Settlement of Debts to the State and Social Security Institutions under the New Out-of-Court Mechanism

Legal Insight

July 2021

George Kefalas, LL.M. (mult.), Μ.Sc.

Summary: In the framework of the new out-of-court debt settlement mechanism of Law no. 4738/2020, debts to the State or Social Security institutions can be settled either through a multilateral settlement procedure, in which one or more financial institutions participate, or through the bilateral procedure provided for in Article 24 of Law No. 4738/2020. 4738/2020, i.e. separately with the State or the Social Security institution. This article summarises, through questionnaires, this bilateral debt settlement procedure, which concerns a large number of individuals and companies that either have no debts to financial institutions or have not succeeded in obtaining multilateral settlement.  

1. In which cases does the procedure of Article 24 of Law No. 4738/2020 on bilateral debt restructuring agreements with the State and the Social Insurance Institutions (SSIs)?

The procedure set out in Article 24 - i.e. the procedure leading to the conclusion of a bilateral debt restructuring agreement with either the State or both the State and the Social Security Institutions (hereinafter 'the Social Security Institutions') - applies in the following cases:

- Where the debtor has debts only to the State and/or the Social Security institutions and has no debts to financial institutions.

- Where the debtor has debts to financial institutions, but cannot be subject to the multilateral extrajudicial procedure because more than 90% of his debts are concentrated in a single financial institution. 

- Where the debtor has been subject to a multilateral procedure in principle, but the procedure has been terminated as unsuccessful due to the failure of the financial institutions to submit a proposal for the settlement of the debts. 

Furthermore, the total amount of the debtor's debt to the State, the social security funds and the financial institutions must exceed EUR 10 000 per creditor. 

2. Are the State and the FIUs required to submit a proposal for a bilateral contract?

In principle, the State and the FIUs each separately propose to enter into a bilateral agreement with the debtor, provided that the agreement makes the debtor viable (if it is a company) or creditworthy (if it is a natural person other than a company). Therefore, in case the State or the FIUs consider that the debtor will not become viable or solvent, according to the criteria of the CBA No 66468 EX/2021, they are not obliged to submit a proposal.

3. Which debts are subject to the bilateral negotiation procedure under Article 24?

The bilateral negotiation procedure covers the debts of the applicant to the State and/or the Social Security Fund already established on the day of submission of the application, including any fines, surcharges and interest on late payments. 

4. Can current debts to the State and/or Social Security institutions be settled?

The debtor may, through the procedure of Article 24, also obtain the adjustment of his/her current debts to the State and/or the Social Security Funds, under the conditions of Article 7 par. 3(f) of Law No. 4738/2020, provided that he proves a 20% deterioration in his financial situation, which may be due either to a reduction in his income or an increase in his expenditure.

5. Does the submission of the application suspend any enforcement proceedings initiated by the State and/or the FSA?

The notification of the application to the State and/or the FIUs suspends the taking of enforcement measures, the continuation of enforcement proceedings (if already initiated) and the prosecution for the offence of non-payment of debts or insurance contributions, and, if a penalty has already been imposed, the execution of the penalty is suspended or discontinued. However, as set out in Law no. 4738/2020 and specified in the CPS No. 66468 EX/2021, the suspension does not cover an auction scheduled within three months of the submission of the application, nor does it cover preparatory acts of the auction, including seizure. 

6. How is the proposal of the State or the FIUs formulated?

The proposal of the State or the FKAs is formulated by means of the calculation tool provided for in Article 71 of Law No. 4738/2020, as its details were established by the Administrative Instruction No. 67360 EX/2021. The repayment amount to the State or the FKAs cannot be lower in terms of net present value than the amount that, on the basis of the calculation tool, each institution would receive in the event of the debtor's bankruptcy and the liquidation of its assets. Thus, for example, if the calculation tool shows that the State would receive EUR 100 000 from the forcible liquidation of the debtor's assets, then the scheme should, in the long run and in terms of net present value, provide the State with at least that amount (in practice, the State would receive more than EUR 100 000 because of the time value of money). Consequently, the calculation tool is also used in the case of the bilateral contracts under Article 24. 

