The mosaic of debtor's options: bankruptcy, out-of-court mechanism, reorganisation or code of conduct?

Legal Insight

September 2021

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

(republished from Moneyreview.gr)

The "mosaic" of debtor's options: bankruptcy, out-of-court mechanism, reorganisation or code of conduct?

Summary: New out-of-court mechanism, second chance, bank mediation, resolution, code of conduct, bankruptcy, etc. We are not exaggerating when we claim that the landscape is totally complex not only for the parties directly concerned (debtors) but also for the special advisors themselves (lawyers, accountants, etc.). In this article we will try to give some guidelines to enable each debtor (legal or natural person) to take more rational decisions, by responding to illustrative examples.

New out-of-court mechanism, second chance, bank mediation, reorganisation, reorganisation, code of conduct, bankruptcy, etc. We are not exaggerating when we say that the landscape is totally complex, not only for those directly concerned (debtors) but also for the special advisors themselves (lawyers, accountants, etc.). Once again, however, the new bankruptcy law (euphemistically entitled 'debt adjustment and second chance') has achieved its goal: press releases from the ministry and various announcements on the possibility of cancelling debts, surcharges and fines have attracted the interest of a large number of debtors. However, it is difficult to really know what is the best arrangement for one's situation; a logical consequence when a plethora of alternatives are laid out before one. In this article we will try to give some guidance to enable each debtor (legal or natural person) to make more rational decisions by answering illustrative examples. It should be noted in advance that, in addition to this article, the website of the Special Secretariat for Private Debt Management (http://www.keyd.gov.gr) contains very useful answers to dozens of questions submitted in the context of presentation seminars held throughout Greece.

1. I have debts to banks, suppliers, the State and the National Social Security Fund. I run a small sole proprietorship and have no real estate (or I own my home, which is nevertheless encumbered with mortgages for amounts far in excess of its market value).

The most appropriate solution in this case is bankruptcy combined with the 'second chance' institution (discharge of the debtor from his debts) and possibly the 'vulnerable debtor' institution (transfer of the house to the acquirer and re-renting). Once the bankruptcy decision has been issued and after 3 years (or a year depending on the assets available to the bankrupt), the debts are 'wiped out' and the debtor can start again from scratch, even starting a new business activity (which he can start immediately after the bankruptcy decision has been issued). In addition, the equipment of the sole proprietorship will be essentially unseizable (the bankruptcy estate includes all the property owned by the debtor at the time of the declaration of bankruptcy, wherever it is located; however, the bankruptcy estate does not include unseizable property, which includes all the things necessary for the work of those who earn income from a sole proprietorship). His home will, however, be liquidated for the benefit of his creditors unless he is considered a 'vulnerable debtor' and chooses to transfer the home to the acquirer and lease it from the latter. Attention should also be drawn to the following: in the event of cancellation of debts for non-employment insurance contributions, the insurance period and the insurance rights of non-employed insured persons are cancelled.

2. I have a large amount of real estate, the value of which exceeds my total debts. However, I do not have the liquidity to repay my debts to the State, banks and the National Social Security Fund when they fall due.

The above example would be better suited to the solution of joining the extrajudicial mechanism of the New Bankruptcy Law. This is because the values of the property based on ENFIA and the income situation of the debtor will be assessed, so that the debts can be adjusted accordingly, with the possibility of repayment in up to 240 instalments for debts to the State and Insurance Funds and 420 for financial institutions (in particular for debts to banks and loan managers, for mortgage loans to mortgage lenders and creditors, the settlement can be made in up to 420 instalments, while for business loans it can be made in up to 180 instalments, based on the guidelines of the EIFIH). Attention, however: as the Special Secretariat for Private Debt Management replies, "...in the procedure of the Out-of-Court Debt Settlement Mechanism there is no obligation for credit institutions or loan managers (representing funds) to settle debtors' debts". Also, in order to accept an arrangement, the debtor must be judged to have the necessary income to meet a payment schedule; if the debtor's income is zero (or minimal), no arrangement will be accepted (through the out-of-court mechanism platform) but the procedure of forced liquidation of the debtor's assets will be preferred (for more see here).

3. I have no property and no activity. I am employed. However, I owe large sums to social security funds and the state from my previous business activity.

Filing for bankruptcy is the most appropriate solution. This is because after 3 years of being entered in the solvency register, the debtor will be discharged from the debts and will be able to acquire assets in his name again. However, according to Article 7(2) of Article 7 of the Administrative Instruction No 44510 EX 2021, in case of cancellation of debts from non-employment insurance contributions due to the debtor's discharge following his declaration of bankruptcy, the period of insurance and his insurance rights are cancelled (see also here).

4. I am a shareholder and CEO of a company that has high debts to the State and credit institutions. The value of the assets is, relative to the amount of debts, quite low. The business is labour-intensive and it is the know-how I have acquired that is ultimately of most value. I have no personal property.

