The (In)sufficiency of Assets as a Reason for Acceptance/Rejection of the Bankruptcy Petition and the Provision of a Second Chance to Debtors

legal insight

September 2023

George Zaouris, Lawyer

Α. Foreword 

In a previous article we examined small claims bankruptcy as a procedure in its entirety, capable of providing a solution to the financial impasse of thousands of debtors. In this article we will attempt to examine in detail when a bankruptcy petition is accepted due to the sufficiency of the bankruptcy estate and when it is not, and how this affects the debtor's discharge of his debts in the context of providing a second chance.

Β. Introduction

By way of introduction, it is good to look again at what are defined as small claims bankruptcy petitions. The Act states that small-object bankruptcies are defined as "those in which the debtor meets the criteria for determining a very small entity under Art. 4308/2014 (Α' 251)".  Specifically, at least two of the three conditions for inclusion in the concept of "very small entity" must be met, namely (proportionally for natural persons):

A) Total assets (assets based on ENFIA value as determined by the last tax assessment act) not exceeding EUR 350,000.

B) Net turnover up to EUR 700,000 (in the case of legal persons, specifically and in particular, if the net turnover exceeds EUR 2 million (2,000,000), they are not considered a very small entity - this criterion does not apply to natural persons without a sole proprietorship).

C) Average number of employees during the period up to 10 persons (this criterion does not apply to natural persons without a sole proprietorship).

According to a dissenting opinion, however, in case law, if all three (3) of the above criteria for inclusion in the concept of "very small entity" are not met, then the debtor - business or legal entity cannot be included in the scope of small-scale bankruptcies and its petition must be referred to the Multimember Court of First Instance, in order to be adjudicated by the non-simplified procedure provided for there (Athens Magistrate Court 83/2022, which held that: "[...] that in the case of bankruptcy of enterprises - legal persons, it is required that all the above conditions (criteria) set out in paragraph 83.2022, paragraph 83.20, are cumulatively met. 2c of Law No. 2c. In any case, the net turnover (of the legal person) must not exceed the amount of EUR 2,000,000, the assets must not exceed the amount of EUR 350,000 and the average number of employees must not exceed 10"). 

In any case, however, and to avoid any misunderstandings, all that matters to a debtor - a natural person without a business is, as we said, that the value of its assets does not exceed €350,000.

In addition to bankruptcy capacity, which is now not only for traders but for all natural persons by law, the creditor or debtor filing a bankruptcy petition with the competent Magistrates' Court needs to prove that a "cessation of payments" has occurred, i.e. that the debtor is unable to meet its outstanding financial obligations in a general and permanent manner. The law for evidentiary purposes establishes a presumption that a debtor is in default when he/she fails to pay his/her overdue obligations to the State, Social Security Institutions or credit or financial institutions in an amount of at least 60% of his/her total overdue obligations for a period of at least six (6) months, if his/her default exceeds the amount of thirty thousand (30,000) euros. The selective fulfilment of overdue financial obligations does not, however, remove the suspension of payments, which may also consist of the inability to fulfil even a significant overdue financial debt (Article 176 of Law 4738/2020).

Γ. The (in)sufficiency of assets 

In addition to the above, a crucial element for the declaration of bankruptcy of the debtor is the sufficiency of his assets or income. In particular, the law states that 'Bankruptcy is declared if, on the basis of the financial information brought to the attention of the court, it is likely that the debtor's property or income is sufficient to cover the costs of the proceedings. Otherwise, the court shall order the registration of the debtor's name or business name, as the case may be, in the Electronic Insolvency Register referred to in Article 213' (Article 77 of Law 4738/2020).

Consequently, two possible cases are likely to be encountered.

1. Either the debtor will be deemed to have property or income that covers the costs of the proceedings, with the consequence that he/she will be declared bankrupt and a trustee will be appointed (a. 77 par. 4 "Bankruptcy shall be declared if, on the basis of the financial information brought to the attention of the court, it is likely that the debtor's assets or income are sufficient to cover the costs of the proceedings").

2. Either his application will be rejected due to the insufficiency of his assets and his name will be ordered to be entered in the Electronic Insolvency Register. The same follows from section 178 of the Act specifically for small-scale bankruptcies which states in paragraph 1 that: "Where [...] it is presumed that the unencumbered assets of the debtor are insufficient to cover the costs of the proceedings and the annual income of the debtor, in addition to reasonable living expenses, does not exceed the reasonable living expenses referred to in par. 5 of Article 92, no receiver shall be appointed and the rapporteur shall order the entry of the name or surname of the debtor in the Electronic Solvency Register of Article 213 and the consequences of the entry in paragraph 5 of Article 92 shall apply. 4 of Article 77".

