Transfer of Business within the Framework of a Restructuring Agreement (Art. 64 of Law 4738/2020)

Asimina Maneta, Lawyer

I. IN GENERAL

The transfer of an overindebted business may constitute a transaction of strategic importance for all parties involved. For the investor, it constitutes an opportunity to acquire a business entity which, although burdened with debts, is offered at an attractive price and presents prospects of recovery. For the debtor, it operates as an exit mechanism, as the preservation of the value of the business and the greatest possible satisfaction of creditors are achieved. For the creditors, it constitutes a tool for optimal exploitation of the business value, as it creates conditions of increased satisfaction of their claims compared to the losses entailed by a bankruptcy liquidation. It essentially constitutes a process of business “revitalization”, whereby an enterprise facing the risk of extinction may, through the entry of a new entity, be restored to a trajectory of viability and growth. 

Such a procedure is provided for in Law 4738/2020. More specifically, restructuring, as provided for in the above law, constitutes a prebankruptcy mechanism aiming at the preservation and restructuring of viable businesses through an agreement between creditors and the debtor (although an agreement of creditors only is also possible—see below). This purpose is reflected in Article 31 of Law 4738/2020, which provides: “The restructuring procedure constitutes a collective prebankruptcy procedure, aiming at the preservation, exploitation, restructuring and recovery of the business through the ratification of the agreement provided for in this Chapter, on the condition that the principle of no deterioration of the position of creditors is met.” 

The procedure for concluding a restructuring agreement is initiated at the initiative of the debtor or the creditors, and such agreement may include writeoffs, debt arrangements, as well as the transfer of all or part of the debtor’s business to a third party or to a company of the creditors pursuant to Article 39 para. 1 item (d) of Law 4738/2020. Consequently, the restructuring procedure may take place either with the retention of the business entity or with the transfer of the business (or part of its assets) to another entity. In the latter case, Article 64 of Law 4738/2020 is applied. 

At this point, the following clarification must be made: the aim of the restructuring procedure is not the rescue of the entrepreneur but the rescue of the business. The extent to which the link between the entrepreneur and the business will be maintained after such a procedure, as well as the entrepreneur’s role in the new entity after the transfer, will result from the negotiations and the structuring of the terms of the restructuring agreement. 

Indicative restructuring agreements with a transfer of business that have been ratified by the courts and published in the press, applying Article 64 of Law 4738/2020 or its predecessor Article 106d of Law 3588/2007, include the transfers of the Marinopoulos supermarkets, Creta Farms, as well as the Elefsina Shipyards—characteristic cases where a business was “reborn” through such a process of transfer and restructuring. 

II. THE PARTIES TO THE TRANSACTION 

First of all, a debtor subject to the restructuring procedure and, consequently, to Article 64 of Law 4738/2020, may be any legal or natural person exercising business activity with its centre of main interests in Greece (Article 32 para. 1 of Law 4738/2020). Credit institutions and insurance companies are excluded. 

On the other hand, the acquirer may be an existing company or a company established by the creditors of the transferred business (Article 64 para. 2 of Law 4738/2020). More specifically, the acquirer may be any third party who acquires the business primarily by way of sale. The creditors may establish a company by contributing in kind their claims against the transferred business, acquiring in satisfaction thereof all or part of the assets of the business. Alternatively, the business may be transferred to an existing or newly established company in which creditors and third parties may participate, in the form of contributions in kind. 

If the applicant is the debtortransferred business, a necessary condition is that it has entered into imminent or actual cessation of payments or even merely into a likelihood of insolvency (Article 32 paras. 1, 2 of Law 4738/2020). This means that the business must already be in general inability to meet its due obligations, or it is probable that it will enter into such inability when claims against it become due, or simply that it is at an early stage of insolvency, facing business difficulties indicating adverse developments in payments. By contrast, if the applicants are the creditors, cessation of payments of the debtor is required, i.e. the permanent and general financial inability to meet its due obligations (Article 34 para. 2 of Law 4738/2020). 

III. THE STAGES OF THE TRANSACTION 

(A) Negotiation Stage – Formation of the Content of the Agreement 

At the initial stage of the transaction, negotiations take place between the involved parties for the conclusion of the restructuring agreement, usually on the basis of a business plan. At this stage of rapprochement of the parties, the necessary legal and financial due diligence of the business may also be conducted by the future acquirer, and the foundations of the transaction are laid. 

At this first stage, the law (Article 53 of Law 4738/2020) provides, in order to facilitate negotiations and the progress of the transaction and to safeguard the debtor’s assets, the possibility of adopting preventive measures by court decision “upon application of the debtor or a creditor, which is publicised as provided in Article 84, provided that the applicant submits a written statement of creditors representing at least twenty per cent (20%) of the total claims against the debtor that they participate in the negotiations for the achievement of an agreement and that the conditions of urgency or imminent danger pursuant to Articles 682 et seq. of the Code of Civil Procedure are also met. […]”. 

