Vol 2 (2005) - Issue 3

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Considering Extrajudicial Proceedings - A Lithuanian Perspective

Introduction

The transition from the state-regulated to the market-based economy for Lithuania as well as for the other Baltic countries of the former Soviet block has not been an easy one. However, since restoration of their independence at the beginning of the 1990s, Lithuania, Latvia and Estonia have made a significant progress in improving conditions for conducting business. Alongside the growth of the economy, the phenomenon of bankruptcy inevitably appeared in the market. Therefore, in order to resolve problems of insolvency and debt recovery, it was required to improve the legal as well as economic environment along with the implementation of respective laws and secondary legislation.
The first bankruptcy proceedings in Lithuania were started in 1993 after the enactment of the first Law on Enterprise Bankruptcy (1992). Since then the judicial bankruptcy procedure has become a common instrument for resolution of the long-lasting problems of liabilities.

General economic growth increased the number of new enterprises, a certain percentage of which unavoidably faced serious financial problems. Accordingly, there was a growing demand for more effective ways for managing enterprises’ financial problems, which would be more flexible and less time-consuming. Therefore, encouraged by the successful examples of some EU and other countries, Lithuania also began promoting extrajudicial procedures to dissolve bankrupt businesses without applying to the court. However, this initiative has not yet gained extensive application by the private sector. Nevertheless, professionals see its future as an effective way to deal with enterprises’ financial problems and at the same time secure creditors’ interests.

The possibility to apply certain rescue measures in order to prevent bankruptcy was introduced together with the first bankruptcy laws. However, a comprehensive restructuring procedure has been introduced relatively recently by a separate law. Therefore, this method of corporate rescue is relatively new in Lithuania and is only just being applied in practice. Today one can already see the results of how the new legal instruments are functioning and can perform certain analysis of trends of their use.

Temporary financial difficulties vs. insolvency

The inability of an enterprise to settle with its creditors is the main precondition for applying for insolvency proceedings. According to the Law on Restructuring of Enterprises (2001) and the Enterprise Bankruptcy Law (2001), when an enterprise fails to settle with its creditors within three months after the due date, this might indicate either that the enterprise has faced temporary financial difficulties and a restructuring could be a solution, or that it has become insolvent, which consequently may lead to the institution of the bankruptcy proceedings.

The main purpose of the enterprise restructuring procedure is to improve business conditions by providing the possibilities for enterprises having temporary financial difficulties and willing to continue their activities to rearrange the business and for their creditors to recover debts albeit after a longer period of time, while the bankruptcy procedure is aimed at economic entities operating ineffectively, when creditors do not see possibilities that solvency of the enterprises in question could be restored.
Sometimes the only way for an investor to terminate the unsuccessful business of its subsidiary company and to save at least a part of its investment is to choose bankruptcy; for instance, in cases where an enterprise undergoing voluntary liquidation turns out to be insolvent.

In addition, while considering the two above-mentioned processes, it is important to emphasize the protection of creditors’ interests of the enterprises undergoing restructuring and those undergoing bankruptcy.

Bankruptcy

According to the law, the main preconditions for instituting bankruptcy proceedings against an enterprise are that:

(a) the enterprise fails to settle with the creditors within three months after the due deadline; and