The distinction between bankruptcy and entry in the register is crucial, in principle, as regards the question of the debtor's discharge of his debts. This is because if the bankruptcy property includes the debtor's main residence and/or other fixed assets exceeding in value ten percent (10%) of the debtor's total liabilities and their minimum value is not less than one hundred thousand (100. 000) (excluding those acquired during the twelve (12) months preceding the filing of the bankruptcy petition), the debtor may then be discharged from his debts within one (1) year of the declaration of bankruptcy. Otherwise, the time required to elapse from the date of the declaration of bankruptcy or entry in the register is three (3) years. It can be understood, that is, that only if the debtor is declared bankrupt and only under the conditions mentioned above, can he be discharged in one (1) year and not in three (3) years. 

Moreover, if the debtor is declared bankrupt, a trustee will be appointed who will be charged with the task of administering the bankrupt's estate and who will be responsible for the sale of its individual assets. The declaration of bankruptcy automatically suspends any enforcement proceedings against the debtor's property. However, creditors in good standing (i.e. the debtor's creditors whose claims are secured by a pledge or mortgage or a mortgage lien or other special privilege on a specific item of the bankrupt's property) may, exceptionally, within nine (9) months of the declaration of bankruptcy, proceed with enforcement actions against the debtor (service of a cheque for payment, compulsory seizure, auction of the seized property, etc.).

On the contrary, in the case of registration in the electronic solvency register, a trustee is not appointed and the individual prosecution of the debtor's creditors is not suspended. In essence, therefore, the debtor's creditors within three (3) years of registration in the register can proceed with enforcement regardless of whether they are creditors or not.

We note, of course, at this point that if it is not established that the debtor has entered a state of default, as we have discussed above, then the bankruptcy petition will be dismissed, without the consequences of registration in the Register and the eventual discharge of the debtor's debts within three (3) years from the registration of the debtor's name in the Register.

We see, therefore, that the (in)sufficiency of the bankruptcy estate is judged not in relation to the possibility of satisfying creditors but in relation to the possibility of covering the costs of the proceedings! These are listed in Article 167 of the aforementioned law and relate to the amounts required to satisfy the court costs, the costs of administering the bankruptcy estate and the group creditors.

It is therefore crucial to see what is considered as bankruptcy property and, in particular, as readily and adequately realisable property.

D. What is included in the bankruptcy estate

Bankruptcy property includes all the debtor's assets, wherever they may be located, at the time of the declaration of bankruptcy, which coincides with the publication of the court's judgment. Anything else acquired by the debtor after that point in time is not included in the bankruptcy estate. In the case of registration in the Electronic Insolvency Register, it goes without saying that there is no bankruptcy property and the debtor's creditors can at any time seize and accelerate an auction of the debtor's assets (pursuant to Article 178(2) of Law 4738/2020).

The bankruptcy estate does not yet include assets that are not subject to seizure under the Code of Civil Procedure (for example: things that are absolutely necessary for the basic living needs of the debtor and his family, things that are necessary for his work, maintenance claims, wages, pensions, etc.), as well as under other provisions (e.g. the partnership share in partnerships is not subject to seizure). Part of the debtor's income may, however, be included in the bankruptcy estate under the conditions set out immediately below.

E. 'Readily' and 'sufficiently' realisable property

The law requires that the 'unencumbered' assets of the debtor's (always bankruptcy) estate must be sufficient to cover the costs of the bankruptcy proceedings. Weights are considered to be the mortgage lien and the mortgage for real estate and the pledge for movable property. Therefore, if the debtor has only encumbered assets, e.g. only real estate encumbered by a (lien) mortgage, then we cannot speak of readily realisable assets, and the application must therefore be rejected and registration in the Electronic Insolvency Register must be ordered. 

The debtor's assets must be "readily" realisable, i.e. capable of generating market interest. Moreover, as it has been held, 'what matters is that the debtor's assets are liquidable immediately and without lengthy procedures or authorisations. The available assets must have an immediately achievable liquidation value based not on their nominal value, but on the value they could achieve on the market to serve the purpose of the bankruptcy" (Eph. 1182/2019).

Where the debtor has only one unencumbered asset, which is of comparatively low value, the question arises as to whether it is "sufficiently" liquid.

It has been held that 'sufficient assets [...] are those which can be liquidated immediately, i.e. within a reasonable time after the case is discussed, depending on the type of asset and market conditions, and which are capable of covering the costs of the insolvency proceedings (CC 73/2014)'.

As we have seen, the law states that the unencumbered assets of the debtor need to be presumed to cover the costs of the bankruptcy proceedings without, however, referring to a specific amount, as "both the commercial value of the realisable asset and the amount of the costs of the bankruptcy proceedings are determined by the court to the best of its ability".  Case-by-case and on the basis of case law alone, we can therefore distinguish the following:

- Whether a private car can constitute "readily" and "sufficiently" realisable property.

Given that most debtors have previously obtained a loan, with the consequence that their real estate is encumbered, the question often arises whether the imminent sale of their car is sufficient for the court to presume that the costs of the proceedings are covered and declare bankruptcy.

