On 16 April 2014 the Estonian Parliament adopted amendments to the bankruptcy and reorganisation laws. The law has now been published in Riigi Teataja (the official journal) and will enter into force on 19 May 2014. The amendments affect professional market participants such as credit institutions, investment firms, fund managers, insurance firms as well as specified large corporations who are parties to financial collateral agreements or derivative transactions involving an Estonian counterparty.
The amended bankruptcy regulation abolishes uncertainty and clearly states that declaration of bankruptcy does not affect the right of a professional market participant to enforce financial collateral established to its benefit. Enforcement can take place on the terms and conditions set out in the financial collateral agreement.
In relation to derivatives transactions (including OTC transactions), the new law states that declaration of bankruptcy does not grant the bankruptcy trustee a right to “cherry-pick” transactions, if the parties have agreed upon a performance deadline or performance term falling after the declaration of bankruptcy. Only claims arising from non-performance can be presented. The amount of the claim must, as a rule, be the difference between the agreed price and the market price fixed at a moment agreed by the parties (however, not later than within two business days after the declaration of bankruptcy). Therefore, if that moment falls more than two business days after the declaration of bankruptcy, the size of the claim arising from non-performance may differ from the amount of lost profit.
Close-out netting will now clearly be allowed. Even after declaration of bankruptcy, a professional market participant can still net claims arising from derivative transactions if that right was agreed when the transaction was concluded. Netting must take place on terms and conditions agreed upon earlier. In addition, the close-out netting of claims secured by financial collateral is permitted if terms for close-out netting are set by the law or in a financial collateral agreement. The amount which remains outstanding can be satisfied on account of the financial collateral securing the transaction.
Under the amended law, neither the transactions made in the course of performance of rights arising from a financial collateral agreement nor collateral securing derivative transactions can be revoked in bankruptcy proceedings. In principle, transactions with derivatives also cannot be revoked unless made specifically for the purpose of harming other creditors.
Under proposed amendments to the reorganisation law, professional market participants can agree upon termination of derivative transactions on commencement of reorganisation proceedings or on approval of a reorganisation plan of one party. The new reorganisation law additionally clearly assures that claims arising from derivative transactions cannot be restructured by a reorganisation plan.
The above amendments affect consequences of all bankruptcy proceedings declared after the entry into force of the amendments, and consequences of reorganisation proceedings commenced thereafter. In addition, the amendments are applicable to all subsequent procedural acts performed in ongoing bankruptcy or reorganisation proceedings.
All these amendments significantly strengthen the position of parties to derivative transactions and financial collateral agreements to fulfil their agreements. The amendments implement the requirements arising from Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements and to facilitate the aims of Regulation 575/2013/EU of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012.