Description
Main Elements And Risks For Creditors Under The New Estonian Restructuring Act
Main elements and risks for creditors under the new Estonian Restructuring Act
The new Estonian Restructuring Act is a long-awaited revolution in the regulation of corporate
insolvencies in Estonia. The Restructurings Act was adopted on 4 December 2008 and entered into
force on 26 December 2008 with the aim of avoiding unnecessary bankruptcies and giving an
alternative solution for distressed corporations. The law established a completely new legal procedure
enabling distressed corporations on the verge of insolvency to reorganize themselves operationally,
restructure their debt, and apply other measures to regain financial health and restore profitability.
The restructuring procedure is designed as an alternative to bankruptcy, similar to the US Chapter 11,
the German Insolvenzordnung, and the Finnish Saneerauslaki.
Background Stats and Interest Groups
Estonian court practice during the first 9 months of 2009 shows that surprisingly many entrepreneurs
have entered into restructuring proceedings – over 70 applications have been filed and there are
around 40 restructuring proceedings ongoing. Several restructuring plans have been left unconfirmed
and proceedings have been terminated. There are only a few of proceedings that can be considered
successful where the restructuring plan has been confirmed by the creditors and by the court. One of
these is the restructuring of the construction corporation advised by Sorainen.
Apart from debtors, the Restructurings Act is intended to be beneficial also for creditors, large and
small, secured or unsecured, who are provided a clear nonbankruptcy means of maximising the
amount they are able to collect from their corporate debtor.
The new law is also appealing to turnaround investors and venture capitalists whose business is
acquiring debt or equity in troubled corporations for a fraction of their face value, injecting new
capital, improving management, and adding other value in order to restore the target’s profitability.
The new Restructuring Act has already dragged to the marketplace a number of distressed
corporations that may be of interest to turnaround investors.
Overview of the Proceedings
A precondition to opening the restructuring proceedings is that the debtor corporation files an
application to court giving proof of that the corporation is likely to become insolvent in the future, the
corporation requires restructuring and the sustainable management of the corporation is likely after
the restructuring. The list of debts and financial reports of the corporation have to be appended to the
application.
If the court decides to satisfy the filing, then the enforcement proceedings against the corporation and
the calculation of a fine for delay or a contractual penalty on claims against the corporation are
suspended. A suspension also applies to the deciding on commencement of bankruptcy proceedings.
Additionally, there’s the possibility to terminate court proceedings regarding a financial claim against
the corporation. This is intended to give the corporation time to work out its problems through the
automatic stay of collection attempts against it, while still continuing to run its business.
If the court opens the restructuring proceedings, then it also appoints a restructuring advisor who will
advise the debtor in preparing the restructuring plan. Among other duties, the advisor also has to
monitor the solvency of the debtor and the purposefulness of the transactions the debtor enters into as
well as check the legality of the claims brought into the restructuring estate.
The entrepreneur has 60 days to prepare and file the restructuring plan to the court. In order for the
restructuring plan to become effective, the plan must be accepted by creditors and confirmed by the
court. The plan is accepted by the creditors if at least 1/2 of all the creditors are in favour and at least
2/3 of all the votes are in favour. The court shall approve a restructuring plan if the creditors have
received notice of the amount of their claim and the restructuring plan and if the plan complies with
legal requirements. On certain circumstances the court can even confirm a plan that has not been
approved by the creditors. This is subject to, among others, that two additional experts confirm that
the restructuring of the entrepreneur is likely to be successful and that the entrepreneur is an
significant employer.
Risks for Creditors
It is clear that given the current state of the economy, some businesses are more viable than others.
Also, it seems that in many restructuring proceedings there may have occurred abuse of the
restructuring proceedings by way of these proceedings being initiated by corporations that do not
have a realistic perspective of making a successful turnaround. In other cases, there appear to have
occurred violations of creditor rights. However, it is likely that additional court practice and
implementation of certain changes to the existing restructuring law will solve these problems. There
are many problematic and unclear clauses in the current language of the Restructuring Act that are
difficult to overcome by way of interpretation. Proposals for amending and improving the current
Restructuring Act are under way and will hopefully reach the Parliament within a couple of months.
