrate judges cannot be promoted to more senior positions at higher courts. Judges typically do not specialize on certain matters but get assigned a whole range of types of cases at the same time; further, generally judges need to rotate every two years from their positions, which does not enable specialization and seeing a case from start to finish since the typical cases lasts more than two years. Courts are operated as individual units rather than a coherent judicial system leading to fragmentation and little flexibility in assigning resources. There is no centralized management nor adequate management at the court level. Data systems, if existent, are court-specific and do not span the entire court system, leading to the absence of an oversight function and the impossibility to have an effective case management.

D. Policy Recommendations

22. Reforms should be supported by more intense implementation efforts and by a reinforcement of the institutional framework. Changes in the legal system have brought Greece closer to best international practices. These changes must be supported by more intense implementation efforts and changes in the institutions. In this regard, the following actions need to be taken:

  • The implementation of the Code of Civil Procedure should be a priority. This is because an efficient enforcement of claims is the foundation for an insolvency and debt restructuring regime. The authorities should thus adopt all remaining secondary legislation necessary for the full implementation of the Code of Civil Procedure. With the completion of the rules on the electronic registry of cases and the use of market valuation standards for collateral, one of the most important changes remaining is the regulation of electronic auctions. A system allowing flexibility in the formulation of bids, open competition, and equal access to information, would represent a significant improvement over the existing framework.

  • Coordination among stakeholders is key. The authorities should set up again and make full use of a coordination mechanism that includes all stakeholders and meets regularly. This mechanism would need to be adequately resourced to design a comprehensive and properly sequenced plan that would then need to be implemented.

  • Liquidation should be simplified and streamlined. This should take into account that 99 percent of business are MSMEs. The current liquidation process is too complex, costly and protracted leaving little to no pay out to creditors.

  • Reinforcement of the judiciary, auxiliary staff, and infrastructure to deal with civil action is also keys. Although the procedural regime designed by the Code of Civil Procedure is largely adequate, it will need to be tested in the courts. It is likely that the demanding deadlines set out by the Code will require additional efforts on the part of the judiciary and Justice administration. In the medium term, the authorities should consider a new judicial organization (focusing on further specialization for judges, concentration of subject matters and flexibility in assigning resources), with professional management tools and data systems that permit a continuous assessment and improvement (e.g., a full e-justice system).

23. The latest reform of the business insolvency law represents a positive step, but effective implementation, and the regulation of the insolvency profession should be now prioritized. The business insolvency regime has been fine-tuned with the amendments adopted in December 2016. Some of the changes are especially positive, such as the measures to tackle the obstructionist tactics of controlling shareholders. There are other aspects of the regime which should be improved, such as the legal protection of public officials and bank staff in charge of insolvency and debt restructuring activities. Irrespective of the legal amendments, modern insolvency procedures require the assignment of functions to qualified professionals with specialized knowledge. The potential of the insolvency legislation will not be fulfilled until an expert insolvency profession is developed. The regime of insolvency professionals requires a number of regulations, covering aspects such as qualifications, examinations, supervision, training, a code of conduct, liability and insurance, and a sanctioning regime. In addition, the supervision of the insolvency profession requires additional administrative resources and a proper structure to guarantee the quality and effectiveness of the functions performed by insolvency professionals. As indicated before, it would be helpful to allow further specialization of the judiciary in commercial law, generally, and in insolvency law, specifically. By their very nature, changes in the institutional framework will not produce effects overnight: the benefits of those changes will only be appreciated over the long term, although this does not detract from their importance.

24. Because of the need to face the immediate consequences of the crisis, the use of out-of-court debt restructuring needs to be made more effective. Since institutional changes will take time to produce tangible results, promoting out-of-court debt restructuring is essential to deal with the over-indebtedness problem over the medium term. The advantages of out-of-court restructuring are numerous: it can deal with a high number of debtors at a much lower cost than judicial procedures, and the restructuring agreements can be more beneficial for creditors and debtors, avoiding lengthy judicial procedures and the stigma associated with insolvency. To be effective, the out-of-court process should be simple, tailored to the large number of SMEs, and based on the cooperation of debtors and creditors. Because of the special characteristics of the ranking of claims in Greece (see Box 2), public creditors will need to participate together with private creditors in debt restructuring solutions on an equal footing. This implies that the public creditors must be prepared to face losses, and those losses should be generally distributed in accordance with the applicable ranking of claims. The system will also require expertise in developing viability assessments, which will necessitate adequate financial and economic information about the debtor. Finally, the system must be supported by a proper tax treatment of debt restructuring activities and by rules providing adequate protection for those who take debt restructuring decisions in the public administration or in financial institutions.

