Available Options for Funding the Insolvency Proceedings of Corporate Debtors

Author:Kersti Kerstna-Vaks

As a rule, corporate insolvency proceedings are financed from the debtor’s estate. To avoid the abatement of bankruptcy proceedings, other, extraordinary arrangements extending beyond this must be found when the estate is insufficient to cover the costs of the proceedings. Such extraordinary arrangements are deposits by creditors, assistance from public funds, and post-commencement financing (loa... (see full summary)

Kersti Kerstna-Vaks
Mag. iur.
Judge Tartu Circuit Court
Available Options for Funding
the Insolvency Proceedings
of Corporate Debtors
1. Introduction
As a general rule, insolvency proceedings*1 are funded from the insolvent debtor’s assets. Yet there are many
cases in which those assets are insuf cient to cover even the cost of the proceedings. Different jurisdictions
apply different principles when deciding whether the courts should declare bankrupt an insolvent debtor
who has no assets and when allocating the burden of funding such proceedings.
In order for insolvency proceedings to be conducted ef ciently, there must be legal clarity as to their
funding at least as to the following issues: 1) May the court require the person who led for bankruptcy to
pay a deposit to the court to cover potential costs incurred in the course of the proceedings? 2) What are the
requirements for funding after the declaration of bankruptcy? 3) Would it be possible to nance the work
of the trustee in bankruptcy from public funds? Clarity on these issues lays the foundations for ef cient and
purposeful conduct of the proceedings. In the UK, the courts have found that neglecting to provide funding
for insolvency proceedings is likely to further increase the number of directors who breach their obligations
and to give such directors an incentive to clean out the debtor’s assets.*2 The existence of public interest in
scrutinising the actions of insolvent companies whose assets are insuf cient to cover the cost of the pro-
ceedings has been stressed also in UNCITRAL recommendations.*3 For this reason, the author will focus
in this article speci cally on issues connected to funding the insolvency proceedings of corporate debtors.
Where the insolvent corporate entity has no assets, Estonian bankruptcy law allows the courts to ter-
minate the bankruptcy proceedings on account of abatement. Abatement terminations have been severely
criticised, yet no provision has so far been made to allow public funds to be used to pay the costs associated
with the proceedings, and the creditors rarely exhibit anything beyond a feeble interest in providing sup-
plementary nancing. The same conclusion was reached in the pilot study of the ef ciency of bankruptcy
1 The author employs the terms ‘bankruptcy’ and ‘bankruptcy proceedings’ in the meaning that they have in the Estonian
Pankrotiseadus (Bankruptcy Act), publication reference in RT I 2003, 17, 95; publication reference of the last amendments
9.5.2014, 14. For the purposes of said act, the term denotes proceedings with a view to liquidation of the debtor, unless the
creditors decide to reorganise the debtor’s business. The terms ‘insolvency’ and ‘insolvency proceedings’ are used where the
reference is broader or concerns speci c jurisdictions that employ the terms.
2 Eastglen Ltd v. Grafton, 1996 2BCLC 279 at pp. 292–293, referred to in A. Keay, P. Walton. Insolvency Law: Corporate and
Personal. Pearson-Longman 2003, p. 383.
3 UNCITRAL Legislative Guide on Insolvency Law 2005, p. 62. Accessible at the URL http://www.uncitral.org/pdf/english/
texts/insolven/05-80722_Ebook.pdf (most recently accessed on 24.2.2015).

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