2016 – season for hunting legal zombies in Lithuania

Lithuania: The Lithuanian parliament has passed legislation addressing the issue of legal zombies in Lithuania: bnt got the snowball rolling.

What is a legal zombie? It is a peculiar creature indeed: an insolvent company which abuses legal loopholes to block its own bankruptcy by perpetually filing for restructuring. Bankruptcy law has an imperative norm that obliges the court to block a bankruptcy case if a company files for restructuring at the same time (article 9, paragraph 6). So the key to immortality is: file for restructuring. After the motion is rejected, file again. Repeat.

Up until now, legal zombies have been wreaking havoc in Lithuania. Literally dead, the zombies masquerade as healthy companies, entering into new business ventures and lining up unsuspecting creditors for an ugly surprise: years of futile effort to initiate bankruptcy proceedings for a company which is stuck indefinitely in “limbo” between bankruptcy and restructuring. However, that will soon no longer be the case: bnt-attorneys-at-law, having represented major German companies in disputes against these legal zombies, together with the German-Baltic chamber of commerce (AHK), joined forces to bring the issue to the attention of the Lithuanian Presidency, which in turn promptly initiated amendments to the problematic article 9 of the bankruptcy law. On 15 October 2015 the Lithuanian legislature passed amendments (No. XII-1962) removing the imperative to block bankruptcy in cases of collateral filing for restructuring.

The amendments will enter into force on 1 January 2016. This will effectively open the season for hunting legal zombies. With the right enforcement by the courts, this breed of companies is likely to become nothing but a relic of legal history.

This story illustrates how the Lithuanian legislator can be willing to respond promptly and appropriately to real-life challenges that businesses face in Lithuania. This story illustrates how private initiative and open dialogue can give rise to meaningful change.

Source: 15 October 2015 Bankruptcy law amendment act No. XII 1962.

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