By invitation: latest court practice facilitates debt collection 

The Supreme Court rendered an interpretation, which favours those creditors who hold judicial mortgages established for their benefit, writes Tarmo Repp, Tarmo Repp, attorney-at-law of Law Office Eversheds Ots & Co.

To date the courts widely applied the practice that when a debtor was declared bankrupt and an action involving a proprietary claim was heard against the debtor, the court dismissed such action by reason of the debtor’s bankruptcy. Moreover, the court also automatically cancelled any judicial mortgage, encumbering the debtor’s real property as a security for the action.

Therefore, according to the hitherto applied practice a judicial mortgage was not regarded as an equivalent to a normal mortgage, inasmuch as it was deleted in the case that the debtor became bankrupt if, by the time of such bankruptcy was declared, the court had not issued a ruling favouring the creditor.

Thus, in the case of the debtor’s risk of bankruptcy, any filing of an action was questionable even in the case that the debtor owned real property, which could have been encumbered by a judicial mortgage.

In their recent (09.02.2011) judgement rendered in the case 3-2-1-143-10 the Supreme Court harmonised the court practice.

In future the court will still dismiss a proprietary claim against a debtor, in the event that the debtor is declared bankrupt, if the court has not rendered their judgement before such declaration of bankruptcy. At the same time the Supreme Court specified that any judicial mortgage shall remain effective regardless of the court’s refusal to review the statement of claim, and shall secure the claim submitted by the creditor in the subsequent bankruptcy proceedings, provided that the claim is accepted. A judicial mortgage securing the claim is subject to deletion only if the creditor’s claim is not accepted in the course of the debtor’s bankruptcy proceedings.

The Supreme Court also pointed out that if in the course of dismissing an action the court also deletes the judicial mortgage securing any claim, the claim of the creditor cannot be regarded as a secured claim, i.e. a priority claim in the debtor’s bankruptcy proceedings, after the judicial mortgage is deleted. Therefore, in the case that the court, when refusing the review the action, has erroneously deleted the judicial mortgage securing the claim, such actions of the court should be contested by submitting an appeal against the court ruling.

In short, the position assumed by the Supreme Court favours an active creditor, who secures an advantage by promptly filing an action to the court and securing the action, as opposed to a passive creditor, because a judicial mortgage, established to secure the action, provides the creditor a vantage position in any subsequent bankruptcy proceedings as well.