Small Scale bankruptcy - Procedural requirements and definition of the petition in particular after the 2023 changes

Legal Insight

June 2024

Vasiliki Tolia, LL.M.

Introduction: The few years of existence of the Electronic Insolvency Registry, frequent legislative interventions, technical weaknesses of the platform, combined with the small number of decisions issued so far, create reasonable questions and discomfort for the attorney entering the system to file a bankruptcy application. In this article, we will try to highlight the weaknesses of the law and the system, as well as how the lawyer should act to address them and file a fully determined small-scale bankruptcy application.

1. The Competent Court by Location

1.1. According to Article 172, paragraph 2 of Law 4738/2020 (hereinafter referred to as the "Law") for small-scale bankruptcies: "The competent bankruptcy court for declaring bankruptcy is the Magistrate's Court in whose district the debtor has his principal residence, provided he does not conduct business activities as defined in Articles 21 and 47 of Law 4172/2013 (A' 167), or the center of his main interests as defined in paragraph 3 of Article 78. In case of dispute, the main residence is the one listed as the debtor's residence in the last tax return before the bankruptcy application." However, the wording in Article 78 of the Law for bankruptcies other than small-scale bankruptcies states: "1. Except for small-scale bankruptcies to which the Sixth Part of this Second Book applies, the competent bankruptcy court is the Multi-member Court of First Instance in whose district the debtor has the center of his main interests, or, in the case of a natural person without commercial status, his principal residence as derived from the debtor's last tax return before the bankruptcy application. [...] 3. The center of main interests is the place where the debtor usually administers his interests and is therefore recognizable by third parties. For legal entities, it is presumed, until proven otherwise, that the center of main interests is the place of the registered office." Finally, according to Article 1 of Presidential Decree 17/2023: "In small-scale bankruptcies, the competent bankruptcy jurisdiction lies with the Magistrate's Court with the largest number of judicial officers in the district of the Court of First Instance," while according to Article 4, paragraph 1 of Law 5108/2024: "Magistrate's courts are abolished, and the first instance jurisdiction of civil justice is unified."

1.2. As derived from the above, beyond the confused criteria of local jurisdiction, it is no longer possible to determine it solely from the provisions of Law 4738/2020. Specifically, the different wording of the law between bankruptcies and small-scale bankruptcies is unfortunate and needs to be amended. In the former, the competent court includes the one in the district where the debtor has the center of main interests, provided he has commercial status. In the latter, the competent court includes the one in the district where the debtor has the center of main interests, provided he conducts business activities. It is evident that commercial status and business activities are not identical concepts, and it would be advisable for the legislator to maintain consistent criteria regarding local jurisdiction, whether it is a small-scale bankruptcy or not. Furthermore, after Presidential Decree 17/2023, to establish jurisdiction in small-scale bankruptcies, Article 172, paragraph 2 of the Law must necessarily be read in conjunction with Article 1 of the aforementioned Presidential Decree. Even if jurisdiction is established for a Magistrate's Court based on the criteria of the above article, it may ultimately not be competent if it is not the Magistrate's Court with the largest number of judicial officers in the district of the Court of First Instance. Any discussion on the subject matter or local jurisdiction for small-scale bankruptcies is rendered moot after the imminent abolition of Magistrate's Courts, which is expected to bring further amendments to Law 4738/2020.

2. Elements of the Pleading – Specificity of the Application

2.1. According to Article 79, paragraphs 3 and 4 of the Law – which also applies to small-scale bankruptcies: "3. The application must state the name, surname, patronymic, trade name, Tax Identification Number (TIN), and address where the debtor has his residence or, as the case may be, the center of main interests and any secondary establishments. In an application concerning a trader, the General Commercial Registry number of the debtor must also be stated. If these details are not stated or not completed, according to Article 227 of the Code of Civil Procedure, the application is rejected as inadmissible. 4. Furthermore, the application must mention the proposed trustee with his name, surname, and address, and be accompanied by a written declaration from the proposed trustee accepting the appointment and stating that there is no impediment. Mention of the proposed trustee is not required if the application is submitted by the debtor and the application states that a proposed trustee could not be found to accept the appointment." According to Article 76, paragraph 1: "Natural persons have bankruptcy capacity. Legal persons pursuing economic purposes also have bankruptcy capacity. By the presidential decree provided for in Article 204, bankruptcy capacity may also be attributed to legal persons under private law that do not pursue economic purposes but conduct economic activities," Article 77, paragraph 1: "A debtor who is in cessation of payments, i.e., one who is unable to meet his due financial obligations in a general and permanent manner, is declared bankrupt. Payments made by fraudulent or destructive means do not constitute fulfillment of obligations" and Article 176, paragraphs 1 and 2: "1. It is presumed that the debtor of this article is in cessation of payments when he does not pay his due obligations to the State, Social Security Funds, or credit or financial institutions, amounting to at least 60% of his total due obligations for a period of at least six (6) months, provided the non-serviced obligation exceeds the amount of thirty thousand (30,000) euros. 2. Selective fulfillment of due financial obligations does not lift the cessation of payments, which can also consist of the inability to fulfill even one significant due financial obligation."

