Available Options for Funding the Insolvency Proceedings of Corporate Debtors

• Author: Kersti Kerstna-Vaks
• Pages: 78-86

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 insuff‌i 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 eff‌i 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 f‌i 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 f‌i nance the work

of the trustee in bankruptcy from public funds? Clarity on these issues lays the foundations for eff‌i 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 insuff‌i 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 specif‌i 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 f‌i nancing. The same conclusion was reached in the pilot study of the eff‌i 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 specif‌i 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).

78 JURIDICA INTERNATIONAL 23/2015

http://dx.doi.org/10.12697/JI.2015.23.09