The case law focuses on the age, price and market interest that a car will attract to judge. While it was recently held that a car with a year of first registration in 2004 and an estimated value of €2,500 is readily saleable (EirHalk 571/2022), in an earlier decision (MPRHan 346/2012) a car with a year of first registration in 2001 and an estimated value of €3,000 at the time was not considered suitable for sale, because it was considered that due to its age and the economic crisis, it would not attract the buyer's interest. On the contrary, a car with an estimated value of €5,000 and a first registration year of 2005 (7 years old at that time) was considered to be liquidated, while in another decision (EirXan 309/2011) a car of the same value and age (with a first registration year of 2004) was not considered suitable for sale. It is obvious that one cannot introduce a safe criterion for when a car is likely to cover the costs of the procedure. However, it can be concluded as a general observation that medium and medium-displacement cars are considered to be easily liquidated, whereas if it is a car of a married debtor with children that serves basic family needs, its liquidation is considered inappropriate (CIR 5106/2011).

- On whether a parcel of land and a co-ownership interest in real estate can constitute "readily" and "sufficiently" realisable property.

It goes without saying that through the sale of a property of which the debtor has full ownership, the costs of the proceedings can be covered, but also the claims of creditors can be satisfied. The question arises as to whether the same is the case with parcels of land outside the town plan and also with properties of which the debtor is a co-owner.

It has been ruled in previous decisions that parcels of small value, such as for example a parcel of land - pasture of 1,000 (Eirath 44/2011), a field of 6,875 sqm of 1. 000 (EirIoan 2/2011), "parcels of land with stony and barren soil in which few olive trees grow without yield, the total value of which does not exceed 3.500 €" (EirEpidavros 2/2011) are not suitable and sufficient assets to be liquidated.

Similarly, for properties where the ownership belongs to the debtor undivided by a certain percentage, it has been considered in most cases that they do not constitute readily realisable assets. Indicatively, it has been ruled that a 50% co-ownership right in a field of 1,000 sq.m. and an objective value of 5,000 € is not suitable for sale (EirAlex 145/2011), as well as a plot of land with an area of 147.60 sq.m. and a house of 30 sq.m. and a value of 13,700 € on which the debtor had an undivided share of 46.857% due to the lack of expectation of receiving a similar consideration (EirAth 106/2011). Finally, a property located in a forested area and which cannot generate a market interest was not considered suitable for sale (Eirath 123/2011). 

F. Income

According to the law, only the annual income of the debtor is included in the bankruptcy estate, to the extent that it exceeds the amount of the annual reasonable living expenses of the debtor and his family members or twelve times the amount of the unseizable amount (i.e. 15,000€, since the unseizable amount is 1,250€ per month according to a. 31 par. 2 KEDE), examining and taking into account the higher of the two. Reasonable living expenses are determined from data provided by ELSTAT and are based on the number of family members of the debtor. If the reasonable cost of living provided by the ELSTAT does not exceed €15,000 per year, then, as mentioned above, we automatically take into account 12 times the unobligated amount (i.e. €15,000). We then compare the debtor's annual income with 12 times the unobligated amount (or with the reasonable cost of living if it exceeds it). If the income is higher, the amount of the difference is included in the bankruptcy estate.

The issue is complicated if the debtor is married and his/her spouse also has income. In this case, in order to find each person's contribution to the family expenses, we first add up the monthly incomes of the two spouses and examine the ratio of each person's income to the sum of both (e.g. e.g. if the debtor has a monthly income of €1,500 and the spouse has a monthly income of €1,000 then the debtor contributes 60% [since 1,500 is 60% of 2,500 (since 1,500 + 1,000 = 2,500)] and the spouse 40% of the family income. Based on this percentage, we then look at participation in family expenses. So, if, based on the previous example, the family's reasonable living expenses amount to €1,500 per month, then the debtor must contribute 60%, as we have seen in proportion to his/her income, i.e. his/her contribution amounts to €900 per month (1,500 x 60% = 900). Therefore, the amount of 600€ (1,500 - 900) per month, as the difference between the debtor's contribution to family expenses and the total amount of family expenses, will be included in the bankruptcy estate if the court finds it sufficient to cover the costs of the proceedings. Again, there are no hard and fast parameters as to the amount of income that will lead to the acceptance of the bankruptcy petition, but the decision is entirely up to the individual court. For example, an amount of €254.5 as the excess of the debtor's income over the amount of his contribution to family expenses, based on the above calculation method, was found, in a recent case we handled, to be unable to cover the costs of the bankruptcy proceedings, resulting in an order for registration in the Electronic Insolvency Register.

Ζ. Epilogue

In conclusion, before filing for bankruptcy, it is important for a debtor to know how its financial situation may affect the outcome of its case. This is because, as we have seen, from what the law stipulates, combined with the lack of more specific provisions, the judge has the discretion to decide otherwise, based on the facts of each case.