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

Legal Insight

September 2023

George Psarakis, LL.M., LL.M., PgCert

(republished from Moneyreview.gr)

Summary: Extrajudicial mechanism, second chance, bank mediation, reorganization, code of conduct, bankruptcy. About 2 years ago we listed the proposed solutions, indicatively, for some basic cases of debtors. In today's article we will update the answers, following the latest legislative and jurisprudential developments. The truth remains that it is difficult for anyone to know with certainty what the best arrangement for them is; a logical consequence when a plethora of alternatives unfold before you. However, the mechanisms on offer are now better understood, at least by the specialised advisers who deal with them and who in turn come to assist debtors. 

Extrajudicial mechanism, second chance, bank mediation, reorganisation, reorganisation, code of conduct, bankruptcy. About 2 years ago we listed the proposed solutions, indicatively, for some key cases of debtors. In today's article we will update the answers, following the latest legislative and jurisprudential developments. The truth remains that it is difficult for anyone to know with certainty what the best arrangement for them is; a logical consequence when a plethora of alternatives unfold before you. However, the mechanisms on offer are now better understood, at least by the specialised advisers who deal with them and who in turn come to assist debtors. Let us therefore look at some cases.

1. I have high 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' scheme (discharge of the debtor from his debts). Once the bankruptcy decision has been issued and after 3 years (or a year, depending on the assets of the bankrupt), the debts are "wiped out" and the debtor can start again from scratch, even starting a new business activity. In addition, the equipment of the sole proprietorship will usually be 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 an income from a sole proprietorship). However, his home will be liquidated for the benefit of his creditors, unless he is considered a 'vulnerable debtor' and chooses to transfer the home to the acquiring entity and lease it from the latter (when this is established; currently, and until 15/12/2023, we have the so-called 'interim programme' which protects the first home under certain conditions). 

2. I have a large property, the value of which exceeds the total of my debts. However, I do not have the liquidity to pay off my debts to the State, banks and the National Social Security Fund at the time they become due.

The above example would be better suited to the solution of joining the out-of-court settlement mechanism. This is because the property values 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, they can be settled in up to 420 instalments for mortgage loans and in up to 240 instalments for business loans). But beware: as the Special Secretariat for Private Debt Management replies, "...in the Out-of-Court Debt Settlement Mechanism procedure there is no obligation for credit institutions or loan managers (representing funds) to settle the debts of debtors". Many arrangements have already been made for debts to social security institutions and the public sector which, especially after the introduction of the fixed interest rate of 3%, do indeed help debtors. 

3. I have no property and no activity. I am an employee. 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. (Note that because the debtor lacks assets, the bankruptcy petition will be dismissed but his assets will be entered in the insolvency register - see here - and from that point the 3-year period for discharge will start). However, according to paragraph 2 of Article 7 of the Decree No. 44510 EX 2021, in case of cancellation of debts for non-employment insurance contributions due to the debtor's discharge following a declaration of bankruptcy, the insurance period and the insurance rights are cancelled.

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

In this case, the possibility of bankruptcy of the company could be discussed, with a simultaneous 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). Under this arrangement (Article 195), the representative in question is exempted from any joint and several liability for debts to the State and EFKA of the company that arose 3-5 years before the bankruptcy (the duration depends on the time when the company stopped making payments), unless an appeal is filed by anyone who has a legitimate interest against the exemption. Otherwise - i.e. if no such exemption was provided for - even if the company went bankrupt, the State and the EFKA would be liable against its representative, who would be liable with his individual assets for the company's debts (for which he is jointly and severally liable under the law). Similarly, if there are debts under guarantees (for loans, e.g. to credit institutions) which are not written off due to the bankruptcy of the debtor company (under Article 195), the possibility of filing an individual bankruptcy petition while the company remains dormant (without filing for bankruptcy) could be discussed. In this case, the managing director would be discharged from all debts existing at the time of filing for bankruptcy and could then start a new business activity. 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 reorganisation agreement with the creditors of the company 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 case No 7 below).

