In insolvency proceedings a claim by a pledgee continues to enjoy preferential status when property seized is sold before bankruptcy was declared in enforcement proceedings

The Supreme Court of Estonia has answered a question not previously regulated in Estonia as to how the insolvency proceedings of a debtor affect satisfaction of a claim by a pledgee. In particular, this concerns the situation where property seized is sold in enforcement proceedings but the debtor is declared insolvent before the proceeds are paid to the pledgee and where the proceeds of sale of the property seized are not paid to the pledgee but the bailiff instead transfers the money to the insolvency administrator.

In this particular case, enforcement action was initiated against the debtor following an application by the plaintiff to recover a claim secured by a mortgage ordered on the property of the debtor in favour of the plaintiff. The property encumbered with the mortgage was sold in enforcement proceedings but the proceeds of sale were not paid to the plaintiff. The reason for this was that on the day the money was handed over to the bailiff, the court approved an insolvency application by the debtor, appointed a temporary insolvency administrator and ordered suspension of all enforcement measures against the debtor. After that, the debtor was declared insolvent, enforcement proceedings were suspended and bankruptcy proceedings were initiated. For this reason, the bailiff, in accordance with legal requirements, transferred the proceeds of sale of the property to the insolvency administrator.

The regulations under § 123 and § 153 (1) and (2) of the Insolvency Act (Pankrotiseadus) regulate the ranking order of claims in insolvency proceedings by giving priority to claims secured by a lien. In this particular case, the Supreme Court of Estonia interpreted these regulations broadly: proceeds obtained by way of coercive measures should replace the seized property in the situation described above. The Supreme Court of Estonia also took the view that the legal position of a pledgee cannot be made dependent on whether the debtor’s bankruptcy is declared before or after transfer of the proceeds by the bailiff to the pledgee. However, the pledgee may demand satisfaction of the claim in the first place only in the amount of the proceeds obtained by way of enforcement but not in the amount of the entire claim secured by the lien.

Source: The Supreme Court of Estonia

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