On the Development of Bankruptcy Law in Estonia
| Author | Paul Varul |
| Position | Professor of Civil Law |
| Pages | 172-178 |
Page 172
The Republic of Estonia did not have a bankruptcy act of its own before 1940. As the economy was based on market economy principles, bankruptcies were possible and bankruptcy proceedings took place. Bankruptcy proceedings were carried out on the basis of the Tsarist Russian laws still valid in Estonia in that period, such as the Commercial Procedure Act, Civil Procedure Act and the Russian Civil Act. A curious phenomenon was the Insolvency (Bankruptcy) Act drawn up by Aleksander Buldas and published in 1934, which despite its title was not a law, but a systematised presentation of the bankruptcy proceedings provisions of the above Russian acts1. Preparation of an Estonian bankruptcy act was started, but it was not passed before Estonia's independence was lost in 1940.
In the controlled economy conditions of the Soviet period, a bankruptcy act was not needed, as bankruptcy proceedings were not possible. In 1991 when Estonia regained independence and market economy became the basis for reorganisation of economy and proprietary relations, the need arose again for a bankruptcy act. The preparation of a bankruptcy act was quite a difficult task, as there was no court practice or experience concerning the country's own bankruptcy cases since 1940. Neither had anyone in Estonia been engaged in bankruptcy law since that time. A draft act was, however, successfully prepared and Estonia's first Bankruptcy Act was passed by the Riigikogu2 on 10 June 1992 and entered into force on 1 September 1992 (RT,3 1992, 31, 403)4. A new target was set at once to improve the Bankruptcy Act after a few years of practice and experience5.
This target was met - on 18 December 1996 the Riigikogu approved major amendments to the Bankruptcy Act, which entered into force on 1 February 1997 (RT, 1997, 5/6, 32)6. We can thus conditionally speak about two bankruptcy acts in Estonia7 - the 1992 Bankruptcy Act and the 1996 Bankruptcy Act (consolidated text: RT, 1997, 18, 302)8. Officially and essentially there is one Act - the amendments and additions do not alter the basic provisions laid down in 1992 - the 1996 Act is an improved and elaborated version of the 1992 Act.
It can be said that the 1992 Bankruptcy Act has performed well and the 1996 amendments should make the application of the Act even more effective. It was stated in the conclusion of the expert analysis of the 1992 Act carried out in 1994 by the American Bar Association in the framework of the Central and East European Law Initiative (CEELI): "In conclusion, it should be once again emphasised that this draft is an excellent starting point. Indeed, even without further amendment, this Estonian Bankruptcy Code could be succesful"9.
In 1991-1992, when the Bankruptcy Act was prepared, a large amount of material on the bankruptcy law of other countries was studied, because, as mentioned above, Estonia had no materials or experience of its own. The acts of Sweden, Finland, Germany, the USA and France providing for bankruptcy proceedings were especially analysed.
At the beginning of the 1990s, large-scale privatisation began in Estonia, many new enterprises emerged based on private capital, banking and credit institutions were in the early stages of development, the land reform was launched, land was not in commerce yet, and it was not possible to establish mortgages as loan security. The situation with creditors was uncertain and unstable. As noPage 173correct and functioning system of securities had formed yet, the payment of debts depended on the debtor's ability to pay. The activity of debtors was also unstable in the early phase of reforms, there were many new entrepreneurs who had no experience in management or financing in market economy conditions. All this created the need to focus on the protection of the creditors' interests in the bankruptcy of the debtor. In choosing a model for the act, the examples of the USA and France were discarded, as the time was not ripe in Estonia to protect the interests of the debtor to the extent that this is done in these countries10.The main example was the Swedish Insolvency Act,11which was one of the newest acts in Europe at the time and provided for the protection of creditors' rather than debtors' interests.
By 1996, the conclusion was reached that the debtor's interests should be more protected than provided by the 1992 Act. This conclusion did not imply changes in the basic model of the Act or conversion to the US and French model. The general development in other countries is toward a greater protection of the debtor, as provided for instance by the latest example in Europe, the German Insolvency Act (Insolvenzgesetz) which entered into force on 1 January 1999 and has been an important example in improving the Estonian Bankruptcy Act.
This article focuses on the balance between the protection of the debtor's and creditor's rights and interests in the Estonian Bankruptcy Act (hereinafter: "BA"), as well as the debtor's liability according to the 1992 bankruptcy Act and the 1996 additions to it. The issues where the Estonian regulation differs from that of other countries will also be discussed.
The commencement of bankruptcy proceeding can be petitioned by the debtor or the creditor. Any natural or legal person can be a debtor and a creditor. The state and local government cannot be debtors.
The Act does not provide the bases for a debtor's bankruptcy petition, therefore a debtor may always file a petition for its own bankruptcy, but must explain the cause of insolvency (BA § 8). As a rule, the court does declare bankruptcy on the basis of a debtor's petition, but might not do it if it finds the petition to be unjustified. In cases prescribed by law the debtor is obliged to file a bankruptcy petition, for example upon the death of a debtor, the successor is obliged to file a bankruptcy petition if the successor is the state or local government and the estate is insufficient to pay all the debts of the bequeathed. (BA § 10(2)). According to § 373 of the Commercial Code (RT, 1998, 59, 941),12 liquidators have to submit a bankruptcy petition if it becomes evident in the course of liquidation of a public limited company that the assets of the company being liquidated are insufficient to satisfy all claims of creditors. The debtor's obligation to file a bankruptcy petition arises from the equal treatment of creditors principle in conditions where the debtor does not have enough assets to fully satisfy all claims of creditors.
As concerns the filing of a debtor's bankruptcy petition, the Bankruptcy Act prescribes for the representation of a debtor which is a legal person requirements which are different to the general rules established for representation of legal persons. When compared to the 1992 Act, the requirements are stricter in the 1996 Act. A bankruptcy petition may be filed by all members of the management board of a legal person collectively, although as a general rule, they have the right to individually represent the legal person. The consideration here concerns better protection of the debtor, to prevent petitions which are unjustified and conflicting with the interests of the debtor.
A debtor is also protected by the fact that a creditor may file a bankruptcy petition only in circumstances prescribed in detail by law (BA § 9). No other person besides the debtor and creditor may file a bankruptcy petition, and the bankruptcy of a debtor cannot be declared on the court's own initiative.
According to the 1992 Act, a bankruptcy proceeding commenced automatically if the bankruptcy petition complied with requirements and was accepted by court. Such procedure was established in 1992 in order to save time, as the bankruptcy proceeding as a whole is rather time-consuming. Account was also taken of the fact that according to law, a bankruptcy petition was to be reviewed quickly - a debtor's petition immediately, or with good reason, within 20 days, and a creditor's petition within 20 days, or with good reason, within two months.
Such procedure for commencement of bankruptcy proceedings did not, however, prove effective in practice, and in many cases, became unjust...
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