Taking counsel: Debtor and Creditor

  • 2009-04-15
  • By Tine Luse [Kronbergs & Cukste]
Under the Law on Insolvency, an application for insolvency of a legal entity may be made inter alia where:

a) It is not possible to obtain judgment execution from the debtor; or

b) The debtor has failed to meet one or more of its debt obligations which separately or in total exceed 1,000 Lats for which the due date has passed, provided that the creditor has sent a notice to the debtor of its intention to commence insolvency proceedings and provided the debtor has not settled the accounts within three weeks of such notice or has not raised a defense for the non payment; or

c) The debtor has not met payroll and other mandatory payments with respect to its employees.

One of the main aims of the Insolvency Law is to defend the rights of creditors by providing for a mechanism by which a debtor is restricted in the use of its assets pending the resolution of the insolvency, with a view to increasing the likelihood that creditors may be left with at least a partial payment of debt, if not the recovery of the full amount. The law discourages capricious insolvency applications, to discourage the process of it being utilized as a blackmail tool. The discouragement comes in the form of a criminal sanction against applicants who submit an insolvency application without cause.

It is also with a view to encouraging reasonableness on the part of the creditor that the three week prior notice of intent to submit an insolvency application exists. The response of the debtor acts as a kind of litmus test. If the debtor is solvent, even if only barely so, it will tend to settle its accounts, especially those pertaining to the applicant creditor, hoping to avoid a negative decision from the court that will determine whether insolvency exists or not. In matters of delinquent debtors, there are really only two basic reasons why debts are not paid: either the debtors do not wish to pay or cannot pay. Unless a creditor utilizes the services of a credit rating company, and perhaps even in some such cases, there may be difficulty in determining which of the two basic causes for delinquency exist up until the date of the insolvency hearing. This is because creditors generally do not, unless they have provided otherwise in their agreements with debtors, have access to current financial statements of debtors, other than those that are made public by annual filing requirements. Such filed financial statements may be stale-dated for current analysis purposes.

Within a day of receiving a creditor's application, the judge determines whether or not to proceed with an insolvency hearing. In the event that it decides to do so, a court hearing must be held to determine the issue within 30 days of the date of the judge's decision to proceed. Where a judge rules in favor of proceeding with an insolvency hearing, it appoints an administrator to whom the debtor must grant disclosure of financial documentation concerning the debtor and its assets. A court may also order an asset freeze upon the debtor, potentially seriously interfering with the debtor's ability to conduct business up to the hearing date.
Even where the debtor manages to find the resources to satisfy its debt, once the insolvency process is in motion, the debtor will still have to attend court to demonstrate that it is not in fact insolvent.  

Tina Luse is a senior associate, Kronbergs & Cukste.  Kronbergs & Cukste is a founding member of Baltic Legal Solutions, a pan Baltic legal network including Glickman & Partnerid in Estonia and Jurevicius, Balciunas & Bartkus in Lithuania.