The new and highly updated Bankruptcy Code (Law 4738/2020, Government Gazette issue A 207/27-10-2020) as voted by the current Greek Parliament brings about critical changes in the bankruptcy process, as we know it and have been enforcing it, from 01.01.2021. The new bankruptcy law, titled “Debt Settlement and Provision of a Second Chance” offers a new dynamic, and only case law and practice will show if it meets the market conditions of this decade. The legislative text attempts, without a doubt, to include all the terms of modern technology, as well as the new instrumenta of the legal science, to the already established process of bankruptcy.
BOOK ONE: Prevention of insolvency
First things first, it is worth mentioning that the purpose of the provisions of the new Bankruptcy Code is the enactment of a debtor access procedure to clear and transparent timely warning tools (insolvency warning), which can identify circumstances that could lead to insolvency (commonly referred as bankruptcy proceedings), and to point out to the debtor the need for immediate response. It is already understandable that the legislator choses the personalized warning, before the insolvency of the debtor, as another Prometheus who favors the early warning over the ex-post settlement of the debt. Early warning is provided by all modern means and legal instruments that technology has to offer, such as the electronic warning of the debtor through a special platform, but also the consulting services from the Borrower Service Centers (KEYD) and other Professional Bodies (Professional Chambers, Associations, Institutions of Institutional Social Partners). At the same time, the debtor maintains full access to information on restructuring and debt relief measures through the website of the Special Secretariat for Private Debt Management.
Secondly, the new Bankruptcy Code introduces “smart” warning mechanisms for the debtor, consisting of a three-level insolvency risk, 1) Low Risk, 2) Moderate Risk, 3) High Risk, for individuals and legal entities. The aforementioned action may be considered as a steady step of the legislator towards the modernization of the bankruptcy process. The electronic mechanism is provided and implemented through a digital platform, upon request by the interested party.
Thirdly, special insolvency prevention procedures -under a precautionary framework – are introduced, like the extrajudicial settlement of monetary debts to financial institutions, to the State and Social Security Institutions. The extrajudicial settlement aims to provide participating creditors with a functional environment for formulating debt settlement proposals and avoiding the risk of insolvency, at the debtor’s request or by his own initiative.
Fourthly, the scope of the new Bankruptcy Code includes any individual or legal entity with bankruptcy capacity, with the exception of investment service providers (domestic or foreign), the Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds, credit and financial institutions (domestic or foreign operating in Greece), insurance or reinsurance companies. Individuals or legal entities of which at least 90% of their total debts are due to one (1) financial institution or their total debts do not exceed the amount of ten thousand (10,000) euros are not included in the new Code. Plus, inclusion in the new Bankruptcy Code is not compatible with persons who have been dissolved or liquidated or have already submit an application before the competent courts for inclusion in law 3869/2010, unless the persons in question have already waived these proceedings by the date of submission of the application for inclusion in the out-of-court debt settlement procedure.
Fifthly, the application for out-of-court debt settlement is electronically submitted by the debtor to the Specialized Secretariat for Private Debt Management (E.G.D.I.X.) using the Electronic Extrajudicial Debt Settlement Platform of article 29 of the new Bankruptcy Code. The data of the debtor are kept for three (3) years from the end of the execution of the restructuring contract. In case of not reaching a restructuring contract, the data will deleted from the electronic file of E.G.D.I.X, three (3) years after their submission.
Last but not least, the consolidation process is a new platform in the collective pre-bankruptcy process, which aims to maintain, utilize, restructure and rehabilitate the business by ratifying the consolidation agreement provided that the principle of non-deterioration of the position of creditors is met. A key innovation is the ability of debtors, to settle their debts, before the main bankruptcy process, through the pre-bankruptcy process, under the conditions of debt sustainability on the one hand and the restructuring agreement with creditors up to 240 installments or 20 years, on the other hand. The whole process moves through the electronic out-of-court settlement platform, setting the creditors from the insecurity and inconvenience of the conciliation in-person, as restructuring proposals are now made with automated tools.
BOOK TWO: BANKRUPTCY
The second book of the new Bankruptcy Code regulates the collective satisfaction of the debtor’s creditors with the liquidation of the debtor’s entire property or individual operating units or individual assets and the return of the means of production to potentially productive use as soon as possible. Individuals have bankruptcy capacity. Legal entities that pursue a financial purpose also have bankruptcy capacity (Article 76 of Law 4738/2020). In addition, insolvency can be attributed to legal entities governed by private law who do not pursue an economic purpose but are engaged in an economic activity. The innovation introduced by the new Bankruptcy Code regarding the responsibility of the members of the administration of the bankrupt legal entities lies precisely in the exemption of the directors of the bankrupt legal entity, within three years from the bankruptcy application or two years from the declaration of bankruptcy. The consequence of bankruptcy is the deprivation of personal rights, which are provided by special provisions of law and not the deprivation of the license to practice a profession (introduction of the term “second chance”)
The competent Bankruptcy Court is the Multi-Membered First Instance Court, in the district of which the debtor exercises his main interests, or, in the case of an individual without commercial status, his main residence, as it results from the debtor’s last tax return before filing for bankruptcy.
