Abusive filing of a bankruptcy petition by a creditor

legal insight

February 2024

Areti Kolokotroni, LL.M.

Abstract: Financial circumstances may force a debtor to apply to the Bankruptcy Court for a declaration of bankruptcy, especially if the debtor is generally and permanently unable to meet its due obligations. However, the right to apply for bankruptcy of a debtor is also granted by law to the creditors of the debtor. But how can the debtor defend himself in such a case if he does not agree to be declared bankrupt? The improper filing of the petition by the creditor is a ground for rejection of the petition and a defence for the debtor. In this article, we will examine cases which bring together elements of abuse by citing relevant case law examples. 

1. Introduction

The conditions and the procedure for declaring a debtor bankrupt are regulated in detail in Law 4738/2020. According to its provisions, a debtor who is in default of payment, i.e. who is unable to fulfil his/her due monetary obligations in a general and permanent manner, is declared bankrupt. In addition to the debtor himself, one or more creditors with a legitimate interest may apply to the competent court for a declaration of bankruptcy. In principle, a creditor who has an established and legally enforceable claim against the debtor for a pecuniary or non-pecuniary benefit shall have a legitimate interest in the application if he is to become a creditor in bankruptcy. 

2. Abuse of a creditor's claim

In addition to the general subjective and objective conditions that must be met in order for a debtor's bankruptcy petition to be admissible, as set out in Articles 76 and 77 of the above-mentioned Act, an additional condition for the admissibility of the petition is imposed by law. More specifically, according to Article 80 para. 2 of the aforementioned law provides that: "The bankruptcy court shall reject the application if it is proven that it is improperly exercised. In particular, the application is abusive if the creditor uses it as a substitute for individual satisfaction proceedings or for purposes unrelated to bankruptcy, as an institution of collective enforcement, and if the debtor submits it for the purpose of fraudulently avoiding payment of his debts'. 

The law mentions by way of illustration two cases in which a bankruptcy petition filed by a creditor is deemed to be abusive. These are applications for bankruptcy declaration, which do not seek to achieve the purpose of bankruptcy as an institution of collective enforcement for the joint satisfaction of creditors, but pursue purposes foreign to it, and the court has a wide discretion to assess the circumstances (PCR 65/2014). It should be noted that the enumeration of the law is not restrictive ("in particular") and there is room to find that the application is improperly pursued in other cases as well, if they gather elements of impropriety. If the Bankruptcy Court finds that the creditor's side of the application is abusive, it will reject the application. 

3. Case study 

a) As a substitute for individual satisfaction proceedings:

The first case of an abusive filing of a bankruptcy petition mentioned in the above article is the one in which the creditor uses it as a substitute for an individual satisfaction proceeding. In other words, by filing a bankruptcy petition, the creditor is attempting to exert excessive pressure on the debtor in order to force him to pay the claim of the petitioner. However, it is accepted that the declaration of bankruptcy does not constitute an ancillary remedy for creditors, so that they must first resort to enforcement measures and, if these prove to be fruitless, to bankruptcy. In other words, the failure of a creditor to bring individual proceedings against the debtor does not in itself constitute an abuse of the application, but this is examined ad hoc in each case, taking into account additional elements. 

Evidence suggesting that a creditor's bankruptcy petition has been filed as a substitute for individual satisfaction has been adjudicated: the absence of other claims against third parties, the fact that the claim of the applicant creditor has been satisfied to a large extent, the fact that the creditor, following the issue of an enforceable title, has initiated enforcement proceedings for the satisfaction of his claim without this having been unsuccessful, and then unjustifiably files a bankruptcy petition, that the creditor's claim is not overdue, but seeks, through the bankruptcy of the debtor, to uncover the debtor's assets in order to initiate enforcement proceedings. 

Some examples of case law are set out below: 

- In decision no. 388/2015 of the Piraeus Court of Appeal, the submission of the bankruptcy petition before the issuance of a decision to set aside the creditor's claim, which was contested by the debtor, was deemed abusive: "{...} on the contrary, it was proven that the bankruptcy petition was submitted abusively, in accordance with the meaning of the provision of article 6 par. 1 and 3 of Law 3588/2007, since the applicant had urged the filing of the petition before the issuance of a decision to set off its claim, which would have made it certain and settled in view of the fact that the defendant disputes its amount and, in particular, whether it includes the agreed discount on unpaid invoices'.

- Similarly, in decision No. 571/2014 of the Larissa Court of Appeal, the Court ruled in favour of the improper use of the application, because it was submitted for the sole purpose of collecting the applicant's individual claim and even before the acquisition of an enforceable title: "In particular, the anomalous statement made at the hearing by F.A., a member of the management of the applicant limited company, further demonstrates that the applicant submitted the application for the sole purpose of satisfying the claim which, according to the applicant, it claims to have against the debtor on the basis of the project contract. He testified at the hearing that the application in question was submitted in order to secure payment of the claims in respect of which the action has been brought before the Single Judge and to recover at least part of that claim before the judgment in the action becomes final. In other words, the application was improperly submitted, with the knowledge of the applicant limited liability company, as a substitute for individual enforcement proceedings, and even before an enforceable title had been obtained'.

