The Insolvency Service recently gave the Riigikogu Economic Affairs Committee an overview of the field where the statistics are alarming: in just three years and one quarter, nearly 600 companies managed to leave behind close to €200 million in debt without facing any real consequences.

According to Insolvency Service Director Signe Viimsalu, the problem is getting worse. "In 2023, the average abandoned debt was under €100,000, while in 2024 it was €255,000. Unfortunately, the losses are growing, as is distrust in society," Viimsalu said.

As of mid-May, around 40,000 companies had not submitted their 2024 annual reports. "What is happening in these 40,000 companies is unknown to creditors and the public. At the same time, these companies continue operating daily in Estonia's business environment and carrying out transactions," Viimsalu explained. She added that even under a more conservative estimate, it could be concluded that around 16,000 companies require more substantial oversight, bringing the potential total volume of hidden bankruptcies to approximately €6.4 billion.

System misuse via straw men and liquidators

The biggest problem is the lack of personal liability for company managers. A member of a management board is not automatically personally liable for anything and the burden of proof falls on the state or creditors.

This situation is being exploited by professional liquidators and so-called company buriers. "Current court practice shows that when a board member realizes they have made mistakes, their first preemptive move is to go to court themselves and file for personal bankruptcy in order to free themselves from debts as a private individual," Viimsalu said, describing malicious schemes.

As an extreme example, a 30-year-old Estonian citizen currently serves as a board member simultaneously "managing" more than 800 companies. "Clearly, one person cannot realistically be responsible for, manage and properly organize the accounting of 800 or 2,000 companies. Everyone's right to establish a company with one cent should not eliminate personal responsibility," Viimsalu said. She warned that the real decision-maker is often a proxy figure located abroad, leaving creditors without protection when trying to recover debts.

Mario Kadastik of the Reform Party, a member of the Riigikogu Economic Affairs Committee, pointed to the need for stricter regulations, asking how the Insolvency Service could inspect such suspicious companies more quickly.

Eesti 200's Marek Reinaas, chairman of the Economic Affairs Committee, suggested that the state could intervene more proactively through the Tax and Customs Board, but Viimsalu acknowledged that the tax authority does not file bankruptcy petitions and instead acts as a regular creditor in proceedings.

The problem is widespread: in 81 percent of investigated cases, bankruptcy petitions were not filed on time, while in 45 percent of cases assets were transferred out of the company and moved to associates beforehand.

Consumers and taxpayers over a barrel

When the bankruptcy proceedings of an assetless company are terminated due to lack of funds, the obligation toward employees falls on the Unemployment Insurance Fund. Last year, the fund paid more than €1 million in compensation to employees of such companies, plus an additional 33 percent in social tax. Since current law does not allow the Unemployment Insurance Fund to file recourse claims against managers responsible for serious management failures, ordinary taxpayers ultimately cover these costs.

"In other words, ordinary taxpayers are paying for sums resulting from severe management failures and are being forced to finance the wages of employees at insolvent companies with no assets. The current system indirectly encourages irresponsible business practices at the expense of regular taxpayers," Viimsalu said. She pointed to Latvia as an example where the state guarantee fund reclaims wage payments from managers found responsible.

Ordinary consumers are also left unprotected. For example, if goods ordered from an online store are never delivered, the defrauded customer would have to file a bankruptcy petition against the company. However, the process has been made unreasonably expensive: the customer must pay a €420 state fee and additionally deposit an average of €4,600 with the court to cover the temporary trustee's fee.

"To get your money back from an online store, you first have to pay another roughly €5,000 at the start of the proceedings! Naturally, this is not motivating and people simply give up," Viimsalu admitted. In any case, the average recovery rate for creditors in Estonia is only around 3 percent.

Proposals stuck behind responsibility

To improve the situation, the Insolvency Service has proposed consolidating all supervision and proceedings within a single authority, modeled after Sweden's Enforcement Authority. "This would help avoid situations where bankruptcy trustees are left alone to battle severe insolvency cases and managers responsible for serious management failures," Viimsalu explained.

The service also recommends introducing business bans lasting five to 15 years, similar to those used in other countries, reviewing the current system allowing companies to be established with one cent in capital and creating a security deposit system for foreigners and e-residents, comparable to Ireland's €25,000 deposit requirement.

Viimsalu was especially critical regarding e-residents. "It is certainly very nice when people advertise the tax revenue brought in by e-residents and their companies, but only one side of the issue — tax revenue — is ever discussed. To this day, the Estonian state does not collect data on how much damage e-residents and their associated companies cause in Estonia's business environment or how much debt they leave behind whether as private individuals or businesses, including tax debts. As a state, we do not know whether and who should register as VAT payers with the Tax and Customs Board and begin declaring and paying taxes. If we finally start collecting this negative data as well, we may perhaps get closer to the objective truth," Viimsalu said.

Committee member Rene Kokk of EKRE agreed that the service's proposals were reasonable but noted that Estonia's insolvency sector lacks a clearly designated responsible minister. Although responsibility is generally assumed to fall under the Ministry of Justice and Digital Affairs, the sector is effectively "ownerless" in legislation.

The Insolvency Service has submitted memorandums to ministries, but according to Viimsalu, the response has been lukewarm. "Replies are slow to come, if they come at all! At the moment, I get the impression that many are waiting for next year's Riigikogu elections in the hope that something might change then. No one has offered us any quick solutions," she admitted.

According to Viimsalu, the first step must be a critical review of Estonia's procedural system and commercial code, both of which have remained essentially unchanged for 34 years. "The issue is credibility — what kind of qualified people do we want to see in Estonia as entrepreneurs, owners and managers? Or is Estonia becoming a launching pad for criminals?" Viimsalu concluded.

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