New amendments to the Law on Insolvency of Legal Entities of the Republic of Lithuania strengthen the restructuring possibilities for the businesses with financial difficulties.
New amendments to the Law on Insolvency of the Legal Entities of the Republic of Lithuania (the LILE) transposing provisions of the EU-restructuring directive (the Directive) into Lithuanian law entered into force on 15th July 2021 strengthening the restructuring possibilities for the businesses with financial difficulties.
Introduction of early warning system
On 17th July 2021 the Lithuanian State Tax Inspectorate carried out the assessment of solvency of companies (VAT payers) and found that 195 companies in Lithuania are currently at risk of becoming insolvent. This assessment was carried out after implementing one of the novelties introduced by the Directive - the Early Warning System (the EWS), which is operated by Lithuanian State Tax Inspectorate and Export Development Agency „Enterprise Lithuania“. The State Tax Inspectorate will regularly asses the financial situation of legal entities and after identify the potential risk of insolvency of legal entities will notify them personally though „My STI“ tool. The notification will provide and additional information on how the legal entity with financial difficulties can use the EWS and receive consultations from the “Enterprise Lithuania” for restoration of its solvency.
New obligations to the managers of the legal entities
The notification of the State Tax Inspectorate to the legal entities on potential risk of insolvency should also remind to the managers of their obligations under the LILE. The amendments to the LILE introduce the concept of the “likelihood of insolvency” and define it as a situation when it is realistically likely that the legal entity will become insolvent within the next three months. In the event of “likelihood of insolvency” the managers of a legal persons will also have to:
- inform the stakeholders of the legal entity and propose a solution for solving financial difficulties of a legal entity;
- seek to protect the interests of creditors;
- avoid deliberate or grossly negligent conduct that threatens the viability of the business.
These amendments will not affect the obligations of the managers of the legal entities in the event of insolvency already laid out in the LILE before amendments entered into force.
Stay of creditor actions
The amendments to the LILE introduce a new concept of “essential executory contracts”. These contracts are considered as necessary to ensure the continuity of the legal entities’ business activities and termination of which would prevent the legal entity from carrying out its economic and commercial activities (e.g. water supply, electricity supply, lease etc.). Until the date of entry into force of the court's order approving the restructuring plan the creditors will be restricted from terminating or modifying contracts deemed to be essential executory contracts if this would be detrimental to the debtor’s business. The creditors will also be restricted from withholding the performance of other executive contracts, their termination and modification due to the fact of starting restructuring proceedings.
The list of essential executive contracts will have to be approved by the court in the order opening the restructuring proceedings. Creditors will retain the right to challenge the recognition of a contract as essential executive contract if continuation of the performance of the contract would unreasonably prejudice their interests.
Cross-class cram down
The amendments also introduce another novelty: the possibility to approve a restructuring plan in the event of disapproval by the groups of creditors affected by the plan. A cram down on dissenting creditors would require a majority of more than 50% of all votes of creditors in the approving group in addition to the other requirements for a cross class cram down as laid down in the LILE. A cram down on dissenting shareholders would require a qualified majority of two thirds of all votes in each of the creditor groups.
Employment relations during the restructuring
The amendments will also affect employment relations during restructuring, which have not been regulated by the LILE so far. In order to harmonize the provisions of the LILE with those of the Labour Code of the Republic of Lithuania, the amendments stipulate that the structural changes in the organisation of work provided for in the restructuring plan shall be carried out in accordance with the procedure laid down in the Labour Code. The amendments to the LILE establish a procedure for informing and consulting employee representatives about the opening of restructuring proceedings, the preparation of the restructuring plan and the consultation of such representatives during the preparation and implementation of the restructuring plan. The restructuring plan will have to include, among other prescribed information:
- a description of the situation of the workforce, including the number of redundancies, if any;
- the general implications of the structural reorganisation of the work organisation: information on the employees, including the number of redundancies to be made, the working conditions of the employees, e.g. application of short-time working, etc.;
- procedures for providing information and consulting employee representatives in accordance with the provisions of the Labour Code;
- information on creditors affected by the restructuring plan and those not affected by the restructuring plan, indicating why these creditors are not affected by the restructuring plan.
Since the entry into force of the Law on Corporate Restructuring on 1 July 2001, the total number of opened restructuring proceedings in proportion to the number of all opened insolvency proceedings in Lithuania makes less than 2% and only about 11% of all the companies placed in restructuring proceedings in the last 20 years have been successfully restructured. This shows that the revision of the LILE was needed for making the restructuring procedures more accessible to the legal entities with financial difficulties and effective. It is expected that the amendments to the LILE will be accepted in practice and motivate debtors to start restructuring process earlier helping to save the businesses.