Since January 1, 2008, when the new insolvency law took effect, the number of insolvency applications has continued to rise. Most such applications are submitted by the tax authorities, but other creditors are with increasing frequency making insolvency applications against bad debtors.
An application for insolvency may be submitted if certain preconditions that constitute indications of insolvency are present. One of those indications is the debtor's failure to meet payments to creditors as they fall due, where individually or in total the overdue and unpaid amount exceeds 1000 lats (about 1,423 euros).
The first step to invoking the insolvency procedure is something that a creditor would ordinarily want to consider doing anyway 's that is, writing a demand letter for a return of the amount owing. If the creditor is fortunate, then the matter may well stop there with the debtor repaying the debt. If not, then the demand letter is a precondition to taking the matter further with an insolvency application.
Why bother with the insolvency application? After all, there is some time and trouble involved. The simple reason is often because the creditor believes that the debtor can pay but does not want to. If the matter proceeds to an insolvency proceeding, then the debtor is likely to have a serious change of mind if he is only reluctant to pay but can in fact do so, because failure to make payment could take control of his company away from him and place it in the hands of an administrator, who will not likely have the debtor's best interests in mind.
To proceed with an application for insolvency can, however, be quite a gamble, one that on occasion is just as likely to backfire as to encourage repayment. The simple reason is that once the matter is before the court, a review of the overall financial status of the company will be conducted in order to determine whether or not the insolvency exists. Under this scenario, even if the debtor would like to repay the creditor, it may be that there are other creditors with their hands out as well, and that the overall picture does not lend itself to repayment of this one creditor's claim. Placement of the company in the hands of an administrator is also a gamble. If the administrator can turn the business around, great 's but if the administrator for whatever reason contributes to its decline, then repayment of the claim could continue to be problematic.
If the creditor does want to proceed with the insolvency route, then the demand letter for repayment must include at least a three-week period before the insolvency application against the debtor is submitted, allowing the debtor to repay the overdue amount or set out why such amount is not due and payable. If there is not at least such three-week period, the insolvency application is exposed to likely defeat on a technical basis alone. A stamp duty of about a 142 euros is also payable.
It is also important that the demand letter writer and insolvency application maker have the authority to make the demand and the application respectively, and that such authority can either be proven by the production of a power of attorney or status conferred upon the writer by law if he is, for example, the director of the creditor.
Once the court has received the application, it will consider same on a relatively quick basis. However, although the law states that insolvency matters are to be considered within 15 days of the application, in practice, matters are generally postponed, as it is quite difficult for the prospective administrator to put together its submissions and recommendations within such a short period of time.
Insolvency proceedings as a collection tool may or may not give the results the creditor seeks. Nevertheless, when writing a demand letter to the debtor, even without a view to launching an insolvency proceeding, the creditor should ensure that the content of the letter meets the formal requirements to serve as supporting documentation for a subsequent insolvency application. That will at least leave the door open to the creditor to pursue the insolvency avenue and save the time and trouble of having to send a second "proper" demand letter, with its additional three weeks notice requirement.
Madara Berzina (LL.M.) is an associate at Kronbergs & Cukste specializing in litigation and insolvency. Kronbergs & Cukste is a Latvian law firm and co-founder of Baltic Legal Solutions, a pan-Baltic legal network including Glikman & Partnerid of Estonia and Jurevicius, Balciunas and Bartkus of Lithuania, comprising over 80 legal professionals across the Baltic States. Baltic Legal Solutions is also a co-founder of the Pinsent Masons Luther Group including over 2,500 lawyers across Europe.
