Out-of-court bankruptcy 's a Lithuanian perspective
Since enactment of the Law on Enterprise Bankruptcy (1992), the judicial bankruptcy procedure has become a common instrument for resolution of the long-lasting problems of liabilities. However, because of the shortcomings of the judicial process, there has been growing demand for a more flexible and less protracted procedure for the management of insolvency of enterprises.
The possibility to conduct bankruptcy procedures out-of-court was introduced together with the first bankruptcy laws, but due to the lack of institutional support it was seldom applied in practice. Therefore, encouraged by the successful examples of some EU and other countries, Lithuania also began promoting extrajudicial procedures to dissolve insolvent businesses without applying to the court.
According to the Enterprise Bankruptcy Law, the inability of an enterprise to meet its financial liabilities confers to creditors, owners or the general manager of an enterprise the right to commence bankruptcy proceedings against it. The law provides two options, specifically either to: (i) file a petition to the court for instituting the bankruptcy procedure; or (ii) seek approval of the creditors' meeting for implementation of the bankruptcy procedures out-of-court.
Unlike in the case of traditional bankruptcy procedures, the main precondition for applying bankruptcy out of court is the consent and cooperation of all the interested parties, especially creditors. The general manager and owners of an enterprise intending to seek the creditors' consent to initiate the out-of-court proceedings must notify every creditor in writing of the motion to institute extrajudicial bankruptcy procedure, at the same time indicating the date and place of the creditors' meeting. The decision may be adopted only by the creditors whose claims in terms of value account for at least 4/5 of the amount of the enterprise's current liabilities.
In general, according to the Enterprise Bankruptcy Law, extrajudicial bankruptcy proceedings should not differ from the judicial procedure, except that the issues within the competence of the court are considered and decided by the creditors' meeting.
However, in comparison with the judicial bankruptcy proceedings, the out-of-court procedure provides more flexibility to the creditors as concerns the decision-making process, supervising activity of the bankruptcy administrator, etc. Moreover, it is faster and it allows avoiding delays, increasing efficiency and reducing costs.
It should also be taken into account that the court's capacity to handle the often-complex commercial issues involved in insolvency cases is rather important. Therefore, there might be situations where the creditors' meeting would not always be competent to handle complex issues related to a bankruptcy procedure. In addition, some practitioners argue that the law does not provide enough guidance on certain aspects of the extrajudicial bankruptcy proceedings as it is not always possible to apply the same regulations to the judicial bankruptcy procedure and the one applied out-of-court.
On the other hand, the extrajudicial procedure itself is designed for more simple cases, and the idea of such a process itself is that the creditors of the enterprise in bankruptcy who are willing to avoid legal action in court are provided with the possibility to apply more flexible out-of-court process that should be more effective in comparison with the legal action. In addition, initiation of the extrajudicial bankruptcy procedure does not preclude a possibility to transfer the process to court. Therefore, although the application of out-of-court bankruptcy procedures has not yet gained extensive application by the private sector, professionals see its future as an effective way to deal with enterprises' insolvency problems and at the same time secure creditors' interests.
Justas Ivanauskas is associate advocate at Jurevicius, Balciunas & Bartkus
Jurevicius, Balciunas and Bartkus is a member firm in the pan-Baltic integrated legal network, "Baltic Legal Soluations," which includes Kronbergs & Cukste in Latvia and Teder, Glikman and Partnerid in Estonia.
