The Second Chance of Entrepreneurs through the New Insolvency Law

Legal Insight

April 2021

George Psarakis LL.M. (mult.), PgCert

(Republished from naftemporiki.gr)

Before the adoption of the new Bankruptcy Law (Law 4738/2020 "Debt Settlement and Second Chance") we had dealt with the issue of the differentiation of the old legal framework with the bill to be adopted. Today, we can list the individual differences with the adopted law now in front of us. One of its important provisions concerns the so-called 'second chance' for debtors, i.e. their ability to make a new 'clean' start. In this note we will try to highlight the key points of the new law in this respect, in relation to the old law as well, through 9 questionnaires.

1. Is the institution of "second chance" being introduced for the first time in Greek law?

No. A substantial adoption of the institution took place for the first time in 2016, when the possibility of providing the trader-debtor with a "second chance" was provided for through the institution of the "discharge of the debtor natural person" of the Bankruptcy Code. In fact, in 2018, these provisions were amended in a more favourable way (Law 4549/2018). It is a reality, however, that, the new regulations make it easier to discharge the debtor. 

2. Who decides on the debtor's discharge?

Discharge, i.e. the "cancellation" of the debtor's debts, under the new bankruptcy law occurs automatically (as of right) after 3 years (or 1 year under stricter conditions) from the bankruptcy, unless a creditor files an action in court opposing it; in this case, the court ultimately decides on the debtor's discharge or not. Under the old regime, it was up to the court to decide, taking into account all the information at its disposal, whether or not to discharge the debtor following a specific request made by the debtor after the expiry of the discharge period. Exemption therefore required a new application to the court by the debtor, an obligation which is removed by the present law. The adoption of the 'automatic discharge' was proposed by the European Commission as early as 2014: 'After the end of the discharge period, entrepreneurs should be discharged from their debts without having to go back to court in principle'. So on this point the new regulation came to amend the old law to the advantage of the debtor.

3. How many years after bankruptcy does the discharge come?

The discharge of debts under the new law comes 3 years after the bankruptcy, provided that the debtor has no property in his/her name (however, if the debtor contributes to the bankruptcy estate items of significant value that exceed in value ten percent (10%) of his/her total liabilities and the minimum value is not less than one hundred thousand (100,000) euros, such as his/her residence, the discharge period is reduced to 1 year after the bankruptcy). Under the old law, the discharge could be obtained at the request of the debtor after 2 years from the declaration of bankruptcy. 

4. What are the obligations of the bankrupt during this period of discharge?

During these 3 years of the discharge period, the bankrupt will, under the new law, be obliged to pay to his creditors a part of his annual income exceeding his reasonable living expenses (unless the debtor contributes to the bankrupt's estate assets of significant value - see above - in which case he will not be obliged to pay unless his annual income exceeds five times his reasonable living expenses). It should be noted at this point that there was no corresponding obligation under the old law to exempt traders. The proposed regulation incorporates a similar provision in the European Directive (which refers to a 'repayment plan'). The explanatory memorandum of the new law bases this option on the following consideration: 'This change is proposed in order to avoid the circumvention of the bankruptcy procedure by persons who, while having no significant movable or immovable property, have instead high incomes, so that, while they are poor and without sufficient assets to repay their creditors, they live richly'. Of course, in practice, the poor businessman is not expected to show income in his name as in order to re-activate he will first wait until he achieves exemption.

5. Is an exemption possible when the debtor has no property in his name but no income?

Significant use of this law is expected to be made by debtor-entrepreneurs who at the present time have no assets in their name but only debts. The new law retains the possibility for a bankrupt who has no assets in his/her name to discharge his/her debts as long as 3 years have passed since the registration of his/her name in the relevant electronic solvency register. The corresponding possibility was introduced in Greek law in 2018 after apt remarks in the context of a parliamentary control on the impossibility of traders-debtors without property to be exempted (see the question of 11/5/2018 by MP Mr. Nikolopoulos: "Businessmen who cannot proceed with bankruptcy proceedings because their business has ceased operations but has no assets capable of covering the costs of bankruptcy are also excluded"). Until 2018, i.e., in order to take advantage of the "second chance" institution, a businessman had to have some property in his name, which was necessary for the costs of bankruptcy proceedings. 

6. If the debtor is not himself a trader but a shareholder or board member or managing director of a limited liability company and has provided guarantees to credit institutions for lending to the company, can he be discharged from his bank debts?

Yes, he can. This is one of the major differences between the new law and the old bankruptcy code. Since natural persons who are not traders can now also become bankrupt, and therefore a shareholder or board member of a company limited by shares who has provided a personal guarantee for a loan of the company, can also benefit from the "second chance" institution. Under the old regime, in order to qualify for the exemption, the shareholder or board member would have had to be deemed to have acquired commercial status himself (and thus to have been classified as a trader himself because of, for example, the successive guarantees and the direct financial benefit he expected from them, etc.) or to have applied to be subject to the law on indebted households. In fact, the relevant concern had already been raised before Parliament in 2018 as follows: "The first problem that arises from the new law is that the 2nd chance, as legislated by Law 4446/2016, applies exclusively to entrepreneurs who had a personal business (Non-capital) i.e. LLC, E.E., sole proprietorship, because they coincide with the insolvent business. Unlike entrepreneurs who had a PE, Ltd. and IKE (capitalised) and do not coincide when the business goes bankrupt".

