Debt recovery and insolvency in Estonia – wisdom of hindsight and new winds in legislation

​​​​​​​​Turbulent times in European economics and local business bring a fresh wave of debt and insolvency matters. While these are unavoidable nuisances in any business activity, there are steps to be taken and options to consider, when dealing with such matters in Estonia to mitigate loss.

This article aims to provide advice in this regard, taking into account the wisdom of hindsight – that is, our previous experience and that of our clients – as well as new winds, which are the recent amendments introduced into Estonian insolvency legislation.

As an introduction, we never tire of reminding our clients about the importance of knowing the business of their business partners. It often happens that even in highly professional environments, decisions are made based on the impression of the opposing party's representative. While people-reading skills are useful in any business, there are a few options in Estonia, worth exploring before entering into any contract – as well as some that might come in handy during the partnership.

First, in Estonia, much financial and business-related information about companies is available online for free. The Commercial Registry in Estonia (find in English: https://ariregister.rik.ee/eng) publishes data such as annual reports, VAT registration data, board members, shareholders -  as well as taxes paid and taxable turnover (historical data about taxes paid can be found on the Tax Board webpage). This enables to have some understanding of the general standing of potential business partner.

Secondly, certain information on companies' assets can be acquired for small fee. For example, Land Registry in Estonia (find in English: https://kinnistusraamat.rik.ee/Avaleht.aspx?lang=Eng) allows searches based on the name of a legal or natural person, showing the real estate they own (if any) as the search result, and also search by address to find out who owns certain real estate.

Thirdly, some services provides provide summaries of financial standing. The most popular of these is Krediidiinfo (https://www.e-krediidiinfo.ee/). This service is also provided by attorneys in the format of a “mini-due diligence report". If the intent is to enter into a transaction or pursue litigation, it would be reasonable to start the process of receiving a small financial due diligence report with an attorney, as this will help avoid double costs.

Finally, for Estonian ID-card holders, Estonian public announcement website https://www.ametlikudteadaanded.ee/ provides a service to order a notice for when any public notice is published regarding any business partner and/or potential debtor. In case there is any doubt about a party's activity, we advise this to be done. Certain proceedings operate under tight schedules (such as bankruptcy proceedings) where creditors only have certain limited period of time to submit their claims. This means, one needs to be informed in a timely manner of any proceeding that has been initiated to partake efficiently and protect their interests successfully.

Lawyers talk by hour, and litigation and any other form of debt recovery are often postponed in the fear of unnecessary costs. However, waiting too long can negatively affect the on potential outcomes of any debt recovery and litigation attempt.

Most importantly, any claim must be brought against the opposing party before the expiry of the limitation period. The main limitation periods to keep in mind in Estonia are:

• The limitation period for a claim arising from a transaction is three years (applied to most cases);
• The limitation period for a claim arising from a contract for services due to defects in construction work is five years. A claim arising from a sales contract due to defects in construction work remains unaffected by the expiry of the limitation period until five years have elapsed from its completion.
• Where the defect in construction work is due to defects in the raw material or other supplies used to produce the construction work according to their intended purpose, the limitation period for a claim arising from the defects of such material or supplies is five years.
• The limitation period for all the claims listed above is ten years if the obligated party violated their obligations intentionally. Keep in mind that intentional breach is very difficult to prove under our legal practice.
• The limitation period for claims for the transfer of immovable property, for encumbering immovable property with a property right, for assignment or discharge of a property right or for modifying the substance of a property right is ten years.

Unless otherwise provided by law, the limitation period begins when the claim falls due. Where the entitled party has a claim against another party for the omission of a certain act, the limitation period for the claim begins when the corresponding obligation is violated. A claim falls due at the moment when the right accrues to the entitled party to require performance of the obligation that corresponds to the claim. The limitation period for a claim for the payment of agreed-upon remuneration begins from the end of the year during which the claim fell due. Where a claim falls due on presentation of the invoice, the limitation period for the claim begins from the end of the calendar year during which the right to present the invoice accrued to the entitled party.

Secondly, good indicators to proceed with litigation are, for example, when the debtor refuses to pay (so there is no point in waiting); when the debtor seems to be heading towards liquidation (and getting rid of its assets); or when it admits the debt (for example, by paying part of it) or certain important circumstances that the debt is based on. The latter is a good basis for starting litigation since the admission of debt and/or the basis of debt existing usually makes litigation faster, cheaper, and the outcome more predictable. The former is also an important reason to start litigation process since any debt recovery is much harder and almost unlikely to be successful after successful liquidation of debtor. A debt claim can also be submitted to the liquidator, but if the debtor has refused payment prior to liquidation, it is unlikely to pay it during the course of liquidation.

Once a debtor has become insolvent, litigation is not practical. A debtor is insolvent if the debtor is unable to satisfy the claim of a creditor that has fallen due and such inability, due to the debtor's financial situation, is not temporary. A debtor who is a legal person is insolvent also if the assets of the debtor are insufficient for covering the obligations thereof and, due to the debtor's financial situation, such insufficiency is not temporary. Claims that have not fallen due are also regarded as obligations.

In Estonia, insolvency usually leads to bankruptcy. Restructuring is less popular since companies are mostly small. Bankruptcy means the insolvency of a debtor declared by a court ruling.

Historically, bankruptcy proceedings have not been very successful nor efficient in Estonia. According to the 2019 Doing Business Report of the World Bank (which is also the last report the World Bank has issued), the average recovery rate in bankruptcy proceedings in Estonia was 40.7 cents on the dollar, while in Finland it was 88.3 cents. The OECD average at the time was 71.2 cents on the dollar. Also, proceedings were slow due to various parallel litigations going on. This was to an extent due to unlawful actions of debtors and connected people in making the debtor insolvent (hiding assets etc.). Other factors in play were (a) the high cost of bankruptcy proceedings with uncertain returns, due to which it was difficult to find creditor interested in financing proceedings and proceedings would just be terminated due to lack of financing; and (b) our lack of practice and knowledge – for a long period of time, many creditors did not fully know their rights and obligations in case of bankruptcy and did not partake in bankruptcy proceedings efficiently.

In recent years however, the state has introduced various amendments to bankruptcy law and starting 2023 January, new institution – Insolvency Division – has been brought to life. Acting as independent authority, the Insolvency Division supervises over the activities of the debtor and persons connected with it/him/her in connection with bankruptcy proceedings of the debtor. It is also responsible for administrative supervision of the bankruptcy trustees in Estonia. The Insolvency Division (so called Insolvency Ombudsman) is independent in its activities with autonomous competence provided by Bankruptcy Act of Estonia and has its own budget.

The tasks of the Insolvency Division are:

• Supervising the activities of the debtor and persons connected with it/him/her in connection with the bankruptcy proceedings of the debtor and
• Investigating potential unlawful conduct of the debtor and connected persons in causing insolvency.

In the performance of its tasks, the Division performs special audits and public investigations of bankruptcy proceedings and makes proposals to the bankruptcy trustee in conducting bankruptcy proceedings.

The division also finances certain proceedings, where public interest is evident. Meaning, proceedings are less likely to perish due to lack of financing.

Note-worthy amendments to Bankruptcy Act are:

• Establishment of above-described Insolvency Division;
• New procedure for acceptance (recognition) of claims.

In conclusion, we highly recommend that our clients address any delays from their contractual partners promptly and take steps to – understand the cause of delay with any payment or performance; assess the financial situation and standing of such partner; and, if need be, submit necessary demand letters, claims and/or initiate court proceedings. 

Rödl & Partner attorneys are experienced in consulting these matters and happy to assist You!​