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Secondary insolvency proceedings

On 24, 11 2011 | No Comments | In Uncategorized | By Kadri Lensment

Jurisdiction – ESTONIA

Functioning of the internal market and fundamental freedoms of European Community have had a great impact on intra-community trade and business activities. Accordingly, a growing number of transactions have cross-border effect. Since it is usual that a company has assets and business activities in several Member States, the insolvency proceedings of that company may also have cross-border effect.

In Community law Regulation No 1346/2000 has been adopted in order to deal with cross-border insolvency proceedings.

According to the Regulation, in case the debtor has assets in several Member States, the insolvency proceedings shall be opened in the Member State within the territory of which the centre of the debtor’s main interests is situated. The aforementioned proceedings can be regarded as the main insolvency proceedings. The centre of the debtor’s main interests is presumed to be situated in the Member State where the debtor has its registered office and central administration.

In addition to the main insolvency proceedings, the Regulation provides creditors with an opportunity to submit a bankruptcy petition also in the other Member State where the debtor has an establishment and assets. This type of proceedings is called the secondary insolvency proceedings and this is carried out in parallel to the main insolvency proceedings. It has to be noted that the effect of the secondary proceedings is restricted only to the assets of the debtor situated in the territory where the debtor has an establishment.

Establishment requires at least a minimum level of organisation and degree of stability. Moreover, the debtor should carry out economic operations with human means and goods in that Member State. The presence alone of some assets or bank accounts does not, in principle, satisfy the requirements for classification as an establishment.

The Estonian Supreme Court held in its judgment No 3-2-1-114-11 that in case a foreign company has a registered branch operating in Estonia, this is sufficient to state that the company has an establishment in Estonia in the sense of the Regulation. Therefore, the secondary insolvency proceedings could be opened in Estonia in case the main insolvency proceedings were opened in the other Member State where the company has its centre of main interests (registered office).

The Supreme Court also explained in its decision that one of the main objectives of the secondary insolvency proceedings is to protect the interests of local (minor) creditors who would otherwise be forced to participate in insolvency proceedings opened in another Member State according to the insolvency laws and in the language of that Member State.