- On the contrary, in decision no. 3 of Law 3588/2007 (L.P.C.), is unlawful and must be rejected, because the mere invocation of the applicants' failure to bring an individual action, without additional facts demonstrating the substitution of this procedure with the institution of collective enforcement, in order to exert pressure on the defendant, as mentioned above, is not sufficient to characterise the exercise of the applicants' right as abusive.

- The Court of Appeal of Piraeus, in its judgment No 74/2011, cites evidence to suggest that the application was submitted as a substitute for an individual satisfaction procedure: 'On the contrary, it has been established that the bankruptcy application was submitted in an abusive manner {...}. The absence of other debts due and payable to third parties, the satisfaction of most of the debt, which initially amounted to a substantial amount, the dispute as to its amount arising at a later date, the knowledge that this debt was primarily owed by the shipowner and secondarily by the co-debtor, the ship's manager, the filing of a counterclaim for the disputed claim against both the shipowner and the manager, while the bankruptcy petition against the shipowner was pending, and the statement by the applicant himself during his examination as a party without an oath before the Court of First Instance that he did not know whether his opponent also owed money to third parties and that he brought the petition as a means of exerting pressure on the latter to pay the amount due, are elements which clearly indicate that the petition was brought as a substitute for an individual satisfaction procedure'.

- Finally, the applicant's refusal to accept the debtor's proposal for partial payment of the debt in instalments does not render the subsequent bankruptcy petition abusive, in accordance with the decision of the Larissa Court of Appeal No. 589/2013: "Furthermore, from the same evidence as above, it was not proven that the petitioner filed the bankruptcy petition in an abusive manner, namely that he used it as a substitute for an individual satisfaction proceeding or in pursuit of purposes unrelated to bankruptcy, in view of the fact that, due to the existence of the aforementioned outstanding debts of the respondent and the non-satisfaction of his (the petitioner's) outstanding debts, {... } and his (the applicant's) refusal to accept the defendant's proposal to pay part of the debt in stages (120. 000) in twelve equal quarterly instalments of 10.000€ each for a total period of four (4) years, namely until November 2015, does not render the exercise of the application abusive".

b) Pursuit of purposes unrelated to bankruptcy as an institution of collective enforcement:

The second statutory case of abuse relates to the creditor's pursuit of purposes unrelated to bankruptcy as an institution of collective enforcement. This case includes applications aimed at discrediting the debtor, forcing him to withdraw from the management of his property, taking away the debtor's clientele, excluding him from participation in public tenders and from access to professions that even require the non-filing of a bankruptcy petition against the debtor. The competitive business activity that the creditor may be engaged in may be an indication that the application submitted is abusive. 

c) Other cases of abuse: 

As has been mentioned above, the law sets out two indicative cases of impropriety. However, it is left to the free discretion of the Court, assessing the facts of each case, to find in other cases as well that the application is being made improperly and contrary to good faith and morality.

The judgment of the Athens Court of First Instance in Case 990/2021, whereby an application for the placement of a company under special administration was rejected as abusive (which could be applied by analogy to a bankruptcy application because of the similarity of the two cases), is characteristic in this respect. In particular, it was held that the debtor company had made repeated efforts to achieve the restructuring of its debts to a banking institution, while the applicant bank had failed to comply with its good faith obligation to exhaust all possibilities for adjustment, rendering the subsequent submission of the application by the applicant bank abusive.

4. Compensation for improper creditor application 

In addition, Article 80 (paragraph 3) provides that where it is found that the application is improperly made, the Bankruptcy Court may, on the debtor's own motion, award damages against the person who made the application, if it is shown that there has been damage caused by the improper filing of the application. This provision does not, however, restrict the debtor who has suffered damage as a result of the creditor's improper application from claiming compensation for the damage suffered or compensation for non-material damage under the general provisions of Articles 57, 59 and 914 CC. The courts with jurisdiction in such cases will, however, be the courts with jurisdiction under the general provisions. 

Similar to the above, the assumptions of the decision of the Court of Appeal of Piraeus No 74/2011: "Furthermore, in view of the fact that, in addition, the bankruptcy petition was brought improperly, because it was proved that the petitioner-petitioner knew that the conditions for its declaration were lacking, this judicial action caused the petitioner-petitioner's personality to be insulted, manifested by the expression of distrust of its financial entity and by the reduction of its reputation in the commercial and transactional circles of the shipping market, mainly in which it operates. The adverse effects of the bankruptcy petition were also reflected in its relations with its partner banks ..., which were obviously adversely affected and did not approve the granting of credit and financing in general, since the information about the bankruptcy petition, which is more drastic than the issuing of a payment order, shook its reputation and its professional future. In the light of the foregoing, it is justified to award damages against the applicant, which should be set at EUR 5 000, after weighing all the circumstances, in particular the nature of the infringement, the nature and size of the undertaking, the normal course of its business and, in general, its normal operation. 

5. In lieu of an epilogue

The existence of a creditor's claim against the debtor, even if it has been finally adjudicated, is not sufficient for the acceptance of any petition that the debtor may file to declare the debtor bankrupt. The creditor must first and foremost prove the permanent and general inability of the debtor to meet its obligations. In the second place, despite the above condition, the Court of Justice may find that the application is being made improperly and does not form part of the general framework of collective enforcement for the satisfaction of creditors. It should be noted, however, that the debtor bears the burden of proving the facts which render the application abusive, since general pleading is not sufficient to obtain the rejection of the application against him.