The Second Chance of Entrepreneurs through the draft of the New Bankruptcy Law: 9 questions and answers

Legal Insight

September 2020

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

Republished from Euro2Day

The "Second Chance" of Entrepreneurs through the draft of the New Bankruptcy Law: 9 questions and answers

A few days ago, the draft law on the "Debt Settlement and Second Chance Code" was put to consultation. One of its important provisions concerns the so-called "second chance" of debtors, i.e. their ability to make a new "clean" start. In this note we will try to highlight the key points of the Bill in this respect, in relation to the current law, through 9 question and answer questions.

1. Is the institution of "second chance" proposed for the first time in Greek law?

No. Substantive adoption of the institution took place for the first time in 2016, when the possibility of providing the trader-debtor with a "second chance" was provided for through the institution of "discharge of the debtor natural person" of the Bankruptcy Code. In fact, in 2018, these provisions were amended in a more favourable way (Law 4549/2018). It is a reality, however, that, the proposed regulations make it easier to discharge the debtor. 

2. Who decides on the debtor's discharge?

The discharge, i.e. the "cancellation" of the debtor's debts, under the draft law is automatic (as of right) after the expiry of 3 years from the bankruptcy, unless a creditor files an appeal opposing it; in this case, the court ultimately decides on the debtor's discharge or not. Under the current regime, it is up to the court to decide, taking into account all the information at its disposal, whether or not to discharge the debtor following a specific request submitted by the debtor to the court after the expiry of the discharge period. Exemption therefore requires a new application to the court by the debtor, an obligation which is removed by the present draft law. The adoption of the 'automatic discharge' was proposed by the European Commission as early as 2014: 'After the end of the discharge period, entrepreneurs should be discharged from their debts without having to go back to court in principle'. So on this point, the proposed regulation modifies the current legal framework to the benefit of the debtor.

3. How many years after bankruptcy does the discharge come?

The discharge under the draft law comes 3 years after bankruptcy, provided the debtor has no property in his/her name (however, if the debtor contributes assets of significant value to the bankruptcy estate, such as his/her home, the discharge period is reduced to 1 year). Under the current legal framework, the discharge can be obtained at the request of the debtor after 2 years from the declaration of bankruptcy. In practice, the two arrangements are rather identical in terms of timing since under the current law, after 2 years of bankruptcy the debtor has to apply to the court and a decision has to be issued (a procedure which, depending on the Court of First Instance, may take more than one year), whereas under the proposed plan the discharge comes automatically after 3 years of the bankruptcy decision. 

4. What are the obligations of the bankrupt during this period of discharge?

During these 3 years of the discharge period, the bankrupt will be obliged, under the draft bill, to pay to his creditors a part of his annual income that exceeds his reasonable living expenses. It should be noted at this point that no such obligation currently exists for the exemption of traders. The proposed regulation incorporates a similar provision in the European Directive (which refers to a 'repayment plan'). The explanatory memorandum of the draft law bases this option on the following consideration: 'This change is proposed in order to avoid the circumvention of the bankruptcy procedure by persons who, although they have no significant movable or immovable property, have high incomes, so that, although they are poor and without sufficient assets to repay their creditors, they live richly'. Of course, the poor businessman is not expected to show income in his name as he will first wait for the exemption to be achieved before he can reactivate.

5. Is an exemption possible when the debtor has no property in his/her name and no income?

Significant use is expected to be made of this bill by business debtors who at the present time have no assets in their name but only debts. The draft law retains the possibility for a bankrupt who has no assets in his/her name to be discharged from his/her debts, provided that 3 years have elapsed since the registration of his/her name in the relevant electronic insolvency register (currently in the GEMI). The corresponding possibility was introduced in Greek law in 2018 after apt remarks in the context of a parliamentary control on the inability of traders-debtors without property to be discharged (see the question of 11/5/2018 by MP Nikolopoulos: "Businessmen who cannot proceed with bankruptcy proceedings because their business has ceased operations but has no assets sufficient to cover the costs of bankruptcy are also excluded"). Until 2018, i.e., in order to take advantage of the "second chance" institution, a businessman had to have some property in his name, which was necessary for the costs of the bankruptcy proceedings. 

