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New Bankruptcy Act eases debtors' woes

12.03.2003

Parliament has ratified the new Bankruptcy Act, which was introduced in order to harmonize the regulation of bankruptcy law with recent private law reforms. The new act increases supervision of bankruptcy trustees, accommodates differences in bankruptcy proceedings involving individuals and amends the ranking of claims.

Parliament (the Riigikogu) has adopted the new Bankruptcy Act, which was introduced in order to harmonize the regulation of bankruptcy law with recent private law reforms. The act takes effect on January 1 2004.

The new act:

• increases supervision of bankruptcy trustees;
• accommodates differences in bankruptcy proceedings involving individuals; and
• amends the ranking of claims.
  

Supervision of Trustees

Pursuant to the new act, not only the courts but also the Ministry of Justice exercises state supervision over trustees in cases where appeals are filed regarding trustees' activities, or where information is submitted regarding a violation of trustees' obligations. The ministry has authority to exert special control over bankruptcy proceedings and to request the intervention of the Chamber of Estonian Bankruptcy Trustees.

Differences in Proceedings involving Individuals

Currently, individual debtors remain liable in relation to bankruptcy proceedings for 10 years. The new act takes a 'fresh start' approach under which they are given a second chance to start their own business. Pursuant to Chapter 11 of the new act, the courts decide on the commencement of proceedings for the release of a debtor from his obligations.

First, the debtor must file a petition requesting release from his obligations. This must be done during bankruptcy proceedings, preferably when filing for bankruptcy since a delay in initiating bankruptcy proceedings is deemed to preclude the possibility of the debtor being released from his obligations under the act.

The court decides on the satisfaction of the petition upon approval of the final report in the ruling on termination of the bankruptcy proceedings. A debtor may apply for release from his obligations only once every 10 years.

During the proceedings for release from his obligations, the debtor must make the utmost effort to satisfy the claims of creditors (eg, by providing detailed information about his financial status). The debtor must submit any income to the proxy appointed at the proposal of the general meeting of creditors, although he is permitted to retain a steadily increasing portion from the third year onwards.

If a debtor performs his obligations within five years, the court will decide the release of the debtor from his obligations at the end of that term. Release will be declined if the debtor proved uncooperative or was declared guilty of a bankruptcy offence.

The release may be annulled within one year if it is found that the debtor intentionally violated his obligations during the proceedings and thereby materially hindered the satisfaction of creditors' claims.

Ranking of Claims

Under the current Bankruptcy Act claims are satisfied according to their ranking as follows:

• claims secured by a pledge, except claims secured by a commercial pledge;
• salary, compensation for termination of an employment contract, holiday pay, compulsory health insurance benefits, support, compensation for damage caused by an injury or any other damage to an individual's health, and compensation for damage arising from the loss of a provider;
• tax arrears;
• claims secured by a commercial pledge;
• other claims accepted on time; and
• claims that were not filed on time but are acceptable.
  

The new act omits two of the priority claims: (i) salary and tax arrears, and (ii) claims secured by a commercial pledge. Claims relating to salary and other employment matters will be satisfied by the Estonian Unemployment Insurance Fund.

Finally, the new act provides that up to 15% of the monies gained through realization of the object of a pledge may be used to cover the costs of bankruptcy proceedings. The current act does not provide for any restrictions.

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