Announcement

What is a Personal Repayment Scheme?

Due to the 2012 economic crisis, the government introduced a series of measures to protect the persons that were most affected by it and were rendered unable to service their debts.

The Insolvency of Natural Persons (Personal Repayment Schemes and Debt Relief Orders) Law 65(I)/2015 (hereinafter «the Law») provides the Debtor with the ability to agree or impose a Personal Repayment Scheme (hereinafter «PRS») on a Creditor. PRSs have recently been increasingly used by Debtors as a tool to save their main residence, avoid bankruptcy, and to ultimately discharge all or part of their unsecured debts gaining the ability to become solvent.

How is an Insolvency Practitioner being appointed?

The Debtor initially gets in contact with an Insolvency Practitioner and provides him with all the necessary documentation, personal information and updated financial status so that the Insolvency Practitioner can assess his current financial situation and determine if he is eligible for a PRS, under the provisions of the Law.

How is a Protective Court Order issued?

If the Insolvency Practitioner determines that the Debtor is eligible for a PRS, he then proceeds with the filing of an application to the Insolvency Department (governmental) in order for the latter to examine the application and to verify if the conditions of the Law are fully met. If the Insolvency Department decides that the conditions are met, the Insolvency Department then proceeds with the filing of a court application for the issuance of a Protective Court Order.

A Protective Court Order, once issued, prohibits any creditors from proceeding with any legal actions or initiating any enforcement or execution proceedings against the Debtor. There is a 14-day time limit from the day a notice of the Protective Court Order is duly served on the creditor during which the creditor has the opportunity to apply for the annulment of such Protective Court Order, but such annulment is generally difficult to achieve. The Protective Court Order remains in force for 95 days and can be extended by court application for 40 days and again for a further 40 days, but this second extension is only available in case of a change in the Insolvency Practitioner involved.

What does the process of making a proposal for a PRS involve?

Where a Protective Court Order is issued, the Insolvency Practitioner will thereafter give written notice to the creditors concerned that he has been appointed by the Debtor for the purpose of making a proposal for a PRS and invite the creditors to make submissions to the Insolvency Practitioner regarding the debts concerned and the manner in which the debts could be dealt with as part of a PRS.

When the creditor receives the abovementioned notice by the Insolvency Practitioner, he is obligated to proceed within 20 days with the submission of a valuation of the debtor’s assets that constitute securities for the debt owed. The valuation may be challenged and then an independent valuation is instructed and is binding on the parties. The creditor proceeds with an affidavit of proof of debt within 35 days of the notice for the Protective Court Order.

Based on the information above, the Insolvency Practitioner drafts a proposal for a PRS which states explicitly the secured and unsecured amount of debt, as well as comply with certain requirements set out in the Law.

Based on the Debtor’s financial status and the remaining amount available for monthly repayments after deducting the Debtor’s monthly expenses, the Insolvency Practitioner proposes a PRS for the secured and unsecured debt’s repayment. The repayment can either be payment arrangements with the creditor, transfer of the proceeds to the creditor coming from the sale of the Debtor’s certain assets that secure the debt or any other assets of the Debtor, transfer of the secured assets to the Creditor or divestment of such assets that secure the debt by the creditor. Secured debts must be repaid as a priority. In case there is no available amount for the repayment of the unsecured debt, the Debtor will ultimately be discharged of their unsecured debt, upon successful completion of the PRS.

The maximum duration of a PRS shall be 60 months but a PRS may provide that this period may be extended for a further period of 12 months in such circumstances as are specified in the terms of the PRS. The PRS shall not contain any terms which would require the Debtor to make payments of such amount that result in the Debtor not having sufficient income to maintain a reasonable standard of living for him and his dependants. The Debtor will be discharged of his unsecured debt by the end of the 60-month period and the successful fulfilment of the terms set forth in the PRS.

What is the scope of a creditors’ meeting?

After the proposal for the PRS and whilst the Protective Court Order is still in force, the Insolvency Practitioner convenes a Creditors’ Meeting, during which all the Debtor’s creditors examine the proposal and vote for its approval or rejection. Where a Creditors’ Meeting does not take place before the expiry of the Protective Court Order, the PRS procedure is deemed to have come to an end.

When is a PRS considered as consensual and when as non consensual?

If a PRS is approved by the Creditors’ Meeting, the Insolvency Practitioner notifies the Insolvency Department in order for the latter to proceed with the filing of a court application for the ratification of the PRS. The Insolvency Practitioner will also send a notice to each creditor indicating that they may file an objection to the entry into force of the PRS by lodging a notice of objection with the competent court, within 14 days of the date of the sending of that notice.

