• Applicable Legislation
• Scope of Regulation
• Petition in Bankruptcy
• Bankruptcy Proceedings
• Administrator
• Non-Judicial Bankruptcy Proceedings
• Protection of Creditors, Debtors and Third Persons
• Termination of Bankruptcy Proceedings
• Restructuring of Enterprises
• Settlement with Creditors
• Liquidation of Bankrupt Enterprises
• Sales of Assets and Ranking of Creditors Claims

In 1992, the Supreme Council of the Republic of Lithuania passed the first bankruptcy law - the 15 September 1992 Law No. I-2881 of the Republic of Lithuania on Enterprise Bankruptcy. The law was replaced by Law No. VIII-270 of the Republic of Lithuania on Enterprise Bankruptcy which was enacted by the Seimas on 17 June 1997. The latter, after several revisions as well as some inconsistencies with the practice of Lithuanian courts, was replaced by a completely new 20 March 2001 Law No. IX-216 of the Republic of Lithuania on Enterprise Bankruptcy which came into force on 1 July 2001 along with the set of other new corporate laws.


Applicable Legislation

1. The 20 March 2001 Law No. IX-216 of the Republic of Lithuania "On Enterprise Bankruptcy" ("the Enterprise Bankruptcy Law");
2. The 3 July 2001 Resolution No. 831 of the Government of the Republic of Lithuania "On Representation of State Institutions by Authorised Persons in Enterprise Bankruptcy and Restructuring Procedures, Auction Sale of Assets of Enterprises under Bankruptcy and Bankrupt Enterprises, and Supplementation of the 15 December 2000 Resolution No. 1458 of the Government of the Republic of Lithuania "On the List of the Subject Matter of a State Duty, Amounts and Procedure for Payment and Refunding Thereof";
3. The 20 April 1993 Resolution No. 276 of the Government of the Republic of Lithuania "On Establishing the Insolvency of Enterprises and the Order of Implementation of the Main Procedures Related to the Implementation of the Enterprise Bankruptcy Law of the Republic of Lithuania";
4. The 5 July 2001 Order No. 276 of the Minister of Economy of the Republic of Lithuania "On Submission and Announcement of Data on Enterprise Bankruptcy Procedures, Submission and Announcement of Data on Enterprise Restructuring Procedures, Granting of the Right to Provide Enterprise Bankruptcy and Restructuring Administration Services to Natural and Legal Persons, Procedure for Control of Activities of Enterprise Bankruptcy Administrators, Composition of Attestation Commission of Enterprise Bankruptcy and Restructuring Administrators and Approval of the Code of Ethics of Business Administrators".

The Enterprise Bankruptcy Law applies to all enterprises, public establishments, commercial banks and other credit institutions (hereinafter collectively - "enterprises") registered in the Republic of Lithuania.

The particular characteristics of bankruptcy procedure, where it relates to the bankruptcy of banks, credit unions, insurance companies, agricultural enterprises, brokerage firms, investment companies and other defined enterprises and institutions, are set forth in the laws that specifically regulate the activities of such entities or institutions.

For the first time the new Enterprise Bankruptcy Law includes a general rule that it overrides the provisions of other laws regulating enterprise activities, creditors' rights to satisfy their claims, creditors' rights to recover debts, payment of taxes and other mandatory contributions and the administration of these in the bankruptcy process. The Enterprise Bankruptcy Law, therefore, ensures that all these types of situations are covered by the same procedures, and removes inconsistencies between them.

The current Enterprise Bankruptcy Law is only applicable to enterprises where bankruptcy procedures were initiated after 1 July 2001, the date on which the law took effect.


Petition in Bankruptcy

Grounds for Filing Petition

Article 4 of the Enterprise Bankruptcy Law establishes the following grounds for filing a bankruptcy petition with a court:

1. the enterprise fails to pay, when due, wages or satisfy other employment - related amounts, when due;
2. the enterprise fails to pay, when due, for goods received, work performed or services rendered, or fails to repay loans or fulfil other contractual financial obligations;
3. the enterprise fails to pay, when due, taxes, other compulsory contributions prescribed by the laws and/or amounts adjudged from it;
4. the enterprise has publicly declared or otherwise communicated to the creditors its inability or refusal to meet liabilities; or
5. the enterprise has no assets or income from which debts could be recovered and therefore a court bailiff has returned the writs of execution to the creditor.

