Explanations of the Supreme Court of Estonia regarding application of prohibition on business Apr 21, 2010
On February 22, 2010 the Supreme Court of Estonia in its judgement no
3-2-1-124-09 provided significant guidelines concerning the extent and
preconditions as well as procedural requirements for application of
prohibition on business1 in cases of bankruptcy of legal entities,
thereby also partly changing its former position in these issues. This
is a landmark case which has to be taken into account in developing
future case-law concerning prohibition on business.
In the present case, the issue of debate centered around the question of whether the prohibition on business which the court of first instance applied in respect of the manager of the legal entity was justified or not. The court relied on the fact that the manager had failed to submit the bankruptcy petition as well as on the suspicion of the bankruptcy trustee that the manager might have misappropriated the funds of the company. Based on the appeal to the Supreme Court submitted by attorneys-at-law Mr Martin Tamme and Mr Vaido Põldoja from law firm Varul Vilgerts Smaliukas, the Supreme Court annulled the court orders of lower courts as the courts of lower instance had incorrectly applied the law.
The grounds for application of prohibition on business
The Supreme Court found that prohibition on business cannot be applied as a punishment for violations already committed, but instead it must be deemed as a precautionary measure to avoid potential new violations in the future and harm to third parties. Considering the aims of prohibition on business the court must substantiate which circumstances or events give rise to suspicion that the person might continue committing violations in the future and how application of the prohibition on business might avoid that.
As prohibition on business might intensively prejudice the legitimate rights of the individual the reasons for applying prohibition on business must have considerable weight. According to the Supreme Court application of prohibition on business may be justified if, in all likelihood (reasonable suspicion of crime is sufficient even if the individual has not yet been convicted), the individual in question has committed a crime while managing the company now in bankruptcy, and a significant risk exists that the person may continue to commit similar crimes unless prohibition on business is applied.
Suspicion of misdemeanour or mere potential risk of damages does not suffice for application of prohibition on business. It is also important to stress that by the above-referred judgement the Supreme Court has partly changed its former position and in the judgement the court also explained which principles of former case-law continue to apply in the future. Thus, this judgement is a landmark case with regard to developing future case-law concerning prohibition on business.
Extent of prohibition on business
The Supreme Court highlighted an important principle that the extent of the prohibition on business must be determined in detail and it must be proportionate with the aims of prohibition on business in each individual case. Accordingly prohibition on business should be applicable with regard to certain fields and forms of business, for instance prohibition to act as a member of a management body of a construction company does not impair the right of the individual to provide construction services as a physical person. It must be apparent from the prohibition on business whether it is aimed at prohibiting transactions for monetary gain (permanent economic activity or any kind of economic activity), i.e. whether the person is prohibited to conclude any service or authorisation contracts for provision of services to anyone or from purchasing, selling or dealing with property.
Prohibition on business as such does not affect the authorities of a person as management board member of a company nor does it affect the validity of the transactions made by such person in the functions of management board member. First and foremost the person with respect to whom prohibition of business has been applied him- or herself must undertake reasonable measures to ensure that he/she follows the prohibition on business, i.e. request removal from the position of manager, refuse from his/her consent to take up position as a member of a managing body, refrain from activities in the fields covered by prohibition on business. Violation of prohibition on business is punishable as a crime. When prohibition on business has been applied with regard to a member of a management body of a company, the company itself must also undertake measures for recalling such person from the management bodies in order to ensure lawful composition of management bodies.
Considering the above specific restrictions arising from each individual case of prohibition on business must be determined in the relevant court ruling and the person affected thereby must be able to understand from the court ruling which activities remain allowed and which activities have been prohibited by the court.
It is important to stress that procedurally the court must grant the affected person the right to be heard in order to specify the details of circumstances which form the ground for applying prohibition on business as well as the future plans of the person in terms of the field and form of activity, thereby contributing to accurate specification of the extent of prohibition on business. The right to be heard plays significant part in affecting the extent of the prohibition on business in order to allow the person affected to continue working or otherwise doing business in a reasonable manner after application of the prohibition.
