COVID-19 impact mitigation: temporary suspension of managers’ duty to file for insolvency and other protective measures.
Managers must immediately initiate insolvency proceedings if their company is insolvent. Under Lithuanian law, a company is insolvent, for example, if it cannot meet its obligations when they fall due for instance, if it cannot pay its bills on time.
On 21 April 2020 the Lithuanian Parliament approved a bill that temporarily changes some provisions of the insolvency law. In doing so, the Parliament followed examples from Germany and other countries. The goal is to support businesses in surviving the economic downturn caused by restrictions imposed by governments worldwide in the wake of the COVID-19 pandemic. Many companies are facing unplanned and unplannable liquidity shortages.
The insolvency related changes enacted in Lithuania are:
1. Suspension of the company manager’s obligation to file for insolvency proceedings with the court. This suspension applies during the quarantine period and for 3 months from the date of its revocation. Important: the statutory pre-filing obligations must still be met, so that the manager must propose each creditor to conclude an agreement of financial aid.
2. Restriction of creditors’ right to have insolvency proceedings opened. This restriction applies during the quarantine period.
3. Protection of ongoing restructuring proceedings: in restructuring proceedings failure of a company undergoing restructuring to implement the restructuring plan in the prescribed period as well as failure to pay due taxes do not trigger the usual termination of restructuring proceedings during the quarantine period and for 3 months after its revocation.
4. Protection of certain transactions: transactions using state financial support measures offered due to COVID-19 cannot be invalidated or challenged if the company later goes bankrupt.The Government may under certain conditions extend the measures mentioned above in no 1 and in no 3, but not longer than 31 December 2020.
It is important to emphasize that all these changes apply only to companies that have encountered financial difficulties or have become insolvent because of the coronavirus (COVID-19) after 16 March 2020, the day when the Lithuanian government announced a quarantine regime for the country.
The changes to the Law on Insolvency are to be welcomed as a step in the right direction to help preserve businesses facing temporary liquidity problems due to COVID-19. A positive effect of the law is that it gives managers some certainty that their decision to continue business and to try to rescue the company during the quarantine does not trigger civil liability for breach of the obligation to file for insolvency.
However, the law will have to be tested in practice. One area where it seems to have aimed too short is that it does not seem to protect transactions in general from voidance or other claw-back claims which might be initiated by an insolvency administrator if the company goes bankrupt in the future. In contrast to recent changes to the insolvency laws in other countries such as Germany, the changes to the Lithuanian insolvency law do not protect transactions from claw-back claims, except for Covid-19 specific financial support under governmental programmes. Another reason for concern as to the effectiveness of the enacted measures relates to the burden of proof for their applicability. As opposed to recent amendments to the German insolvency regime, there is no legal presumption that a company facing distress after a certain date, e.g., the day of announcement of the quarantine in Lithuania (16 March 2020), is in difficulties because of the Covid-19 pandemic. This means for example that a manager wanting to rely on suspension of the obligation to file for insolvency will have to prove that the financial distress is indeed caused by the pandemic.
Law on the Impact of the Consequences of the New Coronavirus (COVID-19) on the Application of the Law on Insolvency of Legal Entities of the Republic of Lithuania (21 April 2020, No. XIII-2861)