Improvements made to bankruptcy code

Major changes to a draft bill on Greece’s new bankruptcy law are being made shortly before being tabled in parliament, in a bid to shut down the ways that could greatly increase the number of up to date borrowers able to request out-of-court debt restructuring via the special platform to be created by the Special Secretariat for Private Debt.

Following consultations between the government, banks, Bank of Greece and European creditors, one of the most important aspects of the new bankruptcy code is being revised, which had raised concerns among lenders that a large number of borrowers would restructure their debt without being necessarily being in a weak position.

In the version of the bill that was put up for consultation, in particular, the possibility of reaching an out-of-court settlement was provided to almost all those engaged in a business activity, with a few exceptions. "Any individual or legal person with bankruptcy capacity can apply for an out-of-court debt settlement," said the original bill. This wording left room even for up-to-date debtors to request debt restructuring without meeting other conditions.

Following strong reactions from banks, which also submitted a relevant note to the Finance Ministry, but also after the intervention of the Bank of Greece and the European institutions, an important change has been introduced to the above provision: the right to the out-of-court settlement will only be provided to those that can prove that their income has declined severely.

According to Bank of Greece governor Yannis Stournaras, in a letter sent to the President of the Hellenic Banking Association, George Hantzinikolaou, changes have been adopted that significantly limit the number of individuals and companies who can be included in the out-of-court mechanism:

"In particular," notes Stournaras in his letter, "regarding the perimeter of informed debtors, who can be subject to the out-of-court debt settlement mechanism, after the last discussions with official sector creditors, there has been a substantial cut. The significant reduction of the income (income event) has been added to the eligibility criteria.".

According to sources, the definition of the significant cut is still being discussed in order to clarify what drop in income will allow a good debtor to use the out-of-court mechanism. It is certain, however, that a small reduction in business income will not be enough for a debtor to seek debt settlement.

The incentive for bankruptcy is removed

In addition, another window in the bill is being closed amidst concerns that it would act as an incentive for mass applications by informed debtors for debt restructuring through the out-of-court mechanism, in order to secure a housing allowance.

In its original form, the bill linked the provision of a state housing subsidy to borrowers with an application for out-of-court debt restructuring. There were fears that, as the Commission put it in yesterday's report on enhanced supervision, it would act as an incentive for bankruptcies.

The amendment disconnects the provision of state housing assistance from the out-of-court debt settlement process.

Moreover, the country’s official sectors have made it clear in their review report that they continue to monitor the process of changing the bankruptcy framework very closely, regarding all crucial details. According to the report, many issues are not regulated by the new bankruptcy bill, but will be the subject of ministerial decisions that the government will have to prepare and bring to the attention of institutions for their comments before the new framework enters into force in  January next year.