Some of the dangers and risks to the creditors in the current regulation are listed below:
• Restructuring procedure is initiated with respect to corporations whose business is not
sustainable and whose insolvency may be permanent
This may result in a situation where a creditor’s claim is not satisfied in the same extent as it would
have been if bankruptcy proceedings had been instituted instead of restructuring. On the other hand,
Estonian courts restructuring practice shows that less than half of the restructuring applications have
been granted and proceedings opened.
This indicates that courts are not too eager to institute restructuring proceedings, but certainly the
practice to evaluate the financial situation and sustainability of corporations is still insufficient. Thus,
for example, restructuring procedure has been initiated with respect to several corporations who
engage only in real estate development and lack a proper business plan.
• If the value of a creditor’s security reduces abruptly, the creditor does not have the right
under the Restructuring Act to demand termination of the restructuring procedure or give the creditor
any preferential status in the restructuring procedure
This may entail a significant risk for a secured creditor considering that the market may still be in
decline, meaning that the value of property may reduce quickly in a short time. To mitigate the risk, it
may be helpful if the corporation’s liquidation value is considered in preparing the restructuring plan.
• The restructuring plan focuses only or mainly on the restructuring of claims and capital,
disregarding operational restructuring measures and opportunities for continuing business
Failure to implement operational organisational measures is often the main reason of potential
insolvency of a corporation going through restructuring. Restructuring can hardly be successful if the
real causes of insolvency are not cured. Such causes may include wrong strategy or communication
(both internal and external), marketing and sales plans, nature of assets, and the number or profile of
employees. Likewise it is difficult to reorganise a corporation who currently has no business activity
and plans to overcome difficulties only by expecting the market situation to improve.
• In Estonia certain essential restructuring principles to protect creditors, which have been in
place in US court practice, for example, for tens of years already, have not been rooted in court
practice
These principles include the Best Interests Test, where claims of all creditors who disagree with the
restructuring plan must be satisfied in the course of the restructuring procedure at least at the
liquidation value of the claim. Another important principle is the Feasibility Test, which means that a
restructuring procedure must be realistic (not relying on wishful thinking) and there must be a
reasonable opportunity to fulfil the plan. Feasibility of the debtor is evaluated mainly by considering
its prior rate of return.
• The value of business of a debtor going through restructuring does not increase in the course
of restructuring procedure, but reduces
This in its turn may reduce the extent to which creditors claims are satisfied. Restructuring advisors,
who have the obligation arising from law to verify expediency of transactions and solvency of the
debtor throughout the restructuring procedure and to prepare reports for each half year, can help
mitigate this risk.
• Unjustified unequal treatment of creditors and impairment of their interests
The Restructuring Act gives a corporation being reorganised freedom to choose which debts and to
what extent to satisfy in the course of restructuring. This poses a risk of damaging creditors’ interests.
The factors that mitigate the risk are supervision exercised by the court and restructuring advisors,
and the creditors’ right to file a motivated petition with the court for non-approval of the restructuring
plan and termination of the procedure. Further, it is very likely that damage caused to creditors by
unjustified preferential treatment or impairment of interest can be recovered in course of potential
subsequent bankruptcy proceedings. On the other hand it may be difficult for a creditor to decide
whether he has been treated unfairly compared to other creditors as the law does not require
disclosure of claims that are not restructured in the course of the restructuring proceedings.
Supplementation of the Restructuring Act with principles of creditor treatment would certainly
enhance transparency of the restructuring procedure.
• Many restructuring advisors are not covered by liability insurance
If restructuring advisors wrongfully violate their obligations thus causing damage to creditors, it may
be difficult for the creditor to enforce its claim with respect to an uninsured restructuring advisor
because the current Restructuring Act does not require liability insurance from restructuring advisors
whereas liability insurance taken by trustees in bankruptcy and lawyers may not necessarily cover the
practice of restructuring advisors.
• Initiation of restructuring procedure does not suspend expiry of the period of limitation of
transactions
In certain cases the Bankruptcy Act allows to revoke transactions which were made before
bankruptcy proceedings were declared and which impair creditors’ interests. The time between
making the transaction (e.g. 6 months, 1 year, etc) and initiation of the bankruptcy proceeding is
important here. Initiation of a restructuring procedure does not suspend the limitation periods for
recovery and therefore certain transactions that impair the creditors’ interest may remain unrecovered.
