16 September 2011

Juridical Mortgage Survives Bankruptcy Proceedings



Under the Estonian Civil Procedure Code, a court action can be secured by a judicial mortgage, in order to ensure that later the debtor has sufficient property for the judgment to be enforced.
Estonia Finance and Banking
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Judicial mortgage

Under the Estonian Civil Procedure Code, a court action can be secured by a judicial mortgage, in order to ensure that later the debtor has sufficient property for the judgment to be enforced. Judicial mortgage is a type of real pledge, and for the purpose of the enforcement proceedings this has similar right as any other mortgage. Claims secured by pledge also have preference in bankruptcy proceedings. If the claim of a creditor is recognized by the court in frames of general civil proceedings, then the judicial mortgage remains in place, and in course of bankruptcy proceedings the creditor is deemed to have a claim secured by a pledge.

Claims in bankruptcy proceedings

According to the Estonian Bankruptcy Act, if the debtor has been declared bankrupt, then any claims can be filed against the debtor only in course of bankruptcy proceedings. Any court action initiated against the debtor before the debtor was declared bankrupt is refused to be heard by the court, unless a court of the first instance has already passed a decision concerning the claim, notwithstanding of the fact that the decision is not yet in force. Hence any court action processed for the first time by a court of the first instance is stopped upon declaration of the debtor bankrupt. Based on the previous practice, creditors who had not gained a decision of the court of the first instance in their actions against the debtor lost their judicial mortgages if the debtor was declared bankrupt. The court proceedings that already have passed through the first instance are continued. This was because of the Civil Procedure Code stating that the refusal of the action to be heard results in lifting of the judicial mortgage that was established in order to secure the claim. In the same time, if the court of the first instance had already passed a resolution concerning the claim, even if such resolution was not yet in force and/or this was appealed, the claimant who held judicial mortgage retained the mortgage and the creditor was in the position equal to any other mortgage holders.

Equality of mortgage holders

According to the latest resolution of the Supreme Court, the aim of the law actually is that all mortgage holders should be equal in the bankruptcy proceedings. The position of the civil chamber of the Supreme Court is that the legislator has not intended to damage the creditors holding judicial mortgage through the declaration of the bankruptcy in respect of the debtor. If the court has refused to hear the action because of the debtor being declared bankrupt, then the claim is basically remitted to the bankruptcy proceedings. This means that the ground for securing the action has actually not lapsed. Considering this, the Supreme Court found that the court processing the general civil action is not obliged to lift the judicial mortgage if the court refuses to hear the action because the debtor has been declared bankrupt. The judicial mortgage may remain in force also after the court proceedings are stopped, and then this judicial mortgage continually secures the same claim. If such a claim is filed in course of bankruptcy proceedings, then this claim is considered being secured by a pledge, and this has preference over any other claims in the same bankruptcy proceedings.

In order to avoid abuse of judicial mortgages, the Supreme Court further stated that if the judicial mortgage was established just before the bankruptcy proceedings in preference of this creditor, then the judicial mortgage may be declared invalid in course of recovery.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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