Bankruptcy Act Does Not Need 150 Amendments

The Chamber of Commerce has sent to the Ministry of Justice a letter regarding the amendments planned for the Bankruptcy Act, in which we set out that the bankruptcy proceedings must be made faster and the claims filed by the creditors should be satisfied in a larger volume, but for that it is not necessary to enter hundreds of changes in to the Act.

A new service does not have to be created to investigate the reasons for insolvency

Today, approximately 45 percent of the bankruptcy petitions filed against companies lapse before bankruptcy is declared. In such cases, the reasons for insolvency are not identified and the claims filed by creditors are not satisfied. Schemes where the board delays with the bankruptcy petition for so long that the company no longer has any assets are common and very often the bankruptcy proceedings laps as a result of that.

In order to improve the situation, the Ministry of Justice has proposed to establish an insolvency service as a unit at the Competition Board, the main aim of which is to investigate the reasons for illegally created insolvencies and through its activities, increase payments made to the creditors.

The Chamber supports the principle according to which, the state could, in case of justified need, interfere in the bankruptcy matters where it is necessary to investigate the reasons for insolvency. At the same time, it is not reasonable to establish a separate service in order to perform this task, instead, these tasks could be given to an existing state agency. Due to the fact that over 40 percent of the debts of the companies consist of tax arrears to the state, the Tax and Customs Board could be given this duty. For example, the Tax and Customs Board in the role of a creditor could cover a larger amount of the expenses related to the carrying out of the bankruptcy proceedings. Even if the state is unable to get the unpaid taxes, it would, in many cases, help to prevent the lapse of the matter, the reasons for the insolvency could be identified and the persons who have acted illegally could be punished.

It is not necessary to establish additional regulations on loans granted by company owners

The Ministry of Justice wants to enter a number of amendments into the Bankruptcy Act in order to prevent the owners of an insolvent company from gaining control over the bankruptcy proceedings, e.g. based on fictitious loan agreements. To prevent such situations, the draft foresees rules for subordinated loans.

If a board member or owner of a company who owns over 10 percent of the share capital gives a loan to a company in a situation where the company is insolvent, the draft considers such loan a subordinated loan. This means that the previously mentioned persons would hold a lower position in the order of payments in bankruptcy proceedings as compared to other creditors. Today, an owner who has given a loan to a company holds the same rights as other creditors when requesting its loan back in a situation of insolvency.

A survey conducted among the members of the Chamber revealed clearly that companies do not support such amendment. The regulation of subordinated loans would decrease the interests of owners to give a company a loan in a situation where the company is in financial difficulties. Furthermore, we drew the attention of the Ministry to the fact that if the owners give a loan to a company in case of financial difficulties, then generally the company uses the loan to satisfy the claims from other creditors and thereby the situation of the creditors is rather improved than deteriorated.

There may be cases where the owners give fictitious loans to companies in order to gain control over the bankruptcy proceedings. In our opinion, the number of such lenders is lower than the number of law-abiding lenders. Unfortunately, the activities of malicious lenders would not be hindered by the solution proposed in the draft. There are schemes used today, where owners do not gain control over the bankruptcy proceedings through the loans they give themselves, but through other legal entities with which they have no official connection, but which they in reality control.

It is reasonable that judges specialise in insolvency cases

While today, the bankruptcy cases are handled by all four county courts, then according to the draft, the bankruptcy cases could be handled by the Harju and Tartu County Courts. The Chamber of Commerce supports higher level of specialisation of the judges, because it helps developing the competence of the judges in the area of insolvency. However, we emphasised in the letter sent to the ministry, that as a result of the amendment, the number of judges specialising in insolvency cases in the Harju and Tartu County Courts should be increased. Otherwise, there is a risk that the procedure for processing the insolvency matters is extended.

The state plans to enter the amendments of the Bankruptcy Act into force on 1 January 2021.