Legal Insight
July 2024
George Kefalas, L.LM. mult., M.Sc.
Summary: The out-of-court debt settlement mechanism under Law 4738/2020 has proven to be an extremely useful tool, especially for the settlement of debts to the State and Social Security Funds, as it allows debt settlements for up to 20 years with a fixed interest rate of 3%. However, the advantages offered to the debtor by this tool are not limited to these favorable settlement terms. Other benefits of the out-of-court mechanism, such as the suspension of enforcement measures, the deactivation of third-party seizures, and the provision of tax/social security clearance certificates, are also highly significant, especially for businesses. This article examines these "collateral" benefits of the out-of-court mechanism framework, from the final submission of the application to the commencement of the settlement's validity.
1. Introduction
As is clear, the primary consequence of submitting an application and concluding a restructuring agreement under the out-of-court debt settlement mechanism is the long-term settlement of the applicant’s debts. However, beyond this primary consequence, there are other significant effects for the debtor from both the final submission of the application and the conclusion of the settlement agreement. These include the suspension of individual prosecutions, the suspension or, under certain conditions, cessation of criminal prosecution for non-payment of debts and social security contributions, and the provision of tax/social security clearance certificates.
2. Consequences of the Suspension Resulting from the Final Submission of the Out-of-Court Mechanism Application
According to Article 18 of Law 4738/2020: "From the final submission of the application and until the completion of the procedure in any way, according to Article 16, enforcement measures and the continuation of enforcement procedures on claims, movable and immovable property against the debtor, as well as criminal prosecution for the offenses of Article 25 of Law 1882/1990 and Article 1 of Law 86/1967 concerning the debts for which settlement is sought, are suspended."
Based on this provision, the final submission of the out-of-court mechanism application results in the following:
- Suspension of enforcement procedures on the debtor’s claims, movable, and immovable property.
- Suspension of criminal prosecution for the offenses of non-payment of debts and social security contributions.
According to Circular E.2065/2022 of the Independent Authority for Public Revenue (AADE), this suspension also applies to those who are jointly liable with the debtor.
Three specific issues need clarification regarding this suspension:
a) Seizures in the hands of a third party imposed before the final submission of the application: The final submission of the out-of-court mechanism application does not suspend the seizure in the hands of a third party imposed by the State/Social Security Funds for the debts for which settlement is sought, even for future claims that are subject to seizure, if the seizure was imposed before the application submission. For example, if the State has imposed a seizure in the hands of a tenant for rent payments, the tenant will continue to pay the rent amounts to the State even after the final submission of the out-of-court mechanism application by the debtor-landlord. However, the State/Social Security Funds cannot impose a new seizure in the hands of a third party for the debts sought to be settled with the application after the final submission and thus the start of the suspension.
b) Issuance of tax/social security clearance certificates during the suspension: During the suspension under Article 18 of Law 4738/2020, the debts to the State/Social Security Funds for which settlement is sought are not in collection suspension but are overdue, and therefore the debtor cannot be issued a tax/social security clearance certificate.
c) Setoff by the State of claims under suspension with the debtor’s counterclaims: The final submission of the out-of-court mechanism application does not affect the State's right to perform an ex officio setoff of its claims, for which settlement is sought, with the debtor’s counterclaims against the State.
3. Consequences of Concluding a Debt Restructuring Agreement
As mentioned in the introduction, the primary consequence of accepting the debt restructuring agreement, which is also the main objective of the applicant, is the settlement of the debtor’s obligations. However, the agreement also has other important effects, such as:
a) Suspension of enforcement measures and continuation of enforcement procedures on the debtor’s claims, movable, and immovable property.
b) Deactivation of third-party seizures imposed by the Tax Office Director.
The law stipulates that if the debtor has paid the first installment of the settlement, settled other non-included debts, and submitted the necessary tax declarations, they can request that third-party seizures do not cover future claims. This is a "deactivation" rather than a "lifting" of the seizures, meaning that already existing claims are not affected.
c) Suspension of criminal prosecution for the offense of non-payment of debts to the State and social security contributions, and postponement or interruption of sentence execution if imposed. For debts to Social Security Funds, Article 8 of Law 4997/2022 applies, stating that criminal prosecution is suspended, and the file is archived.
d) Issuance of tax and social security clearance certificates for the debts included in the settlement. As stated in Article 23 of Law 4738/2020, the out-of-court mechanism debt settlement is considered as an installment payment plan for the issuance of tax and social security clearance certificates.
The legal effects of the debt restructuring agreement apply not only to the primary debtor but also to any co-debtors, provided the settlement is adhered to.
Finally, regarding the setoff of State claims with the debtor’s counterclaims, this is allowed normally, with a distinction depending on whether the State’s claim originated before or after the start of the debt restructuring agreement’s validity.
4. Conclusion
This article examined the additional benefits, beyond the debt settlement itself, that an individual or business can gain from applying to the out-of-court mechanism at two points in time: the final submission of the application and the commencement of the debt restructuring agreement’s validity. These benefits are significant, especially for business debtors, as they relate to criminal responsibility and the continuity of business activities, such as the fate of third-party seizures and the ability to obtain tax/social security clearance certificates.
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