Kullman says insolvency tax would pay scammers’ bills

In an opinion article published by ERR, entrepreneur and Parempoolsed deputy chair Kadri Kullman argues that replacing bankruptcy trustees with state officials and introducing an insolvency tax would make the state financially interested in proceedings and undermine confidence in their independence.

A plan prepared under Justice and Digital Minister Liisa Pakosta proposes replacing bankruptcy trustees with officials to prevent the system from collapsing. It also suggests that the state budget cover trustees’ fees in some proceedings. The discussion has now reached the idea of introducing a new insolvency tax.

Hidden insolvency costs

Kullman argues that the scale of the problem should be kept in proportion. Last year, creditors lost nearly 74 million euros because of assetless insolvent companies. Estonia’s gross domestic product was 41.6 billion euros at the same time, making the losses less than 0.2 percent of GDP. She says this cannot automatically be called a threat to internal security.

The insolvency service estimates the volume of hidden insolvency at as much as 18 billion euros, or nearly half of Estonia’s GDP. In May, however, the same service told the Riigikogu Economic Affairs Committee that the figure was 6.4 billion euros. The estimate therefore grew almost threefold in two months.

Such a figure cannot simply be presented as a claim, Kullman writes. It must be supported by a public and verifiable methodology. If the estimate is accurate, Estonia faces an exceptionally serious economic problem, far greater than the question of who conducts bankruptcy proceedings. If it is inaccurate, it cannot serve as the basis for new taxes or extensive reforms.

Bankruptcy is a tool of a market economy, not a failure of one, Kullman argues. An insolvent company must be allowed to end its operations so that money, skills and people can move on. For an honest entrepreneur, bankruptcy can offer an opportunity to start again with the benefit of experience.

An assetless company is not automatically evidence of fraud. It may simply be a failure. Fraud occurs when someone deliberately strips a company of its assets, leaves its debts unpaid and disappears. The problem, Kullman says, is not bankruptcy itself but the fact that fraudsters can escape. They leave behind an empty shell, creditors lose their money and the person starts again with another company.

Creditors seeking to have a bankruptcy declared must pay hundreds of euros in state fees and, according to the insolvency service’s own data, an average deposit of 4,700 euros, with little likelihood of recovering anything. As a result, applications are often not filed and possible offences remain uninvestigated.

Kullman says the problem does not require a new agency or tax. It would be enough for the state to cover a reasonable minimum fee for a bankruptcy trustee in assetless proceedings. This would remove the biggest obstacle to starting proceedings, while the cost of the solution could be estimated.

She argues that the state-created cost of proceedings is the main obstacle to finding fraudsters, yet the proposed solution is a new agency, the nationalisation of an entire profession and new taxes.

Replacing bankruptcy trustees with officials is a separate issue, Kullman writes. The ministry’s own proposal says the solution carries very high negative impacts and risks, including transition costs, permanent salary expenses, information technology development and premises. No one knows how many millions of euros it would cost because no calculations have been made.

Kullman also questions how the state could remain independent in bankruptcy proceedings when it is often one of the largest creditors through tax debts.