Pursuant to Article 53 of Law 4738/2020, the preventive measures of Articles 50 and 51 are granted once only and may include the suspension of individual enforcement actions against the debtor, the prohibition of disposal of its assets, the appointment of a special mandate holder, the prohibition of termination of contracts, etc. However, the duration of the preventive measures is not indefinite. Article 53 of Law 4738/2020 expressly provides that the preventive measures ordered by the court apply until the filing of the application for ratification of the restructuring agreement and in any case for four months. The sole exception is the possibility of extending for a further two months the measure of suspension of individual enforcement actions, under which each creditor individually may not initiate compulsory enforcement to satisfy its due claims against the debtor, following an application that must be based on a “duly justified circumstance”. Such circumstance could be the progress of negotiations and the drafting of the restructuring plan, the fact that the interests of any of the involved parties are not unjustifiably harmed, and that no bankruptcy petition of the debtor has been filed. 

The content of the restructuring agreement with a transfer of business is shaped through the negotiations of the involved parties and is delimited by Article 64 para. 1 of Law 4738/2020. The transfer of a business within the framework of restructuring may take place either by an asset deal, i.e. by the transfer of the individual assets of the business to the acquirer, or by a share deal, i.e. by the transfer of the shares of the debtor business, which entails a change of control. Transfer by means of transformations under Law 4601/2019, in particular by spinoff of a branch, is also possible. Furthermore, the transfer of the business may not occur upon the conclusion of the restructuring agreement—where the participation of the acquirer is necessary—but by a subsequent, separate contract, in execution of the restructuring agreement. 

As regards the extent of the transfer, Article 64 of Law 4738/2020 provides that the entire assets of the business are transferred, whereas the liabilities are transferred only if their transfer is provided for in the agreement and to the extent provided therein. This regulation is combined with Article 171 para. 4 of the same law, which expressly excludes the application of Article 479 of the Civil Code to transfers of business within the framework of Law 4738/2020, thus excluding statutory joint and several liability of the acquirer for the debts of the transferor, which may only be provided for contractually. In this way, the legislator safeguards the investor and the new business entity, who will not be held jointly and severally liable for the debts of the transferred over-indebted enterprise. Even in the case where liabilities are transferred, this will not constitute universal but rather singular succession, by way of cumulative or substitutive assumption of debt. This means that the consent of the creditor will be necessary so that, visàvis the creditor, the transferred business is replaced by the new entityacquirer. Herein lies one of the restructuring effects of the procedure, benefiting creditors as well: instead of an overindebted business, they face, as a rule, the financially robust acquirer, with the chances of satisfaction of their claims multiplying. 

What happens, however, to the debts that are not transferred to the new entity? These obligations are either satisfied from the sale price of the business, or written off, or—if part of the business is transferred—remain with the debtor, or are capitalised. 

(B) Judicial Ratification of the Agreement 

The next stage of the procedure is the judicial ratification of the restructuring agreement providing for a transfer of business, following an application by the debtor or the creditors. When the application is submitted by the creditors and the debtor has consequently entered into cessation of payments, the application must obligatorily, on pain of inadmissibility, be accompanied by a bankruptcy petition. In addition to the already signed restructuring agreement, the ratification application—which must include all elements analytically referred to in Article 45 para. of Law 4738/2020—is accompanied, on pain of inadmissibility, by the debtor’s financial statements, a list of its creditors, and the expert’s report, in which the expert opines on whether the conditions for ratification of the restructuring agreement are met, and in particular on the reasonable prospect of the viability of the business, compliance with the principle of no deterioration of the position of creditors, and equal treatment thereof. Difficulties arise when the procedure is initiated by creditors, who do not have the above information at their disposal. In this case, the court may adjourn the hearing of the ratification application until the necessary information is provided to the expert within one month. Subsequently, the creditors will restore the hearing of the application by summons. 

The filing of the application for ratification of the restructuring agreement has as an automatic consequence a series of preventive measures pursuant to Article 50 paras. 1–2 of Law 4738/2020, as well as the possibility of adopting preventive measures by court decision provided for in Article 50 paras. 3–5 of Law 4738/2020. The most important automatic preventive measure is the suspension of individual enforcement actions. At the same time, the suspension of the taking of interim measures against the debtor is provided for, as well as the prohibition of disposal of the immovable property and equipment of its business “unless replaced by others of at least equal value or unless the disposal concerns their use as security within the framework of interim financing referred to in the restructuring agreement”, the suspension of limitation and other deadlines, and the prohibition of setoff. All preventive measures have a duration of four months, with the possibility of extension by court decision pursuant to Article 50 para. 3 of the above law. Preventive measures ordered by court decision include the prohibition of termination of contracts, approval of financing without insurance or tax clearance of the debtor, and the appointment of a special mandate holder. All the above measures have a common objective: the maintenance of appropriate conditions for the conclusion and completion of the restructuring agreement and the safeguarding of the integrity and value of the debtor’s assets. 

