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Insolvency procedures

Procedures
What are the main insolvency procedures applicable to companies in your jurisdiction?

  • Legal protection proceedings (restructuring)
  • Corporate insolvency proceedings (liquidation)

Legal protection proceedings (restructuring) – Commenced by the company and intended to restore the company in financial distress to solvency. The company prepares a restructuring plan that must be approved by its creditors (two thirds of secured creditors and a simple majority of unsecured creditors) and the court. On approval by the court the plan is implemented by an administrator chosen by the creditors or, failing that, appointed by the court. The plan can be prepared and approved by the creditors prior to application to the court, but if the application is made first then the company benefits from a moratorium while preparing the plan as well as while implementing it. The proceedings last for two years initially and can be extended by a further two years.

Corporate insolvency proceedings (liquidation) – Commenced by court order on the application of an unsecured creditor or the company. An administrator is appointed by the court unless the insolvency proceedings are commenced as a result of unsuccessful legal protection proceedings, where the existing administrator continues in office. The administrator realises the assets of the company and distributes the proceeds to its creditors.

Moratorium
Can a company obtain a moratorium whilst it prepares a restructuring plan?

Yes. On the court ordering commencement of legal protection proceedings a moratorium arises.

Directors
To what extent do the directors of the company remain in control of its affairs during any of the above procedures?

Restructuring - the directors, council and shareholders remain in control of the company, subject to supervision by the administrator.

Liquidation - powers of the directors, council1 and shareholders of the company cease and the administrator takes full control.

Timeline to commence liquidation
How quickly can a creditor generally commence the liquidation of an insolvent company, assuming an undisputed claim and no opposition from the company?

Five weeks.

Overseas proceedings
Do your courts recognise insolvency proceedings commenced in the courts of another jurisdiction?

Yes - insolvency proceedings commenced in the courts of other EU Member States will be automatically recognised under the EC insolvency regulation.

The liquidator of an insolvent non-EU company will treated as the legal representative of the company but no further recognition is possible.

Position of creditors

Forms of security
What are the main forms of security over movable and immovable property?

Security is taken over:

  • immoveable property by mortgage
  • moveable tangible property by commercial pledge
  • specific intangible property by commercial pledge
  • Latvian registered ship by ship mortgage.

Preferential status
Which classes of creditor are given preferential status? Are any classes subordinated?

The order of priority in corporate insolvency proceedings is as follows:

  • Claims of secured creditors (less costs of realisation)
  • Expenses of the proceedings including tax, professional fees, maintaining the company’s property
  • Debts incurred after commencement of the proceedings
  • Employees’ claims
  • Pre-insolvency tax
  • Unsecured debts
  • Interest on unsecured debts

Treatment of foreign creditors
Are foreign creditors treated equally to domestic creditors?

Yes.

Termination of contract by reason of insolvency
Are contract terms permitting termination of the contract by reason of insolvency valid?

Yes.

Retention of title
Are retention of title clauses effective?

In general – yes. The supplier who has the benefit of a retention of title clause will be able to retrieve the goods provided he submits documents to the administrator proving his ownership of the goods. If a dispute arises, the supplier can submit a claim to the court to prohibit the administrator from selling the goods until the dispute is settled.

Setting aside transactions

Transaction avoidance provisions
What are the main transaction avoidance provisions, and who can challenge transactions?

The administrator or, if the administrator fails to act, a creditor can bring actions to avoid the following:

  • Transactions at an undervalue entered into after or within three months prior to the company being declared insolvent, regardless of whether the counterparty was aware of the
  • company’s insolvency
  • Transactions at a loss entered into after or within three years prior to the company being declared insolvent provided the counterparty knew or should have known the company was insolvent
  • Gifts
  • Repayment of a debt before its due date or to a connected party in the period after or within six months prior to the company being declared insolvent

Position of directors

Risks for directors
What are the risks facing the directors of an insolvent company?

Directors can be held civilly liable for losses suffered by the company as a result of them failing to perform their duties to the standard of an honest and careful manager.

Directors can be held criminally liable for causing the company to:

  • to enter into transactions at a loss
  • perform activities which cause the company to become insolvent (eg transfer money to a new entity, leaving company only with debts)

On conviction they can be imprisoned for up to three years, given community service or fined up to EUR 48,000 and disqualified from all or some business activities for up to five years.