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September 28 2007
Bankruptcy proceedings start when a bankruptcy petition is filed. Such a petition may be filed by either the debtor or the creditor.
If a debtor realizes that it is insolvent or that insolvency appears to be inevitable, it is reasonable for it to file a bankruptcy petition. In certain circumstances the debtor is obliged to file a bankruptcy petition. Companies are subject to the principle that a company cannot exist while insolvent; therefore, Section 36 of the General Part of the Civil Code Act provides that in such cases a member of the management board of a legal person must file a bankruptcy petition. However, the ordinary winding-up of a company takes place through a liquidation proceeding. During liquidation proceedings a situation could also occur where it becomes evident that the assets of a legal person are not enough to satisfy all claims of its creditors. Such situation is regulated under Section 44 of the General Part of the Civil Code Act, which in such cases requires the liquidator to file a bankruptcy petition immediately.
If a debtor has filed a bankruptcy petition, it must justify it; however, its insolvency is presumed.
In practice, it is usually a creditor which files a bankruptcy petition. The bankruptcy petition of a creditor must comply with the requirements set forth by law. Section 10(1) of the Bankruptcy Act stipulates that the bankruptcy petition of a creditor must substantiate the debtor's insolvency and prove the existence of a claim. This means that in addition to the claim, the creditor must prove the circumstances that indicate probable insolvency. According to Section 10(2), in order to do so the creditor must rely on at least one of the following circumstances:
Under Estonian law, once received by the court a bankruptcy petition goes through a formal verification process as set out by Section 14 of the Bankruptcy Act. Section 14 states that the court can rule to refuse the petition if:
If such a hindrance exists, a court will refuse to accept and hear the bankruptcy petition. If no such hindrance exists, a court will decide separately whether to commence proceedings.
Different verification procedures are carried out by the court with regard to the debtor's bankruptcy petition and the creditor's bankruptcy petition. While the debtor's bankruptcy petition is formally verified by a court as indicated, the verification of the creditor's bankruptcy petition is more thorough. The verification of the creditor's bankruptcy petition is regulated under Section 15 of the Bankruptcy Act. If any of the circumstances mentioned in Section 15 exist, a court will not commence the bankruptcy proceedings. According to Section 15 of the Bankruptcy Act a court will refuse to commence bankruptcy proceedings in the following circumstances:
The court's option to forgo bankruptcy proceedings if any of the circumstances listed in Section 15 of the Bankruptcy Act exist should help to minimize the hearing of unreasonable bankruptcy cases.
A court will rule on the commencement of bankruptcy proceedings within 10 days of the filing of the bankruptcy petition. If the commencement of bankruptcy proceedings is to be decided on during a preliminary hearing (there is no need for a preliminary hearing if the debtor has filed the bankruptcy petition), the court will decide on the time of the hearing and send out summonses for that hearing within 10 days of the filing of the bankruptcy petition. The preliminary hearing is necessary to allow the debtors to defend themselves against the bankruptcy petition. Under Estonian law, the commencement of bankruptcy proceedings does not mean that bankruptcy is declared - that is, on commencement of bankruptcy proceedings, bankruptcy has not yet been declared. At this stage the court does not discuss whether the debtor's insolvency is established. Estonian law sets out a framework under which a certain period of time remains between the commencement of bankruptcy proceedings and the issue of the bankruptcy order. This period is necessary to determine the financial situation of the debtor and ensure the preservation of the debtor's property to the greatest extent possible. A court can appoint an interim trustee to perform these two tasks.
The length of time between the commencement of bankruptcy proceedings and the issue of the bankruptcy order depends on whether the bankruptcy petition was filed by the debtor or the creditor. According to Section 10(1) of the Bankruptcy Act, the hearing of the debtor's bankruptcy petition may take a maximum of 20 days. Section 10(2) states that the hearing of the creditor's bankruptcy petition may take a maximum of two months.
Upon hearing a bankruptcy petition the court concentrates on establishing insolvency. Upon finishing hearing a bankruptcy petition the court has three options:
For further information on this topic please contact Paul Varul or Peeter Viirsalu at Law Office Paul Varul (Attorneys-At-Law) by telephone (+372 7 301 610) or by fax (+372 7 301 620) or by email (firstname.lastname@example.org or peeter.viirsalu).
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