Lithuania: new insolvency concept enters into force

Will the new insolvency concept increase the number of bankruptcy cases in Lithuania?

On 1 January 2020 the new Law on the Insolvency of Legal Entities will come into force. The law will supersede the currently-in-force Enterprise Bankruptcy Law and the Law on Restructuring of Enterprises. The new law aims mainly to increase the efficiency of insolvency proceedings of legal persons, to create conditions for timely initiation of bankruptcy proceedings and greater satisfaction of creditors’ claims, and to promote the restructuring and preservation of viable legal persons in financial difficulty.

One of the most important innovations of the new law is the introduction of a new concept of insolvency. Under the current Enterprise Bankruptcy Law, a company can be declared insolvent if

  • (i) it fails to discharge its obligations and
  • (ii) the overdue liabilities of the company exceed half the value of the assets entered in the company’s balance sheet.

The new law substantially changes this concept by declaring that a company will be considered insolvent if

  • (i) it is unable to fulfil its property obligations in due time, or
  • (ii) its liabilities exceed the value of its assets.

A comparison of the two statutory provisions shows that the new regulation extends the concept of insolvency and sets not two mandatory criteria, but two alternative criteria for determining when a company can be declared insolvent. On the one hand, the new concept seeks to achieve the aims, namely to create conditions for timely initiation of bankruptcy proceedings and greater satisfaction of creditors’ claims. On the other hand, the new concept sets legal preconditions for opening bankruptcy proceedings against viable companies in financial difficulty, which is not fully compatible with the objective of the EU Restructuring Directive No. 2019/1023, to enable such companies to effectively restructure and to avoid bankruptcy. Therefore, the number of bankruptcy processes is likely to increase when the new law will come into force.

In addition, the expanded concept of insolvency may cause practical difficulties for heads of companies to assess and determine the insolvency of the company and fulfil their statutory obligation to promptly initiate bankruptcy proceedings. This may, in turn, lead to liability of heads of companies for damage suffered by creditors as a result of late filing of a bankruptcy petition with the court. 

Source: Law on Insolvency of Legal Persons of the Republic of Lithuania

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