The highly anticipated establishment of the Insolvency Division in Estonia aims to bring more efficiency to bankruptcy proceedings

The Estonian Bankruptcy Act has been amended to establish the Insolvency Division, a state entity responsible for supervising the activities of insolvent debtors and funding bankruptcy proceedings where it deems it necessary to improve the business culture. Modelled after the Finnish bankruptcy ombudsman’s institution, the service aims to bring more efficiency to bankruptcy proceedings. The Insolvency Division is highly anticipated and welcomed, as the previous supervision system did not meet expectations in satisfying creditors’ claims or identifying the causes of debtor insolvency.  

The need for the Insolvency Division 

The Estonian Bankruptcy Act requires that the cause of the debtor’s insolvency must be ascertained. While insolvency may often result from commercial risk, investigating the causes of insolvency is necessary to determine whether there has been any malicious practice. This objective was added to the Estonian Bankruptcy Act in 2010 to better serve creditors’ interests and allow sanctions in cases where insolvency resulted from intentional or grossly negligent actions. However, simply including this requirement did not lead to improvements, as analysing and determining reasons for insolvency requires resources that bankruptcy proceedings often lack. 

For the most part, companies that have been declared insolvent lack sufficient funds to even fully carry out bankruptcy proceedings, leading to a reliance on creditor funding and a high number of cases ending in abatement since creditors are often hesitant to finance bankruptcy proceedings themselves. As a consequence, many bankruptcy proceedings are closed without resolution, leaving potential offences unresolved, creditors’ interests unprotected, and undermining the business environment with no accountability from business owners and managers. 

Therefore, an additional contribution by the state to the bankruptcy proceedings and the investigation of the causes of insolvency was deemed crucial to better protect creditors’ interests and improve the business culture.  

Introduction of the Insolvency Division 

The Insolvency Division operates as an independent structural unit under the Competition Authority and is autonomous in its activities. It supervises the activities of the debtor and affiliated individuals in relation to bankruptcy proceedings, investigates potentially unlawful conduct that may have led to insolvency or exacerbated solvency difficulties through special audits and public investigations. Additionally, the Insolvency Division may offer recommendations to the court-appointed bankruptcy trustee on conducting the proceedings and has the power to supervise the trustees’ actions and the appropriateness of bankruptcy proceeding costs. 

The new regulation of the Bankruptcy Act aims, in particular, to meet the law’s objectives as of 2010 – to determine the cause of the debtor’s insolvency. The Insolvency Division’s main goal is to increase the rate of payouts to creditors through its activities. By exercising state supervision in insolvency cases, the Insolvency Division plays a significant role in improving the overall business culture, identifying causes of insolvency, and detecting unlawful behaviour that may have contributed to insolvency.  

The Insolvency Division’s expenses are covered by the funds allocated to it in the Competition Authority’s budget and subsequently reimbursed from the state budget. Increased funding creates better opportunities for investigating and prosecuting economic crime and enables the bankruptcy trustees to investigate the causes of insolvency more thoroughly. With the new amendments, the state has a vested interest in the success of the bankruptcy proceedings, as it becomes one of the creditors due to contributing funds for the proceedings. This sends a positive signal that the state has set aside additional resources to investigate insolvency causes, and that malicious actors cannot rely on proceedings being closed without resolution. 

Estonia does not tolerate scheming debtors 

With state supervision and financing, debtors can no longer rely on creditors’ unwillingness to fund bankruptcy proceedings of an empty company. By investigating potential unlawful conduct that may have led to insolvency or exacerbated solvency difficulties, the Insolvency Division helps to deter fraudulent and unethical behaviour in the business community. Moreover, by improving the rate of payouts to creditors through its activities, the Insolvency Division helps to ensure that businesses operate in a fair and transparent manner, which is essential for building trust and confidence in the business environment.  

Estonia expects to see a positive impact resulting from establishing the Insolvency Division. It will take time to see its full potential, but overall, the Insolvency Division’s efforts to investigate the causes of insolvency and identify unlawful behaviour contribute to a more responsible, reliable and trustworthy business culture in Estonia.