What should the debtor’s successor know about the additions to the Bankruptcy Act and the Law of Succession?
In December 2020, the Supreme Court passed a law amending the Bankruptcy Act (BA) and the Law of Succession Act (LOS). Here are some of the most notable additions to take effect on the 1st of February 2021.
In the event of the death of a debtor, bankruptcy proceedings are carried out in respect of his estate and in bankruptcy proceedings the estate is deemed to be insolvent if the obligations specified in section 142 (1) subsection 1 of LOS) and the creditors of the estate are not paid in the first order and this failure is not temporary.
In bankruptcy proceedings, the debtor’s successor is subject to the provisions of the LOS concerning the debtor to the extent in which it is not inextricably linked to the identity of the deceased debtor or his estate. The successor cannot be considered as a debtor, but the provisions of the law applied to the debtor are still applicable to him. The extent to which the norm could be inextricably linked to the identity of the deceased debtor and/or his estate depends on the circumstances and the assessment of the specific norms. Clarity in this is likely to come during possible disputes.
Upon initiation of bankruptcy proceedings regarding an estate, the rights and obligations between a debtor and a successor of the debtor which can transfer to the successor in accordance with subsection 130 (1) of the Law of Succession Act shall not be deemed to be terminated due to consolidation of the obligations upon opening of the succession. Therefore, the rights and obligations of the deceased debtor’s and his successor(s) are kept apart, which is why, among other things, the deceased’s rights of claim against the successor(s) are preserved.
If the succession has not been accepted, the successor is not known or whether he or she will accept the succession, the court may appoint a temporary representative to the successor. There is no clear d.c. whether the successor is subject to the will of his or her interim representative (which could not be considered justified) nor how to resolve the situation if the successor and his representative wish to express the opposite intention on any matter. The general principles are that the representative must be loyal to the representative and be guided by his or her interests.
Upon the death of a debtor, a court (compulsory) shall revoke transactions by which a successor, the executor of the will or the administrator of the estate has satisfied the claim specified in clause 142 (1) 3) of the Law of Succession Act or the claim for a compulsory portion out of the estate. For example, it may be a transaction with what it was entered into from the opening of the estate if the claim was settled in favor of one creditor over another, if the estate was insolvent at the time of performance of the obligation and the successor knew or should have known about it.
Recovery shall not preclude the filing of claims against a successor of the debtor to compensate for the damage specified in sections 142 (4) and 143 (2) and (5) of the LOS and against the executor of the will to compensate for the damage specified in section 83 (1) of the LOS. Therefore, the liability of the successor does not cease if the court has annulled one of the transactions carried out with his participation. The provision of a recovery institute should strengthen the principle of legality (including the reversal of unauthorized transaction).
A successor is required to submit a petition for the declaration of bankruptcy of the estate to the court within three months after the person became aware or should have become aware of the circumstances from which it can be presumed that the estate is insufficient for covering the claims specified in sections 142 (1) and (2) of LOS and the successor does not agree to satisfy the claims out of the successor’s own property.
After filing a bankruptcy application, the liability of the successor for the obligations relating to the estate is limited to the value of the estate. After the termination of the bankruptcy proceedings, the successor will be liable for the performance of claims not submitted in bankruptcy proceedings only to the extent where the successor has enriched on the account of the estate at the time of the notification of the claim to the successor. Therefore, if the enrichment in question has ‘exhausted’ before the successor is notified of the claim, the successor will no longer be liable.
If, the successor has fulfilled the creditor’s claim before the application of the bankruptcy of the estate (probably in its entirety) by favoring one creditor to another (hence, regardless of the reasons), the successor would therefore be liable for the damage caused to the remaining creditors (it is questionable whether the non-material damage as well) if, at the time of performance of the obligation, the successor knew or should have known that the claims of the creditors of the deceased could exceed the value of the estate.
If you have any further questions about the above, feel free to contact the writer of this article.
Raini Nõu / LEADELL Pilv Law Office Attorney-at-law