1The essence of prohibition on business is prescribed in § 91 of the Bankruptcy Act. According to section 2 of that paragraph the court, in case of bankruptcy of a legal entity, may resolve to apply prohibition on business with regard to member(s) of the management bodies of the company, thereby prohibiting the individual from acting as a member of a management body or a liquidator or a procurator of another company until the end of bankruptcy proceedings.
Senior associates Mr Martin Tamme and Mr Vaido Põldoja acted as representatives of the client.
For further information please contact Mr Martin Tamme
The grounds for application of prohibition on business
The Supreme Court found that prohibition on business cannot be applied as a punishment for violations already committed, but instead it must be deemed as a precautionary measure to avoid potential new violations in the future and harm to third parties. Considering the aims of prohibition on business the court must substantiate which circumstances or events give rise to suspicion that the person might continue committing violations in the future and how application of the prohibition on business might avoid that.
As prohibition on business might intensively prejudice the legitimate rights of the individual the reasons for applying prohibition on business must have considerable weight. According to the Supreme Court application of prohibition on business may be justified if, in all likelihood (reasonable suspicion of crime is sufficient even if the individual has not yet been convicted), the individual in question has committed a crime while managing the company now in bankruptcy, and a significant risk exists that the person may continue to commit similar crimes unless prohibition on business is applied.
Suspicion of misdemeanour or mere potential risk of damages does not suffice for application of prohibition on business. It is also important to stress that by the above-referred judgement the Supreme Court has partly changed its former position and in the judgement the court also explained which principles of former case-law continue to apply in the future. Thus, this judgement is a landmark case with regard to developing future case-law concerning prohibition on business.
Extent of prohibition on business
The Supreme Court highlighted an important principle that the extent of the prohibition on business must be determined in detail and it must be proportionate with the aims of prohibition on business in each individual case. Accordingly prohibition on business should be applicable with regard to certain fields and forms of business, for instance prohibition to act as a member of a management body of a construction company does not impair the right of the individual to provide construction services as a physical person. It must be apparent from the prohibition on business whether it is aimed at prohibiting transactions for monetary gain (permanent economic activity or any kind of economic activity), i.e. whether the person is prohibited to conclude any service or authorisation contracts for provision of services to anyone or from purchasing, selling or dealing with property.
Prohibition on business as such does not affect the authorities of a person as management board member of a company nor does it affect the validity of the transactions made by such person in the functions of management board member. First and foremost the person with respect to whom prohibition of business has been applied him- or herself must undertake reasonable measures to ensure that he/she follows the prohibition on business, i.e. request removal from the position of manager, refuse from his/her consent to take up position as a member of a managing body, refrain from activities in the fields covered by prohibition on business. Violation of prohibition on business is punishable as a crime. When prohibition on business has been applied with regard to a member of a management body of a company, the company itself must also undertake measures for recalling such person from the management bodies in order to ensure lawful composition of management bodies.
Considering the above specific restrictions arising from each individual case of prohibition on business must be determined in the relevant court ruling and the person affected thereby must be able to understand from the court ruling which activities remain allowed and which activities have been prohibited by the court.
It is important to stress that procedurally the court must grant the affected person the right to be heard in order to specify the details of circumstances which form the ground for applying prohibition on business as well as the future plans of the person in terms of the field and form of activity, thereby contributing to accurate specification of the extent of prohibition on business. The right to be heard plays significant part in affecting the extent of the prohibition on business in order to allow the person affected to continue working or otherwise doing business in a reasonable manner after application of the prohibition.
1The essence of prohibition on business is prescribed in § 91 of the Bankruptcy Act. According to section 2 of that paragraph the court, in case of bankruptcy of a legal entity, may resolve to apply prohibition on business with regard to member(s) of the management bodies of the company, thereby prohibiting the individual from acting as a member of a management body or a liquidator or a procurator of another company until the end of bankruptcy proceedings.
Senior associates Mr Martin Tamme and Mr Vaido Põldoja acted as representatives of the client.
For further information please contact Mr Martin Tamme
