Company Directors And The Insolvency Code: Benefits And Pitfalls

A key issue in the event of the submission of an application under the out-of-court debt settlement mechanism, the conclusion of a restructuring agreement, or the bankruptcy of a legal entity, is the treatment of the liability of persons who are jointly and severally liable. In other words, the question is how chairpersons, managers, managing directors, chief executive officers and other corporate officers remain liable vis-à-vis public creditors following the legal entity’s entry into the above procedures.

The Insolvency Code contains provisions governing the restructuring of debts of natural and legal persons through the out-of-court debt settlement mechanism, the restructuring of businesses through the restructuring procedure, as well as bankruptcy and the discharge of natural persons and corporate officers. Whenever a company enters into any of the above procedures, a pivotal question arises: what is the position of persons who are jointly and severally liable? In other words, what effect does the company’s recourse to the out-of-court mechanism, restructuring or bankruptcy have on the liability of its directors and officers?

Joint and several liability for debts owed to the Greek State and to Social Security Organisations is provided for in Article 49 of the Tax Procedure Code and Article 31 of Law 4321/2015, respectively. Persons holding the capacities referred to in those provisions, such as chairpersons, directors, managers, managing directors, chief executive officers and similar corporate officers, are liable, in parallel with the legal entity, for the relevant debts, including income tax, withholding and pass-through taxes, VAT, ENFIA real estate tax and social security contributions.

In this article, we examine the corresponding provisions applicable in the context of the out-of-court debt settlement mechanism, restructuring proceedings and bankruptcy.

Out-of-court debt settlement workout

Where a legal entity enters into a debt restructuring agreement through the out-of-court debt settlement mechanism, whether bilateral or multilateral, pursuant to Article 22(f) of Law 4738/2020, the legal effects of the restructuring apply not only to the applicant, but also to any persons who are, by law, jointly and severally liable for the debts included in the restructuring.

Moreover, according to Circular E. 2065/2022, the extension of these effects to jointly and severally liable persons also applies in relation to the stay provided for in Article 18 of Law 4738/2020, namely the stay of compulsory enforcement measures and criminal prosecution for the offences of non-payment of debts and social security contributions, which already results from the final submission of the application under the out-of-court mechanism.

Accordingly, under the out-of-court debt settlement mechanism, a jointly and severally liable person benefits from the protective effects arising both from the final submission of the application and from the conclusion of the debt restructuring agreement by the legal entity. These include the reduction or limitation of the claim, the stay of collection measures, the suspension or discontinuance of prosecution for the offences of non-payment of debts and social security contributions, the issuance of tax clearance certificates, and other related benefits.

Restructuring proceedings

The position is different in the case of the conclusion of a restructuring agreement between the legal entity and its creditors. Pursuant to Article 60(3) of Law 4738/2020: “Creditors’ rights against guarantors and joint and several co-debtors of the debtor, as well as their existing rights over assets of third parties, shall be limited to the same amount as the claim against the debtor only if the creditor expressly agrees, while Article 37(2) shall not apply for the granting of such consent.” The procedure for granting such consent is described in detail, as regards the Independent Authority for Public Revenue, in Circular E. 2117/2021.

Correspondingly, as regards preventive measures, Article 50(5) provides that: “Where there is an important business or social reason, the above preventive measures may also be extended in favour of guarantors or other co-debtors of the debtor.”

As further provided in Circular E. 2117/2021: “All the above statutory stays/prohibitions — namely the stay of enforcement measures, interim measures, limitation periods and set-off, as well as the prohibition on withholding in the context of the issuance of a tax clearance certificate or debt certificate for the collection of monies — apply only in relation to the debtor, that is, the business entity whose debts are the subject of a restructuring agreement filed before the court for ratification, and not in relation to any persons jointly liable with it.”

Specifically with regard to the issuance of a tax clearance certificate to a jointly liable person, the same Circular provides that: “[…] for the purposes of withholding, account must be taken of the total amount of the debt for which joint and several liability exists, given that the liability of such persons is not limited where they are not covered by the court-ratified restructuring agreement.”

At the same time, compulsory collection measures may be taken against jointly liable persons, notwithstanding the execution of a restructuring agreement by the legal entity.

It follows, therefore, that in the context of restructuring proceedings, the jointly and severally liable person enjoys only part of the benefits arising from the agreement. Thus, criminal prosecution for the offences of non-payment of debts and social security contributions is stayed, and a tax clearance certificate may be issued, although the withholding percentage is calculated on the basis of the total amount of the debt. However, compulsory collection measures against that person are not stayed, nor is the amount of his or her debt towards the Greek State or the Social Security Organisations reduced. The jointly liable person therefore continues to be liable towards the Greek State and the Social Security Organisations to the same extent as before the conclusion of the restructuring agreement.

Bankruptcy

In the event of the bankruptcy of a legal entity, Article 195 of Law 4738/2020 applies to its director or officer. This provision provides for the discharge of the jointly liable person from any liability for debts of the legal entity — for which that person is jointly and severally liable by reason of his or her representative or managerial relationship with the entity — which arose during the suspect period or within the 36 months preceding it. Such discharge takes effect upon the lapse of 36 months from the filing of the bankruptcy petition, or 24 months from the declaration of bankruptcy or the registration of the legal entity’s name in the Electronic Solvency Register.

Accordingly, the jointly liable person may be discharged from debts that arose during the last three to five years prior to the filing of the bankruptcy petition. The beneficial effects of the discharge also extend to the criminal aspect of the case; see Article 198A and Ministerial Decision 44510 EX 2021.

However, the jointly liable person may be deprived of the discharge if an objection to his or her discharge is filed by the public creditors pursuant to Article 195(2) and is upheld. The court will rule in favour of the discharge where the natural person acted in good faith at the time of the declaration of bankruptcy and during the bankruptcy proceedings, cooperated with the bankruptcy bodies, was not responsible for delaying or fraudulently causing the bankruptcy, the bankruptcy was not attributable to fraudulent acts on his or her part, and he or she has not been convicted of any bankruptcy offence or of felony theft, embezzlement, fraud or forgery.

By way of conclusion

As follows from the above, the liability of jointly and severally liable persons is not treated uniformly across all procedures provided for in the Insolvency Code.

Thus, under the out-of-court debt settlement mechanism, the jointly and severally liable person enjoys the same benefits as the legal entity that submits the application and enters into the debt restructuring agreement. By contrast, in restructuring proceedings, except where the relevant public creditor has expressly consented to the restructuring agreement, the jointly and severally liable person continues to be liable on the same terms as before the conclusion of the agreement.

Finally, in bankruptcy, the jointly and severally liable person may obtain a full discharge. However, such discharge is, on the one hand, limited in time and, on the other hand, may be set aside if an objection filed by the Greek State or the relevant Social Security Organisation is upheld.

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.