Debtor’s Liability under Bankruptcy
| Author | Paul Varul |
| Pages | 197-202 |
Paul Varul
Debtor's Liability under Bankruptcy
The liability of a debtor who has been declared bankrupt may consist of:
1) liability for insolvency, as the bankruptcy is caused by the debtor's permanent insolvency;
2) liability for violation of the obligations arising in the bankruptcy proceedings.
Liability may come in the form of criminal or civil liability, but also in other legal remedies that do not fall under criminal or civil liability. Criminal liability is provided for by §§ 384 and 385 of the Penal Code1 (PC) as liability for causing insolvency and for concealing assets and debts in bankruptcy proceedings. Civil liability implies the obligation to compensate for damage if the constant insolvency that caused bankruptcy was caused by a grave error in management or if a member of a directing body of the legal person otherwise violated his or her obligations and caused damage to the legal person. The concept of a grave error in management has been defined in § 28 (2) of the new Bankruptcy Act2 (NBA). Other legal remedies include detention of the debtor, which may be applied if the debtor fails to perform his or her obligations in the bankruptcy proceedings (NBA § 89). Prohibition of business (NBA § 91), which may also be called liability under bankruptcy law, also belongs to the same subtype of liability and it may be applied during the bankruptcy proceedings after bankruptcy has been declared, as well as within three years after the end of the proceedings.
The aforementioned three types of liability - criminal liability, civil liability, and liability under bankruptcy law, are discussed below in view of their different implications depending on whether the liability pertains to causing insolvency or failure to perform the obligations arising in the bankruptcy proceedings. It is important to note that the application of one type of liability does not exclude the application of others; the types of liability may be applied severally, jointly, or all collectively.
The reasons for the debtor's insolvency may vary to a great extent. It is important to identify the reason for insolvency particularly from the viewpoint of application of liability. According to NBA § 163 (5), the court shall set out in the ruling terminating the bankruptcy proceeding whether the cause of the debtor's bankruptcy was an act with criminal elements, error in management, or other fact. A great variety of conditions may serve as other circumstances; to decide on the application of liability, it should be identified whether the insolvency was caused by a criminal offence or by a grave error in management.
Where insolvency is caused by a criminal offence, the debtor is at fault in causing insolvency. One should distinguish between bankruptcy offences and offences that are committed by the debtor, but are not wilfully aimed at materially reducing the debtor's solvency or causing insolvency3.According to NBA § 28 (1), the court must notify the prosecutor or police to decide on the institution of criminal proceedings if it appears in the bankruptcy proceedings that the debtor has performed an act with criminal elements in relation to the insolvency. There is thus an obligation to report bankruptcy offences and other insolvency-related offences. When speaking about the debtor's criminal liability for causing insolvency, we are speaking about bankruptcy offences only; in the case of other criminal offences, the bankruptcy of the debtor is not decisive, while the mandatory condition for conviction of a bankruptcy offence is the prior declaration of bankruptcy and intentional causing of insolvency.
Section 384 of the PC specifies causing insolvency as a bankruptcy offence. Causing of insolvency is understood as material reduction of solvency or causing oneself's insolvency through destroying, damaging, squandering or unjustified grant or assignment of assets or investment thereof in a foreign state or assumption of unjustified obligations or grant of unjustified benefits, or preferring one creditor to another while being aware that due to the existing or expected economic difficulties the acts of the debtor may violate the interests of the creditor. Such an act is punishable only if the court has declared the bankruptcy or established the insolvency of the offender or terminated the bankruptcy proceedings by abatement since the assets of the debtor are insufficient to cover the costs of the bankruptcy proceeding and it is impossible to recover or reclaim the assets (BA § 15 (1) 2); NBA § 29 (1)), let alone to satisfy the creditors' claims. This restriction is justified -- otherwise, the court should decide on insolvency in a criminal proceeding, and this would be rather difficult to do when no bankruptcy proceedings have been instituted before and no interim trustee in bankruptcy has been nominated4.The aforementioned offence presumes that the debtor has intentionally reduced their solvency or caused insolvency by such acts. At least indirect intent is presumed5. The PC does not distinguish between whether these acts are performed before the bankruptcy proceedings or not; declaration of bankruptcy is the decisive criterion. Once bankruptcy has been declared, the debtor may incur criminal liability for acts performed both before and after the declaration of bankruptcy. Of course, it should be kept in mind that after bankruptcy has been declared, the debtor may no longer dispose of and administer the assets of the bankruptcy estate -- this right transfers to the trustee in bankruptcy (NBA § 35) and thus, the possibilities of committing a criminal offence described in PC § 384 are much more limited.
The question of the subject of liability is an important problem. It has been noted in the commentaries on the Penal Code that only a natural person may serve as a subject of the criminal offence described in PC § 3846. If we are to agree to such a conclusion, we would have to admit that the members of the management board of a legal person do not incur criminal liability for causing the legal person's insolvency. This is not justified at all, as the intentional causing of the insolvency of legal persons is, in reality, a much more serious problem than the insolvency of natural persons. The Estonian Penal Code should be supplemented in this respect by providing for the liability of the management board members of a legal person for causing the insolvency of the legal person. A good example is the regulation of the liability of the company officers in British law in sections 206-211 of the Insolvency Act (1986). The criminal offences of company officers are: fraud in anticipation of winding up, transactions in fraud for creditors, misconduct in course of winding up, falsification of company's books, material omissions from statements relating to the company's affairs, false representations to creditors7. There is no need to provide in the Estonian Bankruptcy Act for the criminal liability of debtors who are natural persons or the management board members of debtors which are legal persons; however, PC § 384 should be amended so as to provide for the criminal liability of management board members of a debtor which is a legal person for acts aimed at material reduction of the solvency of the legal person or causing its insolvency, or a new section should be inserted in the PC, analogous to § 384, for management board members of debtors that are legal persons.
An important change in Estonian law is the obligation of management board members of legal persons to file a bankruptcy petition if it is obvious that the legal person is permanently insolvent, set out in § 36 of the General Part of the Civil Code Act8 (GPCCA). The provision was...
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