The Estonian Bankruptcy Act has been amended to establish the Bankruptcy Division, a state institution responsible for supervising the activities of bankrupt debtors and funding bankruptcy proceedings where it deems it necessary to improve business culture. Modeled after the institution of the Finnish bankruptcy ombudsman, the service aims to bring more efficiency to the bankruptcy process. The Bankruptcy Division is highly anticipated and welcomed, as the previous supervisory system did not meet expectations to satisfy creditors’ claims or identify the reasons for debtor bankruptcy.

Requirement of Bankruptcy Division

The Estonian Insolvency Act requires that the debtor’s cause of bankruptcy be ascertained. Bankruptcy can often be caused by business risks, it is necessary to investigate the causes of bankruptcy to determine if there has been any malicious practice. This objective was added to the Estonian Bankruptcy Act in 2010 to better serve the interests of creditors and to allow sanctions to result in bankruptcy due to willful or grossly negligent acts. However, simply including this requirement will not lead to reforms, as analyzing and determining the causes of bankruptcy requires resources that are often lacking in the bankruptcy process.

For the most part, companies declared insolvent lack sufficient funds to fully complete bankruptcy proceedings, which increases reliance on creditor funding and makes creditors reluctant to finance bankruptcy proceedings themselves. As a result, many bankruptcy proceedings are closed without resolution, leaving potential delinquencies unresolved, creditors’ interests unprotected, and undermining the business environment with no accountability from business owners and managers.

Therefore, more contribution by the state to the investigation of the bankruptcy process and the causes of bankruptcy was considered important to better protect the interests of creditors and to improve the business culture.

Introduction to the Bankruptcy Division

The Insolvency Division functions as an independent structural unit under the Competition Authority and is autonomous in its activities. It supervises the activities of debtors and related persons in connection with bankruptcy proceedings, investigates possible illegal conduct that may lead to bankruptcy or increased solvency difficulties through special audits and public investigations. In addition, the Bankruptcy Division may make recommendations to the court-appointed bankruptcy trustee to conduct the proceeding and has the power to supervise the trustees’ actions and appropriateness of bankruptcy proceeding costs.

The new regulation of the Bankruptcy Act aims, in particular, to fulfill the objectives of the law as of 2010 – to determine the cause of the debtor’s bankruptcy. The main objective of the Insolvency Division is to increase the rate of payment to creditors through its activities. By exercising state supervision over bankruptcy cases, the Bankruptcy Division plays an important role in improving overall business culture, identifying causes of bankruptcy, and detecting illegal behavior that may have contributed to bankruptcy.

The expenses of the Insolvency Division are reimbursed from the funds allocated to the competition authority’s budget and later from the state budget. The increased funding creates better opportunities for the investigation and prosecution of financial crimes and enables bankruptcy trustees to better investigate the causes of bankruptcy. With the new amendments, the state has a vested interest in the success of the bankruptcy proceedings, as it has become one of the creditors due to fund contributions for the proceedings. This gives a positive signal that the state is devoting more resources to investigating the causes of bankruptcy, and that malicious actors cannot rely on the proceedings being closed without resolution.

Estonia does not tolerate conspiring debtors

With state supervision and financing, debtors can no longer rely on the reluctance of creditors to proceed with empty company bankruptcy proceedings. By investigating potentially illegal conduct that may lead to bankruptcy or escalating solvency difficulties, the Insolvency Division helps prevent fraud and unethical behavior in the business community. Furthermore, by improving the rate of payment to creditors through its activities, the Insolvency Division helps ensure that businesses operate fairly and transparently, which is essential for building trust and confidence in the business environment.

Estonia expects to see a positive impact from the establishment of the Insolvency Division. It will take time to see its full potential, but overall, the Insolvency Division’s efforts to find causes of bankruptcy and identify illegal behavior contribute to a more responsible, reliable and trustworthy business culture in Estonia.

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