7. Are there any specific exemption criteria? Are all debtors exempt from their debts?

The same criteria for bankruptcy discharge that were in force under the old regime remain basically the same in the present law. A creditor who will go to court to prevent the discharge of his or her bankrupt debtor will have to prove that the bankruptcy was caused by fraudulent actions of the debtor or that the debtor did not show good faith either at the time of the declaration of bankruptcy or during the bankruptcy, or that he/she has not cooperated with the bankruptcy institutions or that he/she has fraudulently concealed income or assets during the bankruptcy proceedings or that he/she has a pending criminal prosecution against him/her or has been convicted of any of the acts mentioned in the law (theft, fraud, embezzlement, defrauding creditors, etc.). In fact, the Executive Committee of the Bank of Greece recently issued a relevant decision (Meeting 185/09.03.2021) where it mentions various indications of bad faith, such as the disappearance or concealment of the bankrupt's commercial books or the failure to draw up balance sheets or inventory in accordance with the law, or the preparation of balance sheets in a way that makes it difficult to ascertain the state of the bankrupt's assets, etc. In general, the court will uphold the discharge of the bankrupt when his bankruptcy is due to a rapid change in economic conditions (financial crisis), a commercial accident which cannot be attributed to his fraudulent action (e.g. (e.g. fire), serious family problems, such as illness, which caused him to incur substantial expenses affecting his commercial activity, and other circumstances which were unforeseeable, not due to his fault and which led to his bankruptcy. In accordance with European Directive 2019/1023: "In order to determine whether the trader has behaved dishonestly, judicial or administrative authorities may take into account elements such as the nature and amount of the debts, the time when the debts were incurred, the trader's efforts to repay them and to fulfil his legal obligations, including his obligations to obtain public licenses and to keep proper accounting records, any actions taken by the trader to prevent creditors from succeeding in their obligations, and the trader's failure to comply with his obligations to pay the debts.

Another important difference in the new law is the introduction of the possibility of a partial exemption or an extension of the exemption period. If the bankruptcy court considers that the conditions for discharge are not met, it may, in a reasoned decision, set a deadline for the debtor to meet them, limit the discharge to certain debts only or set an exceptionally longer discharge period (i.e. beyond 3 years). Therefore, even when it is established that the bankruptcy was caused by the debtor's fraudulent actions, the court has the possibility to limit - and not exclude - the discharge according to the gravity of the debtor's fault.

8. Does the discharge apply to all of the debtor's debts?

The draft law provided that the bankrupt would not be exempt from debts created by an offence committed with malice or gross negligence. The same provision was contained in the old bankruptcy code. This wording of the bill could be interpreted as including debts whose non-payment constitutes a criminal offence, e.g. tax evasion, bounced cheques, etc. If this wording of the law were eventually adopted, it would lead to the "cancellation" in practice of the "second chance" since a large part of the debts of poor businessmen are related to the offences of tax evasion, tax evasion, non-payment of accrued wages and the issuing of bounced cheques. This was also pointed out in Parliament. For this reason, the legislator eventually adopted a more limited exclusion and now under the new bankruptcy law the bankrupt is not exempted only from (a) debts created after the filing of the bankruptcy petition, (b) debts arising from fraudulent or grossly negligent acts causing death or bodily injury to a person, (c) debts arising from the offences of money laundering and (d) maintenance debts.

9. Finally, is it appropriate to exempt the poor from their debts? Does this institution constitute an incentive to default?

The poor person under the old legislative and social views was a stigmatised trader, not accepted by the state for resuming economic activity. The European Union, however, intervened. On the basis of mainly economic studies that give another dimension to the issue, it recommended already in 2014 that member states adopt provisions that give a "second chance" to the poor man, a chance to reactivate himself and, taking advantage of his experience from past mistakes, to develop him and the local economy with him. The economic studies available to the relevant EU legislative bodies gave the impression that, because of the inability to reactivate the poor, the economies of the Member States were deprived of experienced members of the local economic life and therefore of effective development actions. This is because most of the time the trader who has failed once has acquired the knowledge and experience to avoid a second failure. This was vividly described by the European Commission in a relevant document as follows: "The consequences of bankruptcy, in particular the social stigma, legal consequences and the continuing inability to repay debts are important disincentives for entrepreneurs wishing to set up a business or take a second chance, even if the evidence suggests that entrepreneurs who have gone bankrupt are more likely to succeed in their second attempt". The explanatory memorandum of this new law is along the same lines: "Providing debtors with a second chance, in addition to the leniency of the legal system towards them, also serves the national economy, both because it facilitates the taking of entrepreneurial risks and because it allows over-indebted persons to have incentives to work and create wealth. When over-indebted persons are not able to get rid of their debts, they are driven into the informal economy to the detriment of society as a whole. Moreover, until the introduction of the 'second chance' scheme, those who had been bankrupt several times continued to trade through relatives, foreign companies, etc. In other words, while all his assets had been used to pay off his creditors before the declaration of bankruptcy, he would start again from scratch, perhaps even acquiring new assets from the profits of his new business. In order to shield his new assets from his old creditors, however, he was practically obliged to conceal them artificially through third parties and elaborate legal constructions. Even in the case of succession, he was obliged to make a disinheritance in favour of his usually related persons (children, brothers, sisters, etc.). So not to accept the institution of "second chance" is to close one's eyes to commercial reality. Besides, under the new law too, in order to be exempt, the bankrupt must first have lost all his assets (through bankruptcy proceedings), and then his exemption must have been subject to judicial review, provided of course that there are creditors who object to it.