The discharge of traders from their debts under the new provisions of the Bankruptcy Code

Legal Insight

January 2019

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

Summary: At the end of 2016, the Greek Parliament passed an amendment to the Bankruptcy Code regarding the institution of the discharge of traders from their debts.  At the end of 2018, with a new law, it confirmed its intention to give a second chance to entrepreneurs. This note analyses the key points of this regulation and highlights the practical changes to the previously existing regime. 

We had previously (early 2014) written an article in Capital.gr on the issue of "second chance" in bankruptcy. At that time, this concept was still unknown in Greek law. No legislative initiative had been taken to ensure that the bankrupt was actually given a second chance. The poor man, moreover, according to the old legislative and social views, was a stigmatised trader, unacceptable to the state for resuming economic activity. The European Union, however, intervened. On the basis of studies, mainly economic ones, which put another dimension on the issue, it recommended that Member States should adopt provisions giving the poor man a 'second chance', a chance to re-enter the market and, taking advantage of his experience of past mistakes, to develop himself and the local economy with him. The economic studies available to the relevant EU legislative bodies gave the impression that, because of the inability to reactivate the poor, the economies of the Member States were deprived of experienced members of the local economic life and therefore of effective development actions. This is because most of the time the trader who has failed once has acquired the knowledge and experience to avoid a second failure. This was vividly described by the European Commission in a relevant document as follows: "The consequences of bankruptcy, in particular the social stigma, legal consequences and the continuing inability to repay debts are important disincentives for entrepreneurs wishing to set up a business or take a second chance, even if the evidence suggests that entrepreneurs who have gone bankrupt are more likely to succeed in their second attempt."

In this context, in December 2016, the Greek legislator adopted the above rationale by incorporating the relevant provisions into Chapter 11 of the Bankruptcy Code, which is entitled "The discharge of the debtor natural person". In simple terms, the following are provided for:

1. The bankrupt (i.e., the bankrupt trader) may be discharged from all his debts that could not be satisfied from the bankrupt's estate either after the expiration of two years from his bankruptcy or after the termination of his bankruptcy (whichever comes first), provided that (a) the bankruptcy is not due to his fraudulent actions and (b) he shows good faith in the declaration of bankruptcy and its duration and a willingness to cooperate with the bankruptcy institutions. It is not possible to discharge persons who have been convicted of bankruptcy offences or of the felony forms of the crimes of theft, fraud, embezzlement or forgery. Only natural persons who have had a sole proprietorship and not legal persons or any representatives of legal persons (limited liability companies, limited liability companies, limited liability companies, etc.) are exempt, subject to the following paragraph for guarantor shareholders/partners.

2. Facts that the court will take into account in order to examine the good faith and honesty of the bankrupt, so that it can finally proceed to discharge him in case of a finding of such, are, among others, the nature and amount of the debts, the time of their creation, the efforts of the bankrupt to repay his debts and comply with his obligations, including his obligation to keep proper accounting records, and any actions taken by the bankrupt to obstruct the efforts of creditors to obtain satisfaction of their claims. In general, the court will accept the discharge of the bankrupt when the bankruptcy is caused by a rapid change in economic conditions (financial crisis), a commercial accident which cannot be attributed to fraudulent action (e.g. (e.g. fire), serious family problems, such as illness, which caused him to incur substantial expenses affecting his commercial activity, and other circumstances which were unforeseeable, not due to his fault and which led to his bankruptcy. 

3. It is the bankruptcy court that will decide whether the bankrupt deserves to be discharged, i.e. whether he deserves a "second chance", on the basis of the facts before it, in particular the report of the bankruptcy trustee, the evidence provided by any creditors of the bankrupt and, of course, the evidence provided by the bankrupt himself. 

4. If the court agrees to discharge the bankrupt, any claims of his creditors that have not been satisfied from his bankruptcy estate, i.e. his property before the declaration of bankruptcy (due to the fact that it has not been sufficient), are deleted. As a result, these creditors can no longer take legal action against him and it is therefore possible for him to acquire new property in his own name (and by accepting an inheritance) without fear of prosecution.

In fact, at the end of 2018, the Greek Parliament confirmed its intention to give a second chance to businessmen who lack any assets with the following regulation: any trader who lacks any assets can now apply to the bankruptcy court and request to be exempted, even though he cannot file for bankruptcy due to the lack of sufficient assets to start the bankruptcy proceedings. Therefore, even if he is not bankrupt, he can benefit from the benefit of the write-off if he applies and waits for a period of 3 years for the discharge to be granted (see the relevant recital: In this respect, the possibility of a second chance is provided for natural persons who, in the absence of bankruptcy assets, cannot go bankrupt and both themselves and third parties who have a business relationship with them remain in a permanent state of insolvency. In this case, the debtor should certainly be declared bankrupt after three years have elapsed since the registration of his name or business name in the General Register of Companies and in the bankruptcy registers. The aim is to reactivate those entrepreneurs who, despite their honest efforts, have failed to escape 'commercial death'.)

The legislative framework in question also provides an important way out for general partners and shareholders of limited liability companies - partners of limited liability companies (and partners of commercial companies in general) who had guaranteed with their personal property the loans of the companies. As regards the general partners in the first place, the bankruptcy of the company results in their own bankruptcy. Under the previous legal regime, the debts of the company would have followed the general partner even after the end of his own bankruptcy, with the result that he would practically never again be able to acquire property in his own name. Similarly, however, as regards the shareholder of a limited liability company (whether or not he was a member of the board of directors), or the partner of a limited liability company who had guaranteed the company's debts more than once, especially as regards the banking institutions which most often required the corresponding guarantees. In many of these cases, and depending on the specific circumstances of each case, it is accepted that the shareholder/partner may be bankrupt because of the acquisition of commercial status as a result of the successive guarantees and the direct financial benefit he expected to derive from them. This means that under the above mentioned exemption procedure, once he has become bankrupt and his personal assets have been sold, he can regain the possibility of holding assets in his own name without fear of persecution by the creditors of the company against which he had guaranteed. In simple terms, since, on the basis of the guarantees he has given, he expects to lose his personal assets anyway, it is advantageous for him to try to discharge all his debts under the present procedure, so that, at the end of the procedure, he will be able to resume his commercial activity by starting afresh or simply to be able to acquire assets in his own name again without fear of further prosecution.

Until now, moreover, anyone who has been bankrupt several times has continued to trade through relatives, foreign companies, etc. In other words, while all his assets had been used to pay off his creditors before the declaration of bankruptcy, he would start again from scratch, perhaps even acquiring new assets from the profits of his new business. However, in order to shield his new assets from his old creditors, he was practically obliged to conceal them artificially through third parties and elaborate legal constructions. Even in the case of succession, he was obliged to make a divestiture within four months in favour of his usually related persons (children, brothers, sisters, etc.). Now, following the new changes in the legislative framework, he no longer needs to feel like an outsider, hunted and moving through virtual schemes and surrogates. He can have property back in his name, he can do business under his name again, he can regain a place in the commercial life of the country, provided that he has been an honest businessman and that this is proven in court.