Fluctuating interest rates with such an increasing course, which yield huge bank profits but at the same time, leave a multitude of borrowers facing non-performing loans. And then, in the face of undesirable circumstances, which often result in Insolvency, Foreclosures, Bankruptcy…
If all this sounds familiar and the solution seems possibly inaccessible to you, the interview that follows will probably be useful and enlightening.
The Insolvency Practitioner, Mr.Marios Ieropoulos, who is well versed in the operation of banks and credit acquiring companies in Cyprus, as well as in our legislative framework, refers, among other things, to the main causes that lead a business to insolvency, as well as to the steps that must be followed in order to be able to emerge “unscathed” from such a situation.
He explains the difference between Margin and Euribor, comments on the interest rate and lending landscape in our country, provides advice that borrowers could use as a protective shield and talks about important signs that businesses should look out for to realise that they are at risk of being deemed insolvent.
Interview with Nicola Karatzia
Mr.Ieropoulos, as we may not all be familiar with what exactly an Insolvency Practitioner does on a professional level and what his responsibilities are, could you please explain this?
Licensed Insolvency Practitioners (IP) must have specialised knowledge in the restructuring of debts of natural and legal persons. Under the Law, only a licensed Insolvency Practitioner can be appointed as a Bankruptcy Trustee of a natural person, or a Liquidator of a corporate person. At the same time, only he/she can seek the protection of the Court for debt restructuring and/or primary residence protection by issuing a Protection Order, so that the creditors do not proceed with measures against borrowers in the midst of negotiations with the IP.
Must the Insolvency Practitioner necessarily have an educational background related to law or accounting?
Licensed IPs may have a legal and/or accounting background, but they must have experience in debt restructuring and are required to pass examinations in relation to five different legislations. These specific examinations are quite demanding and the success rate is relatively low.
What was it that made you want to become an Insolvency Practitioner and what would you say are the most important challenges that you encountered in your career in this profession?
Knowing how Banks and Credit Acquiring Companies operate in Cyprus, I noticed that the Insolvency of Natural Persons Law offers important tools for the protection of borrowers, assets, and their primary residence. Because I had understood that after 2013 the Banks had changed, and would change even further, I decided to try to pass the relevant examinations for the IP and to go private.
The most significant challenges that I am faced with in my career relate both to the way Credit Acquiring Companies operate, as well to each time that I await the court decision in relation to a creditor’s objection for primary residence protection.
When and for what reasons would it be useful for a company or a private individual to contact you for the provision of your services?
When they see that they are starting to have difficulty paying their instalments or when they realize that they are being charged high interest rates. 96% of the backbone of Cyprus’ economy consists of small and medium-sized businesses, with their survival playing a major role in the prosperity of the country’s economy. Each company that closes or drowns in debt has an impact on the general economy, to a greater or lesser extent.
What is the difference between insolvency and bankruptcy, what could be the outcome in each of these two cases and what are the permanent or temporary consequences?
Insolvency is the inability to repay debts at a particular point in time. It precedes bankruptcy as an attempt to avoid it. On the other hand, bankruptcy means the disposal/sale of any assets of the debtor with the aim of repaying all or part of their debts.
In case banks or credit acquiring companies refuse to give the debtor a second chance, the outcome in relation to the insolvency may be the imposition of the Personal Repayment Plan on the specific creditors. This provides them with a second chance to save their assets and/or home. At the same time, it releases them from all unsecured debts.
The outcome in relation to bankruptcy has to do with the restoration of the debtor in three years, based on good cooperation on his/her part, as well as the discharge of all unsecured debts.
The temporary implications are that, should they need financing for any of their needs (car, children’s education), they will not be able to receive this. The permanent impact for bankrupts is the fact that the “doors” of the banks will close forever to them, unless, of course, the bankruptcy decree is annulled.
What are the main causes that lead a business to an insolvency situation, how easy is it to overcome it by coming out “unscathed”, but also what steps-procedures must be followed to achieve this?
Businesses are driven into an insolvency situation, both because of misjudgements and misbehaviors of their executives, as well as due to exogenous factors such as supply chain influences and/or sharp increases in costs and/or interest rates.
How easy it is to overcome it depends on the nature of the company, its cash reserves, its available assets, and the actions it will take. Managing debtors-creditors, debt restructuring and interest rate reductions requires specialized handling and specialized knowledge.
In short, the steps to be taken depend on the nature of the problem. If, for example, the problem is that the interest rate on the working capital of the business has increased in a year and a half from 3.5% to 9.00%, then help must immediately be sought from an Insolvency Practitioner, to assist in reducing the interest rate through specific actions.
How would you characterize the current bank interest rates? Do you consider that is the right time for someone to take out a loan or would you discourage them if it is not an urgent need?
