In July 2009, substantial amendments to the Insolvency Law and the Civil Procedure Law entered into force; consequently, the legal protection proceedings (LPP) have become better available for commercial companies facing temporary financial problems (i.e. insufficient funds to meet obligations that are or soon will come due).
Since 2008, 27 LPP cases have been instituted by courts in Latvia; of them, 17 cases have been terminated, and 10 cases are still being adjudicated by the court. It is forecast that the efficiency of the LPP will improve thanks to the new amendments.
One of the major amendments to the Insolvency Law is the extension of the LPP application period, from one year to two years. Consequently, now commercial companies can stipulate in their LPP plans that solvency will be resumed within 2 years, during which the obligations to their creditors will be fulfilled. To approve the LPP plan, commercial companies need support from 1/2 of the claims of unsecured creditors, whose claims amount to more than a half of the total amount of creditors' claims (before the amendments were made, support from 2/3 of unsecured creditors was required). Furthermore, the support has to be obtained not only from those unsecured creditors whose claims have fallen or would fall due during the LPP, but also from those whose claims would fall due after the planned LPP period. It should be stressed that, in determining the total amount of creditors' claims, only the principal amount of the debt to creditors is taken into account.
There are now some advantages for companies as a result of initiating the LPP, inter alia: secured creditors are prohibited to demand that the pledged property be sold; unsecured creditors are prohibited to file an insolvency application; and, following the entry into force of the amendments - the increase in the penalty, interest and late payment penalty is suspended. It should be pointed out that prior to the amendments to the law, the increase in the penalty, interest and late payment penalty was suspended only as of the moment of approving the plan; this, in fact, meant that the LPP plan did not correspond to the actual situation on the day of its approval, because the plan did not comprise the increase in the sanctions during the period from instituting the proceedings by the court till the declaration of the LPP by the court. Furthermore, according to the amendments, if the court does not declare the LPP, or if the LPP is terminated, the increase in the penalty, interest and late payment penalty will be resumed to the full amount also for the suspension period.
With the new amendments, Latvia has implemented an out-of-court LPP, which, despite the name, does not mean that the LPP is not adjudicated by the court. In point of fact, the out-of-court LPP is a possibility for a company to commence the TAP plan as soon as possible, provided that two preconditions are met: first, the company has developed the LPP plan; second, it has been approved by more than one half of the creditors whose claims amount to more than one half of the total creditors' claims already prior to filing the application to the court. Both the unsecured and secured creditors take part in negotiating the out of court LPP plan.
Since usually the major share of a company's creditors' claims is held by a secured creditor (a bank, which also holds the commercial pledge) then the out-of-court LPP will be applied, most likely, in the cases where the commercial company is able to agree with the bank on deferring the fulfilling of liabilities.
Under the out-of-court LPP, the commercial company, agreeing on it with the creditors, can itself choose the administrator (of course, receiving approval from the administrator). The case is adjudicated by the court in a written procedure within 15 days of receiving the application. For comparison 's ordinary LPP cases are adjudicated within 45 days.
Considering the above, it can be forecast that in the nearest time more and more Latvian companies that lack money assets will choose the LPP to solve their temporary financial problems.
Madara Berzina is an associate in the law firm Kronbergs & Cukste. 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.
