Taking Counsel: Bankruptcy of natural persons still a concept

  • 2009-05-07
  • By Greta Makaraityte [Jurevicius, Balciunas & Bartkus]
According to the current legal regulations, only legal persons that are recognized as insolvent by the court or by a creditors' meeting may undergo the bankruptcy procedure. The Enterprise Bankruptcy Law (No. IX-216 of March 20, 2001) does not include regulations for the bankruptcy and/or insolvency of persons engaged in individual activity, farmers, and other natural persons.

A person that has established an individual enterprise (the owner of the individual enterprise) and a person acting under a trade (business) certificate cannot become bankrupt under the uniform legal regulations, thus unequal competition conditions are established by the legal regulations. Natural persons that have not established an individual enterprise are subject to financial defeat and due to their insolvency status they are actually deterred from the potential possibility of returning to business.

The Ministry of Economy of the Republic of Lithuania has finally announced that the preparation of the concept on a law regulating the bankruptcy of natural persons shall be finalized in the short term. However, the stage of preparation for the draft law and many related documents, as well as the adoption procedure in the parliament, has not yet been launched.

Apart from the above procedure, a group of parliament members on March 24, 2009 registered the Draft Law No. XIP-450 on the Bankruptcy of Natural Persons (hereinafter "Draft Law") in the Parliament of the Republic of Lithuania. The Explanatory Notes have already been prepared by the European Law Department under the Ministry of Justice.

The Draft Law establishes that the bankruptcy procedure may be commenced exclusively through the application of a natural person and upon the condition that the person is not financially capable of carrying out obligations to creditors, and that the claims of the creditors are higher than 12 monthly wages approved by the Government of the Republic of Lithuania. Pursuant to the Draft Law, the recovery of a person's solvency shall proceed in accordance to the Plan of the Solvency Recovery (hereinafter "Plan") and the schedule for fulfilling of the creditors' claims and reimbursement of other expenses (hereinafter "Schedule"). While executing the Plan, a person will be granted a monthly fixed amount depending on the number of encumbrances. 

The term of the Plan execution shall not last for more than three years, but the term may be extended for six months at the longest. The bankruptcy proceedings of natural persons may be executed in the court, or without any intervention of the court. The extrajudicial solvency recovery shall be executed in the institution authorized by the Department of the Enterprise Bankruptcy Management under the Ministry of Economy (hereinafter "Institution"). Either the court or the Institution will appoint a bankruptcy administrator.

The Draft Law is to be considered as very preliminary, since it does not solve many issues that arise with respect to noncompliance with EU regulations as well as national legislation. Firstly, the Draft Law does not ensure the right to become bankrupt to foreigners who have not resided in Lithuania for more than five years since, according to the definitions established in the Draft Law, the legal act shall be applied to natural persons having their permanent residence in the Republic of Lithuania 's meaning that the foreigners (including natural persons from other member states) residing in Lithuania for less than five years are excluded from the "target group."

Moreover, doubts arise with respect to the compliance of the Draft Law with European Council Regulation No. 1346/2000 of May 29, 2000, on insolvency proceedings. Pursuant to Articles 32 and 39 of the latter EC Regulation, any creditor may present a claim in the bankruptcy case, whereas the Draft Law establishes the right only to the creditors that are indicated in the Plan. The Draft Law does not solve the issue how the other creditors may present their claims or how the procedure for the Plan could be corrected respectively.

The European Law Department has distinguished more incompatibilities of the Draft Law with national and EU legislation. However, taking into consideration that the other new draft of the Law on the Bankruptcy of Natural Persons shall be prepared after the approval of the concept in the Ministry of Economy, the mentioned issues are likely to be solved and the adopted Law on Bankruptcy of natural Persons shall comply with EU and national requirements.   

Greta Makaraityte is an associate advocate at Jurevicius, Balciunas & Bartkus, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms including Glikman & Partnerid in Estonia and Kronbergs & Cukste in Latvia, dedicated to providing a quality "one-stop shop" approach to clients' needs in the Baltics.