7. What specific rules apply with regard to the regulation of debts to the State and the FKA?

The rules for the settlement of debts to the State and the FIUs are the same both in the case of the multilateral procedure (i.e. where financial institutions are involved) and in the case of the Article 24 bilateral procedure and can be summarised as follows:

- The repayment of debts (to the State or the FIUs) can be made in up to 240 monthly instalments. 

- The interest on each instalment is calculated on the basis of an interest rate equal to the quarterly Euribor rate (currently -0.544%) + 5%.

- Each monthly instalment must be at least EUR 50. 

- No grace period can be granted and the first instalment of the arrangement is payable within five working days of the debtor's acceptance of the restructuring proposal.

- No write-off of basic debt from imputed and withheld taxes to the State and from insurance contributions to the social security funds is allowed. 

- No adjustment of debts that were settled under the previous out-of-court mechanism of Law No. 4469/2017, regardless of whether or not this regulation is in force. 

- In all other cases (e.g. income tax debt, ENFIA, etc.), the cancellation of basic debt is allowed, which can reach up to 75% of the basic debt. 

- In any case, a write-off of up to 95% of claims from fines and up to 85% of claims from surcharges or interest on late payment is possible. 

- Where a write-off of a basic debt is provided for, it shall be made in order of seniority from the oldest to the newest debt and shall be subject to the condition of the full repayment of the regulated debts. The write-off therefore occurs when the debtor has fulfilled his obligations under the restructuring agreement. 

- For the purposes of the proposal, where there is already an existing arrangement with the State or the FIUs, the amount of the regulated debts is taken into account, as it would have been if the arrangement had been terminated and the relevant benefits had been lost.

8. What happens to any existing arrangements in the event of recourse to the Article 24 procedure?

The submission of an application for recourse to the procedure under Article 24 of Law No. 4738/2020 does not entail the loss of existing arrangements. If an agreement is reached with the State and/or the FKA, any previous arrangements for the same debts will automatically cease to apply. Therefore, the debtor may apply for the out-of-court settlement, evaluate the proposed arrangement and, depending on the circumstances, either reject it while maintaining the existing debt arrangement or, if it is more favourable to him, accept it. 

9. What are the results of the drawing up of a debt adjustment agreement with the State and/or the FIUs?

A debt restructuring agreement with the State or the FIUs has the following effects for the respective entity:

- The taking of enforcement measures and the continuation of any enforcement proceedings that have been initiated are suspended.

- The prosecution for the offence of non-payment of debts to the State is suspended and the execution of any penalty imposed is suspended or interrupted. 

- Once the first instalment of the arrangement has been paid, in the case of the State, any seizures imposed in favour of a third party shall not cover future claims. 

10. What actions can the State and/or the FIUs take even after the bilateral debt settlement?

The State and/or the FIUs may, even after the debt has been settled, take the following actions:

- Set off claims that the debtor has against them against debts that are either subject to the arrangement or not.

- to register mortgages on the debtor's assets if their claim is not secured.

- carry out checks on the accuracy of the information provided by the debtor up to one year after the repayment of the arrangement. If a discrepancy is found, the debtor shall be retroactively deducted from the arrangement and the original debt shall be revived. 

11. After the debt restructuring agreement is concluded with the State and/or the FKA, is the debtor issued with a tax and insurance certificate, respectively?

With regard to the possibility of granting a tax and insurance certificate for the debts subject to the regulation, Law no. 4738/2020 refers to the relevant provisions of the tax and insurance legislation, in particular, namely the Code of Tax Procedure (Law 4174/2013, item 12) and Law 4738/2020. 4611/2019, respectively. These provisions provide for the possibility of granting a tax or insurance certificate for debts that have been subject to a regularisation regime, subject to a retention condition in certain cases, such as the collection of money, transfer of property, registration of security in rem on real estate, if the claims of the relevant entity are not secured. 

12. When does the arrangement with the State and/or the FIUs become void?

The arrangement is reversed in the following cases:

- If the debtor fails to pay under the arrangement amounts corresponding to three instalments.

- If the debtor fails to submit, in respect of the State, the required income tax and value added tax returns and, in respect of the FIU, the required detailed periodic return within three months of the deadline for their submission. 

- If the debtor fails to pay or settle debts to the State or to the FIU that became due before the conclusion of the bilateral agreement (and were not subject to it) within 90 days of its conclusion or debts that became due after the conclusion of the bilateral agreement within 60 days of the expiry of the deadline for payment.