Notable Changes in Pre-Insolvency Procedures

Transparency of Legal Protection Proceedings concerning debtors in Latvia to be considerably increased.

Legal Protection Proceedings (LPP) are a set of legal measures that aim to renew the ability of a debtor in Latvia to settle their debt obligations if they get into financial difficulties or expect to do so. LPP can be characterized as a situation threatening insolvency but that has not yet gone as far as insolvency. In general, LPP must be an attempt to reduce or to postpone some liabilities of the debtor, meanwhile seeking reorganization, selling off movable or immovable property, and so on.

It is no secret that the well-intentioned LPP has often been used as a malicious tool to prolong the pre-insolvency period without serious attempts to restructure the business. To limit this approach, the Latvian legislator has adopted a set of measures directed towards more transparent LPP as well as vesting creditors with substantially increased powers during LPP.

The principle of outsourced supervision of LPP is still maintained. In particular, one individual must control implementation of LPP. Previously, supervision powers were reserved for (registered) insolvency administrators, i.e. a debtor could choose only one of them. The novelties are, first, it becomes the creditors’ and not the debtor’s right to appoint a supervisor for LPP and, second, any person complying with a few requirements can be appointed apart from among the list of insolvency administrators. However, it is important to note that the remuneration for the work of the person supervising LPP must now be borne by the creditors themselves.

Moreover, the creditors now get information about other creditors at an early stage of the proceedings. In particular, the relevant information must be provided by the debtor to all creditors already in parallel with drafting the LPP Plan. Thus, creditors are finally enabled to coordinate among themselves before the LPP plan is confirmed.

Among other related changes, each individual creditor is empowered, i.e. without mandatory involvement of the LPP supervisor as was the case before, to request the court immediately to cease the LPP if the debtor delays in fulfilling their LPP related duties towards the particular creditor for at least 30 days. In result, creditors control the destiny of the LPP.

Presumably, the changes in the LPP legal framework will considerably reduce the number of confirmed and effected LPP’s in Latvia. In particular, with creditors being vested with the decisive powers in this process, they are interested in accepting only those LPP plans which are truly reliable and prima facie effective. Most of the changes are effective as of 1 July 2017.

Source: December 2016 Amendments to the Insolvency Law

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