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Last update: 30-05-2007
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Bankruptcy - Lithuania

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TABLE OF CONTENTS

1. What are the different types and aims of insolvency proceedings? 1.
2. What are the conditions for opening each type of insolvency proceedings? 2.
3. What is the role of the various participants in each type of proceedings? 3.
4. What are the effects of the opening of proceedings? 4.
5. What are the specific rules related to certain categories of claims? 5.
6. What are the rules relating to detrimental acts? 6.
7. What are the conditions for the lodgment and admission of claims? 7.
8. What are the rules relating to reorganization proceedings? 8.
9. What are the rules relating to the winding-up proceeding? 9.
10. What are the conditions for the closure of the proceeding? 10.

 

1. What are the different types and aims of insolvency proceedings?

Under effectual legal acts of Lithuania the definition of insolvency is used only speaking about legal entities. Legal acts regulating bankruptcy of natural persons is going to be drafted following the best world practice.

According to the Enterprise Bankruptcy Law an insolvency is the state of an enterprise when it fails to settle with the creditor/creditors after the lapse of three month from the deadline prescribed by laws, other legal acts as well as by agreements between a creditor and the enterprise, or upon expiry of the said time period after the creditor/creditors demands/demand the discharge of the obligations where the deadline has not been set in the agreement, and the overdue obligations/debts are in excess of over a half of the value of the assets on the enterprise’s balance.

The purpose of bankruptcy proceedings is:

  • to ensure a uniform treatment of requirements of creditors and
  • satisfy requirements of creditors after having realized a debtor’s assets in the order established by laws.
 The aim of the restructuring procedure is:
  • to capacitate enterprises that have temporary financial embarrassments and that have not seized their economic – commercial activity to maintain,
  • develop the activity,
  • repay obligations,
  • renew solvency and
  • avoid bankruptcy.

Under effectual laws, restructuring, as insolvency proceeding, may only be formal. Bankruptcy proceedings can be both formal and informal. Bankruptcy proceedings may be enacted not following judicial order if there are no cases in court wherein there are material claims including claims regarding labour relations, also if an enterprise is not being levied under enforceable instruments issued by courts or other institutions.

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There are two equivalents of formal insolvency proceedings for administration purposes in Lithuania – restructuring and making a composition with creditors in bankruptcy proceedings.

Formal insolvency proceeding for liquidation purposes is declaration of bankruptcy of an enterprise and its liquidation.

2. What are the conditions for opening each type of insolvency proceedings?

At least one of the conditions for opening bankruptcy proceedings may be present, when the enterprise:

  1. fails to pay wages and other employment-related amounts when due;
  2. fails to pay, when due, for the goods received, work performed/ services provided, defaults in the repayment of credits and does not fulfill other obligations;
  3. fails to pay, when due, taxes, other compulsory contributions prescribed by law and/or the awarded sums;
  4. has made a public announcement or notified the creditor /creditors in any other manner of its inability or lack of intent to discharge its obligations;
  5. has no assets or income from which debts could be recovered and therefore the bailiff has returned the writs of execution to the creditor.

Restructuring of an enterprise may commence when the following conditions are present:

  1. an enterprise fails to settle with a creditor/creditors for more than three months;
  2. an enterprise has not discontinued its economic and commercial activities;
  3. no bankruptcy proceedings have been initiated against the enterprise or no extrajudicial bankruptcy process has been commenced.

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The bankruptcy proceedings shall be initiated by:
  1. the creditor/creditors;
  2. the owner/owners;
  3. the head of the enterprise administration.

A petition to initiate restructuring proceedings shall be filed to the court by the head of the enterprise.

If during the liquidation of the enterprise it transpires that it will be unable to discharge all its liabilities, the enterprise liquidator must suspend all payments and state file for initiating the enterprise bankruptcy proceedings.

3. What is the role of the various participants in each type of proceedings?

It is established that county courts examine both bankruptcy and restructuring proceedings:

  • analyses the petition for bankruptcy/restructuring,
  • upon issuing an order to institute bankruptcy proceedings immediately informs the Register of Enterprises and other interested subjects about the instituted proceedings
  • makes a decision to institute insolvency proceedings,
  • appoints the administrator of the enterprise,
  • approves creditors’ claims,
  • performs functions of the supervisory institution, etc.