Article 5 of the Enterprise Bankruptcy Law authorises the following entities or persons to file a bankruptcy petition with a court:

1. a creditor or group of creditors;
2. the owner or owners of the enterprise;
3. the head of administration of the enterprise.

Petitions are filed in writing, in the manner set forth by the Code of Civil Procedure, in the district court having jurisdiction over the locality in which the enterprise has its registered office.

Petitions Filed by Creditors

A creditor or group of creditors may file a petition in bankruptcy not earlier than three months from the date when the obligation became due, or three months after the creditor or creditors presented a demand for the performance of the obligation where the term for performance has not been fixed. The creditor or creditors must notify the enterprise manager, in writing, of the intention to file a petition in bankruptcy. The enterprise must be provided with at least 30 days grace period to fulfil its obligation before the petition in bankruptcy may be filed. These two conditions are not applicable in case the enterprise has no assets or income, from which debts may be recovered, and therefore a court bailiff returns executive writs to the creditor.

Petitions Filed by Owners and Head of Administration

Definition of the "owner" in the Enterprise Bankruptcy Law is rather broad and includes not only owners of unlimited liability enterprises, but also shareholders (or a group of shareholders) having more than 10% of shares in a limited liability enterprise (e.g. a public or private company).

Owners (shareholders) or the head of administration of the enterprise file a bankruptcy petition in case the enterprise is not or will not be able to fulfil all its liabilities to the creditors and the creditors have not filed the bankruptcy petition of their own, also in case of public declaration of the enterprise or other communication to the creditors of its inability or refusal to meet liabilities.

Petitions Filed by Enterprise Liquidator

If at the time of liquidation of the enterprise it is established that the enterprise will not be able to fulfil all its liabilities, the enterprise liquidator must, not later than within 15 days after the establishment of said state of the enterprise, file a petition in bankruptcy.


Bankruptcy Proceedings

The court, not later than within 1 month from the date of filing of the bankruptcy petition (this term may be extended for another month yet), renders a decision to institute a bankruptcy proceedings or refuse initiation thereof. The bankruptcy proceedings will be instituted if the court has sufficient grounds to find the enterprise insolvent or, alternatively, it is found that the enterprise has publicly declared or otherwise communicated to the creditors its inability or refusal to meet liabilities.

The Enterprise Bankruptcy Law largely redefines the concept of insolvency. An enterprise is considered insolvent if it fails to settle with creditors within three months after the due date and the aggregate value of its overdue liabilities is more than a half of the net book value of all its assets. Pending (non-overdue) debts are not taken into account when determining the insolvency.

Institution of the bankruptcy proceedings may also be postponed or denied in case a restructuring petition is filed or restructuring proceedings are instituted in respect of the enterprise. Initiation and implementation of restructuring procedures is regulated by a separate enactment - the 20 March 2001 Law No. IX-218 of the Republic of Lithuania "On Restructuring of Enterprises".

The following are the most significant actions and consequences that occur after the court institutes bankruptcy proceedings:

1. the management bodies of the enterprise transfer to the appointed bankruptcy administrator the assets of the enterprise;
2. the management bodies of the enterprise lose their powers and the appointed bankruptcy administrator terminates employment contracts with the board members and the head of administration of the enterprise;
3. the enterprise is prohibited from fulfilment of liabilities not met prior to the initiation of bankruptcy proceedings, including payment of interest, penalties and taxes; an automatic stay is put on actions for the recovery of debts of the enterprise, either through court action or directly; calculation of interest and default interest for all liabilities of the enterprise, including those related to employment relations, is suspended;
4. the appointed bankruptcy administrator of the enterprise within 30 days of the initiation of bankruptcy procedures is entitled to unilaterally decide and notify other parties on termination of the agreements of the enterprise (including lease or loan for use agreements); termination rights are not applicable only to employment agreements and agreements from which the rights of claim of the enterprise arise;
5. the enterprise has the right to engage in business activities only if such activities decrease losses of the creditors incurred in relation to the enterprise bankruptcy, and to consume income received from such business activities for covering of the business-related expenses; if the enterprise's business activities generate tax obligations, the enterprise must pay taxes under the laws of the Republic of Lithuania;
6. upon request of the creditors, the court may impose restrictions on the enterprise's business activity and disposal of its assets which then may be sold, leased, pledged or otherwise transferred or conveyed only by leave of the court.