6. If the debtor is not himself a trader but a shareholder or director of a limited liability company and has provided guarantees to credit institutions for lending to the company, can he be discharged from his bank debts?

Yes, he can. This is one of the major differences between the proposed plan and the current law. Since it is now proposed that natural persons - not traders, and therefore also a shareholder or board member of a company limited by shares who has provided a personal guarantee for a loan of the company - can also benefit from the "second chance" institution. Under the current regime, in order to qualify for the exemption, the shareholder or board member must be deemed to have acquired commercial status himself (and thus to have qualified as a trader himself due to, for example, the successive guarantees and the direct financial benefit he expected from them, etc.) or to have applied for the law on indebted households. In fact, the relevant concern had already been raised before Parliament in 2018 as follows: "The first problem that arises from the new law is that the 2nd chance, as legislated by Law 4446/2016, applies exclusively to entrepreneurs who had a personal business (Non-capital) i.e. LLC, E.E., sole proprietorship, because they coincide with the insolvent business. Unlike entrepreneurs who had a PE, Ltd. and IPE (capitalised) and do not coincide when the business goes bankrupt".

7. Are there any specific exemption criteria? Are all debtors exempt from their debts?

Do the same criteria for discharge of the bankrupt already in place under the current regime remain in this draft law? Factors that the court will take into account in considering the bona fides and honesty of the bankrupt in order to ultimately make a confirmation of discharge under the draft law include, among other things, the nature and amount of the debts, the timing of their creation, the bankrupt's efforts to repay his debts and comply with his obligations, and any actions by the bankrupt to obstruct the efforts of creditors to obtain satisfaction of their claims. In general, the court will accept the bankrupt's discharge when the bankruptcy is caused by a rapid change in economic conditions (financial crisis), a commercial accident that 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. In accordance with European Directive 2019/1023: "In order to determine whether the trader has behaved dishonestly, judicial or administrative authorities may take into account elements such as the nature and amount of the debts, the time when the debts were incurred, the trader's efforts to repay them and to fulfil his legal obligations, including his obligations to obtain public licenses and to keep proper accounting records, any actions taken by the trader to prevent creditors from succeeding in their obligations, and the trader's failure to comply with his obligations to pay the debts.

8. Does the discharge apply to all the debtor's debts?

The draft law provides that a bankrupt is not exempted from debts incurred as a result of an offence committed with intent or gross negligence. A similar provision is contained in the current bankruptcy code. Of course, the question is whether this wording of the law also includes debts whose non-payment constitutes a criminal offence, such as tax evasion, issuing bounced cheques, etc. Accepting this interpretation would lead to a "nullification" in the "second chance" act since a large part of the debts of poor businessmen are related to tax evasion and bounced cheque offences. It is therefore more appropriate to provide some legislative clarification on this point. Moreover, if it is found that the bankruptcy is due to fraudulent actions by the bankrupt, the bankrupt's discharge will not be granted from the outset. 

9. Finally, is it appropriate for the poor to be discharged from their debts? Does this institution constitute an incentive to default?

The poor man, according to the old legal and social views, was a stigmatised trader, unacceptable to the state for resuming economic activity. The European Union, however, intervened. On the basis of mainly economic studies that give another dimension to the issue, it recommended already in 2014 that member states adopt provisions that give a "second chance" to the poor man, a chance to reactivate himself and, taking advantage of his experience from past mistakes, to develop him 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". The explanatory memorandum of this draft law is along the same lines: "Providing debtors with a second chance, in addition to the leniency of the legal system towards them, also serves the national economy, both because it facilitates the taking of entrepreneurial risks and because it allows over-indebted persons to have incentives to work and create wealth. When over-indebted individuals are not able to get rid of their debts, they are driven into the informal economy to the detriment of society as a whole. Moreover, until the introduction of the 'second chance' scheme, those who had been bankrupt several times 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. In order to shield his new assets from his old creditors, however, 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 disinheritance in favour of his usually related persons (children, brothers, sisters, etc.). So not to accept the institution of "second chance" is to close one's eyes to commercial reality. After all, under the draft law too, in order to be exempt, the bankrupt must first have lost all his assets (through the bankruptcy proceedings), and then his exemption must have been subject to judicial review, provided of course that there are creditors who object to it