The palette of solutions for indebted businesses

legal insight

April 2024

(republished from Euro2day)

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

Summary: Extrajudicial mechanism, bankruptcy, second chance, mediation, reorganization, code of conduct. The truth is that it is difficult for anyone to know with certainty which is the best debt settlement legislation for them; a reasonable consequence when a plethora of alternatives unfold before you. However, the mechanisms on offer are now better understood as it is already some 3 years since the new Insolvency Code (Law 4738/2020) came into force.

Let us therefore examine some working cases in order to better understand through examples the practical manifestations of the broader legislative framework for dealing with corporate insolvency (each case is of course different and the options may differ based on personal preferences and taking into account other parameters).

1. A public limited company with assets of significant value in relation to its liabilities, holding debts to a credit institution and to the State.

In this case, the out-of-court mechanism can be used. However, if the result of the calculation tool is not accepted by the credit institution, the SA will settle its debts through the out-of-court mechanism only as regards the State and then it can make use of the Code of Conduct through the new online platform for its debts to banks. In both contexts, the out-of-court mechanism provides a period of suspension of enforcement actions, while the Code of Conduct can formulate more customised solutions and gives the debtor the right to make a counter-proposal to the creditor's proposal.

The advantages of settling debts to public bodies through the out-of-court mechanism (in the context of a bilateral restructuring agreement) can be summarised, in particular, as follows:

α) The proposal for a settlement resulting from the calculation tool, which takes into account the debtor's income and assets (the real estate in NFI values), as well as his expenses and the working capital needs of the company, must be accepted by the public bodies.

b) Monthly repayment instalments can reach 240 (20 years).

(c) The interest rate of the arrangement is fixed at 3 % throughout its duration.

(d) The arrangement may, depending on the repayment capacity of each debtor, include the cancellation of surcharges, interest, fines and even basic debt (but not basic debt from withheld and imposed taxes or insurance contributions).

2. A joint stock company owes large amounts to the State (mainly VAT) and banks. Its legal representative lacks personal property. The value of the company's assets is, in relation to the amount of its debts, quite low and the company is labour-intensive.

In this case, the possibility of filing for bankruptcy on behalf of the company could be discussed, with a parallel discharge of the representative from the debts that he personally incurs as a result of representing the company (Article 195 of Law 4738/2020). Under this arrangement, the respective representative is exempted from joint and several liability for debts to the State and the Social Security Fund of the company that arose 3-5 years before the declaration of bankruptcy (unless an appeal is filed by anyone with a legal interest against the exemption). Similarly, if there are also debts due to guarantees (for loans, e.g. to financial institutions), which are not cancelled due to the bankruptcy of the debtor company (under Article 195 of Law 4738/2020), the possibility of filing an individual bankruptcy petition could be discussed. In this case, the legal representative, after the expiry of the prescribed period (1 or 3 years), is discharged from all debts existing at the time of filing for bankruptcy, including those arising from his guarantee liability. Therefore, even the day after the bankruptcy he can start a new business activity and any new property will be shielded from his old creditors (with the exception of a part of his annual income if it exceeds a legal limit and for the specific period of 3 years until the discharge). Applying to join the out-of-court mechanism is probably not an appropriate option since the largest share of the debts to the State relates to imputed taxes (VAT), which cannot be written off.

3. A public limited company has high debts to banks, the Social Security Fund and the State. The value of its assets is significant but lower than its debts. Its legal representative has personal property of considerable value.

The appropriate solution for the individual and the company is that of an out-of-court mechanism or reorganisation. The choice of the most appropriate institutional framework of the two will depend, inter alia, on the amount of debts owed to the State/FKA in relation to that owed to the financial institutions (e.g. under the out-of-court mechanism, basic VAT, FTT and social security contributions cannot be written off, whereas under the reorganisation procedure this is possible; under the reorganisation procedure, a clause can be agreed on the write-off of debts arising from future tax audits and on the write-off of undisclosed credits, whereas this is not foreseen under the out-of-court mechanism). The reorganisation procedure is suitable for larger companies with tailor-made settlement needs, whereas the out-of-court mechanism offers more horizontal solutions with the only possibility of bundling the debt into monthly payments (e.g. the out-of-court mechanism does not provide for advance payments - only recently the advance payment of 10% of the principal to be received by the 'lead' creditor in case of impending auctions was foreseen - interim payments, interim transfers of assets for the repayment of debts, etc.). It should be noted, however, that in a reorganization, any write-off of debts to the State and FKA does not also benefit the jointly and severally liable persons, such as the representative of a company limited by shares, However, for those debts for which the representative is jointly and severally liable, the representative will continue to owe them with his personal property as security (unless the State/FKA agrees otherwise - Article 60(2)(a) of the Act). 3 ν. 4738/2020). However, the relevant regulation under the out-of-court mechanism is contrary to this. There, write-offs also benefit the legal representative. Also, under the out-of-court mechanism the interest rate for the settlement of debts to the State is set at 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%, while for the first 3 years of the settlement a fixed interest rate of 3% and 4% respectively is set. In the context of the reorganisation there is no specific interest rate foreseen, while in many cases debts to the State and the Social Security Fund are settled without interest, while the interest rates for settlements with financial institutions are usually lower than 3% + Eur3m.

4. A natural person holding the status of representative of a company that has been dissolved several years ago, is in liquidation and has high debts to the State and the Social Security Fund dating back more than 5 years. He owns real estate of high commercial value.

Filing for bankruptcy on behalf of the company using the possibility of discharging its representative is not an appropriate alternative in this case, as the debts date back more than 5 years from the intended bankruptcy. However, debts to the State that have been established against a legal person that has been dissolved and is in liquidation can now be settled by means of a request from its legal representative, who is also jointly and severally liable for their payment (the activation of this option by the AADE is expected in the next few days). Therefore, the legal person is not required to revive in order to submit the request itself. Therefore, the appropriate option is for the legal representative to submit a request for adjustment under the out-of-court mechanism. If there are more than one jointly and severally liable person at the time the debts were incurred, any one of them may submit the application and, in case of disqualification, any other jointly and severally liable person who wishes to do so (i.e. in addition to the one who has already been disqualified).