One topic under discussion at most banks operating in Estonia is the new Debt Restructuring and Debt Protection Act, which entered into force on April 5 2011. The act regulates the restructuring of debts owed by natural persons and has a direct impact on businesses that extend credit to such borrowers (for further details please see ”New debt restructuring option influences banks”).
Suretyship
In Estonia, security for consumer loans is commonly provided by means of a suretyship, whereby a party undertakes to be liable to a creditor in respect of the obligations of a third party (ie, the principal obligor). The act sets forth new rules for natural persons who provide suretyship. All suretyships provided by natural persons are regarded as consumer suretyships, which was not automatically the case under the previous regime. Among other things, this means that all suretyship agreements entered into by natural persons – that is, all statements whereby a natural person undertakes to assume the obligations of a principal obligor – must be in writing. In addition, such agreements must be signed by the surety and must state the latter’s maximum financial liability.
Debt restructuring
The act gives a debtor with solvency problems the option to request debt restructuring through the courts. As credit agreements are, by nature, long-term contracts, restructuring can be carried out in one of two ways. First, the contract can be cancelled. In such cases the agreement is deemed to be cancelled as of the date of the court’s approval of a debt restructuring plan. The consequences are similar to those of a debtor cancelling the agreement on extraordinary grounds. However, debt obligations that arise after the cancellation can be restructured as part of the debt restructuring plan. Second, the debtor can restructure obligations which arise from the credit contract and which will fall due within one year of the approval date of the debt restructuring plan. The court has discretion to postpone the due date of such obligations or to provide for such obligations to be met in instalments.
Ownership of immovable asset
The act expressly provides that following a change in ownership of a mortgaged immovable asset, a collateral arrangement (ie, an agreement from which the claims secured by the mortgage arise) remains in force with respect to the new owner of the asset. The main aim of this provision is to ensure security for the mortgagee in the event of a transfer of ownership of an immovable asset. In practice, this means that changes in ownership should not influence the mortgagee’s right to enforce the mortgage; this, in turn, should reduce the number of disputes about collateral arrangements. In addition, the mortgagee is not entitled to claim for an additional security or partial fulfilment obligation secured by the mortgage if the immovable asset in question is the mortgagor’s principal residence and if the value of the property has fallen owing to changes in the property market.
Comment
It is too early to assess the act’s impact on credit business and the possible legal risks that may arise – any practical problems with the new provisions will be ironed out in the months to come. However, as so often in legislation affecting banks, the devil is in the detail.
*The article was published in International Law Office (ILO) Newsletter on April 21, 2011. ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription. Register at www.iloinfo.com.
This entry was posted in Banking and Finance. Bookmark the
permalink. Both comments and trackbacks are currently closed.
Changes for lenders in debt restructuring and protection
One topic under discussion at most banks operating in Estonia is the new Debt Restructuring and Debt Protection Act, which entered into force on April 5 2011. The act regulates the restructuring of debts owed by natural persons and has a direct impact on businesses that extend credit to such borrowers (for further details please see ”New debt restructuring option influences banks”).
Suretyship
In Estonia, security for consumer loans is commonly provided by means of a suretyship, whereby a party undertakes to be liable to a creditor in respect of the obligations of a third party (ie, the principal obligor). The act sets forth new rules for natural persons who provide suretyship. All suretyships provided by natural persons are regarded as consumer suretyships, which was not automatically the case under the previous regime. Among other things, this means that all suretyship agreements entered into by natural persons – that is, all statements whereby a natural person undertakes to assume the obligations of a principal obligor – must be in writing. In addition, such agreements must be signed by the surety and must state the latter’s maximum financial liability.
Debt restructuring
The act gives a debtor with solvency problems the option to request debt restructuring through the courts. As credit agreements are, by nature, long-term contracts, restructuring can be carried out in one of two ways. First, the contract can be cancelled. In such cases the agreement is deemed to be cancelled as of the date of the court’s approval of a debt restructuring plan. The consequences are similar to those of a debtor cancelling the agreement on extraordinary grounds. However, debt obligations that arise after the cancellation can be restructured as part of the debt restructuring plan. Second, the debtor can restructure obligations which arise from the credit contract and which will fall due within one year of the approval date of the debt restructuring plan. The court has discretion to postpone the due date of such obligations or to provide for such obligations to be met in instalments.
Ownership of immovable asset
The act expressly provides that following a change in ownership of a mortgaged immovable asset, a collateral arrangement (ie, an agreement from which the claims secured by the mortgage arise) remains in force with respect to the new owner of the asset. The main aim of this provision is to ensure security for the mortgagee in the event of a transfer of ownership of an immovable asset. In practice, this means that changes in ownership should not influence the mortgagee’s right to enforce the mortgage; this, in turn, should reduce the number of disputes about collateral arrangements. In addition, the mortgagee is not entitled to claim for an additional security or partial fulfilment obligation secured by the mortgage if the immovable asset in question is the mortgagor’s principal residence and if the value of the property has fallen owing to changes in the property market.
Comment
It is too early to assess the act’s impact on credit business and the possible legal risks that may arise – any practical problems with the new provisions will be ironed out in the months to come. However, as so often in legislation affecting banks, the devil is in the detail.
*The article was published in International Law Office (ILO) Newsletter on April 21, 2011. ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription. Register at www.iloinfo.com.