The Debtor's Defence Against the Bankruptcy Petition through the denial of being in a State of Bankruptcy

Legal Insight

February 2024

Stellina Mandalou, LL.M.

Abstract: In a previous article (see here), we discussed how a debtor who does not wish to be declared bankrupt can defend himself against a petition filed by one of his creditors by claiming that the petition was improperly filed as a reason for its rejection. This article examines another ground for rejecting a creditor's bankruptcy petition, namely the debtor's refusal to comply with the substantive conditions laid down by law for inclusion in bankruptcy proceedings, in particular the fact that the debtor is in a state of suspension of payments.

1. Introduction

Articles 76 and 77 of the new Bankruptcy Law (Law 4738/2020, as amended and in force) set out the substantive conditions that must be met in order for a debtor, whether a natural person or a legal entity, to be declared bankrupt. If even one of these conditions is not met, the creditor's bankruptcy petition will be rejected as unfounded.

Specifically, article 76 defines the subjective conditions for inclusion in the bankruptcy proceedings, which provide for persons capable of bankruptcy, and article 77 defines the objective conditions for inclusion, which relate to the financial situation of the person capable of bankruptcy as a factor justifying his or her submission to bankruptcy proceedings. One of these objective conditions, which will be discussed below, is that the debtor must be in a state of suspension of payments.

2. The concept of "suspension of payments”

In accordance with Article 77(1)(a)(2)(a) of the EC Treaty, the concept of "suspension of payments" is defined in Article 77(1)(b) of the EC Treaty, pursuant to Article 1 of Law No. 4738/2020, a debtor who is in a state of suspension of payments, i.e. who is generally and permanently unable to meet his due financial obligations, is declared bankrupt.

Furthermore, the weakness is also considered to be permanent if it is not the result of a temporary and reversible situation but, on the contrary, is expected to have a negative impact on future debt. Of course, if there are reasonable expectations of recovery (e.g. grant approval, agreement with a major investor, new partnerships, etc.), the suspension of payments will be lifted.

Moreover, according to this provision, payments made by fraudulent means (e.g. convenience bills, fictitious invoices, etc.) or by destructive means (e.g. borrowing at excessive interest rates, highly unprofitable transactions such as selling at prices far below cost, etc.) do not constitute fulfilment of obligations. However, refusal to pay because of objections that the debtor believes in good faith to be well-founded does not constitute a cessation of payments (e.g. disputing the existence or the amount of the debt).

With regard to the date of the suspension of payments, it should be noted that it must exist at the time of the hearing of the petition before the bankruptcy court and, in any case, at the time of the publication of the decision of the first instance (see Athens Court of Appeal Decision 2077, 1182/2019).

It should be noted that if the cessation of payments is recognised at the time of the hearing of the relevant bankruptcy petition, any decision taken, for example, on a previous petition for inclusion in the reorganisation proceedings (whether or not the cessation of payments was recognised) does not constitute a precedent in the bankruptcy proceedings (see Peraki, E., Bankruptcy Law, 2021, p. 151).

3. The presumption of cessation of payment

Article 77, paragraph 2, establishes a presumption of default in the event that the debtor fails to pay his overdue monetary obligations to the State, social security institutions or credit or financial institutions for at least forty percent (40%) of his total overdue obligations for a period of at least six (6) months, provided that his unpaid obligation exceeds the amount of thirty thousand (30,000) euros.

For example, a debtor will be considered to be in default if he has outstanding debts to the State of 100,000.00 euros and to banks of 140,000.00 euros (or e.g. only to the bank of 240,000.00 euros), while his total outstanding debts amount to 600,000.00 euros, for a period of at least six (6) months. The six (6) month period shall be deemed to end on the date of the hearing of the petition before the competent court.

It should be noted that this presumption is differentiated in the case of a small bankruptcy, i.e. a bankruptcy in which the debtor cumulatively meets all three (3) criteria for determining a very small entity pursuant to Article 2 of Law no. 4308/2014 (A' 251), a case in which the above percentage is sixty percent (60%), based on A. 176 par. 1 of Law no. 4738/2020 (for the bankruptcy of a small entity see here).

This presumption is defined as rebuttable in the sense that it can be rebutted by any person with a legitimate interest, including the debtor, by proving the absence of a de facto suspension of payments (i.e. by citing specific facts and providing the relevant evidence).

As established by case law, the inability to pay outstanding debts will usually manifest itself in "the destruction or cessation of commercial activity, an irreparable loss of confidence on the part of the trader or a disturbance of his financial standing". In other words, such a failure will occur when the debtor's trading cycle gives the impression that he is unable to meet his outstanding obligations, thereby undermining his financial credibility. Such indications include, for example, the flight or disappearance of the debtor, the definitive closure of the debtor's shop or cash desk, the protesting of bills of exchange for non-payment, the non-payment or reduction of the salaries of the company's staff, etc. (see Psychomanis, Bankruptcy Law, 10th ed., 2022, pp. 69 - 72).

b) To cover the operating costs of the business, such as utility bills, insurance premiums, maintenance costs, etc. (North Aegean Court of Appeal 7/2022, Thessaloniki Court of Appeal 1863/2021, Lamia Court of First Instance 4/2019).

c) Employment of a sufficient number of employees and proof of their payment (Lamia Court of First Instance 4/2019).

d) Payment of substantial sums of money for the repayment of transactions (Thessaloniki Court of Appeal 1863/2021 - in this case for the purchase of real estate).

e) continuous supply of materials for the marketing needs of the company, which indicates the loyalty of the suppliers to the company (Athens Court of Appeal 1117/2001).

f) reasonable expectations of recovery, e.g. taking into account the market situation due to the coronavirus pandemic that affected the company's activity (TriefVorAigaion 7/2022, Thessaloniki Court of Appeal 1863/2021), due to the recovery of a large sum of money (METFDOD 51/2020) or due to the full repayment of a significant debt (Athens Court of Appeal 1117/2001) or due to a positive development in a legal dispute of the company (Athens Court of Appeal 3528/2018 - in this case, The annulment of major tax assessment acts, with the subsequent resolution of a problem that had a significant impact on the course of the company, as an obstacle to the settlement of debts owed to the State, the obtaining of tax information, the collection of the contractor's exchange due from the State, etc. with the consequent inability to repay its debts), or due to the reasonable possibility of settling the company's debts by including the company in an alternative debt settlement procedure (PPLAM 4/2019). 

It should be noted that reliance on the claim of a reasonable expectation of recovery of the debtor should be based on concrete and specific evidence and not on unrealistic or vague plans and wishes.

g) the conclusion and observance of a debt settlement agreement with the main creditor (Thessaloniki Court of Appeal 1863/2021).

h) the absence of a loss of commercial credibility and the destruction of the business (Single-member Court of Appeal of Dodoni 51/2020, Multi-member Court of First Instance of Lamia 4/2019, Athens Court of Appeal 1117/2001).

5. Instead of an epilogue

In fact, by adopting the presumption of cessation of payments in Art. 2(a) (and a. 176(1), for minor bankruptcies) of the Law no. 4738/2020 seems to make it easier for the creditor to obtain the bankruptcy of his debtor, if the latter fulfils the conditions set out in the said provision. However, if the case is properly handled, it is possible to rebut the above presumption by proving that the creditor has not actually suspended payments. To this end, it is essential to identify and cite the relevant facts showing that the debtor's business is not in decline or, in any case, that there is a reasonable expectation that it will recover, as well as to properly substantiate the relevant evidence.