Hints and tips on managing debtors

According to the Bank of Estonia, the country is heading towards recession and due to ongoing high inflation, the purchasing power will also decrease. This means that there is less money available, more care is put into giving any out and it is also time to pay more attention to debtors. Since some time has passed from the last recession, it is appropriate to remind ourselves – what can be done to recover money from debtor?

First step needs to be direct communication between creditor and debtor. Negotiating in good faith and reaching agreements on new payment terms (such as payment schedule) can prevent spending significant amount of time and money on proceedings connected to debt recovery as well as prevent harsh consequences on debtor.

Hint! Creditor should not be too trusting.

Precondition for entering into any additional agreements with a debtor that is facing a financial difficulty should be that the creditor receives a security for the claim. Security can be used to cover the debt in case the debtor does not comply with the additional agreement. In practice, common securities are surety from an affiliated party and liquid assets, for example placing a mortgage on debtors’ property in favour of the creditor. Estonian legislation sets out certain requirements for both validity of the surety agreement as well as placing a mortgage.

Tip. It is better to deal with a debtor sooner rather than later.

It is likely that the debtor prioritizes making payments to those creditors first that “make the most noise”.

As a second step creditor can send a demand letter to the debtor, as well as a bankruptcy warning in case there is a risk of insolvency. Reasonable deadline for payment should be provided to the debtor in the letter sent. With this step, creditor also moves closer to giving the matter a formal go-ahead. In the court proceedings that may later potentially take place, submitting demand letter first and/or seeking other out-of-court solutions plays a role for example in division of procedural costs. Bankruptcy warning is also often prerequisite for the submission of the bankruptcy petition.

Hint! Any and all documents should be sent to the official contact addresses of the debtor, to known contact addresses and also, if possible, by registered mail to the registered place of business of the debtor.

Letter sent to a so to say “random” e-mail address may not be usable in subsequent proceedings.

Tip. The tone of the letter and warning sent should be clear and concrete, but open to communication.

The letter should also present, in addition to the sum of the debt, details of the basis and formation of the debt in sufficient detail. The evidence supporting the claim need not be added to the letter, as the debtor presumably has those (for examples the invoices issued). If drafting the letter in a manner that is free from emotion is difficult, it may give a better result if the letter is instead drafted by a neutral third party.

As a third step it is reasonable to consider initiating court- or bankruptcy proceedings to recover the debt and defend the rights of the creditor. Depending on the size of the debt, the creditor can choose whether to submit the claim in the expedited procedure for orders for payment or in regular proceeding of action.

In choosing what type of proceeding to initiate, following should be taken into consideration:

- Bankruptcy proceedings are initiated against debtors that are insolvent. There are several basis for initiating the proceedings, most wide spread of which are: (a) obligation has fallen due and the creditor has cautioned the debtor in writing of the creditor's intention to file a bankruptcy petition and the debtor has thereafter failed to perform the obligation in certain period of time; and (b) it has not been possible within a period of three months to satisfy a claim in execution proceedings conducted with respect to the debtor due to lack of assets or it has become evident in the execution proceedings that the assets of the debtor are insufficient for performing all the obligations thereof. Law sets out different circumstances that need to be present for submission of bankruptcy petition under different basis. It must be considered when making the decision on submitting such application that creditor usually must pay deposit to cover the fee of the bankruptcy administrator when submitting the bankruptcy petition. It is also reasonable to take into account that all other creditors of the debtor may also submit their claims against the debtor in the course of the bankruptcy proceedings, in which case debtors’ assets (if there are any or if administrator is able to recover any) will be divided between all creditors (deposit paid shall be reimbursed prior dividing the assets).

- In the expedited procedure for orders for payment claims under 8000 euros (with ancillary claims) are submitted. This proceeding is faster, cheaper and places a lower burden of proof on the creditor, compared to “regular” proceedings. However, in case the opposing party disputes the claims of the creditor in the course of this proceeding, the proceeding will be forwarded to be settled in court of action.

- Filing a lawsuit is the best-known way to recover a debt. Upon filing a claim in an action proceeding, the application shall be submitted together with the evidence to the county court, which shall hear the views of the plaintiff and the defendant, examine the evidence, and make a decision on the basis of the foregoing. Legislation sets out no maximum amount for the claim and it is possible to secure the claim on or prior submission of claim if certain circumstances are present, for example by placing a judicial mortgage on the real estate of the debtor or seizing the assets on debtors’ accounts. The filing of an action usually entails legal costs and the obligation to pay the state fee. Decision on the compensation of the procedural costs of the parties is made at the final phase of the proceedings and the losing party must reimburse the winning party the costs the latter has incurred in the amount determined by the court (often not in full). The costs associated with court proceedings in Estonia are rather reasonable.

Hint! Absence of assets existence of which can be determined by third parties or transferring debtors’ financial activity to another (legal) person may not necessarily make it impossible to recover the claim.

Legislation enables recovering assets previously owned by debtor in certain cases or to demand the value of such assets to be compensated and/or to demand the board member who has acted in bad faith to compensate the damages he or she has caused (including from their personal assets). It is also usually not a problem if the debtor is in or from another country.

Tip. Correspondence with the debtor and documents relating to the claim should be kept until the claim is satisfied.

Correspondence may constitute as a proof of acceptance of the debt. In other documents, the contractual representative may find other material of legal significance, the importance of which may not be apparent to the creditor himself.

To summarize the above, the steps of managing a debtor are thus following:

1. Communicate with the debtor as soon as the debt arises. Find out what the problems and options of the debtor are. In case you wish to agree on prolonged payment schedule, ask for a security; if this does not result in claim being satisfied

2. Send a clear, concrete, written demand letter to the debtor (or bankruptcy warning if necessary) with reasonable payment deadline to the official contact addresses of the debtor; if this also does not result in claim being satisfied

3. Make sure what the financial situation of the debtor is and what is the most suitable proceeding for recovering such debt and initiate relevant proceeding.

In case you have any doubts and/or don’t have an in-house legal consultant, it is reasonable to consult with a specialist.

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Kristiina Reinson

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