Small Scale Bankruptcy and Discharge of Overindebted Debtors under the New Bankruptcy Code

By Alexandra Giaki, Managing Partner

With Law 4738/2020, our country introduced a comprehensive and robust framework for managing the insolvency of both natural and legal persons, regardless of their commercial status. This framework addresses every stage of insolvency, from its prevention through an early warning mechanism, addressing it through debt restructuring via an out-of-court workout (OCW), restoring business viability through restructuring, and finally, in the case of bankruptcy, discharging the bankrupt debtor from their debts.

This article focuses particularly on the procedure of small-scale bankruptcy, which has already garnered significant interest from overindebted individuals and small businesses, as it offers debtors the possibility of a “second chance” (fresh start) through discharge from their debts after completing the prescribed procedure.

I. Introduction

Law 4738/2020 introduced the procedure of small-scale bankruptcy petitions, detailed in Articles 172 to 188. According to Article 78, paragraph 2, the so-called small-scale bankruptcy applies if the debtor meets the three criteria for a small entity as defined by the Greek Accounting Standards (Law 4308/2014). Therefore, the provisions for small-scale bankruptcy apply when the debtor/business meets the following criteria:

1. Total assets not exceeding €350,000.
2. Net turnover not exceeding €700,000.
3. An average number of employees per fiscal year up to 10 people.

In the case of individuals, the sole criterion for applying small-scale bankruptcy is the value of assets, which, as per the debtor’s tax returns, must not exceed €350,000.

II. Conditions of Bankruptcy

The conditions for small-scale bankruptcy are essentially the same as those for large-scale bankruptcy. According to Article 77, a debtor is declared bankrupt if they are in cessation of payments, meaning they are unable to meet their overdue financial obligations in a general and permanent manner (objective condition of cessation of payments). This occurs when there is a negative relationship between the debtor’s liquidity and their obligations.

However, for small-scale bankruptcy, Article 77 of Law 4738/2020 specifies a presumption of cessation of payments, where the debtor is presumed to be in cessation of payments if they fail to meet overdue obligations to the state, social security institutions, or financial institutions amounting to at least 60% of their total overdue obligations for a period of at least 6 months, provided that the non-serviced debt exceeds €30,000.

Further, the subjective condition of the debtor’s bankruptcy capacity must be met. Under Law 4738/2020, bankruptcy capacity is detached from commercial status, and Article 76 states, “Natural persons have bankruptcy capacity. Legal persons pursuing an economic purpose also have bankruptcy capacity.”

Additionally, the condition of the adequacy of unencumbered assets or the debtor’s income must be met. According to Article 178 of Law 4738/2020, if it is probable that the unencumbered assets of the debtor are insufficient to cover the costs of the procedure, and the debtor’s annual income does not exceed the amount of annual reasonable living expenses or twelve times the unseizable amount of paragraph 2 of Article 33 of the Public Revenue Collection Code, no trustee is appointed. Instead, the court orders the registration of the debtor’s name in the Electronic Insolvency Registry (hereinafter EIR).

III. The Procedure for Filing a Small-Scale Bankruptcy Petition

The procedure for submitting a small-scale bankruptcy petition, which is submitted via the EIR, varies depending on whether or not a principal intervention is filed by any creditor. If no intervention by a creditor is filed, Article 173 of Law 4738/2020 stipulates that the petition is accepted with the mere passage of 30 days from its publication in the EIR. Hence, the petition is automatically accepted without examining the objective and subjective conditions, leaving it to the bankruptcy court to determine if the unencumbered assets or income exceeding reasonable living expenses or twelve times the unseizable amount cover the procedure costs.

If a principal intervention by a creditor is filed, the process outlined in Article 177 of Law 4738/2020 is followed. This includes filing statements within sixty days of the petition’s publication in the EIR and additional counter-statements within five more days. A formal hearing is then scheduled, where the petition is discussed without the presence of the parties.

IV. The Ultimate Goal of Bankruptcy: The Debtor’s Discharge

A reasonable question arises as to why a debtor would file a petition requesting their declaration of bankruptcy or registration in the insolvency registry. The overindebted debtor aims to be discharged from debts existing at the time of the bankruptcy petition, as per Articles 192 et seq. This discharge occurs automatically after the prescribed period, without the need for another court procedure.

Article 192 of Law 4738/2020 states, “With the exception of paragraph 2, the debtor – natural person is fully discharged from all obligations to the bankruptcy creditors, regardless of whether they have been declared or not, thirty-six (36) months from the date of declaration of bankruptcy or the registration of paragraph 4 of Article 77, unless an appeal against the discharge is filed within this period by any person with a legitimate interest.”

Exceptionally, the debtor can be discharged in just one year if:

1. The debtor is declared bankrupt (not merely registered in the insolvency registry, as this always requires a three-year period for discharge).
2. The bankruptcy estate includes the debtor’s primary residence or other assets exceeding in value 10% of their total liabilities and having a minimum value of €100,000.

Thus, the debtor can be discharged in just one year from the declaration of bankruptcy. The discharge applies to all debts existing at the time of the bankruptcy petition, except for debts arising from fraud or gross negligence causing death or bodily harm, money laundering offenses (unless the basic offense is non-payment of debts), and alimony obligations.

Discharge does not occur within the aforementioned periods if an intervention against it is filed, as outlined in Article 193 of Law 4738/2020. In summary, the described bankruptcy represents an institutional attempt to assess the debtor’s assets and based on this value, the resulting quantitative limitation of the creditor’s claim and its satisfaction/discharge of the debtor. The creditor, whose property rights are affected, can object by filing an intervention, alleging, for instance, that the debtor deliberately caused their insolvency or did not cooperate with creditors at earlier stages, etc. The debtor can counter these allegations, and the bankruptcy court resolves the dispute.

Following the amendments introduced by Law 5072/2023, it is provided that after the discharge period, the reporting judge, upon the debtor’s application, and after receiving the trustee’s report and ensuring no appeal against the discharge is pending, issues an act confirming the discharge of the debtor from their obligations.

V. Conclusion

The relatively new procedure of small-scale bankruptcy allows natural and legal persons meeting the legal definitions to follow a simplified procedure to be declared bankrupt and subsequently discharged, under the conditions of Article 195 of Law 4738/2020.

The automatic acceptance of the bankruptcy petition in the absence of an intervention and the automatic discharge from all debts after the prescribed period undoubtedly provides significant incentive for overindebted debtors to resort to this procedure. However, the “price” of discharge from all debts existing at the time of the petition is the loss of all their assets, either liquidated by the bankruptcy trustee (in case of bankruptcy declaration) or by individual creditors (in case of registration in the EIR). Nevertheless, this achieves the fresh start for the overindebted debtor, which was the primary aim of the Directive leading to the enactment of Law 4738/2020.