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Lithuanian Supreme Court reduces possibilities for creditors to abuse their rights in insolvency proceedings

The insolvency court may decide matters that fall within the competence of the creditors’ meeting if the creditors’ meeting deliberately avoids taking necessary decisions and thus delays the insolvency proceedings.

On 12 May 2017 the Lithuanian Supreme Court developed a new legal rule in insolvency cases. The rule aims at restricting abuse of rights by creditors. The court held that it can intervene in the competence of the creditors’ meeting and adopt decisions itself in cases where the creditors’ meeting fails to take decisions within its competence, or where the creditors’ meeting adopts decisions violating the effectiveness of the insolvency process. The new court practice aims at ensuring faster and more effective insolvency proceedings.

In the case at hand, creditors with a voting majority avoided adopting decisions within its competence and related to setting the sale price and the procedure for sale of the debtor’s real estate.

Based on a decision of the creditors’ meeting, a mortgaged building had been rented out during the insolvency proceedings. The rental payments had been used to satisfy claims of all creditors proportionally, including the claims of unsecured creditors.

The creditor secured by the mortgage on that asset felt that this decision infringed its rights, taking into consideration that its proposals to sell the real estate and to use the proceeds of sale to satisfy its claim had not found the necessary voting majority in the creditors’ meeting. The secured creditor based its view on a provision in the Enterprise Bankruptcy Law according to which claims by a creditor that are secured by a mortgage are to be satisfied first of all from the proceeds obtained from the sale of the mortgaged asset. In the case at hand, unsecured creditors holding the voting majority had an interest in not approving the sale of the mortgaged real estate (for the benefit of the secured creditor) but rather to rent out the building so as to benefit in the long run from the rental payments.

According to the judgment of the Lithuanian Supreme Court, the insolvency court may, in certain exceptional cases, interfere with the competence of the creditors’ meeting and adopt the necessary decision itself if the court finds that the insolvency proceedings are being delayed as a result of the creditors not duly implementing their statutory competence. For cases like the one at hand, the Supreme Court held that the insolvency court has a right to annul a decision of the creditors’ meeting and to set the procedure and the initial price for selling the property, i.e. to take the decision that should have been taken by the creditors’ meeting.

This judgment of the Supreme Court is to be welcomed, as it furthers the effective handling of insolvency proceedings by clarifying that the insolvency court may interfere in the competences of the creditors’ meeting in cases where unsecured creditors for their personal gain abuse their voting majority in the creditors’ meeting to torpedo the statutory rights of secured creditors to have the collateral realized and the proceeds distributed to them.

Source: Decision of the Lithuanian Supreme Court of 12 May 2017 in civil case No. 3K-3-253-219/2017