The Estonian Parliament adopted significant changes to the Estonian Criminal Code in 2014, and the package of amendments entered into force on January 1, 2015.
The amendments are the result of a revision process instigated by the government as early as 2011 as a response to claims that the criminal law should be revised to address over-criminalization that remains evident, despite the new and modern Criminal Code enacted in 2002.
The reform touched upon the field of bankruptcy crimes, and the offense of failure to issue a petition to instigate bankruptcy – former Section 385 of the Criminal Code – was eliminated. The amendments gave rise to heated discussions during the readings at the Parliament, with the voices of civil court bankruptcy law judges being the loudest in claiming that decriminalization of the offense would have detrimental effects on the country’s business environment. The arguments were also picked up by local business papers in summer 2014. Expressions such as “freeing of bankruptcy carousel makers” and “bankruptcy artists” were used by the media in headlines.
Despite this, the Parliament accepted the proposals provided by the government, and as of January 1, 2015, not filing a petition to instigate bankruptcy or missing the deadline for doing so is no longer a crime. Now, after several months have passed, it is appropriate to review what the main arguments behind the change were, and to consider the effect of the amendments in practice.
The main argument behind decriminalization of the offense was provided by case law itself: the Supreme Court in two of its judgments in 2011 stated that the offense had to be given a restrictive interpretation and in cases where the facts were less than obvious, the existence of insolvency had to be determined by an expert. The requirements for this expert opinion laid down by the Supreme Court set a high burden of proof for the Prosecutor. The Prosecutor’s Office found this new burden of proof either too cumbersome or too expensive (as it often required the retaining of highly trained business experts), especially as the offense itself foresaw only a monetary punishment or imprisonment up to 1 year. In other words, the offense was killed off by the Supreme Court even before any consultations regarding decriminalization began.
However, the emotional argument that by eliminating the offense the legislature had freed company directors or other persons having influence for causing the insolvency of a now-bankrupt entity from any criminal liability is false. The willful causing of insolvency by management or supervisory board members is still punishable under Section 384 of the Criminal Code. Even more, the offense went through a review during the revision process from January 1, 2015 and is much clearer than before, as any willful causing of insolvency by actions contrary to a board member’s duties is punishable. In addition, any favoring of bankruptcy creditors prior to bankruptcy proceedings is now punishable under a new and special offense, Section 384.
In addition, the deleted offense of Section 385 had criminalized situations where the fact of insolvency was not in any way attributable to the director, but the company had missed the deadline for filing its bankruptcy petition (20 days after it become obvious that the company was insolvent). Thus, this offense was a nightmare to directors whose records were generally otherwise clean, who had hesitated to issue the petition, as liability may have been incurred simply by missing the deadline by one or two days. Of course, if those directors had committed any other damaging acts, other classical offenses such as embezzlement (Section 201), theft (Section 199), or fraud (Section 209) would still apply. This remains as true after January 1, 2015 as it was before. And, as noted, if the damaging acts were the reason for occurrence of the insolvency, liability under Section 384 could be raised. In addition, directors who have missed the deadline for issuing a petition to instigate bankruptcy proceedings may still be found civilly liable to the company, and in some cases directly before the creditors under tort. So the new law represents no significant revolution after all, and is instead simply a technical step to reorganize the field.
By Marko Kairjak, Head of Criminal Defense and Compliance, Varul
This Article was originally published in Issue 2.2. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
