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Statutory form requirement for transfer of enterprises

26.01.2004

Certain statutory form requirement must be taken into consideration while transferring of an enterprise in Estonia.

Pursuant to § 77(1) of the Civil Code, a transaction may be entered into in any form (ie, orally, in writing or through notarization), unless a mandatory form is provided by law. Estonian law stipulates mandatory forms for some types of transaction, the most complicated of which is certification by a public notary, in the course of which various aspects of the transaction are subject to scrutiny. If such mandatory form is prescribed by law, the consequences of failure to fulfil this requirement are serious: the deal may be rendered void (§ 83(1)).

An 'enterprise' is an economic unit through which an undertaking operates. It is comprised of possessions, rights and obligations which are or should, by their nature, be designated for the activities of the enterprise (§ 5(1) of the Commercial Code). During the transfer of an enterprise, the ownership of objects of different character is transferred within the frames of the enterprise transfer agreement, including movables, immovables (eg, plots of land) and claims. The law prescribes different form requirements for the transfer of different objects: some have no prescribed form, some require written form, while a transfer of an immovable can be effected only in the form of notarial certification. Pursuant to § 119(1) of the Law of Property Act, a transaction by which the acquisition or disposal of an immovable is undertaken must be notarially certified. As the law stipulates no form requirement for the transfer of enterprise, the question arises as to the form in which the agreement for the transfer of an enterprise must be concluded where immovables belong to the transferable enterprise.

In such circumstances the transfer agreement must fulfil the necessary form requirement in order to be valid and binding. It must be certified by a public notary and subjected to legal scrutiny. As notarial certification is costly (due to the fact that the fee is calculated on the basis of the transaction value), the parties to the agreement may wish to avoid the mandatory form requirement and seek a more cost-effective solution.

With the aim of keeping costs to a minimum without risking validity, the parties can choose to split the transfer agreement into two parts. § 11(3) of the Law of Obligations Act stipulates that if a contract must be entered into in a specific form, then agreements on security, other accessory obligations, assignment of claims or assumption of obligations arising from the contract must also be entered into in such form unless otherwise provided by law or the contract. Accordingly, the agreement for the transfer of immovables will still be certified by a public notary, but a clause stipulating the application of a different form of agreement on accessory obligations can be inserted for the transfer of immovable(s). An agreement on accessory obligations can then be concluded in written form on the basis of the relevant clause. Thereafter, the parties insert all other issues concerning transfer of enterprise into a simple written agreement on accessory obligations.

No court practice exists to evaluate this alternative. Nevertheless, a sensible approach would regard it as being compliant with the purpose of the mandatory form requirement, which is to protect individuals against the negative consequences of their own actions. The mandatory certification requirement appears to have lost its function in the case of enterprise transfers, since adequate protection is already provided by various professionals engaged in the preparation of the proceedings.

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