April 2023

Decision of the Athens Court of Appeal on the Application of the 2nd Chance for Debts of approximately 8.5 million Euros

The Athens Court of Appeal issued decision No. 737/2023 on an appeal against a decision ordering the registration of the name of a natural person in the Bankruptcy Register and in the General Commercial Register, rejecting at the same time the request to declare him as a relative, under the previous Bankruptcy Code (Law No. 3588/2007). It is noted that, under the previous legal regime, as it was established before the publication of Law No. 4738/2020, the discharge of the debtor natural person from his debts was subject to the expiry of three years from the registration of his name as described above and his declaration as a debtor, upon submission of a request. Therefore, in this particular case, the debtor in question requested in April 2019 the declaration of bankruptcy, otherwise the registration of his name in the above-mentioned Registers, with the ultimate aim of discharging him from debts arising from the systematic provision of guarantees for the financing needs of his business, which exceeded €8,550,000.00. At the same time, the debtor in question submitted, by the same application, a request for a declaration of being a debtor in absentia before the Athens Court of First Instance. The court of first instance held that the applicant had acquired commercial status as a result of the granting of the above guarantees, indirectly benefiting from them, and that he had become permanently and generally unable to meet his obligations, but did not declare him bankrupt because his assets were insufficient to cover the costs of the proceedings. Subsequently, the court, after ordering his name to be entered in the relevant registers, examined and rejected his application for a declaration of being a debtor in debt, holding that: 'it was not proved that he was in good faith in the management of his property, nor did he plead or show that special reasons existed in his person which would justify his being declared a relative, such as a commercial accident, which cannot be attributed to his fraudulent conduct, or to a serious illness which caused him to incur substantial expenditure of money and affected his commercial activity, and other circumstances which were unforeseeable ... , but on the contrary, it has been established that the applicant has been trading in bad faith, given the amount of the debts which have finally accumulated, which is totally disproportionate to the size of the applicant's assets, and the breaking of any logical link between the two simply confirms what has been said above'. 

The debtor appealed against that judgment, in so far as it dismissed his application for a declaration of innocence. At the same time, already at the time the case was discussed before the court of first instance (September 2021), the new Bankruptcy Code (Law 4738/2020) had come into force, under which the debtor's discharge is automatic, i.e., it is independent of the previous declaration of the debtor as a debtor-in-possession. Pursuant to the relevant provision (Art. 192 of Law 4738/2020), after thirty-six (36) months from the registration of the debtor's name in the Electronic Solvency Register, the debtor is fully discharged from any debt, unless an appeal against the discharge is filed within the aforementioned period by anyone with a legitimate interest. Therefore, under the new law, a prior declaration of the debtor's insolvency is not required. In other words, the lack of a relative is no longer a condition for discharge but, in practice, a reason for excluding it after an appeal has been lodged. As noted by the Athens Court of Appeal in the case in question: 'The basic criterion for the bankruptcy court to decide on the appeal, except in the case of a plea that the bankruptcy is due to fraudulent actions of the debtor, is the investigation of professional good faith, honesty, morality in his conduct and transactions throughout the proceedings and compliance with the principles of good faith and morality, as required by common law. [...] In other words, these are criteria similar to the concept of 'excusable', which is, however, being abandoned in principle as a concept and procedure and which will now be referred to the courts only if an action is brought by one of the creditors in conjunction with other criteria laid down in the above provisions'. 

Given that, in this particular case, the bankruptcy petition of the debtor in question had been filed under the previous regime (April 2019) and had been discussed (September 2021) and rejected (March 2022) after the entry into force of Law no. 4738/2020, the Court of Appeal undertook an examination of the transitional provisions of the new law to determine the law that should be applied with regard to the issue of discharge. As already noted, under the old Bankruptcy Code, discharge was conditional on the debtor being declared insolvent, whereas under the new Code, it is self-executing and therefore independent of the relevant judgment. The debtor in question filed his application in 2019, and his cumulative request for a declaration of insolvency was rejected, pursuant to the relevant provision of the old Insolvency Code. The appellate court, in this context, held that: "... Articles 162 to 167 of Law No. 3588/2007 ... are maintained after 1-3-2021 otherwise after 1-7-2021 only with regard to bankruptcies already declared. Whereas in the case of bankruptcies which, at the request of the bankrupt, have been dismissed for lack of assets, pursuant to para. 4 of Article 3 of Law No. 3588/2007 before the entry into force of the new law but after 1.1.2019 is not applicable even by analogy as any relevant further proceedings are now subject to Articles 192 to 194 and 196, on the basis of which the legality or otherwise of any related claim will be decided. Thereafter, the Court of Appeal concluded that: '... already at the time of the hearing of the above application on 29-9-2021 and in any event at the time of the hearing of the appeal under consideration, the provision of Article 167 of the former PC has been repealed and there is no possibility of investigating the possibility of declaring the bankrupt as a relative in the event of rejection of his relevant application for bankruptcy in the absence of assets, either at the time of filing the petition or at a later stage, as the relevant procedure is governed by Articles 192 et seq. of the new Bankruptcy Code of Law 4738/2020 as in force on the basis of the transitional provision of Article 263 par. 5 thereof, which expressly states that it governs the present dispute. [...] Therefore, the Court of First Instance, which in the judgment under appeal considered the relevant claim to be lawful by applying by analogy the provision of Article 162 of the old Civil Code and then rejected it on the merits, erred in that judgment. Accordingly, the appeal should be allowed on the assumption of the appellant's sole ground of appeal and the appeal should be disposed of only in so far as it dismissed the petitioner's application for a declaration of innocence as being devoid of merit and, having reserved the case as to that part for consideration on the merits, that application should be dismissed as being devoid of merit and without any specific ground of appeal, since its rejection on the above ground would constitute a different operative part of the application and would lead to the creation of a different precedent for the appellant ... '. 

In this way, the Court of Appeal, by identifying the applicable law in the case in question, relieved the debtor in question of the negative judgment of the court of first instance concerning his failure to be declared a debtor in debt, which, under the new legal regime, is legally irrelevant, at least at the stage of automatic discharge. Consequently, the debtor in question may, as a result of the favourable judgment of the court of appeal, claim, after three years from the registration of his name, to be discharged from the debts in question; the judgment of first instance declaring him not to be a debtor will not become a precedent in the context of a possible action by creditors against the intended discharge. On the contrary, the relevant issues will be decided anew before the judge who will be called upon to rule on the relevant appeal, if it is indeed brought.