The deposit rates of the two major banks are very low. Some smaller banks offer higher rates. On the other hand, borrowing rates fluctuate, despite all their increases. There are banks whose interest rates on existing housing loans have reached 8%-8.5%. There are, of course, banks that have an interest rate of 4.5%. The same is the case with current accounts/working capital.
However, because we as people have a need for home ownership, there are tips – such as higher equity contribution and fixed-rate agreements – for new borrowers that could be followed to reduce risks.
If there is no need, then it is not the time to borrow unless, of course, you have the tools to reduce risk and then manage it.
When is it speculated that the lending environment will be more favorable for Cypriots?
As the geopolitical situation around us currently stands, I am of the opinion that it will take time to see low interest rates.
We would like you to explain to us in simple terms the difference or correlation between Margin and Euribor, as well as why the banking system follows the same interest rate policy towards all borrowing customers, even if the potential risk is not always the same.
The Margin is the profit margin that banks charge per product category (residential, consumer, business loans). There should have been a separate calculation for the profit margin per borrower, but this, with very few exceptions, is not applied, which is why there is a lot of discussion in relation to this.
The Euribor is the interbank rate, that is to say, the interest rate at which the twenty largest banks in the Eurozone lend to each other.
Your question in relation to the same interest rate policy for all borrowers shows (quite rightly) the magnitude of the problem, because it should indeed be the job of the banks to judge the risk of each borrower individually (which they do), and thus offer them a differentiated margin (which they do not).
Has there, in the past, been a very difficult case that you have undertaken and managed to win, which is worthy of mention or a significant achievement in your career?
Every small and medium-sized enterprise that I save from closure is a unique success. As is the suspension of a primary residence foreclosure combined with a viable repayment plan.
However, the most important case for me concerned a company with 32 employees. The bank had proceeded to terminate the accounts and take legal action, which we subsequently averted by convincing them that the viable restructuring plan we presented to them was in the best interests of both parties. It was not only the company and the jobs that were saved, but also the loans of the 32 employees which continued to be repaid normally, as without employment – even temporarily for some, they themselves would have been at risk of measures being taken against them. Such a situation would have a knock-on effect throughout the economy.
Similarly, have there been times when you have felt that your clients have suffered gross injustice and if so, how did you manage it?
Several loans have overcharges. I have a case of gross injustice with a loan that, according to both my own calculations and those of the Financial Ombudsman, has been repaid, but the bank has taken action against the borrower. We took targeted actions, succeeding in stopping them through the Court.
What changes would you like to see in our legislation regarding insolvency, foreclosures and bankruptcy, in order to improve the whole process and make it fairer for the citizens of our country?
Your question is very important but cannot be answered in the context of this interview.
Recently, a Judge who rejected a banking institution’s application to annul a Personal Repayment Plan Enforcement Order, commented that “the Law is poorly written and is a poor copy of the Irish law, as important parts have been removed and others added”. The Law needs a general revision because of both the passage of time and diversification of circumstances.
In relation to foreclosures, I believe that safeguards must be put in place. For example, creditors should not be able to proceed with a divestment unless the correct balance and the effects of other abusive clauses are first determined, as well as if it is proven that the restructuring plan is viable or if they have refused to discuss restructuring.
What are the biggest pitfalls for investors in a company that faces the risk of being declared insolvent?
The biggest pitfalls for investors are the statements and assurances given by the management as to what can actually be done/achieved. The real picture of the company’s financial situation may be very different from that presented by the person in charge of the company’s accounts. At the same time, what many business owners believe to be feasible may not be realistic.
What are the key signs that businesses should look out for to realise that they are at risk of being declared insolvent?
There are specific indicators that we monitor in the companies that are in our portfolio, which when we see that they are affected, are immediately handled to be improved. The main indicators and indexes that we analyse relate to cash flow, asset and liability fluctuations and fluctuations in expenses/costs.
Would you say that there are current “trends” in the real estate market, that in the near future may lead to increased levels of insolvency in Cyprus?
A lot of properties in Cyprus are now being bought by foreign investors, by non-residents. In relation to borrowers who financed their property purchase with a loan, there are always risks, such as a reduction in income or increases in interest rates and diversification of instalments. We are already seeing signs of increased restructuring requests. As long as interest rates remain high, there is an increased risk of non-repayment for many borrowers.
If you would give any final advice that borrowers could use as a protective shield against the risk of bankruptcy or insolvency, what would this be?
Insolvency is not a negative thing. Former president and current US candidate Donald Trump used the bankruptcy code seven times. Since insolvency proceedings can prevent bankruptcy, my recommendation is that borrowers who are unable to repay their debts or who find themselves struggling should seek and receive specialist advice on restructuring/writing-down their debts. Monitor, be informed and act proactively. Borrowing means risk, while floating interest rates mean reductions and increases. Risk management and monitoring is needed. And the most simple, no reckless spending. It is prudent to make efforts to save for a rainy day.