When filing to court a petition for enterprise bankruptcy or restructuring, any person as well the court may nominate a candidate to the post of the administrator. Unlike in restructuring process, the candidacy of the administrator for bankruptcy must be coordinated with the Enterprise Bankruptcy Management Departament which supervises the activities of administrators.

The administrator shall exercise functions of the liquidator, in particular:

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  • submits a transcription of the order to initiate restructuring proceedings to creditors or their representatives after the court order to initiate restructuring proceedings comes into effect,
  • supervises or organizes the drafting of the enterprise’s restructuring plan,
  • files the enterprise’s restructuring plan with the court.

After the court order to institute bankruptcy proceedings becomes effective, the enterprise managing bodies shall lose their powers - they shall transfer the administrator the assets of the enterprise according to the financial accounts and all pertinent documents.

If the owners of an enterprise make a decision to restructure the enterprise and consent of creditors is given or if the creditors make a proposal for restructuring of the enterprise and the owners give their consent, the head of the enterprise files a petition on initiating the enterprise restructuring proceedings to the court. 

All creditors may:

  • file a petition for bankruptcy with the court,
  • have the right to file their requirement to the court,
  • apply to the court for the establishment of a fraudulent bankruptcy,
  • question the resolutions adopted by the creditors’ meeting, etc.

Creditors’ consent or proposal is necessary for initiating restructuring proceedings and they must approve the guidelines for the enterprise restructuring plan.

The creditors' meeting shall:

  • investigate complaints about the actions of the administrator,
  • applies to the court requesting the replacement of the administrator,
  • approves the reports of the administrator and the estimate of expenses,
  • decide on the continuity of economic-commercial activities of the enterprise,
  • fixes the price of the property on offer, etc.

4. What are the effects of the opening of proceedings?

In the process of bankruptcy the enterprise managing bodies must transfer the assets of the enterprise to the appointed administrator on the day the order to institute bankruptcy proceedings comes into effect. The court may provide provisional protective measures in force until the effective date of the court order to institute bankruptcy proceedings or the refusal to institute it as well as must levy an attachment against the immovable property and other fixed tangible assets of the enterprise, in force until the effective date of the court order to institute bankruptcy proceedings.

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In the process of restructuring, the restructuring plan shall be implemented, all property owned or held in trust shall be disposed of and economic activities of the enterprise shall be directed by the managing bodies within the limits of their competence. The enterprise may not sell the enterprise or a part thereof, long-term assets or property rights, assign the enterprise or a part thereof, long-term assets or property rights, or transfer them for use without remuneration, grant guarantees, give sureties, pledge or secure the discharge of the obligations in any other way.

There are two types of claims:

  • Regarding initiation of bankruptcy proceedings;
  • Regarding initiation of restructuring proceedings.

Upon institution of bankruptcy proceedings all creditors must lodge their claims with the court. Individual acts of creditors are not possible as all the claims lodged against the enterprise are referred to the court.

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5. What are the specific rules related to certain categories of claims?

Persons, who have leased, borrowed, are keeping in custody, or using or managing on any other grounds the assets of the enterprise in bankruptcy shall be prohibited from concluding with third parties contracts relating to the above assets. All contracts entered into in breach of this provision shall be invalid as of their conclusion.

The creditors’ claims are satisfied in the sequence and procedure established by the law.

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First in line for satisfaction shall stand claims for compensation for damage caused by grievous bodily harm or some other injury, an occupational disease or death due to an accident at work.

The name of the enterprise may be preserved when the arrangement with creditors is concluded. The name can also be sold.

Upon the institution of bankruptcy proceedings against the enterprise the administrator of the enterprise shall upon a 15-day written advance notice terminate employment contracts with the members of the enterprise board and the head of the administration. The said individuals shall not be entitled to severance pay or compensation, except for monetary compensation for the unused holidays.

Within 3 working days after the institution of bankruptcy proceedings against the enterprise the administrator gives the workers of the enterprise a written notice of the termination of employment contracts with them and after 15 working days terminates the employment contracts with them.

