Appeal against the Bankrupt's Discharge - Some Thoughts Based on the First Decisions of the Courts

Legal insight

April 2024

George Kefalas, L.LM. mult., M.Sc.

Summary: The most important innovation of the new bankruptcy law under the new law. 4738/2020 is the automatic discharge of the bankrupt from his debts after the expiration of the specified period of time (three years or, if applicable, one year from the declaration of bankruptcy or registration in the Solvency Register). This automatic discharge can be prevented if a person with a legitimate interest (usually a creditor) appeals against the discharge. In this article, we examine the conditions for such an appeal and provide an indication of the few cases published to date on this issue. 

1. Introduction

One of the main pillars of the new bankruptcy law (Law no. 4738/2020 - Settlement of debts and provision of second chance and other provisions) is the discharge of natural persons from their debts, in accordance with the provisions of Articles 192 et seq. 4738/2020. This exemption is in principle automatic once the statutory period of time has elapsed since the declaration of bankruptcy or the entry in the Insolvency Register of the decision ordering the entry of the applicant's name in the register (three years or one year, if the debtor's assets exceed EUR 100,000.00 and amount to at least 10% of his debts, provided that the debtor has submitted a request), without any other judicial decision. The purpose of the exemption and the provision of a second chance is, on the one hand, the practical demonstration of the leniency of the legal system towards over-indebted persons, but also to serve the national economy by facilitating the assumption of business risks and preventing these persons from being driven into the underground economy to the detriment of society as a whole. 

However, the law also provides for the possibility of an appeal against the above exemption by any person with a legitimate interest (e.g. a creditor, the bankruptcy trustee, even the Public Prosecutor). The appeal may be brought at any time within the period until the discharge takes effect. In this article, we examine the grounds on which an appeal against the bankrupt's discharge is justified, while also reviewing the decisions of the courts that have been handed down to date regarding this issue. 

2. The grounds for appeal against the discharge

The grounds for an appeal against the discharge are set out in para. 1 of Article 193 of Law No 193. 4738/2020 and are as follows:

(a) The inability of the debtor to fulfil his obligations is due to fraudulent actions on the part of the debtor. 

(b) The debtor has not shown good faith either at the time of the declaration of bankruptcy or during the bankruptcy proceedings.

(c) The debtor has not cooperated with the bankruptcy institutions.

(d) The debtor has fraudulently concealed income or assets during the bankruptcy proceedings. 

(e) A criminal prosecution is pending against the debtor for bankruptcy offences or for the offences of theft, fraud, embezzlement, creditors' fraud, or felony forgery. 

(f) The debtor has been convicted of one of the above offences. 

Of the above cases, some are clear and do not require further interpretation. Thus, for example, in cases (e) and (f), if a criminal prosecution or a conviction for one of the acts mentioned in these cases results, the automatic discharge of the debtor is prevented. It also seems clear that case (d) of the above provision is also clear, so that if the applicant proves that the debtor has concealed income or assets, his discharge will likewise be prevented. However, even in this case, if, for example, assets of very little value have been concealed, the court may, in view of the purpose of the exemption, reject the application and rule in favour of the debtor's exemption. 

In contrast, cases (a) to (c) are more ambiguous. However, it is understood that in cases b) and c), the report of the rapporteur and the opinion of the bankruptcy trustee, which the court takes into account in accordance with para. 2 of the same article, in order to decide on the discharge or not of the debtor. 

However, the case that the courts will most often be called upon to deal with is case (a), i.e. the allegation that the debtor's inability to perform is due to his fraudulent actions. This case is related to the objection of fraudulent interference by the claimant in a suspension of payments under the Act. 3869/2010. Thus, if the applicant invokes and proves that the debtor has fraudulently entered into default, it will similarly become more difficult to discharge the debtor from his debts. 

The decision of the Bank of Greece No 185/2021 is also indicative, in which certain indications are set out which, according to that institution, require an appeal against the discharge to be brought. These include, but are not limited to, the fraudulent avoidance of payment of debts, the untimely filing of a bankruptcy petition by the debtor, the execution by the debtor of acts detrimental to the debtor's property, such as donations, gratuitous legal transactions, payments of non-overdue debts, the failure to keep compulsory commercial books, the failure to prepare financial statements, etc. 

Already creditors often raise the above objection - incorrectly, however - in their main submissions to reject the bankruptcy petition. At this stage of the bankruptcy petition, however, only the existence of the condition of insolvency and any improper filing of the bankruptcy petition by the debtor are examined, and not any fraudulent conduct on his part in causing the insolvency. 