Point of Interest
The appointed bankruptcy administrator has unilateral powers to terminate ongoing agreements of the enterprise in bankruptcy (including property lease or usage agreements) and is not required to provide reasoning for such termination.


Administrator

When instituting bankruptcy proceedings, the court must appoint a bankruptcy administrator for the enterprise. The candidate for the bankruptcy administrator may be suggested by the petitioner or other parties entitled to provide bankruptcy petition, however, the court is authorised to appoint another candidate to the bankruptcy administrator, provided such person meets the established requirements. Discharge of the administrator is also possible only through a court ruling.

The bankruptcy administrator is an individual or a legal person appointed by the court with the right and authority to provide bankruptcy administration services, act as an enterprise manager and executor of court decisions and orders and/or resolutions of the creditors' meeting, from the date of the court's ruling to institute bankruptcy proceedings throughout the bankruptcy proceedings.

A natural person may not be the bankruptcy administrator of two enterprises at the same time. However, practically, if the bankruptcy administrator is a legal person, such administrator's representative, a natural person, may act as the bankruptcy administrator's representative for an unlimited number of bankrupt enterprises. Only natural and legal persons that have obtained a qualification certificate (in case of a natural person) or permission to provide administration services (in case of a legal person) from the Ministry of Economy of the Republic of Lithuania may be appointed as bankruptcy administrators.

In addition, the appointed administrator may not be: a creditor (a person connected with the creditor by employment relations or a member of the latter's management bodies) of the enterprise under bankruptcy; a person who under the laws of the Republic of Lithuania or other legal act has no right to be appointed the head of administration; an owner of the enterprise or its daughter enterprise; a member of the supervisory board or the board, head of administration or its deputies, chief financier of the enterprise or its parent enterprise; a shareholder owning in excess of 10% of shares of the enterprise or its parent enterprise. The prohibition also applies to persons employed in an enterprise under bankruptcy or dismissed from office within 12 months immediately preceding the initiation of bankruptcy proceedings.

Point of Interest
Powers of the bankruptcy administrator are very broad. Among the powers of the bankruptcy administrator established in Article 11 of the Enterprise Bankruptcy Law are: the power to manage, use and dispose of the assets of an enterprise under bankruptcy; the power to conclude new transactions on behalf of the enterprise; the power to examine transactions of the enterprise under bankruptcy concluded within a period of at least 36 months before the initiation of bankruptcy proceedings. Administrator also has the authority to file with the court, in which the bankruptcy hearing is conducted, claims for the invalidation of pre-bankruptcy transactions and claims to declare invalid the fraudulent discharge of financial liabilities, also within 30 days after institution of bankruptcy proceedings to decide on termination of ongoing transactions of the enterprise.

Although the Enterprise Bankruptcy Law provides that the bankruptcy administrator is liable for any losses incurred through his/her fault, and that his/her activities are controlled by competent governmental institutions, these do not ensure adequate safeguards on the activities of the administrator. It should be noted that creditors of the enterprise in bankruptcy have no instant and direct means to supervise the bankruptcy administrator.


Non-Judicial Bankruptcy Proceedings

Bankruptcy procedures may be implemented without involvement of the court, provided that no court proceedings, under which proprietary claims, including claims connected with employment relations, have been instituted against the enterprise.

The decision to utilise non-judicial bankruptcy procedures is adopted at a meeting of creditors, provided that the decision is approved by open voting of the group of creditors whose claims, in terms of value, account for at least 4/5 of the amount of the enterprise's current financial liabilities (including those which are not due), as of the day of the creditors' vote.

In the case of non-judicial bankruptcy proceedings, all issues within the jurisdiction of the court may be considered and decided by the creditors' meeting.

Point of Interest
Rather uniform procedures for non-judicial bankruptcy proceedings were provided in several revisions of the Enterprise Bankruptcy Law, however, there have been no actual non-judicial enterprise bankruptcy proceedings in Lithuania within the last decade.


Protection of Creditors, Debtors and Third Persons

Upon the institution of bankruptcy proceedings, the court will fix the time period within which creditors must present their financial claims. The time period may be not less than 30 days and not longer than 45 days from the date of institution of the bankruptcy proceedings. The administrator is entitled to adjust the creditors' claims according to the books and records of the enterprise, as well as to challenge unreasonable claims in the court. The creditors' claims must be reviewed and approved by the court.

