The organisers of the Conference thank the following

The Reform and Regulation of Preferential claims in Estonian Law Anto Kasak

Overview 1) Preferential Claims in Estonia; 2) Position of Secured Claims; 3) Issues with

Ranking of Claims 1) 2) 3) 4) Superpriority Claims; Priority Claims; Regular Claims; Subordinated

Definition of Priority Claims Preferential debts are unsecured debts which, by force of statute,

Essence of Priority Claims under Estonian Law Following circumstances shall apply to define the

List of Priority Claims before Reform of Estonian Law 1. Secured Claims, except claims

List of Priority Claims after Reform of Estonian Law 1. Secured Claims, including floating

Definition of Priority Claims under Estonian Law Preferential claims are claims which are filed

Position of Secured Claims in Insolvency Proceedings 1. Pledgeholderds rights are regulated outside of

The Role of the Pledgeholder Concerning Satisfaction of Superpriority Claims Before the Reform of

The Role of the Pledgeholder Concerning Satisfaction of Superpriority Claims After the Reform of

The Purpose of the Reform Concerning the Position of the Secured Claims 1. Pledgeholderds

The Decision of the Supreme Court Making payments related to the bankruptcy proceedings out

What is the Problem? To which extent shall pledgeholder cover the expenses of the

Solution to the Problem? Pledgeholder shall cover the expenses of the insolvency proceedings in

Definition of Floating Charge Floating charge shall include everything, except money in a cash

Difference between Fixed Charge and Floating Charge The object of the floating charge and

Solution to the Problem Floating charge should be preferred to certain percentage in respect

Assets under a floating charge - 100 000 EUR Secured creditor’s claim – 100

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The Reform and Regulation of Preferential claims in Estonian Law Anto Kasak

Overview 1) Preferential Claims in Estonia; 2) Position of Secured Claims; 3) Issues with Floating Charge.

Ranking of Claims 1) 2) 3) 4) Superpriority Claims; Priority Claims; Regular Claims; Subordinated Claims.

Definition of Priority Claims Preferential debts are unsecured debts which, by force of statute, fall to be paid in a winding up in priority to all other unsecured debts but which abate rateably as among themselves. (Finch, V. Corporate Insolvency Law. Perspectives and Principles. Cambridge University Press, 2002, p 425. )

Essence of Priority Claims under Estonian Law Following circumstances shall apply to define the preferential claims according to Estonian Law: a) Claims shall be filed in insolvency proceedings; b) Claims shall be satisfied before regular claims.

List of Priority Claims before Reform of Estonian Law 1. Secured Claims, except claims secured by a floating charge; 2. Employees Claims; 3. Tax Claims; 4. Floating Charge Claims; (Bancruptcy Act. 10. 06. 1992 - RT I 1997, 31, 403; RT I 2002, 44, 284)

List of Priority Claims after Reform of Estonian Law 1. Secured Claims, including floating charge; (Bankruptcy Act. 22. 01. 2003 - RT I 2003, 17, 95; RT I 2009, 68, 463. )

Definition of Priority Claims under Estonian Law Preferential claims are claims which are filed in the insolvency proceedings and are to be satisfied before regular claims.

Position of Secured Claims in Insolvency Proceedings 1. Pledgeholderds rights are regulated outside of insolvency proceedings; 2. Pledgeholderds rights are regulated inside of insolvency proceedings.

The Role of the Pledgeholder Concerning Satisfaction of Superpriority Claims Before the Reform of Estonian Law 1. Firstly are satisfied all the claims regarding to debts arising form activity of trustee and costs of insolvency proceedings; 2. Secondly are satisfied secured claims. (Bancruptcy Act. 10. 06. 1992 - RT I 1997, 31, 403; RT I 2002, 44, 284).

The Role of the Pledgeholder Concerning Satisfaction of Superpriority Claims After the Reform of Estonian Law Claims secured by a pledge shall be satisfied first to the extent of the money received from the sale of the pledged object from which the payments relating 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 15/100 of the amount of money received from the sale of the pledged object, have been deducted. (Art of 153 section (2) of Bankruptcy Act. 22. 01. 2003 - RT I 2003, 17, 95; RT I 2009, 68, 463. )

The Purpose of the Reform Concerning the Position of the Secured Claims 1. Pledgeholderds shall not cover all the expenses of the insolvency proceedings; 2. Pledgeholderds shall cover the expenses of the insolvency proceedings in reasonable amount.

The Decision of the Supreme Court Making payments related to the bankruptcy proceedings out of the proceeds of the sale of a pledged object does not mean that the part of the pledgee’s claim that is not satisfied because of the said payments as a claim in the first ranking should be satisfied as a claim in the second ranking. (Decision of Estonian Supreme Court No 3 -2 -1 -44 -05 as of 11. 05. 2005, published in RT III 2005, 188)

What is the Problem? To which extent shall pledgeholder cover the expenses of the insolvency proceedings?

Solution to the Problem? Pledgeholder shall cover the expenses of the insolvency proceedings in amount of 15 % of the sum received form the sale of the pledged object, but no more than 50% of the costs of the insolvency proceedings.

Definition of Floating Charge Floating charge shall include everything, except money in a cash register or credit institution; shares, stocks, investment fund shares, contributions in co-operatives or participation in other companies belonging to an undertaking; promissory notes or other loan documents accepted in common usage; or other pledges. (Commercial Pledge Act as of 26. 01. 2006 entered into force 04. 02. 2006 - RT I 2006, 7, 42)

Difference between Fixed Charge and Floating Charge The object of the floating charge and value of the pledged assets are fluctuating. In contrast, the object of the fixed charge normally remains the same. Taking into consideration the above, there is no reason to afford the floating charge creditor the same level of protection as to the fixed charge creditor.

Solution to the Problem Floating charge should be preferred to certain percentage in respect to the money received from the sale of the pledged assets.

Assets under a floating charge - 100 000 EUR Secured creditor’s claim – 100 000 EUR Unsecured creditors claims – 30 000 EUR Secured creditor receives 50 000 EUR (50%) + 31 250 (62, 5%) = 81 250 (81, 25%) Unsecured creditors receive 18 750 EUR (37, 5%)