Bankruptcy is declared at the request of one or more creditors with a legal interest, as well as at the request of the First Instance Prosecutor, if this is justified by reasons of public interest, or at the request of the debtor. When the application is submitted by a creditor or creditors of the debtor, representing at least thirty percent (30%) of the total claims against the debtor, including guaranteed creditors representing at least twenty percent (20%) of the debtors and, if it is a business and not a small object bankruptcy, it may contain a request for the sale of all the assets of the business or its individual operating units in accordance with the procedure of Articles 157 et seq. When applying for bankruptcy without submitting the request of the preceding subparagraph, a creditor or creditors of the debtor may submit an additional intervention with a request for the sale of all the assets of the enterprise or its individual operating totals, provided that at least thirty percent (30%) of the total claims against him are represented, with the exception of related party claims of the debtor, in the meaning of Annex A’ of Law 4308/2014 (A’ 251), which includes guaranteed creditors representing at least twenty percent (20%) of the debtors.
It’s noteworthy that from the declaration of bankruptcy the creditors’ claims cease to produce legal or contractual interest and overdue surcharges. However, the cessation of interest rates does not apply to co-debtors and guarantors. In addition, from the declaration of bankruptcy, all the individual prosecution measures of the bankrupt creditors against the debtor are automatically suspended in order to satisfy or fulfill their bankruptcy claims. In particular, the commencement or continuation of enforcement proceedings, the exercise of declaratory or counter-litigation actions, the continuation of legal proceedings against them, the exercise or adjudication of legal remedies, the issuance of administrative acts, or their execution on elements of bankruptcy assets, including of the measures of administrative execution by the State and the Social Security Institutions, as well as of the measures of securing the debt, according to article 46 of law 4174/2013 (A’ 170), are forbidden.
INSTRUMENTS OF BANKRUPTCY
The instruments of bankruptcy are : a) The Bankruptcy Court, b) The Rapporteur-Judge, c) The Bankruptcy Trustee and d) The Assembly of Creditors. The declaration of a creditor claim is made within three (3) months from the publication of the bankruptcy declaration in the Electronic Solvency Register.
The fees and rights of notaries, lawyers, bailiffs and land registrars for any contract or legal action related to the bankruptcy proceedings of Chapter A of Part 5 of Book Two, the extrajudicial settlement of debts of Chapter A’, of Part Two of Book One, the consolidation of Chapter B of Part Two of the Book One, or the exercise of the right of par. 4 of article 219 are limited to thirty percent (30%) of the legal amount of money. Each transfer of assets is governed by provisions concerning universal succession without the acquirer being liable for any obligation of the debtor or group credit, unless to the extent expressly stated in the terms of the relevant legal act. The assets are transferred in their entirety, free from any burden or right of a third party. Finally, the special arrangements for small object bankruptcies with the simplified procedure of the new Bankruptcy Code are of particular interest. The competent Court for the declaration of bankruptcy is the Magistrates’ Court of the debtor’s main residence, while also electronic filing of the Electronic Solvency Register is necessary.
TERMINATION OF BANKRUPTCY
Bankruptcy is terminated by the sale of all assets and the distribution of the proceeds of the sale to creditors, but also by the cessation of operations due to lack of assets in accordance with paragraph 1 of Article 191 or due to the expiration of the specified time, in accordance with par. 3 of article 191 or due to the repayment of all bankruptcy creditors in the capital and interest until the declaration of bankruptcy. Termination of bankruptcy due to repayment of all bankrupt creditors is a reason for revival of the legal entity in accordance with the provisions of Company Law.