Karin Madisson
Partner of Sorainen, Head of Corporate Advisory Team
Risto Agur
Senior Associate of Sorainen, Restructuring Advisor
doc_963496991.pdf
Main Elements And Risks For Creditors Under The New Estonian Restructuring Act
Main elements and risks for creditors under the new Estonian Restructuring Act
The new Estonian Restructuring Act is a long-awaited revolution in the regulation of corporate
insolvencies in Estonia. The Restructurings Act was adopted on 4 December 2008 and entered into
force on 26 December 2008 with the aim of avoiding unnecessary bankruptcies and giving an
alternative solution for distressed corporations. The law established a completely new legal procedure
enabling distressed corporations on the verge of insolvency to reorganize themselves operationally,
restructure their debt, and apply other measures to regain financial health and restore profitability.
The restructuring procedure is designed as an alternative to bankruptcy, similar to the US Chapter 11,
the German Insolvenzordnung, and the Finnish Saneerauslaki.
Background Stats and Interest Groups
Estonian court practice during the first 9 months of 2009 shows that surprisingly many entrepreneurs
have entered into restructuring proceedings – over 70 applications have been filed and there are
around 40 restructuring proceedings ongoing. Several restructuring plans have been left unconfirmed
and proceedings have been terminated. There are only a few of proceedings that can be considered
successful where the restructuring plan has been confirmed by the creditors and by the court. One of
these is the restructuring of the construction corporation advised by Sorainen.
Apart from debtors, the Restructurings Act is intended to be beneficial also for creditors, large and
small, secured or unsecured, who are provided a clear nonbankruptcy means of maximising the
amount they are able to collect from their corporate debtor.
The new law is also appealing to turnaround investors and venture capitalists whose business is
acquiring debt or equity in troubled corporations for a fraction of their face value, injecting new
capital, improving management, and adding other value in order to restore the target’s profitability.
The new Restructuring Act has already dragged to the marketplace a number of distressed
corporations that may be of interest to turnaround investors.
Overview of the Proceedings
A precondition to opening the restructuring proceedings is that the debtor corporation files an
application to court giving proof of that the corporation is likely to become insolvent in the future, the
corporation requires restructuring and the sustainable management of the corporation is likely after
the restructuring. The list of debts and financial reports of the corporation have to be appended to the
application.
If the court decides to satisfy the filing, then the enforcement proceedings against the corporation and
the calculation of a fine for delay or a contractual penalty on claims against the corporation are
suspended. A suspension also applies to the deciding on commencement of bankruptcy proceedings.
Additionally, there’s the possibility to terminate court proceedings regarding a financial claim against
the corporation. This is intended to give the corporation time to work out its problems through the
automatic stay of collection attempts against it, while still continuing to run its business.
If the court opens the restructuring proceedings, then it also appoints a restructuring advisor who will
advise the debtor in preparing the restructuring plan. Among other duties, the advisor also has to
monitor the solvency of the debtor and the purposefulness of the transactions the debtor enters into as
well as check the legality of the claims brought into the restructuring estate.
The entrepreneur has 60 days to prepare and file the restructuring plan to the court. In order for the
restructuring plan to become effective, the plan must be accepted by creditors and confirmed by the
court. The plan is accepted by the creditors if at least 1/2 of all the creditors are in favour and at least
2/3 of all the votes are in favour. The court shall approve a restructuring plan if the creditors have
received notice of the amount of their claim and the restructuring plan and if the plan complies with
legal requirements. On certain circumstances the court can even confirm a plan that has not been
approved by the creditors. This is subject to, among others, that two additional experts confirm that
the restructuring of the entrepreneur is likely to be successful and that the entrepreneur is an
significant employer.
Risks for Creditors
It is clear that given the current state of the economy, some businesses are more viable than others.
Also, it seems that in many restructuring proceedings there may have occurred abuse of the
restructuring proceedings by way of these proceedings being initiated by corporations that do not
have a realistic perspective of making a successful turnaround. In other cases, there appear to have
occurred violations of creditor rights. However, it is likely that additional court practice and
implementation of certain changes to the existing restructuring law will solve these problems. There
are many problematic and unclear clauses in the current language of the Restructuring Act that are
difficult to overcome by way of interpretation. Proposals for amending and improving the current
Restructuring Act are under way and will hopefully reach the Parliament within a couple of months.
