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What are the main insolvency procedures applicable to companies in your jurisdiction?
Bankruptcy – Provides for the company’s assets to be realised and the proceeds distributed to creditors in accordance with the Bankruptcy Act. A bankruptcy is commenced by a petition, filed by either the company or one of its creditors. If a creditor has filed the petition, there will be a preliminary hearing at which the court will appoint an interim trustee. If the court finds the company to be “permanently insolvent”, the court will declare the company bankrupt and appoint a bankruptcy trustee. When determining whether the company is permanently insolvent, the court will take into account the balance sheet and cash flow insolvency of the company, Estonian law and court practice.
Reorganisation – A flexible procedure under which a company can restructure its financial obligations to compromise its debts, reschedule its debts so they are repaid over a longer period or both, with the aim of restoring the company to solvency. A reorganisation is commenced by the company making an application to court.
Can a company obtain a moratorium whilst it prepares a restructuring plan?
On commencement of a reorganisation the court will stay enforcement proceedings against the company until a reorganisation plan is approved or the reorganisation proceeding is terminated.
To what extent do the directors of the company remain in control of its affairs during any of the above procedures?
On being declared bankrupt the powers of directors cease and the bankruptcy trustee takes control of the company’s assets.
On a reorganisation the powers of the directors continue subject to supervision of a court appointed reorganisation adviser while drafting and implementing the reorganisation plan.
Timeline to commence liquidation
How quickly can a creditor generally commence the liquidation of an insolvent company, assuming an undisputed claim and no opposition from the company?
Between six months and one year, depending on the court process, the bankruptcy trustee and the judge involved in the matter.
Do your courts recognise insolvency proceedings commenced in the courts of another jurisdiction?
Yes - insolvency proceedings commenced in the courts of other EU member states will be automatically recognised under the EC insolvency regulation.
Insolvency proceedings commenced in a non-EU jurisdiction will be recognised in Estonia unless recognition would be contrary to Estonian law or public policy.
Position of creditors
Forms of security
What are the main forms of security over movable and immovable property?
Security is taken over real estate by way of a mortgage.
Security is taken over tangible property by a:
- possessory pledge
- commercial pledge
- lessor’s right of security
Security is taken over intangible property by pledge.
Which classes of creditor are given preferential status? Are any classes subordinated?
The order of priority of payment on a bankruptcy is:
- secured debts, less the expenses of the bankruptcy up to a maximum of 15% of the proceeds of the sale of the secured asset. Any shortfall can be claimed as an unsecured debt
- unsecured debts where the creditor has filed their claim with the bankruptcy trustee within two months of the date of publication of the bankruptcy notice in the official publication Ametlikud Teadaanded
- unsecured debts filed after the two months deadline
Debts owed to directors and shareholders are subordinated.
Treatment of foreign creditors
Are foreign creditors treated equally to domestic creditors?
Termination of contract by reason of insolvency
Are contract terms permitting termination of the contract by reason of insolvency valid?
Yes – although terms that provide for termination on commencement of reorganisation proceedings or approval of a reorganisation plan are void.
Retention of title
Are retention of title clauses effective?
Yes. The trustee will return property (which the company has not paid for at the time the bankruptcy commences) to a supplier who can prove he has a retention of title over that property.
Setting aside transactions
Transaction avoidance provisions
What are the main transaction avoidance provisions, and who can challenge transactions?
The bankruptcy trustee can challenge transactions that impair the rights of other creditors and were entered into in the five years prior to the appointment of an interim trustee.
The courts deal with applications on a case by case basis. The courts are more likely to avoid transactions if:
the counterparty knew or should have known that the transaction would impair the interests of the creditors
the counterparty was a connected party
The court will avoid security granted:
- after the appointment of an interim trustee
- in the six months prior to the appointment of an interim trustee where that security was granted in respect of pre-existing debts or at a time when the company was insolvent
- in the two years prior to the appointment of an interim trustee where the security was
- granted in favour of a connected person
Position of directors
Risks for directors
What are the risks facing the directors of an insolvent company?
Directors can be held civilly liable for losses caused to the company as a result of a director’s breach of duty.
Directors can be held criminally liable and fined or imprisoned for up to three years for:
- knowingly causing the company to become insolvent
- causing the company to prefer one creditor over others
- concealing the company’s property