SPECIAL CRIMINAL PROVISIONS
Furthermore, specific criminal offenses are currently being re-introduced. The bankruptcy/failure of Article 197 of the new Bankruptcy Code is one of them. According to the provision: 1) Punishment of imprisonment of two (2) years and a fine is accorded to anyone who, during the suspicious period as determined by the bankruptcy decision according to par. 2 of article 81 or even six (6) months before or after the declaration of bankruptcy at any time: a. disappears or parasitizes his assets that in case of bankruptcy fall into the bankruptcy assets or in a way that is contrary to the rules of prudent financial management of the business he exercised, cancels the fulfillment of the obligations of third parties, damages or renders them worthless, b. prepares loss-making or for-profit or risk-taking legal acts of all kinds, even on financial derivatives, in a manner contrary to the rules of prudent financial management, or spends excessive amounts in games, bets or uneconomical expenses or incurs debts for them, c) procures goods or securities on credit, which, or the things it manufactures with them, possesses or concedes at prices substantially below their value, in a manner contrary to the rules of prudent financial management, d) falsely claims to be a debtor of others or acknowledges non-existent rights of third parties, e) fails to keep the mandatory business books or keeps them in such a way or changes them, so that it is difficult to determine the status of his property or does not submit tax returns or other property declarations (eg “where you came from”) in accordance with the law, f) destroys, conceals or damages his commercial books or other data or paralyzes the existence of commercial books or other data, the observance of which is obligatory by law, before the expiration of the deadline to maintain them , in order to make it difficult to determine the status of his property, g) contrary to the law, i) omits the preparation of the balance sheets or the inventory according to the law or ii) prepares balance sheets or inventory in a way that makes it difficult to determine the status of his property , or h) reduces the status of his property in another way or hides his true legal relations. Failure to provide assistance and the required information by the debtor or, in the case of a legal entity, by its representatives, in accordance with the procedure of this law is punishable by imprisonment of at least six (6) months or a fine.
At the same time, the criminal liability of third parties is regulated in articles 199 et seq. such as individuals, but also the spouses, cohabitants, as well as relatives of the debtor (descendants and relatives of the debtor and close relatives).
A new incorporation is that of article 204 of the new Bankruptcy Code, where a Presidential Decree issued by the Ministry of Finance can attribute bankruptcy capacity legal entities of private law that do not pursue an economic purpose but carry out economic activity, according to article 76.
The added value of the electronic means mentioned in the introduction could not leave unaffected the legal content of the new Bankruptcy Code, as special provisions are being introduced (Articles 212 et seq). They implement the electronic means of communication referred to in Article 28 of Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on a framework for preventive restructuring, debt relief and disability or fallen debtors, as well as measures to improve their procedures, while amending the Directive (EU) 2017/1132 (Restructuring and Insolvency Directive).
The procedures of the new Bankruptcy Code are assisted, as specifically defined, by electronic means of communication and data exchange. These electronic means are the following: a) The Electronic Solvency Register, b) the Electronic Platform for Out-of-Court Debt Settlement of article 29 of the present and c) the Integrated Judicial Case Management System of Civil and Criminal Justice (IACS).
Finally, although not of lower real and legal value, there are special provisions for vulnerable debtors. A “vulnerable debtor” is the debtor, in whose face the income, property and other criteria that apply in accordance with Article 3 of Law 4472/2017 (A’ 74) are cumulatively met. A “Certificate of a vulnerable debtor” certifies that the debtor is vulnerable in accordance with paragraph A and that his property, which is identified in the certificate hereof, constitutes his main residence. The vulnerable debtor can apply for the transfer or lease of his main residence for 12 years (Article 220 of the new Bankruptcy Code) to an acquisition and re-leasing body. If the debtor pays all the rents for the duration of the lease, he can exercise the right of repurchase and obtain it for a repurchase price that will be determined in accordance with the decision of par. 3 of article 225 of the new Bankruptcy Law.
INSTEAD OF EPILOGUE
The new law 4738/2020 protects the vulnerable social groups and their core residence with special provisions, both in the program of preventive debt restructuring and in the program of bankruptcy / liquidation of the debtor’s property. In particular, at the stage of the extrajudicial debt settlement mechanism, the “first residence” loans are subsidized, a constant request of the production factors and the unions, but also at the stage of bankruptcy or auction, there is the possibility of purchase of the first residence by a special body, providing the citizen a 12-year lease and the obligation of its resale to him, if the latter recovers financially.
The settlement of debts of small entrepreneurs and households to the state (AADE), insurance funds (EFKA), banks and third parties is now up to 20 years or 240 installments for the State. If the debtor is considered vulnerable under the aforementioned provisions of the law, his first residence is secured and protected by the State.
From now on, the application for out-of-court debt settlement will be electronically submitted to the Special Secretariat for Private Debt Management (http://www.keyd.gov.gr/), while through the bankruptcy code it is possible, in addition to bankruptcy, the provision of a second opportunity. This second opportunity comes with the write-off of the balance of the debts, after the liquidation of the entire property and the control of the property situation in harmonization with the Directive (EU) 2019/1023. In addition, the liability of the members of the administration of bankrupt legal entities is limited in time, with liability for 3 years from the bankruptcy application or 2 years from the declaration of bankruptcy.
Overall, the new Bankruptcy Code establishes innovative and friendly procedures, which bring a wind of renewal to the long-suffering bankruptcy law of the country, while at the same time modernizing the institutional framework and offering modern electronic procedures. However, only business practice and case law will prove the added value of the new Bankruptcy Code and whether this wind eventually brings the debtor’s ship to the windward side or drives it to sail out of control.
Author : Anastasia K. Nikolopoulou. LLB, MSc, Associate at NTOGIAKOS & ASSOCIATES – LAW OFFICE