Point of Interest
The court, in its discretion, may accept the creditors' claims after the date fixed, provided that the failure to act in a timely manner has been justified. Late submissions, however, may be accepted only until the end of bankruptcy proceedings. Thus, the court may approve the creditors' claims only until the court decision to liquidate the bankrupt enterprise comes into force.

From the date of the institution of bankruptcy proceedings, the enterprise owner(s) and its administration cease having the right to conclude any business-related contracts or dispose of the enterprise's assets. Likewise, creditors are prohibited from taking over the assets or seizing funds of the enterprise after the institution of bankruptcy proceedings. Persons or entities using, leasing or holding in custody the assets of the enterprise under bankruptcy are prohibited from concluding any contracts with respect to such assets. As it has already been noted, the continuation of the ongoing transactions is dependent on the administrator of the enterprise.

If the court, in which the bankruptcy hearing is conducted, deems the bankruptcy to be fraudulent, the bankruptcy administrator must review all contracts concluded by the enterprise within at least the last 5 years. If the bankruptcy administrator finds contracts which are contrary to the interests of the enterprise and/or which could have brought about the enterprise's inability to satisfy creditors claims, an action to invalidate such contracts must be brought before the court conducting the enterprise bankruptcy hearing.

All cases containing proprietary claims, that have been filed with the courts prior to the institution of bankruptcy proceedings, will be referred to the court conducting the enterprise bankruptcy proceedings. All debts of the enterprise under bankruptcy are considered past due as of the date of the institution of bankruptcy proceedings.

After the institution of the bankruptcy proceedings, the creditors of the enterprise have the right:

1. within the court prescribed time period, to present creditors' claims and supporting documents, as well as indicate any security of their claims issued by the enterprise;
2. to refer to the court in respect of intentional bankruptcy and to challenge resolutions of the meeting of creditors of the enterprise;
3. to attend the meetings of creditors of the enterprise and defend own claims;
4. according to the procedure established by the meeting of creditors to receive information on the course of bankruptcy proceedings from the bankruptcy administrator.

The creditors' meeting to be convened not later than within 15 days after the approval of the creditors' claims by the court, will have the following rights:

1. to elect the chairman of the creditors' meeting;
2. to decide on the formation of the creditors' committee, elect the committee, change its composition and delegate to the committee all or part of the rights vested in the creditors' meeting;
3. to investigate creditors' complaints relating to actions of the administrator;
4. to demand that the administrator reports on his/her activities and approve such reports. (If the administrator's report is not approved by the creditors' meeting, it may be approved by court);
5. to approve the estimate of administrative expenses, as well as to revise this estimate;
6. to submit proposals to the court on continuation of the enterprise's economic activities, restrictions thereon as well as to restrict its freedom to dispose of the enterprise's property;
7. to fix the number of employees to be employed during the bankruptcy procedures;
8. to fix the salary of the administrator;
9. to adopt a resolution on concluding the settlement with creditors;
10. to apply to the court for the replacement of the administrator;
11. to propose to the court that the liquidation procedure be applied with respect to the enterprise;
12. to resolve any other issues ascribed under the law to the competence of the creditors' meeting.

In order to more effectively supervise the bankruptcy procedure, the administrator's activity, as well as to protect the creditors' interests, the creditors' committee can be formed by the creditors' meeting. The rights of the creditors' committee are established by the creditors' meeting. The creditors' committee consists of at least 5 members. At least one member of the creditors' committee is a representative of the employees if the enterprise has employment - related liabilities.

Points of Interest
No particular procedure for election of the creditors' committee is prescribed in the Enterprise Bankruptcy Law. This, in practice, allows formation of creditors' committee which represents principally the interests of the majority of creditors.

The creditors are free to assign their claims to other creditors or third parties, they are also entitled to reduce or waive their claims. Assignment of claims does not affect the ranking thereof as established in the Enterprise Bankruptcy Law.


Termination of Bankruptcy Proceedings

Bankruptcy proceedings may be terminated on the following grounds:

1. all creditors waive their claims and the court accepts the waivers; or
2. the enterprise in bankruptcy settles all creditors' claims and the administrator provides proving documents to the court; or
3. a settlement with creditors is concluded and approved by the court.