25. In order to establish a solid foundation for access to credit in the future, it will be necessary to revisit the ranking of claims in the Greek law. The position of secured creditors under Greek law (both in individual enforcement and in insolvency) creates comparative disadvantages for financial institutions operating in Greece, and will limit the access to credit for households and enterprises. A revision of the ranking of claims, hand in hand with the implementation of other reforms, will be needed in the future to avoid these negative effects.

Ranking of Claims in Selected European Jurisdictions

Insolvency systems implement different approaches to the ranking of claims, reflecting complex policy choices: the ranking of claims reveals a distributional policy, allocating the damage derived from insolvency to different classes of creditors. Despite the existence of some common features, such as the priority of secured credit, and the priority of workers’ claims, there are many differences across legal systems, including across countries belonging to the European Union.

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In Greece, 10 percent of the proceeds are reserved for unsecured creditors. In all other European countries, unsecured creditors would only receive proceeds from the sale of collateral after full satisfaction of the secured claim.

The ranking of claims in Greece is different: the ranking operates within the Code of Civil Procedure, and applies separately to the proceeds of different assets, as opposed to insolvency rankings, which consider the position of creditors over the whole of the insolvency estate. Regarding collateral, secured creditors are entitled to receive 65 percent of the proceeds of the sale of the encumbered asset, and 25 percent of the proceeds are distributed among general preferential creditors, which include the workers’ remuneration for two years before insolvency, and termination compensation; lawyers’ fees for six months, social security contributions until the declaration of bankruptcy for two years, and claims of the state arising from VAT and its surcharges. After all these, all other claims of the state (including taxes and social security contributions) also have priority. Unsecured creditors receive the remaining ten percent of the proceeds.

1 France has a general tax preference, but is limited in its application to the main taxes. There is no specific limitation for social security, agricultural security and holiday insurance contributions, and there is a longer period for income and wealth taxes (four years) and a shorter period for customs duties (three years). The general tax preference entitles the government to priority with regard to movable assets but not real estate (except for real estate taxes).

References

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1

Prepared by Wolfgang Bergthaler and José Garrido (all LEG).

2

The authorities commissioned multiple studies to review the deficiencies of the framework and proposed changes which culminated in the 2015 amendments. However, no impact analysis or comprehensive stakeholder consultation was conducted. An analysis of the insolvency regime, with proposed adequate amendments to the insolvency framework had been part of the Fund supported program as early as 2013.

3

The stay of creditor actions can be granted for a 4-month period. In the rehabilitation procedure, the stay is automatically granted when 30 percent of creditors, including 20 percent of secured claims, support the petition.

4

These clauses create insurmountable obstacles for the reorganization of enterprises, since they may imply the loss of services, supplies, or intellectual property rights which are necessary for the continuation of business operations.

5

In a similar situation to that of the business insolvency regime, the authorities used several studies to propose changes, resulting in the 2015 amendments. Again, no impact analysis and comprehensive stakeholder consultation were conducted. An analysis with proposed amendments to the personal insolvency framework were part of the Fund supported program as early as 2013.

6

There were previous reforms, especially the Law No. 4055/2012 on fair trials and their reasonable duration.

7

The parties’ pleadings are submitted within a deadline of 100 to 130 days from the submission of the lawsuit, and additional pleadings can only be submitted within a fifteen-day period after the expiration of the general deadline. After the case is closed, the judge or court is appointed, and there is a hearing within a period no longer than thirty days. The hearing does not include witness examination, unless it is considered that this is strictly necessary, it is just a general discussion of the case. Therefore, the procedure is generally a written one, with the extraordinary possibility of examining witnesses in certain cases.

8

Source: GSEVVEE data.

9

Source: Athens Court of First Instance, Bankruptcy Chamber.

10

Statistics are fragmentary (collection of insolvency statistics is an issue in itself), but this statement appears in various sources, including in a statement made by a member of the Law Reform Committee on Insolvency Law.

11

The number of strategic defaulters is estimated to amount to as much as 30 percent of the applicants (ECB 2016, 64).

12

The commonly used pre-notation (which is noted in the cadaster and secures priority if perfected within 90 days of an initiated seizure) requires a payment order (PO) from the court of first instance to foreclose on the property. This PO requires payment of a judicial fee of 1.4 percent and may take up to one year to obtain in Athens.

Greece: Selected Issues
Author: International Monetary Fund. European Dept.