However, the important breakthrough in this respect of the new law is that the above facts must be pleaded and proved by the party bringing the action, with the consequence that if he fails to meet the burden of proof, the action will be dismissed and the debtor will be discharged from his debts as a matter of course. 

3. Revocation of the discharge

In addition to the appeal against the discharge, Article 194 para. 2 and the procedure of revocation of the exemption that has already occurred and within three years of its selection. However, in this case, the conditions for revocation are particularly strict. In particular, revocation is justified only if the debtor has fraudulently or through gross negligence failed to disclose his financial and property situation during the bankruptcy proceedings or has failed to comply with his obligations under the payment plan provided for in Article 92(1)(b) of the Bankruptcy Code. 2 of the Act (under which the debtor must, under certain conditions, contribute to the bankruptcy estate a part of his income in excess of his reasonable living expenses or the limit of the unobligated). 

4. The attitude of case law to date 

We note from the outset that the provisions of Law no. 4738/2020 on small-scale bankruptcy, as well as the provision conferring bankruptcy capacity on natural persons, have come into force as of 1.6.2021. Therefore, even for natural persons who rushed to file for bankruptcy upon the entry into force of the law, the three-year period for their discharge has not yet expired, and as a result, the number of court decisions that have ruled on appeals against discharge is limited. These relate, for the most part, to appeals by public bodies against representatives of legal persons who had been declared bankrupt under the pre-law. 4738/2020. 

- In the case of decision No 18/2022 of the Chios Court of First Instance, the applicant EFKA argued in its application that the debtor did not meet the conditions for exemption, since, after creating debts from joint and several liability as a managing director of a limited liability company, it subsequently operated through another limited liability company and created additional debts to the insurance company. In relation to this claim the court held that: "it is likewise rejected as essentially unfounded, since the participation of the defendant in the joint-stock company in question cannot be linked to the bankruptcy of the joint-stock company "....", nor does it constitute a fraudulent act on the part of the defendant, to which the bankruptcy of the latter is attributable". 

- Similarly, Decision No. 395/2022 of the Patras Court of First Instance ruled on an appeal by EFKA, which requested that the court declare that the conditions for exemption were not met, because the debtor "has not made any effort to settle the aforementioned outstanding and confirmed debts of the latter, with the consequence that he is responsible for the offence of non-payment of insurance contributions, which constitutes the offence provided for in Article 195 par. 2 of Law 4738/2020, which establishes the condition of fraudulent actions of the natural person - representative of the bankrupt legal person'. The court, however, dismissed the appeal, considering that, on the one hand, it was not proven that criminal proceedings had been brought for the above offence and that the bankruptcy was due to fraudulent actions of the debtor. 

- The Rhodope Multi-Member Court of First Instance, in its judgment no. 26/2023, it ruled that 'the financial situation of the defendant's business was seriously shaken by the general economic and consequent commercial crisis which also affected the market in Komotini, since its operating costs increased and its borrowing and debts to third parties [.... ] The same report also states that the defendant was cooperative at all stages of the bankruptcy proceedings, in particular, it produced its commercial books, cooperated in the registration and inventory of the bankrupt's assets and attended all bankruptcy proceedings'. 

- In the case of judgment No 588/2020 of the Thessaloniki Trial Court of Appeal, which was delivered under the earlier law, it was held that the debtor was not in good faith, as his bankruptcy was not due to commercial or economic circumstances, while he continued his business for a long period of time despite the fact that he had become insolvent, creating new debts and providing false information as to the value of his business. 

To date, therefore, the sample of judgments of the courts ruling on appeals against the discharge of a debtor is therefore small. It concerns in particular appeals from the EFKA, which are dismissed either as inadmissible or as unproven because, as we have mentioned above, the burden of pleading and proving the existence of a reason for the deprivation of the exemption lies with the applicant and not with the debtor. Therefore, in the event that the applicant fails to prove the existence of one of the grounds mentioned above, the debtor is exempted. 

5. Instead of a postscript

The automatic discharge of the bankrupt's debts adopted by the Act. 4738/2020 is an important breakthrough with regard to this institution, as it shifts the burden of invoking and proving any bad faith of the bankrupt to his creditors. In fact, the new Law no. 5072/2023 also provides for a procedure by which the bankruptcy rapporteur establishes the occurrence of the debtor's discharge from his debts by issuing a relevant act. Thus, the debtor will have a milestone in time - the issuance of the relevant act - from which he will know that he can now be active again, free from the burdens of the past.