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

The out-of-court mechanism can now also be used in this case. At the same time, the Code of Conduct can also be used, but with certain restrictions for companies with a turnover of more than EUR 1,000,000. In both contexts, the out-of-court mechanism provides for a period of suspension of enforcement actions (an important aspect), but the Code of Conduct gives the debtor the right to make a counter-proposal to the creditor's proposal (i.e. in practice, the debtor has the right to submit a counter-proposal to the creditor's proposal). Ultimately, the over-indebtedness problem will be resolved between the company - bank/servicer by means of negotiations, sometimes quite tough and depending on the negotiating power of each party at the critical moment. The legal representative is not liable with his personal assets for debts to credit institutions, unless he has guaranteed them (which is usually the case in family businesses). It is also possible to use the reorganisation procedure if there is an agreement on the part of the credit institution (the Code of Conduct is aimed at agreement, whereas the reorganisation procedure requires it; any agreement, of course, under the Code of Conduct may result in a reorganisation agreement and its ratification by the court; the ratification of the reorganisation agreement exempts the company from income tax on any debt write-off, etc.). 

6. I have a sole proprietorship that has debts only to the National Social Insurance Fund and the State. I have personal property that exceeds my debts.

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 an arrangement. 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 cancelled up to 75%. Surcharges can be written off up to 85% and fines up to 95% (while independent fines can be written off up to 75%). The State and the Social Security institutions must each separately propose to conclude bilateral debt restructuring agreements. Repayment is made in monthly instalments at a fixed interest rate of 3% and may be followed in a second year by a prepayment of instalments with deduction of the calculated interest. An application may also be submitted for the adjustment of debts already adjusted on the basis of earlier laws. Debts that are already established at the time of application (basic debts including surcharges, interest, fines) are regulated. 

7. I am a major shareholder and legal representative 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 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. in the context of the out-of-court mechanism, basic VAT, FTT and social security contributions cannot be written off, whereas in the reorganisation procedure this is possible; in the context of the out-of-court mechanism, the implied consent of the State/FIFKA is, inter alia, provided 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).  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 mechanism procedure) must be supported. The resolution procedure is suitable for larger companies with high leverage and needs for a tailored settlement, while the out-of-court mechanism offers more general solutions with the only possibility of batching the debt into monthly payments (e.g. the out-of-court mechanism does not provide for advance payments, interim payments, interim transfers of assets for the repayment of debts, etc.). It should be noted, however, that in a reorganisation any write-off of debts to the State and the EFKA does not also benefit the persons who are jointly and severally liable, such as the representative of a company, a large part of the basic debt and fines/interest from debts to the State and the EFKA may be written off in respect of the company, but for those of them 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 para. 3 ν. 4738/2020). The opposite, however, is the regulation in the context of the out-of-court mechanism ("Thus, the legal effects of the out-of-court regulation of Law no. 4738/2020 - suspension of enforcement measures and criminal prosecution, issuance of a certificate of compliance, possibility of "inactivation" of seizures, cancellation of outstanding debts after repayment of the arrangement - occur not only as regards the applicant-principal debtor, but also as regards any co-debtors, as long as the arrangement is observed by the principal debtor" - 151323 EX 2021). Also under the out-of-court mechanism, the interest rate for the settlement of debts to the State is 3% fixed and to financial institutions a) for secured debts equal to the interest rate Eur3m + 2.5% and b) for unsecured debts equal to the interest rate Eur3m + 3%. In contrast, in the context of reorganisation, there is no specific interest rate and several times debts to the State and the EFKA are settled interest-free, while the interest rates for settlements with financial institutions are usually lower than 3% + Eur3m.

8. I am a representative of a company that has been dissolved several years ago, is in liquidation and has high debts to the State and the EFKA dating back more than 5 years. I have a large property portfolio.

Filing for bankruptcy of the company using the representative's discharge (see case no. 4) is not an appropriate alternative in this case, as the debts date back to years beyond 5 years from the intended bankruptcy and therefore the legal representative will not be discharged from them. However, based on a recently passed regulation (April 2023), debts to the State that have been established against a legal person that has been dissolved and is in liquidation may be settled upon request of its legal representative, who is also jointly and severally liable for their payment. Prior to the adoption of this arrangement, the legal person had to be revived in order to cease to be in liquidation, a procedure which required decisions of corporate bodies etc. Therefore, the appropriate option is for the legal representative to submit a request for adjustment under the out-of-court settlement mechanism.