- within Insolvency/Bankruptcy/Re-Structuring topic(s)
Introduction
One of the most critical consequences of a company being declared bankrupt or being registered in the Electronic Insolvency Registry (EIR) is the possibility of releasing its directors and legal representatives from corporate debts for which they are personally and jointly and severally liable by law (by virtue of holding that capacity).
This release concerns, in particular, cases in which managers, executive chairpersons, managing directors or executive/authorized directors are jointly and severally liable, in full, for the company's tax and social security debts to the State and to EFKA (and not for their own personal debts), which became overdue during their term of office, pursuant to Article 49 of Law 5104/2024 and Article 31 of Law 4321/2015. These persons bear joint liability with the legal entity vis-à-vis the State for the payment of due income tax, for the remittance of withheld taxes, VAT and all indirect taxes, and the Uniform Real Estate Ownership Tax (ENFIA), owed by legal entities, as well as for the debts of the legal entity they represent towards Social Security Institutions.
This article analyses the current framework of automatic discharge, its prerequisites and scope, as well as its application to bankruptcies that were concluded under the previous bankruptcy law, given that the provisions of Law 4738/2020 on automatic discharge extend to bankruptcy proceedings under the previous bankruptcy regime (pursuant to the transitional provision of Article 263 paras. 5 and 6 of Law 4738/2020), as we will set out in detail below. These issues are also described in detail in the relevant Circular E.2003/2023 of the Governor of the Independent Authority for Public Revenue (AADE).
1. The institution of automatic discharge under Law 4738/2020
With Law 4738/2020 (Articles 192–196), the institution of the debtor's automatic discharge from remaining debts was introduced, for the first time in Greek law, without the need for a court decision following an application by the debtor, as was the case under Law 3588/2007. The discharge occurs automatically upon the lapse of:
- 24 months from the declaration of bankruptcy, or
- 36 months from the registration of the debtor's name in the EIR (in the event that bankruptcy is not declared),
unless, within that time limit, an appeal/objection against the discharge is filed by any creditor.
Of particular importance is that this institution does not concern only natural persons who have gone bankrupt, but expressly also extends to the legal representatives and directors of legal entities that are subject to bankruptcy proceedings.
2. Scope of the discharge of directors of bankrupt companies
In the event of the bankruptcy of a legal entity, the discharge of the persons managing it covers the company's debts to the State and to EFKA, for which they are personally and jointly and severally liable by virtue of their capacity as the legal representatives/directors of the legal entity.
The discharge extends to debts that:
- arose during the suspect period, or
- arose within the 36 months preceding the suspect period,
and takes effect upon the lapse of:
- 36 months from the filing of the bankruptcy petition, or
- 24 months from the declaration of bankruptcy, as the case may be.
"Suspect period" means the period from the date of cessation of payments (as determined in the decision declaring bankruptcy) until the issuance of that decision.
According to the explanatory report, the purpose of introducing the discharge of jointly liable legal representatives/directors of legal entities is to remove the problems created by their personal liability, as regards the stifling of entrepreneurship and the deterrence of managers from assuming the management of businesses that are in difficult financial condition, by discharging representatives of legal entities who acted in good faith from debts that arose during the suspect period or during the three years preceding it.
It is noted that, for debts to the State, the critical time is not the date of assessment/certification, but the time to which the tax obligation relates (fiscal year).
3. Limitations and exceptions to the discharge
Automatic discharge is subject to the condition that no appeal/objection is filed by a creditor within the statutory time limit.
All grounds for such an appeal are exhaustively listed in Article 195(2) of Law 4738/2020 and consist mainly in the bad faith of the legal representative during the bankruptcy, the fraudulent causation of the bankruptcy on his/her part, and the fact that criminal prosecution is pending against him/her for the commission of certain criminal offences or that he/she has been convicted of those offences.
Therefore, where a timely appeal/objection against the discharge of a debtor who is the legal representative/director of a legal entity has been filed and a court decision on it is pending, the effects of the discharge do not occur (see in detail paras. 10.A.d. and 10.B.d. of Circular E.2192/2021) prior to the issuance of the relevant court decision.
It is noted that the scope of the legal representative's discharge may be restricted. In particular, the bankruptcy court may, by analogous application of Article 193 of Law 4738/2020, restrict the debtor's discharge to certain debts (partial discharge), set a longer discharge period, or impose conditions for its occurrence.