6. What are the rules relating to detrimental acts?

In bankruptcy case the contracts which are contrary to the objectives of the enterprise activities and/or which could have led to the disability of the enterprise to settle with creditors are considered as detrimental. If the court establishes a fraudulent bankruptcy, the administrator must review all contracts concluded within the 5-year period prior to the institution of bankruptcy proceedings.

In restructuring case the contracts which are contrary to the objectives of the enterprise and/or which might have led to the inability of the enterprise to settle with creditors.

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7. What are the conditions for the lodgment and admission of claims?

In the process of insolvency the court sets a time limit within which the creditors shall have the right to file their claims which emerged prior to the institution of bankruptcy proceedings.

The administrator of the enterprise compiles the list of all enterprise creditors and their claim on the basis of claims filed by the creditors and submits the list to the court for approval.

The creditors’ claims are satisfied in two stages. During the first stage the creditors’ claims not including the computed interest and default interest are satisfied. In the second stage the remaining part of the creditors’ claims (interest, default interest) are paid in the following sequence:

  • First in line - claims of the workers arising from employment relationships; claims for compensation for damage caused by grievous bodily harm or some other injury, an occupational disease or death due to an accident at work; claims of natural or legal persons for payment for agricultural produce purchased for processing.
  • Second in line - claims for payment of taxes and other payments into the budget, also for compulsory state social insurance contributions and compulsory health insurance contributions; claims relating to loans obtained on behalf of the State or guaranteed by the State;
  • Third in line - claims other than those specified above.

The creditor’s claims secured by pledge and/or mortgage shall be paid first of all from the proceeds obtained from the sale of the pledged assets of the enterprise or by transferring the pledged assets.

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Claims of the creditors of each successive sequence shall be met after full payment of the claims of the creditors of the preceding sequence. If assets are insufficient to satisfy all of claims of one sequence in full, the said claims are paid in proportion to the amount due to each creditor.

8. What are the rules relating to reorganization proceedings?

Described in questions 2, 3, 4, 5, 6, 7.

9. What are the rules relating to the winding-up proceeding?

The court shall declare the enterprise bankrupt and issue an order to put the enterprise into liquidation if an order to conclude the arrangement with the creditors is not issued within 3 months from the effective date of the order to allow the creditors claims and the court has not granted any extension of the deadline. Immovable property and pledged assets shall be sold by auction. The procedure of sale of other assets, except the pledged assets, shall be decided by the creditors. Unsold assets may be transferred to the creditors. The creditors whose claims have not been satisfied due to the insufficiency of funds shall decide on the use of the unsold assets.

The creditors’ claims in the liquidation procedure shall be satisfied in the same stages and sequence as the claims in the bankruptcy procedure. (See Question 7.)

Claims connected with employment relationships which have been put forward by workers may be satisfied from the resources of the Guarantee Fund. The allowed claims of a worker or a natural or legal person shall be reduced by the amount of the sum paid from the above Funds.

10. What are the conditions for the closure of the proceeding?

A bankruptcy case shall be discontinued when:

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  1. all creditors waive their claims and the court passes an order to accept the waivers;
  2. the enterprise in bankruptcy effects settlement with all the creditors/creditor and the administrator files documents in proof thereof with the court;
  3. the arrangement with the creditors is concluded and approved by the court.
A restructuring case shall be discontinued when:
  1. the enterprise restructuring plan is not filed in with the court within 4 months from the day when the court order to initiate restructuring proceedings becomes effective;
  2. it becomes evident during restructuring that erroneous information about the economic situation at the enterprise has been produced, owing to which implementation of the restructuring plan is impossible, and this is duly confirmed by the creditors’ committee/meeting;
  3. it becomes evident that the measures provided for in the restructuring plan will not be implemented, and the enterprise fails to prove that the restructuring plan will be implemented.
The laws do not provide for restrictions for persons setting up a new enterprise irrespective of whether they have gone bankrupt before or not.

The head of the enterprise shall be given a fine for violations of the order for satisfaction of creditors’ claims, for not filing a petition for initiation of the enterprise bankruptcy proceedings, etc.

A person, who has deliberately mismanaged the enterprise thus bringing it to bankruptcy and causing the creditors material damage shall be imposed a punishment of up to three years of imprisonment.

A fraudulent debtor shall be given a fine or a punishment of imprisonment.

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Last update: 30-05-2007

 
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