2.2. From the above, it is clear that for the specificity of the small-scale bankruptcy application, the application must include: the applicant's full name (or trade name in the case of a legal entity), patronymic, TIN, General Commercial Registry number (if it concerns a trader), address of principal residence or center of main interests, and the debtor must assert that the subjective and objective conditions of bankruptcy under Articles 76, paragraph 1, and Articles 77, paragraph 1, and 176, paragraphs 1 and 2 of the Law are met. Furthermore, the proposed trustee must be mentioned, and the accompanying documents (see below under 3.) must include a written declaration from the proposed trustee accepting the appointment and stating that there is no impediment. Mention of the trustee is not required in two cases: a) when the applying debtor cannot find a trustee to accept the appointment, and b) when under Article 178, paragraph 1 of the Law, the judge estimates that the unencumbered assets of the debtor are insufficient to cover the bankruptcy expenses, and the debtor's annual income does not exceed the amount of annual reasonable living expenses or, if higher, twelve times the unseizable amount under paragraph 2 of Article 33 of the Public Revenue Collection Code (Law 4987/2022, A' 190).

2.3. If the above details are missing from the bankruptcy application, the procedural consequence is rejection as inadmissible unless the trustee is not mentioned. In this case, the Law does not prescribe inadmissibility, but the trustee will be appointed by the rapporteur. However, Article 79, paragraph 3 in fin of the Law provides for the possibility of supplementing the pleading according to Article 227 of the Code of Civil Procedure. This is consistent with the investigative system prevailing in voluntary jurisdiction procedures, a procedure followed in small-scale bankruptcies. In any case, in small-scale bankruptcies, the platform has fields that the attorney fills out for all the elements of the specificity mentioned above, making it unlikely that an issue of indefinite application will arise.

2.4. At this point, it is worth making a specific reference to the presumptions of the law regarding the objective condition of inability to pay, which manifests externally as cessation of payments ("symptom") and is referred to in Articles 77, paragraphs 1 and 2, and 176, paragraphs 1 and 2 of the law. The presumption of cessation of payments concerning small-scale bankruptcy is found in Article 176 of the law. According to this provision, it is presumed that the debtor is in cessation of payments when he does not pay his due obligations to the State, EFKA, and financial institutions amounting to at least 60% of these obligations and for a period of at least six months before filing the bankruptcy application, provided the non-serviced obligation exceeds the amount of 30,000 euros. The criterion, however, is rebuttable, even though it is not explicitly stated in Article 176 of the Law. The argument is derived from Article 77, paragraph 2 in fin of the Law, which explicitly mentions the rebuttable presumption of cessation of payments for bankruptcies in general. The lack of specific mention in Article 176 is due to a legislative oversight. Therefore, even if, for example, the debtor's non-serviced obligation does not exceed the amount of 30,000 euros, the bankruptcy application can be accepted if the entirety of the submitted documents demonstrates an objective inability to pay.

3. Documents Accompanying the Application

3.1. If the small-scale bankruptcy application is submitted by a debtor who does not publish financial statements or does not conduct business activities, on penalty of inadmissibility, the "other supporting documents" must be submitted (see Article 174, paragraph 2 of the Law):

a) The last tax return (E1),

b) The real estate declaration (E9) – if the applicant does not have real estate, the E9 is practically replaced by printouts from Taxisnet of the fields "E9" and "property status" for at least the last two years and a declaration from the debtor that he does not own real estate. The application is accompanied by:

c) A list of all creditors – in practice, a relevant table is added at the end of the pleading,

d) A certificate from the competent tax office for the debtor's debts to the State – if the creditor is a tax office in Attica, the certificate is now issued by KEBEIS; the application is submitted electronically via myaade, and

e) A cadastral sheet or certificate of encumbrances of the debtor's real estate – if the debtor owns real estate. From the different wording between the first and second sentences of Article 174 of the Law, the following conclusion is drawn: the supporting documents mentioned in the first sentence can be supplemented if missing, under Article 227 of the Code of Civil Procedure as specifically set out above. Those mentioned in the second sentence cannot be supplemented.

