April 20 2012
Estonian bankruptcy law, in line with that of many other countries, offers greater protection and rights to creditors whose claims are secured by a pledge. The advantage for pledgees is primarily that their claims are given priority over the claims of other creditors and are satisfied out of the money received from the sale of the pledged object.
However, the claim of a pledge is given priority only to the extent of the money received from the sale of the pledged object. This does not mean that the whole amount of money received from the sale of the pledged object is expended to satisfy the claims of pledgees. The legislature has provided that, like other creditors, pledgees must bear the costs of payments related to the bankruptcy proceedings, including the cost of:
Pursuant to Section 153(2) of the Bankruptcy Act, claims secured by a pledge will be satisfied to the extent of the money received from the sale of the pledged object, minus the payments related to bankruptcy proceedings, in proportion to the ratio of the amount of money received from the sale of the pledged object to the total amount of money received from the sale of the bankruptcy estate (but not more than 15% of the amount of money received from the sale of the pledged object). Thus, up to 15% of the money received from the sale of the pledged object may be expended to cover costs related to the bankruptcy proceedings.
However, in practice, concern has arisen as to whether a pledgee has the right to contest the final report on the bankruptcy proceedings in cases where the payment based on the final report forms less than 85% of the money received from the sale of the pledged object and the pledgee has not filed an objection to the distribution proposal. The Civil Chamber of the Supreme Court has analysed this issue in a recent ruling (Civil Case 3-2-1-167-11, February 20 2012).
A creditor whose claim was secured with a first-rank pledge filed an objection to the final report, according to which the bankruptcy trustee had ordered that the payment he should receive in bankruptcy proceedings was approximately 75% of the money received from the sale of the pledged object. The creditor held that he should receive an additional payment and asked the court not to approve the final report.
The court of first instance did not consider the creditor's objection, but approved the final report on the grounds that the creditor had not filed objections to the distribution proposal (on which the final report was based), and thus had lost his right to file such an objection to the final report. The court of first instance also considered that when compelling reasons exist (as in the present case, where the bankruptcy estate consisted only of the pledged object), the court may deviate from the regulation that stipulates the obligation of the pledgee to bear the costs related to the bankruptcy proceedings for up to 15% of the money received from the sale of the pledged object.
The court of second instance found that, despite a possible violation of the requirement stipulated in Section 153(2) of the act, the creditor could no longer rest on such a violation, as the court had already approved the distribution proposal, which clearly showed that the creditor would be paid less than 85% of the money received from the sale of the claims secured by the pledge. Since the payments to be made based on the final report corresponded exactly to the distribution proposal and the creditor had not filed an objection to it, or to the court ruling approving the proposal, the creditor had lost his right to file an objection to the final report.
Unlike the courts of lower instance, the Supreme Court held that even though the creditor had not appealed the court ruling approving the distribution proposal, he still had the right to appeal the ruling approving the final report.
The court explained that since the distribution ratio set out in the distribution proposal is a proportion of the money received from the sale of a bankruptcy estate, which a creditor has the right to receive on the basis of an accepted claim of the corresponding ranking, and the trustee commences payment of money on the basis of the distribution ratios after the approval of the distribution proposal as the money is received, the content of the creditor's appeal to the distribution proposal - and the court ruling approving it - may primarily be an objection to the proportion of the ratio in relation to other creditors (ie, the ratio between creditors).
The final report makes clear the extent to which the creditor's claim will be satisfied and payments from the bankruptcy estate will be made to cover the costs of the bankruptcy proceedings. Therefore, if the creditor objects to the approval of the final report, it must be assessed whether the costs of the bankruptcy proceedings and the payments made to the creditor from the bankruptcy estate based on the ratio have been correctly allotted. The creditor's right to object to the approval of the final report is not restricted by the fact that the distribution proposal approved by a court sets out the amounts of the costs of the bankruptcy proceedings and that no objections have been made to the distribution proposal. However, on approving the final report, the court does not assess the correctness of the ratio (ie, the proportion of the costs); therefore, the creditor may not object to the approval of the final report on the grounds that the ratio has been incorrectly determined.
In addition, the court noted that Section 153(2) of the act is an imperative norm. Therefore, on satisfying a claim secured by a pledge, the pledgee must receive at least 85% of the money received from the sale of the pledged object.
Section 153(2) of the act protects the pledgee by providing a guarantee that no more than 15% of the money received from the sale of the pledged assets may be expended to cover the costs related to the bankruptcy proceedings. This rule applies even if the pledged object constitutes the whole bankruptcy estate. At the same time, as practice has shown, it cannot be ruled out that pledgees will not receive the protection guaranteed for them by the legislature. They must therefore be attentive and file an objection in due time to protect their rights.
In light of the Supreme Court's judgment, the fact that a pledgee did not object to the distribution proposal does not remove the right to object to the final report if the payment that the pledgee receives based on the final report forms less than 85% of the money received from the sale of the pledged object, provided that the ratio was correctly determined in the distribution proposal.
The court's viewpoint is justified, since at the time of preparing and approving the distribution proposal, two factors may be unknown:
In reality, only the final report shows the extent to which the pledgee's claim was satisfied (ie, the amount of the payment actually made to it).
For further information on this topic please contact Peeter Viirsalu or Kedli Anvelt at Law Office Paul Varul (Attorneys-At-Law) by telephone (+372 626 4300), fax (+372 626 4306) or email (firstname.lastname@example.org or email@example.com).
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