Study: Estonian enterprises do not use reorganization to avoid bankruptcy

According to an analysis conducted by the Ministry of Justice and the Government Office, Estonian enterprises do not use reorganization as a possible tool to avoid bankruptcy.

Even though the procedure of debt restructuring could be used by legal persons to avoid bankruptcy, it is also not used by natural persons and in both cases, bankruptcy proceedings are preferred.

Reorganizing an enterprise is in essence a significant overhaul of a troubled business to restore it to profitability. According to the analysis, there have been cases where proceedings are instead used to delay bankruptcy, not to restore the enterprise. Ministry of Justice hopes to present a bill to change that according to the analysis.

In 2018, reorganization applications were submitted by 28 businesses, while 430 bankruptcy applications were submitted.

"In terms of natural persons the discrepancies are even greater, with 983 bankruptcies for natural persons being submitted and only 63 reorganization applications," said Kai Härmand, Deputy Secretary for legal policy.

The analysis was ordered to assess legislation related to reorganization and its use in practice. Additionally, the analysis will also give guidelines to adopt the laws regarding reorganization and bankruptcy of the European Parliament in Estonian legislation.

When making proposals, effects of the coronavirus are also considered, which have brought forth global changes in the structure of the world economy and behaviors of businessowners.

"Among this deteriorating economic situation, it is very important that a business can use opportunities to repair itself rapidly and efficiently. Crises have a measurable effect on insolvency, bringing with a rapid increase in insolvent persons. Improving legislation will help both debtors and creditors," Härmand added.


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Editor: Kristjan Kallaste

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