Newsletter View

Newsletter July 2011


New Bankruptcy and Public Procurement Legislation

Greece has significantly advanced its legislation on bankruptcy as it affects businesses and introduced sweeping reforms to its public procurement process.

New Legislation
Pre-bankruptcy Law and Public Procurement
A safety net for businesses at risk because of the economic crisis and rules on transparency in public procurement were introduced with two important bills by the Minister for Development, Competitiveness and Shipping, Michael Chryssochoidis.

According to the minister, the "Pre-bankruptcy Reorganisation of Enterprises' bill gives a second chance to companies which, for any reason, are in economic difficulties, increases the possibility of consolidation for firms that are viable, ensures protection of creditors and saves jobs."

The bill on the "Establishment of a Single Public Procurement Authority,” said Mr. Michael Chryssochoidis, "puts a permanent end to the fiscal black hole that swallows taxpayers' money, panders to mismanagement and corruption, and undermines the efforts of the Greek people to exit the crisis.”

Pre-bankruptcy Procedure for the Consolidation of Businesses
The main points of the draft law on pre-bankruptcy procedures are:

• In this institutional reform of pre-bankruptcy the attempt to rescue a company is not done in the framework of bankruptcy proceedings, as was the case up to now. In Greece, going bankrupt, financially and socially, is connected with the settlement, the result being attempts to reorganise under bankruptcy to be undermined by the depreciation of the company in the eyes of customers and suppliers.

• The Bankruptcy Code in force today provides for pre-insolvency in the stage of conciliation, but the agreement resulting from this process is not binding to non-consenting creditors. This creates what in economics is called "problems of collective action." So, even if all creditors recognise that a settlement on their claims, which will save the borrower, is in the collective interest, each one separately may hope that other creditors will bear the cost of the settlement and will consolidate the business of the debtor, without the creditor himself to bear the sacrifices of the arrangement. For this reason, while there is a great number of firms entering the procedures of Article 99, very few reach agreement with their creditors and an effective consolidation.

• To solve this problem the possibility of engagement of non-consenting creditors is introduced, thus solving the abovementioned "problem of collective action."

•The greatest possible flexibility is introduced. Specifically, and according to the French model, the ability is provided for debtor and creditors to reach an agreement without formal negotiations, with confidential negotiations, to avoid, where possible (usually when lenders are few and working together), the creation of uncertainty as to the survival of the business as is the case currently when a conciliation process takes place.

• If the procedure of formal negotiation is selected in the framework of the consolidation process there are two options: either creditors conclude the agreement directly, or call a creditors' meeting. The second, more "involved" process, is expected to be used where there are many creditors that are otherwise difficult to coordinate.

• Regarding the content of the consolidation agreement, the option is available to all parties involved to use various measures, from the milder (for instance, a simple extension of time for repayment obligations) to the most drastic (capitalisation of debts or transfer of the business) to cover all possible cases depending on the extent of the company’s problem.

• The need for a rescue operation is not in conflict, but rather to the interests of creditors, since lenders will be satisfied more from a company in operation than from the forced sale of a company’s assets.

• The criterion of the consolidation process is to avoid prejudicing the collective satisfaction of creditors.

• To avoid unjust results the bill provides substantial criteria for the ratification of the agreement. Indicatively, the provision exists that on the basis of the agreement the creditors should not get into a worse position than that in which they would be if the debtor went bankrupt, and the principle of equality among creditors in the same position must be respected – regulations that are essential safety valves for small creditors.

• The rescue of a company does not necessarily mean the rescue of its body—the businessperson. This would be contrary to economic logic, since in the case of a successful business the businessperson benefits from the profits and therefore should be, mainly, subjected to the economic consequences of failure. Furthermore, it could also be socially unfair to rescue the businessperson at the expense of creditors who are often more worthy of protection (eg employees, suppliers, insurance funds). It is therefore possible that the rescue of a company may result in loss of control by the businessperson, as will happen when the rescue will take place with the transfer of business or (possibly) the capitalisation of debt.

Single Public Procurement Authority
The benefits from the establishment of a Single Public Procurement Authority include:

1. The coordination of a national strategy on public contracts
2. The reduction and control of state expenditure for public contracts
3. The facilitation and encouragement of the participation of economic bodies involved in public tenders
4. The development of healthy competition in tendering procedures in accordance with the principles of transparency and equal treatment
5. Compliance with the rules and principles of European and national legislation on public procurement
6. The formulation of proposals to the relevant national institutions for the proper alignment of the national legal system with European legislation and for the simplification, supplementation, coding and integration of relevant laws and regulations


Examples of business reorganisation under the new rules laid down in the pre-bankruptcy procedure.

Listed below are indicative cases of consolidation with full or partial transfer of the business of the debtor:

a. An S.A company owes 10,000,000 Euros. A third party buys all the assets of the business, without taking on its liabilities, with 5,000,000 Euros, which are used to partially satisfy creditors who agree to delete the balance.

b. An S.A company owes 10,000,000 Euros. A third party buys all the assets of the business, liabilities of 3,000,000 Euros and makes payment in cash 3,000,000 Euros. The remaining 4,000,000 Euro is deleted.

c. An S.A company owes 10,000,000 Euros. A third party buys the assets of one of the two branches of the business at a price of Euro 4,000,000. Of the remaining 6,000,000 Euros, 1,000,000 Euros remain as a debt of the debtor, 3,000,000 Euros are capitalised and 2,000,000 Euros are deleted.

d. An S.A company owes 10,000,000 Euros. The creditors inject their requirements into a limited liability company established for this purpose. Then the new limited liability company buys, with 10,000,000 Euros, the total assets of the old company. The payment compensates the demands that by now belong to the new company. So the business enters free of debt to a company owned by the creditors.

e. An S.A company owes 10,000,000 Euros. The creditors inject into a new S.A. company claims amounting to 5,000,000 Euros, and the new company purchases one of the two branches of activity of the old company for 5,000,000 Euros (offsetting claims against the old company) and accepts additional obligations of 2,000,000 Euros. Of the remaining obligations of the old company, 1,000,000 Euros is agreed to be paid out in installments based on the expected profitability of the remaining sector of activity, and 2,000,000 Euros are paid out from a capital increase covered by the existing shareholders of the old company and third party investors.