In this case, the possibility of bankruptcy could be discussed, with a parallel discharge of the representative from the debts that are personally incumbent on him/her due to his/her representation of the company (under Article 195 of the Bankruptcy Act - see more here). Similarly, if there are debts due to guarantees (for loans e.g. For example, if there are guarantee debts (e.g. to credit institutions) which are not written off due to the bankruptcy of the debtor company, the possibility of filing an individual bankruptcy petition while the company remains dormant (and its assets are sold through enforcement by its creditors) could be discussed. In this case, the managing director is "cleared" of all debts existing at the time of filing for bankruptcy and can then start a new business activity. His shares or partnership shares (if he is an LLC or an IPE) in the old company will also be sold by his creditors. In this way he succeeds in making a new start in business without the burdens of the past. It is of course also possible to try to reach a reorganization agreement with the creditors of the SA in order to avoid bankruptcy. The latter possibility, however, will only exist if the creditors agree to a debt write-off of such an amount as to make the company viable (see question 7 below).

5. I am a legal representative of a limited liability company that has debts to only one credit institution. 

In this case the out-of-court mechanism cannot work (debts to only one credit institution). Therefore, the only solution is to apply the Code of Conduct, as amended a few months ago (no. 392/1/31.5.2021), with specific restrictions, however, for companies with a turnover of more than 1,000,000 euros. Ultimately, the over-indebtedness problem will be resolved between the company and the bank through negotiations, sometimes quite tough and depending on the bargaining power each party has at the critical moment (see for more here). The legal representative is not liable with his personal assets for debts to credit institutions, unless he has guaranteed them (which is what usually happens in family businesses). It is also possible to use the reorganisation procedure, provided that the credit institution agrees (the code of conduct is aimed at agreement, whereas the reorganisation procedure basically requires it; the choice of one of the two mechanisms also depends on the tax treatment of any debt write-off).

6. I have a sole proprietorship that has debts only to EFKA and the State.

In this case, the appropriate solution seems to be the out-of-court procedure based on the bilateral settlement mechanism. For debts to the Tax Administration and/or Social Security institutions exceeding the amount of EUR 10,000 per creditor, the debtor can apply to the out-of-court mechanism, which is routed to the creditor (State and/or EFKA) in order to propose a settlement. This arrangement is derived from a special algorithm (i.e. automatic calculation tool), which evaluates the debtor's financial situation (i.e. income - income and property) and the instalments can reach up to 240. No cancellation of basic social security contributions and withheld/imposed taxes (VAT, FMS etc.) can take place. Other taxes and social security debts can be written off up to 75%. Surcharges can be written off up to 85% and fines up to 95% (and independent fines up to 75%). The State and the Social Security Institutions must each separately propose to conclude bilateral debt restructuring agreements, provided that the agreement makes the debtor viable or solvent, as the case may be, and the recovery of the State or the Social Security Institution is at least equal to its estimated recovery in case of bankruptcy. Repayment shall be made in monthly instalments at a 3-month Euribor rate + 5 % margin. An application may also be made for the adjustment of debts already adjusted under previous laws. Debts that are already established at the time of the application (basic debts including surcharges, interest, fines) can be regulated. The debtor, if not in arrears, will have to plead facts showing a 20% deterioration of his/her financial situation (for more see here).

7. I am a major shareholder/partner/CEO of a company with high debts to banks, EFKA and the State. The value of the company's assets is significant but less than its debts. 

The most appropriate solution for the company is that of an out-of-court mechanism or reorganisation. The choice of the more appropriate institutional framework of the two will depend on the level of the debts of the State/FIFKA in relation to the banks (e.g. under the out-of-court mechanism, basic VAT, FTT and social security contributions cannot be written off, whereas in the reorganisation procedure this is possible; under the out-of-court mechanism, the implied consent of the State/FIFKA is provided on condition that the debts are below EUR 1.5 million, whereas in the reorganisation procedure this limit is increased to EUR 15 million for the State and the EFKA separately - see also: in the out-of-court procedure, the implied consent of the State/FIFKA is provided under the condition that the debts are below EUR 1.5 million, whereas in the reorganisation procedure this limit is increased to EUR 15 million for the State and the EFKA separately - see also here: in the out-of-court procedure, the implied consent of the State/FIFKA is provided under the condition that the debts are below EUR 1.5 million. A precondition, of course, is that the bank or banks (generally financial institutions) holding the largest share of the claims (60% of the total claims, including 50% of those with a special privilege for the resolution procedure and 40% for the out-of-court procedure) must be supported.) It should be noted, however, that any write-off of debts to the State and EFKA does not also benefit the jointly and severally liable persons, such as the representative of a company, a large part of the basic debt and fines/fines/interest from debts to the State and the EFKA may be written off in respect of the company, but for those debts for which the representative is also jointly and severally liable (see e.g. Article 50 of the Code of Tax Procedure), the latter will continue to owe them with his personal property as security (unless the State/FIFKA agrees otherwise - Article 60(1)(b) of the Code of Tax Procedure). 3 ν. 4738/2020). This is also stated in the relevant POL of the AADE, however it is an issue that will be adjudicated in court in the future (for more see here).

8. I am a representative of an SA that has high debts to the state and EFKA. There is no chance of reorganization and the company is not viable.

In this case, a preferable alternative is to file for bankruptcy on behalf of the SA in combination with the legal representative's discharge from debts to the State and EFKA (of Article 195 of the new Bankruptcy Law). Under this arrangement, the respective administrator is exempted from any liability for debts to the State and EFKA of the company arising 3-5 years prior to the bankruptcy (the duration depends on the time the company stopped making payments), unless an appeal is filed by anyone with a legitimate interest against the exemption. Otherwise - i.e. if the above option is not used - even if the company is deprived of assets, the State and EFKA will take action against its representative, who will be liable with his/her individual assets.