Important feature of the Enterprise Bankruptcy Law is that it does not allow rehabilitation or similar procedures to take place after bankruptcy proceedings have been instituted against the enterprise. Restructuring of enterprises is governed by a separate law - the 20 March 2001 Law No. IX-218 of the Republic of Lithuania on Restructuring of Enterprises. Restructuring of an enterprise may only be attempted prior to the institution of bankruptcy proceedings against such enterprise. No restructuring is possible after bankruptcy proceedings are in place. After bankruptcy proceedings are started i.e. application for bankruptcy is approved, the enterprise may only be wound up and liquidated, or recovered through an amicable settlement with the creditors.

The Law on Restructuring of Enterprises came into effect simultaneously with the Enterprise Bankruptcy Law on 1 July 2001. The law governs the restructuring of enterprises and public establishments which face temporary financial difficulties, its main aim being to avoid bankruptcy. The purpose of the law is to allow enterprises that face temporary financial difficulties and have not ceased commercial activity to preserve and maintain their activity, as well as to settle their debts and restore their solvency. Unlike the Enterprise Bankruptcy Law, it applies only to enterprises, not to other types of legal entities. Moreover, it does not apply to banks, credit unions, other credit institution, insurance companies, investment companies, pension and other funds or to securities brokers. It gives priority to restructuring over bankruptcy proceedings by establishing that restructuring petitions will prejudice bankruptcy petitions against the enterprise i.e. if the petition for restructuring of enterprise is provided simultaneously or after the petition for bankruptcy, then the bankruptcy petition will be decided only if restructuring petition is dismissed.


Settlement with Creditors

The only way to recover enterprise in bankruptcy foreseen in the Enterprise Bankruptcy Law may be a settlement agreement between the enterprise and the creditors. The settlement agreement may be proposed by the creditors, administrator or owners. The settlement agreement must be signed by all creditors, whose claims are not satisfied, or their authorised representative and the enterprise's administrator upon written consent of the enterprise owner(s), the management body which has the right to decide on liquidation or reorganisation.

A settlement with creditors may be concluded at any stage of the bankruptcy proceedings prior to the ruling on liquidation by the court. The court, and in case of non-judicial bankruptcy procedures - the public notary, must approve the settlement agreement.


Liquidation of Bankrupt Enterprises

If the bankruptcy court enters no ruling regarding the approval of the settlement agreement between the enterprise and its creditors (i.e. if settlement is not reached) within 3 months from the approval of creditors claims by the court, and extension of the said term was not requested by the creditors' meeting, the court will adjudge the enterprise bankrupt and issue a decision instituting liquidation proceedings.

Functions of the liquidator of the enterprise will be performed by the bankruptcy administrator. In liquidation the administrator disposes of the assets of the enterprise, organises sale or assignment of the assets, satisfies approved creditors claims, appropriates assets remaining after settlement with the creditors to the owners (shareholders) etc. A bankrupt enterprise may be removed from the register not earlier than 1 month following the effective date of the liquidation ruling.


Sales of Assets and Ranking of Creditors Claims

The assets of the enterprise and receivables owed to the enterprise are appraised prior to selling. Immovables and mortgaged/pledged assets will only be sold through public auction according to the procedure laid down by the Government. Publicly traded securities will only be sold in compliance with applicable legislation. Procedure for selling assets other than immovables will be established by the creditors of the enterprise. Unsold assets may be transferred to the creditors.

The ranking of creditors' claims in satisfaction is established in Articles 34 and 35 of the Enterprise Bankruptcy Law as follows:

1. claims by creditors secured by a mortgage/pledge of the debtor (only in respect of the proceeds from sale of mortgaged/pledged assets);
2. employment - related claims and claims arising from unpaid debts for agriculture production supplied to the debtor (the Government of the Republic of Lithuania has established funds to aid in the satisfaction of claims arising from employment relations and compensation for the unpaid supply of agricultural production);
3. tax, social insurance and state medical insurance related claims and claims relating to loans guaranteed by or issued on behalf of the Republic of Lithuania or the Government; and
4. all other creditors' claims.

The Enterprise Bankruptcy Law does not establish the maximum limit for administration expenses of the enterprise in bankruptcy. These expenses are compensated from all funds of the enterprise in bankruptcy (proceeds from sale of assets, including mortgaged/pledged assets, income from economic activities, recoveries etc.). The estimate of administration expenses, the procedure and ranking of payment are established by the creditors' meeting.