Proposed amendments to insolvency regulation

Taking into account the measures set by the resolution No. 207 “Regarding the announcement of quarantine in the territory of the Republic of Lithuania” of the Government of the Republic of Lithuania as of 14 March 2020, a number of companies face unexpected liquidity problems, which can lead to some of them becoming insolvent.

In order to establish a balance between companies facing financial difficulties and their creditors, the Ministry of Finance initiates the Law of the Republic of Lithuania on the Impact of the Consequences of the New Coronavirus (COVID-19) to the Application of the Law on Insolvency of Legal Entities of the Republic of Lithuania (hereinafter – the Draft Law), aimed at facilitating business retention.

The current Law on Insolvency of Legal Entities of the Republic of Lithuania (hereinafter – the LILE) imposes an obligation on the head of a company facing financial problems to initiate insolvency procedure, which does not in itself mean bankruptcy yet. In order to seek out-of-court solutions, the first step of insolvency procedure shall be an attempt to agree on assistance with creditors whose claims the company has not been able to meet.

A time limit of not less than 15 days and not more than 30 days shall be set for this purpose. Failure to reach such an agreement within the set time limit may impose an obligation on a head of the company to initiate a bankruptcy procedure. The obligation to try to agree on assistance with a head of the company is also imposed on a creditor who intends to initiate insolvency procedure against the company whose obligation has expired.

In the context of today’s circumstances, along various business support measures, the Government is considering additional alternatives that would further expand the measures available to address insolvency problems. One of them – the possibility of suspending insolvency procedure.

The Draft Law proposes to temporarily, during the quarantine period and 3 months after the date of its revocation, suspend the above-mentioned obligation of the company’s head to initiate insolvency procedure when an agreement on assistance to overcome financial difficulties has not been concluded. Such a suspension period would give companies the freedom to seek solutions without fear of liability for the obligations imposed by the LILE.

In order to ensure a balance between the interests of the company facing financial difficulties and that of its creditors, the right of creditors to initiate insolvency procedure is not suspended, but the deadline for concluding an agreement on assistance is extended for the quarantine period. The obligation of the company’s head to seek out-of-court solutions is presented as well.

Such a provision will protect businesses from initiating sudden insolvency procedures and at the same time will encourage companies’ managers not to ignore their creditors and seek out-of-court settlements with them, as creditors will retain the right to initiate insolvency procedures at the end of the prescribed period after the quarantine and in the absence of an out-of-court consensus within the prescribed period.

It is also likely that a moratorium on the initiation of insolvency procedures will help investors to decide to invest in a company facing financial problems, as the investor will know that there still is extra time to enter into agreements with creditors and continue the business or to transfer the assets.

Among other things, the changes will also affect the started restructuring procedures. It is proposed that the calculation of the three-month period, after which the court may terminate the restructuring case under certain conditions provided by the LILE, shall be suspended during the quarantine period and resumed after 3 months from the date of revocation of the quarantine.

Finally, after assessing the economic situation, the restoration of the market balance and its duration, as well as the impact of these processes on the solvency of legal entities, the Draft Law proposes to grant the Government the right to extend the above-mentioned deadlines, but not longer than until 31 December 2020.

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