3.2. If the application is submitted by a debtor who publishes financial statements and conducts business activities, again on penalty of inadmissibility, the following must be submitted (Article 79, paragraph 6 of the Law):

a) A certificate from the competent tax administration service for his debts to the State, certifying that it includes all of the applicant's certified debts, both individual and joint, as well as any tax pending issues,

b) Financial statements for the last available fiscal year if required to prepare such (very small entities generally keep: a) a summary balance sheet, b) a summary income statement, and c) an appendix), and

c) A list of details from business activities.

3.3. In any case, the application is accompanied by the debtor's consent for access to his financial data held in public or financial institution databases, as well as consent for the lifting of banking secrecy and tax secrecy.

3.4. The small-scale bankruptcy application is accompanied by a deposit slip of 250 euros from the Deposits and Loans Fund. It is not enough to submit this electronically on the platform; the original deposit slip must be submitted in the physical file of the application kept at the Magistrate's Court. The consequence of not submitting it is, similarly, the inadmissibility of the application – its absence can be supplemented under Article 227 of the Code of Civil Procedure. A deposit slip is not submitted when Article 178, paragraph 1 of the Law applies (see above).

3.5. Naturally, the attorney must also upload the prepayment from the Bar Association on the platform.

4. Publicizing the Application on the Electronic Insolvency Registry by the Debtor and Deadline for Creditor Intervention

4.1. According to Article 173, paragraph 1 of the Law: "The small-scale bankruptcy application is submitted electronically through the Electronic Insolvency Registry, where it is publicized for thirty (30) days. [...] If no intervention against the application is submitted within the time frame of the first sentence or if an intervention is submitted concerning only the appointment of a trustee, the application is accepted solely by noting the passage of time by the bankruptcy court...".

4.2. If one visits the platform of the Registry, they will notice two dates: a) the start date of the bankruptcy application and b) the submission date. It is also a fact that especially after the aforementioned Presidential Decree 17/2023, these two dates may be more than a week apart. This particularly happens at the Athens Magistrate's Court, where court clerks now have to handle a very large volume of small-scale bankruptcy applications. Therefore, when the two dates do not coincide – a situation already occurring – the question arises as to which of the two dates marks the start of the 30-day deadline the creditor has to file an intervention. This, in view of Article 84, paragraph 2 of the Law, according to which: "Wherever in this law publication, publicity, or registration is provided, unless otherwise explicitly provided in the relevant provision, it means registration in the Electronic Insolvency Registry of Article 213."

4.3. Although to date we are not aware of any decision containing a judgment on this issue, it is more correct – and logically – to accept that the 30-day deadline starts from the second date, i.e., from the date of submission of the application. Practically, the deadline starts from the date the court clerk registered the application by issuing a filing act and assigning a general registry number (GAK) and a special registry number (EAK). Otherwise, the creditor loses days from the thirty-day period, as the application is not visible to creditors until it has been assigned a GAK/EAK.

4.4. From the same above point in time, the 60-day deadline for filing briefs under Article 177, paragraph 3 of the Law should be understood to start if a main intervention by a creditor has been filed (otherwise, no briefs are filed, the application is accepted, and either a trustee is appointed – Article 173, paragraph 1, sentences d and e – or the Court orders the registration of the debtor's name or trade name in the Registry – Article 178, paragraph 1).

5. Filing of a Main Intervention by a Creditor and Deadline for Service to the Debtor

5.1. According to Article 177, paragraph 2 of the Law: "Interventions are submitted electronically to the Electronic Insolvency Registry. If main interventions are filed timely, copies of the procedural documents are submitted in printed or electronic form to the competent Magistrate's Court by the most diligent party. A copy of the intervention is served by the intervenor within ten (10) working days to the other parties."

5.2. The wording of the Law is problematic as it does not clarify whether the 10-day deadline starts: a) from the filing of the main intervention or b) from the expiration of the thirty-day deadline of Article 173, paragraph 1 of the Law – similarly problematic was the previous wording of the provision which provided the same deadline for serving the intervention instead of the bankruptcy application in case of a main intervention.

5.3. According to the prevailing and correct view in case law, the above ten-day deadline starts from the second point in time. This is because if the first solution were followed, there would be a risk that in the case of multiple main interventions filed on different dates, the deadline would start from different points (see among others, Eir.Patr. 8/2022 referring to Eir.Chan. 650/2021).

Conclusion: The legislation related to bankruptcy and specifically to small-scale bankruptcy indeed presents shortcomings, primarily of a procedural nature. Some of these were presented above; however, an exhaustive presentation of them would exceed the purpose of this article. Frequent legislative interventions seem to intensify the ambiguities of the legislator. Therefore, our Courts' case law is called upon to provide the solution with the correct interpretation of the relevant provisions.