The court, adjudicating under the procedure of voluntary jurisdiction the application for ratification of the restructuring agreement with transfer of business, examines (Article 54 para. 3 of Law 4738/2020): 

A) whether the restructuring agreement, which includes an agreement for the transfer of business, ensures the survival of the business. This assessment is based on the business plan and the expert’s report. 

B) whether the principle of no deterioration of the position of creditors is met. This condition is met in the following cases (Article 31 of Law 4738/2020): (a) nonconsenting creditors or creditors whose consent is presumed by law are not in a worse financial position than that in which they would have been if the debtor had gone bankrupt; (b) any of the nonconsenting creditors who has ownership of an asset or is an assignee of a claim, in particular in the case of a factoring or leasing agreement, does not receive a smaller amount than the amount it would have received by exercising its contractual rights against the debtor. 

C) whether the agreement is not the result of fraud and does not violate provisions of mandatory law, and in particular competition law. This condition is particularly important in restructuring agreements involving a transfer of business, as the execution of such an agreement may lead to problematic concentration of undertakings with excessive market power, which other businesses cannot effectively compete against. 

D) whether the principle of equal treatment of creditors is observed. 

From its ratification, the restructuring agreement binds the debtor and all creditors whose claims are regulated therein, even if they are not parties to it. 

Of particular interest is the structuring of the transaction in the form of an exclusively “aggressive” procedure on the part of the creditors, as the debtor’s consent may, under conditions, be bypassed. Specifically, as mentioned above, the restructuring agreement may be signed only by the creditors, provided that the debtor is in cessation of payments. Furthermore, at the ratification stage, the debtor’s consent is deemed to be given when “up to the hearing of the ratification application, it does not file an intervention against its acceptance. The debtor’s intervention against the acceptance of the ratification application of the agreement does not prevent the ratification of the agreement by the court, if it follows from the application and in particular from the expert’s report that the restructuring agreement will not render the legal and financial position of the debtor worse than that in which it would have been without the agreement.” Moreover, even when the restructuring agreement cannot be concluded or implemented due to lack of cooperation of the partners/shareholders, the law provides as a means of bypassing them the appointment of a special mandate holder by the court, who may convene the general meeting and exercise voting rights. The transfer of a business within the framework of a restructuring agreement may therefore, with the appropriate tools of Law 4738/2020, be completed as a procedure without the consent and cooperation of the debtor. 

IV. WHAT HAPPENS TO THE EMPLOYEES OF THE TRANSFERRED BUSINESS? 

As regards employees, Presidential Decree 178/2002 applies, concerning the protection of employees’ rights in the event of transfer of undertakings, establishments or parts of undertakings or establishments. The new entity automatically succeeds to all obligations of the previous employer towards the employees—i.e. existing employment contracts and terms of employment are maintained—and the transfer does not in itself constitute grounds for dismissal of employees. 

V.  TAX AND OTHER FACILITATIONS 

Law 4738/2020 provides for tax and other facilitations in relation to the rehabilitation process, which promote and render the transaction more attractive by reducing the time required for its completion, its complexity, and its cost for the parties involved. Specifically, as provided in Article 170(4) of the Law, any contract concluded and any act performed within the framework of a rehabilitation agreement, including the transfer of an enterprise pursuant to Article 64 of the same Law, as well as the registration and any other related act necessary for their implementation, are exempt from stamp duty and any other indirect tax or charge (with the exception of VAT, for which the VAT Code and the Real Estate Transfer Tax apply). These exemptions apply automatically, without the need to submit any relevant declaration to the competent Public Financial Service (Tax Office – D.O.Y.). In such cases, by way of derogation from any general or special provision, it is not required that certificates from the tax authorities of any form or use, or from any other public authority, organization or entity, or from Local Government Authorities of any level, nor certificates or sworn statements of third parties provided for under any statutory provision, be mentioned or attached, with the sole exception of cadastral certificates. Furthermore, pursuant to Article 171(1) of the same Law, the fees and charges of notaries public, lawyers, judicial officers and land registry officials for any contract or act within the framework of the rehabilitation procedure are limited to thirty percent (30%) of the statutory amounts. 

VΙ. IN CONCLUSION 

In conclusion, the acquisition of an overindebted business within the framework of restructuring is not merely an investment act; it constitutes a significant opportunity of crucial importance for all involved parties. For the investor, it opens new horizons of business development at low cost. For the debtor, it operates as the sole rescue mechanism that keeps the business activity alive, while for creditors it becomes the most effective tool for satisfaction from assets whose value would be lost in an unproductive, “punitive” liquidation for the debtor. At this point, the law provides the tools for business rebirth: where collapse seems inevitable, organised transfer leads the parties to a new, viable business reality.