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Insolvency procedures

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

  • Judicial bankruptcy
  • Out of court bankruptcy
  • Restructuring

Judicial bankruptcy – An application for a judicial bankruptcy of a company can be made by a company’s creditor, its shareholders (holding more than 10% of the company’s shares), its managing director or, where it is subject to a solvent liquidation and it transpires that there is an insufficiency of funds to meet the company’s debts in full, its liquidator. If the court judges the company to be insolvent it will initiate bankruptcy proceedings and appoint a bankruptcy administrator.

Out of court bankruptcy – A company’s managing director or shareholders can call a creditor’s meeting to consider a written proposal for an out of court bankruptcy (specifying the duration of the bankruptcy, the date on which debts will be settled and the identity of the bankruptcy administrator). The proposal requires the approval of 80% in value of the creditors. If approved the out of court bankruptcy commences. If not approved a judicial bankruptcy will usually be commenced instead.

An out of court bankruptcy cannot be commenced where the company is subject to debt recovery proceedings.

Restructuring – If a company is or is likely to become financially distressed, its managing director can prepare a draft restructuring plan and put it to a vote of shareholders. The plan must be approved by a two thirds majority of shareholders and two thirds majority in value of creditors. Court approval is required but the court will not look at the economic substance of the plan and its approval is usually a formality. A restructuring plan is intended to settle the company’s debts and restore it to financial health.

A restructuring cannot be commenced if the company is subject to either type of bankruptcy proceedings or has ceased trading.

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

No, a moratorium only arises on the making on an application to the court for the opening of restructuring proceedings and recognition of the already agreed restructuring plan.

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

Judicial bankruptcy or out of court bankruptcy - the powers of the directors cease and the bankruptcy administrator assumes control of the company.

Restructuring - the powers of the directors continue, subject to the supervision of the restructuring administrator and the provisions of the restructuring plan. Certain significant decisions may require court approval.

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?

Two months.

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 members states will be recognised under the EC insolvency regulation.

Insolvency proceedings commenced in non-EU jurisdictions may be recognised by the Lithuanian Court of Appeal under the recognition of foreign courts’ judgements procedure.

Position of creditors

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

Security over immoveable property is taken by a mortgage.

Security over moveable property is taken by a pledge.

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

The following categories of debt are preferred to unsecured debts and rank in the following order:

  • debts owed to employees
    • remuneration
    • compensation for work related injury, disease or death
  • debts owed to the state
    • taxes
    • social insurance contributions and compulsory health insurance contributions
    • loans provided by the state out of its own borrowing
    • loans guaranteed by the state or by guarantee institutions which are in turn guaranteed by the state

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

Yes. Foreign creditors have the same rights as domestic creditors.

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?

Yes, provided that the clause is incorporated into the contract and the goods in question can be identified.

Setting aside transactions

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

In bankruptcy proceedings, the bankruptcy administrator examines all contracts entered into in the three years prior to the commencement of bankruptcy. The bankruptcy administrator can bring an avoidance action in respect of any transaction that:

  • was contrary to the objectives of the company’s business
  • contributed to the company becoming insolvent

Position of directors

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

A managing director can be held civilly liable for:

  • failure to file for bankruptcy proceedings
  • taking unreasonable commercial risks that prejudice the company or its creditors

A managing director can be held criminally liable for:

  • taking unreasonable commercial risks that prejudice the company or its creditors where such behaviour is sufficiently serious
  • intentional bad management, including:
  • taking actions that will clearly cause the company to become insolvent
  • causing the company to enter into obviously unprofitable contracts
  • providing fraudulent financial information about the company that cause a creditor or shareholder to making a loss

A managing director can be disqualified from acting as a managing director of a company for three to five years for:

  • failure to file for bankruptcy proceedings when required to do so by law
  • failure to hand the company’s assets and documents to the bankruptcy administrator
  • not providing relevant information to the bankruptcy administrator and the court
  • interfering with the bankruptcy proceedings in any other way