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23.09.2019

Ingrida Maciūtė: the Expert Opinion. The New Insolvency Initiation Procedure

The Enterprise Insolvency Law of the Republic of Lithuania enters into force on 1st January 2020 and will replace the Enterprise Bankruptcy Law of the Republic of Lithuania and the Law on Restructuring of Enterprises of the Republic of Lithuania. The new regulation of insolvency brings a number of innovations both in the restructuring and in the bankruptcy procedures. Ingrida Maciūtė, PRIMUS DERLING Associate, points out these key innovations in the insolvency process:

1. The new concept of insolvency. The current legal regulation links insolvency of a legal entity with a state where an entity fails to settle its obligations and the overdue obligations / debts are in excess of over a half of the value of the assets on the enterprise’s balance. In the meantime, the new regulation links insolvency with a state where an enterprise fails in a timely manner meet its obligations or obligations of a legal enterprise exceed the value of its assets. Thus, the new regulation establishes two alternative conditions when a legal entity is considered insolvent. As it can be seen, according to the new regulation when assessing the solvency of a legal entity, there is no longer a requirement to assess the overdue obligations of an entity, i.e. it is sufficient to establish that a legal entity is not in a position to meet its obligations, including the ones which are not yet due. This may cause some problems when assessing the solvency of companies which had undertaken long term liabilities. Furthermore, under the new regulation obligations of a legal entity are no longer compared with half of the value of the assets indicated on the balance, but whit all the entity’s assets, which are determined not according to the entity’s balance (as it is currently), but according to an actual value of the entity’s assets. It is believed that in comparing the entity’s obligations with the value of all the entity’s assets ensures “a second chance” for the companies facing short-time financial difficulties.

2. The new insolvency initiation procedure. Under the new regulation in order to initiate the insolvency procedure the manager of a legal enterprise as well as the creditor or a liquidator are obligated to send a notification to creditors and / or a legal enterprise with a time limit of not less than 15 days and not more than 30 days to settle the obligation / debt, to conclude an agreement for financial aid or to decide to carry out bankruptcy proceedings out of court. And only in such a case where the creditor’s claim is not met within the established time limit, no financial aid is agreed upon and decision regarding the bankruptcy proceedings out of court is not adopted, the manager of a legal enterprise, a liquidator or a creditor has a right to file a claim with the court regarding initiation of restructuring or bankruptcy. Therefore, under the new regulation a possibility for a legal enterprise and creditors to agree on financial aid is established. In order to conclude an agreement for financial aid, the law establishes a possibility for a person to go to the court regarding application of interim measures. Moreover, the Enterprise Insolvency Law establishes a significant development, entitling the creditors, whose overdue obligations exceed 10 MMW, to initiate a restructuring of an enterprise.

3. Easier liquidation of “empty” companies. The Enterprise Insolvency Law establishes a new possibility in such a case where an enterprise’s assets are not sufficient to meet the administrative costs of the bankruptcy proceedings, also, in case where a person who initiated the bankruptcy proceedings, does not pay in the escrow account the amount needed for administrative cost, and the insolvency administrator does not agree to undertake the risk of administrative costs, the court adopts a ruling to refuse to start a bankruptcy case and assigns the liquidation of an insolvent enterprise to the Registry of Legal Entities. This new possibility to assign the liquidation to the Registry of Legal Entities will allow to liquidate the companies, which do not engage in any activity and have no assets, easier. However, considering that in such a case the review of company’s transactions will not be carried out, there is a risk that this could help the managers of legal entities and / or their members avoid liability.

4. The changes of the order creditor claims are settled. The new regulation lightly changes the order creditor claims are settled, establishing that the first in line for settling their claims are creditors, who issued a new and / or interim financial aid to an enterprise, also, claims of employees related to labour relations, claims for social security insurance, health insurance, contributions to the Guarantee Fund and Long Term Job Benefits Fund, moreover, claims regarding outstanding obligations from commercial activity during the bankruptcy proceedings. Second in line for settling are all the rest claims. Therefore, as it can be seen, under the new regulation, claims of employees and state institutions, acting in the area of taxes (which previously were second in line for settling) are combined. Furthermore, claims arising out of financial aid issued to an enterprise (this is established in accordance with a new possibility to reach an agreement between an enterprise and creditors regarding financial aid) are given a priority, claims regarding outstanding obligations from commercial activity during the bankruptcy proceedings are also first in line. Claims regarding damage to health and life as well as claims of agricultural entities to pay for the sold agricultural projects are no longer first in line. It is noted that the new regulation is not clear on the order under which all the claims in the first line are settled, i.e. what has a priority – claim of an employee or, for example, claim of the state arising out of tax administration. This certainly brings a bit of uncertainty and diminishes the priority of employee claims.

5. The possibility to sell a legal enterprise. One more innovation – a possibility to sell a legal enterprise as a complex. The law establishes that the insolvency administrator is required to provide an opinion to the first creditor meeting on the sale of a legal enterprise, justifying that the benefits to the sale of a legal enterprise would benefit the creditor more than selling the assets of a legal enterprise individually. The decision regarding the sale of a legal enterprise is adopted by the creditors’ meeting. This possibility to sell a legal enterprise as a complex will certainly benefit the companies engaging in specific activities, having special production equipment and premises adapted to them, whose total assets are of greater value than sold individually.

The Enterprise Insolvency Law establishes a lot of other innovations related to the settling a legal enterprise’s obligations during the bankruptcy proceedings, fraudulent bankruptcy, liability of a manager of a legal entity, also, activity of an insolvency administrator. All these amendments change the insolvency system, provide the process with flexibility (for example, the possibility to agree on the financial aid), however, at the same time they bring somewhat uncertainty, which, we think, will be cleared out by the courts when applying the new law and shaping the rules of law interpretation.