Some of the dangers and risks to the creditors in the current regulation are listed below:
• Restructuring procedure is initiated with respect to corporations whose business is not
sustainable and whose insolvency may be permanent
This may result in a situation where a creditor’s claim is not satisfied in the same extent as it would
have been if bankruptcy proceedings had been instituted instead of restructuring. On the other hand,
Estonian courts restructuring practice shows that less than half of the restructuring applications have
been granted and proceedings opened.
This indicates that courts are not too eager to institute restructuring proceedings, but certainly the
practice to evaluate the financial situation and sustainability of corporations is still insufficient. Thus,
for example, restructuring procedure has been initiated with respect to several corporations who
engage only in real estate development and lack a proper business plan.
• If the value of a creditor’s security reduces abruptly, the creditor does not have the right
under the Restructuring Act to demand termination of the restructuring procedure or give the creditor
any preferential status in the restructuring procedure
This may entail a significant risk for a secured creditor considering that the market may still be in
decline, meaning that the value of property may reduce quickly in a short time. To mitigate the risk, it
may be helpful if the corporation’s liquidation value is considered in preparing the restructuring plan.
• The restructuring plan focuses only or mainly on the restructuring of claims and capital,
disregarding operational restructuring measures and opportunities for continuing business
Failure to implement operational organisational measures is often the main reason of potential
insolvency of a corporation going through restructuring. Restructuring can hardly be successful if the
real causes of insolvency are not cured. Such causes may include wrong strategy or communication
(both internal and external), marketing and sales plans, nature of assets, and the number or profile of
employees. Likewise it is difficult to reorganise a corporation who currently has no business activity
and plans to overcome difficulties only by expecting the market situation to improve.
• In Estonia certain essential restructuring principles to protect creditors, which have been in
place in US court practice, for example, for tens of years already, have not been rooted in court
practice
These principles include the Best Interests Test, where claims of all creditors who disagree with the
restructuring plan must be satisfied in the course of the restructuring procedure at least at the
liquidation value of the claim. Another important principle is the Feasibility Test, which means that a
restructuring procedure must be realistic (not relying on wishful thinking) and there must be a
reasonable opportunity to fulfil the plan. Feasibility of the debtor is evaluated mainly by considering
its prior rate of return.
• The value of business of a debtor going through restructuring does not increase in the course
of restructuring procedure, but reduces
This in its turn may reduce the extent to which creditors claims are satisfied. Restructuring advisors,
who have the obligation arising from law to verify expediency of transactions and solvency of the
debtor throughout the restructuring procedure and to prepare reports for each half year, can help
mitigate this risk.
• Unjustified unequal treatment of creditors and impairment of their interests
The Restructuring Act gives a corporation being reorganised freedom to choose which debts and to
what extent to satisfy in the course of restructuring. This poses a risk of damaging creditors’ interests.
The factors that mitigate the risk are supervision exercised by the court and restructuring advisors,
and the creditors’ right to file a motivated petition with the court for non-approval of the restructuring
plan and termination of the procedure. Further, it is very likely that damage caused to creditors by
unjustified preferential treatment or impairment of interest can be recovered in course of potential
subsequent bankruptcy proceedings. On the other hand it may be difficult for a creditor to decide
whether he has been treated unfairly compared to other creditors as the law does not require
disclosure of claims that are not restructured in the course of the restructuring proceedings.
Supplementation of the Restructuring Act with principles of creditor treatment would certainly
enhance transparency of the restructuring procedure.
• Many restructuring advisors are not covered by liability insurance
If restructuring advisors wrongfully violate their obligations thus causing damage to creditors, it may
be difficult for the creditor to enforce its claim with respect to an uninsured restructuring advisor
because the current Restructuring Act does not require liability insurance from restructuring advisors
whereas liability insurance taken by trustees in bankruptcy and lawyers may not necessarily cover the
practice of restructuring advisors.
• Initiation of restructuring procedure does not suspend expiry of the period of limitation of
transactions
In certain cases the Bankruptcy Act allows to revoke transactions which were made before
bankruptcy proceedings were declared and which impair creditors’ interests. The time between
making the transaction (e.g. 6 months, 1 year, etc) and initiation of the bankruptcy proceeding is
important here. Initiation of a restructuring procedure does not suspend the limitation periods for
recovery and therefore certain transactions that impair the creditors’ interest may remain unrecovered.
Karin Madisson
Partner of Sorainen, Head of Corporate Advisory Team
Risto Agur
Senior Associate of Sorainen, Restructuring Advisor
doc_963496991.pdf