Moreover, in the event of the director's conviction for bankruptcy fraud (chreokopia) or for the felony offences of theft, fraud, embezzlement or forgery, full discharge does not occur in respect of those debts.
In addition, it is possible for the bankruptcy court to grant an application for revocation of the discharge within three years from the occurrence of the discharge, due to a change in circumstances that justifies revocation. In contrast to what the law provides for the discharge of a natural person debtor, where the possibility of revocation is provided within a certain period after its occurrence (see Article 194(2) of Law 4738/2020), without distinction—i.e. whether the discharge occurred simply upon the lapse of the period provided by law (with no appeal having been filed), or occurred following the dismissal of an appeal— the corresponding provisions regulating the discharge of legal representatives/directors of a legal entity provide for the possibility of revocation of the discharge when the discharge has occurred by virtue of a court decision, i.e. following the filing of an appeal (see in this regard Article 195(2) of Law 4738/2020).
4. Legal effects of the discharge
The legal consequences of the discharge relating to the process of writing off State claims were specified by the legislator by Joint Ministerial Decision No. 44510 EX 2021 of the Ministers of Finance and of Labour and Social Affairs (Government Gazette B 1516/15-4-2021).
In particular, from the time the discharge takes effect:
- the discharged debts are not taken into account for the issuance of a tax or social-security clearance certificate,
- the debts to which the discharge extends are not taken into account for the initiation of criminal proceedings against the legal representative of the legal entity, neither for the offence of non-payment of debts to the State nor for the offences of withholding employers' contributions and misappropriation of employees' contributions. These acts effectively become non-prosecutable. This is also clearly evidenced by the relevant Circular E2192/2021 of the Governor of AADE, entitled: "Providing instructions and clarifications regarding the changes brought to the bankruptcy procedure by Law 4738/2020 for the collection of debts of bankrupt debtors of the State",
- no measures of compulsory enforcement or administrative execution are imposed against the director for those debts.
It is important to refer to the new provision of Article 198A of Law 4738/2020, pursuant to which, in the event of the debtor's discharge under Articles 192 (discharge of the debtor/natural person) and 195 (discharge of the representative/director of a legal entity) and provided that the period for revocation of the discharge has elapsed or an application for revocation has been rejected, criminal liability is extinguished for the offences of non-payment of debts to the State and of the imposition of sanctions against those delaying the payment and remittance of contributions to Social Security Organisations, and the execution of a sentence that has begun is discontinued. This very recent provision is expected to be tested judicially, in order to determine the manner in which it will be interpreted and applied by the Greek courts.
5. Application of the automatic discharge of legal representatives/directors to company bankruptcies under the previous regime (Law 3588/2007)
As mentioned above in the introduction, the institution of automatic discharge also applies to older bankruptcies, by virtue of the transitional provision of Article 263 paras. 5 and 6 of Law 4738/2020.
Specifically, for companies that (a) were declared bankrupt, or (b) were registered in the Bankruptcy Registry (after the bankruptcy petition was dismissed), before 1/7/2021, the directors' discharge took effect on 1/1/2022, provided that no appeal/objection against their discharge had been filed by 31/12/2021.
Indicative example of the application of automatic discharge under the previous legislative regime:
In a recent case we handled, the KEVEIS of Attica issued a certificate of discharge for a natural person—director of a limited liability company (EPE)—from corporate debts amounting to EUR 992,880.91, deriving mainly from legal entity income tax and VAT.
In particular, the company had been declared bankrupt in 2013, with the date of cessation of payments being 26/7/2012, and the discharge concerned debts relating to the period from 26/7/2009 to 26/7/2012, i.e. within the suspect period.
Upon submission of the required supporting documents to the KEVEIS of Attica, a certificate was issued pursuant to which KEVEIS discharged the legal representative of the bankrupt EPE from the company's debts certified to the Tax Authority (for which he bore joint and several liability by virtue of the above capacity), which related to the period from 26/7/2009 to 26/7/2012 (i.e. debts relating to the period of the suspect period).
Epilogue
Decoupling the personal liability of directors from a purely corporate obligation constitutes a fundamental reform in bankruptcy law, strengthening entrepreneurship and the logic of a "second chance".
However, automatic discharge is not an automatic privilege, but an institution that requires careful use, proper legal guidance and timely handling.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
