Restructuring And Insolvency In Estonia 2009

1 Legislation What legislation is applicable to bankruptcies and reorganisations?

Bankruptcy proceedings and reorganisations of insolvent entities are primarily governed by the Bankruptcy Act, in force since 2004. The Bankruptcy Act applies to the bankruptcy proceedings of both legal persons and individuals, which are carried out following generally the same procedure with only certain differences and exceptions in the case of individuals. Bankruptcy proceedings of two types of entities, namely credit institutions and insurance undertakings, are additionally regulated by the Credit Institutions Act and Insurance Activities Act respectively, which supplement or substitute parts of the regulations of the Bankruptcy Act.

The judicial procedure in bankruptcy proceedings is mainly regulated by the Code of Civil Procedure and the sale of debtor's assets must be organised in accordance with the Code of Enforcement Procedure, although these two acts are in some parts overruled by special provisions of the Bankruptcy Act. Finally, several other basic legal acts have relevance to bankruptcies and reorganisations, such as the General Part of the Civil Code Act, the Law of Obligations Act, the Law of Property Act, the Commercial Code and the Penal Code.

2 Excluded entities What entities are excluded from bankruptcy proceedings and what legislation applies to them?

All individuals and legal entities may be subject to bankruptcy proceedings, with the only exceptions being the state, local government units and the Estonian Unemployment Fund. The aforesaid three legal persons in public law are excluded from bankruptcy proceedings altogether.

Special regulations apply to two specific types of legal entities: the Credit Institutions Act and Insurance Activities Act provide for specific rules to be followed in the bankruptcy proceedings of credit institutions and insurance undertakings respectively.

3 Secured lending and credit (immoveables) What are the principal types of security devices that are taken on immoveable (real) property?

The principal type of security taken on immoveable property is the mortgage. A mortgage is established by a real right contract that is attested by a notary public and on the basis of which the mortgage is entered in the Land Register. In addition, a mortgage may be established by a court order (judicial mortgage) as a means of securing a claim. A mortgage does not presume the existence of a claim to be secured, but claims secured by pledges, including a mortgage, have a priority over other unsecured claims in bankruptcy proceedings.

4 Secured lending and credit (moveables) What are the principal types of security devices that are taken on moveable (personal) property?

Security devices taken on moveable property are different types of pledges (rights of security). As will be seen below, a proprietary right may also be the object of a pledge, if it is transferable.

Possessory pledge

A possessory pledge is established when the pledged thing is transferred into the possession of the pledgee (or of a third person, whereas the pledgee obtains indirect possession of the thing) and the establishment of a possessory pledge is agreed upon. One thing may be encumbered with only one possessory pledge. The possessory pledge is accessory to the secured claim, that is, together with the termination of the claim the pledge is also terminated.

Registered security over moveables

A patent, trademark, industrial design, utility model, variety, layoutdesign of an integrated circuit, motor vehicle or aeroplane, which is entered in a publicly accessible register, the maintenance of which is regulated pursuant to procedure provided by law, may be encumbered with a registered security over moveables. Creation of a registered security over moveables requires that the holder of the pledged object and the pledgee agree upon encumbering the object with a registered security and a relevant entry concerning the pledging is made in the corresponding register. The registered pledge does not presume the existence of a claim to be secured. Although the law provides for the possibility to encumber motor vehicles and aeroplanes and to enter such encumbrances in the respective registers, the validity and enforceability of these securities are questionable, because the respective registers are not publicly accessible or not maintained pursuant to the law, therefore one prerequisite for the creation of a registered pledge is not fulfilled.

Commercial pledge

An undertaking entered in the commercial register may establish a pledge on the undertaking's moveable property as security for a claim (commercial pledge), without the undertaking transferring possession of the pledgeable property. A commercial pledge extends to all moveable property of a company (including branch of a foreign company) or moveable property relating to the economic activity of a sole proprietor. The pledge extends to all encumberable property that belongs to an undertaking at the time the pledge entry is made and to property that the undertaking acquires after the pledge entry is made, with a few exceptions deriving from the law (eg, money, shares, stocks, promissory notes and other securities; property that has already been encumbered by a pledge). The commercial pledge does not restrict the right of the undertaking to use and dispose of the property encumbered with a pledge in the ordinary course of business. A commercial pledge is created after a corresponding entry is made in the commercial pledge register, based on the commercial pledge contract between the undertaking (pledgor) and the pledgee. A commercial pledge does not presume the existence of a securable claim and does not extinguish with termination of a claim. Commercial pledge is probably the most common type of security taken on moveables.

Pledge of rights

A proprietary right (claim) may be the object of a pledge, if it is transferrable. As a general rule, the pledge of a right is established when the pledgor and the pledgee have concluded a written agreement concerning the establishment of a pledge. Establishment of the pledge does not require transfer of the pledged right to the pledgee; however, the use of the pledged right by the pledgor is somewhat restricted (the pledgee's consent is needed to terminate the pledged right by a transaction or alter the pledged right in a way that decreases the value of the right).

A specific form of pledging rights is the establishment of financial collateral, which may be used for pledging securities and financial claims. Another similar form of pledging rights is transfer of collateral, which can be regarded as a special form of assignment of claims. Transfer of collateral is not expressly regulated in the law, but is allowed and used in practice and has been recognised as a form of security interest also by the Supreme Court of Estonia.

Others

In addition, retention of title could be regarded as security taken over moveables.

5 Unsecured credit What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available? Do any special procedures apply to foreign creditors?

Interim measures may be imposed by the court. In general, interim measures may be awarded to secure the execution of a future judgment, that is, one has to submit an action to court in order to apply for interim measures. As an exception, the court may award interim measures within one month before the claimant submits the action to the court. A special fee (security) of 5 per cent of the value of the requested interim measures, but not more than 100,000 kroons (approximately e6,390) has to be paid to the state in order to apply for interim measures, which is returned if the interim measures are awarded at least partially. In addition, interim measures may be requested and imposed in executive, administrative and criminal proceedings. No special procedures apply to foreign creditors.

6 Courts What courts are involved in the bankruptcy process? Are there restrictions on the matters that the courts may deal with?

Bankruptcy cases are considered as civil cases and are therefore heard exclusively by the general (civil) courts. Bankruptcy petitions are filed with and heard at the courts of first instance (county courts). All disputes related to the bankruptcy proceedings, including claims aimed at recovering the debtor's assets and disputes over the acceptance of claims, are also heard by the same (civil) court, even if these concern issues that would normally fall under the competence of an administrative court (for example, disputes over the existence or size of the debtor's tax debt). Similarly to other civil cases, the decisions and orders of the court of first instance (with some exceptions) may be contested by submitting an appeal to a circuit court and, in the last instance, an appeal in cassation to the Supreme Court.

7 Voluntary liquidations What are the requirements for a debtor to commence a voluntary liquidation of its business? What are the effects of the commencement of the liquidation?

There are no special requirements for commencing voluntary liquidation if the debtor is solvent, that is, able to satisfy the claims of all creditors during the process of liquidation. Liquidation proceedings are commenced after shareholders have adopted a resolution to dissolve the company. A dissolution resolution is adopted if at least two-thirds of the votes of the shareholders who participate in the voting are in favour, unless there is a greater majority requirement prescribed in the articles of association. As a general rule the members of management board will also act as liquidators, whose task is to terminate the activities of the company, collect debts, sell assets and satisfy the claims of creditors. However, if during the process it should occur to the liquidators that the assets of the company are insufficient...