In case the PRS is rejected by the Creditors’ Meeting, the Protective Court Order is deemed to have come to an end. In more limited cases and if specific criteria and requirements set out in the Law are met, the Debtor may proceed with the filing of an ex-parte court application for the issuance of an order imposing the PRS on the creditors. An example of such requirements concerns the value of the Debtor’s main residence that has to be under €350.000 for the Debtor to be eligible for a non consensual PRS. There is also a criterion that the Debtor’s income must have been decreased by more than 25% from the day he concluded the credit agreement with the creditor, compared to his income immediately before the issuance of the initial Protective Court Order.

A creditor has the opportunity to apply for the annulment of such order within 15 days from the day the order imposing the PRS was duly served on the creditor. The main grounds for annulment relate to non fulfillment of the criteria for a non consensual PRS or non compliance of the mandatory requirements under the Law. The creditor may also apply for an annulment in case a material inaccuracy or omission exists in the Debtor’s personal information and financial status which causes material detriment to the creditor.

When is a PRS entered into and when is terminated?

In the event that the PRS is either ratified or imposed, its provisions are effective from the day of issuance of either the ratification order or the order imposing the PRS.

If the Debtor fails to comply with the provisions of the PRS, the creditor can file a court application for the termination of the PRS. There are even provisions under which a PRS is deemed as automatically terminated for non compliance by the debtor.

Vassilis Papadopoulos
Advocate

Disclaimer: The above is offered as a simplified general outline for the purpose of this Article and does not constitute legal advice.

The explosive rise of interest rates during the last year seems indeed unprecedented. Since 21 July 2022, when the Governing Council of the European Central Bank (hereinafter called “ECB”) announced the first increase of one of the key ECB rates – the interest rate on the main refinancing operations (MRO), by 50 basis points setting it to 0,50% with effect from 27 July 2022, in approximately a year the said interest rate has risen to 4,25%, with increases being announced roughly every 6 weeks. By the latest announcement of the Governing Council of the ECB on 27 July 2023, the interest rate on the main refinancing operations, was raised by 25 basis points and has been set to 4,25% with effect from 2 August 2023. According to the said announcement “Inflation continues to decline but is still expected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner”.

It should be noted that the said rate was set at lower than 100 basis points (1,00%) on 11 July 2012, reached almost zero floor (0,05%) on 10 September 2014, and then indeed zero floor on 16 March 2016 where it remained since.

What is the main refinancing operation interest rate?

As defined by ECB, this is the interest rate banks pay when they borrow money from the ECB for one week, while offering collaterals as guarantee for the repayment.

How does it affect borrowers?

The interest rate based on which the interest a borrower has to pay when borrowing money is calculated, usually consists of the base rate and the margin, where in case οf a non-performing loan, a default interest rate may also be applied. The ECB main refinancing operation interest rate may form the base rate or may be used for the calculation methodology of a bank’s base rate.

Indicative example of how a monthly loan instalment with the ECB main refinancing operation interest rate being its base rate has been affected:

01 July 2022

01 September 2023

*For the above indicative example, the capital amount of the loan is €200.000 and the maturity of the loan is 30 years.
The above calculations cannot be fully accurate and were made for the purposes of the indicative example for this Article only.

It should be noted that very recently, local banks announced some reward schemes for eligible customers with housing loans with variable base interest, including among others those with the ECB main refinancing operation interest rate. Quite interesting is also the fact that lately there has been a discussion about levying a windfall gains tax on banks for unexpected earnings or profits above average. If this is adopted, it will interestingly remain to be seen whether banks will eventually decide to lower their earnings by decreasing their interest rates on lending or by increasing their interest rates on deposits.

It also remains to be seen whether the ECB will continue to raise its key interest rates, including the main refinancing operation interest rate, as a measure to tackle inflation, and up to what level will that rise go. It will also be interesting to see whether Cyprus will seek to refrain from any more increases or even attempt to tackle the increases that have been already enforced, either by regulation or by measures taken individually by banks and credit acquiring companies as an initiative to limit the risk of explosion in numbers of non-performing loans.

Rafaella Georgiou
Advocate

We would like to make the following statement as to the issue of pro bono work.

As part of our corporate social responsibility and our commitment to aid as far as we can those who serve the public benefit, we have over the years been more than happy to offer our services to charitable or public benefit institutions and organisations, on a pro bono basis and without any charge or other consideration.

Likewise, we have been more than happy to assist on a pro bono basis several individuals that were genuinely unable to have access to legal services due to limited funds.

We have offered and continue to offer our services in such appropriate cases on a pro bono basis based on our strongly held principles and values, but we also strongly believe that such pro bono assistance, which was offered genuinely and without any motive from our part, should remain away from any publicity.

We will accordingly avoid making any public statement as to our pro bono work or engagements.