Company CEO’s duty to start the insolvency process and apply to court

A company’s CEO (vadovas) is responsible for organising the company’s commercial activity. The CEO must work with care and skill and do everything in their power to make sure the company they manage operates in line with the law and other legal acts. The CEO and the company are bound by a fiduciary relationship (a relationship of trust), and from the moment of taking office the CEO must act with care, attention and prudence. Whether a CEO has met this duty in a given case is judged against objective standards of conduct: the conduct of a careful, prudent and reasonable CEO.

The Law on Insolvency of Legal Entities of the Republic of Lithuania (Juridinių asmenų nemokumo įstatymas, JANĮ) provides that once a company becomes insolvent, its CEO must inform the company’s members of the insolvency without delay and start the insolvency process without delay (JANĮ Article 6(2), points 1 and 2). A company is insolvent when it cannot meet its property obligations on time or when its liabilities exceed the value of its assets (JANĮ Article 2(7)). The law gives this duty to the CEO and, for a company in liquidation, to the liquidator (JANĮ Article 5, points 1 and 2); it does not give it to shareholders as shareholders. The process starts with a notice to creditors (JANĮ Article 8(1)). The notice states that if, within the period it sets, no assistance agreement is reached and no decision is taken to carry out the bankruptcy process out of court, the company will apply to the court to open restructuring or bankruptcy proceedings (JANĮ Article 8(2)). From 1 January 2027 the law will state directly that in that case the CEO must file an application with the court to open insolvency proceedings without delay (JANĮ Article 6(2), point 2, version from 2027-01-01). The duty to start the insolvency process is placed on the CEO because the CEO knows the company’s financial position best. Starting the insolvency process late could harm both the company’s existing creditors (if its debts keep growing) and new potential creditors (if, not knowing that the company is insolvent, they supply it with goods or services).

In running the company the CEO must follow not only the interests of its members, the shareholders, but must also take account of the interests of its creditors, especially when the company’s financial position is getting worse and it has many debts. The CEO must reconcile the interests of everyone concerned, creditors included, and seek to balance them. Where the company carries on no business, or carries on business but its losses grow because creditors are not being paid, this does not amount to reasonable business risk and is contrary to good business standards.

If no application to open insolvency proceedings is made in time, the more favourable conditions that opening proceedings provides are not used. From the day the court ruling opening insolvency proceedings becomes final, it is prohibited to perform the company’s financial obligations that were not performed before that day, including paying taxes, interest and penalties (JANĮ Article 28(1), point 1). It is also prohibited to recover debts from the company and to charge penalties and interest on obligations that arose before that day (JANĮ Article 28(1), points 2 and 4). The company continues to make current payments, and these may be recovered (JANĮ Article 28(3) and (4)).

Failing to start the insolvency process is an unlawful omission that may cause damage for which the CEO is liable: the CEO must compensate damage caused by failure to perform, or improper performance of, the duties set by the Law on Insolvency of Legal Entities (JANĮ Article 13(1)). In addition, a court may restrict, for 1 to 5 years, the CEO’s right to act as the head of any legal entity or to be a member of a collegial management body if the CEO failed to start the insolvency process when required to do so (JANĮ Article 13(2), point 1); from 1 January 2027, also if the CEO failed to file an application with the court to open insolvency proceedings when required to do so by law (JANĮ Article 13(2), point 1, version from 2027-01-01).

The Supreme Court of Lithuania has held that the CEO’s liability under JANĮ Article 13(1) essentially matches the liability under Article 8(4) of the Law on Enterprise Bankruptcy in force until 2020, so case law formed under that law remains relevant when applying the equivalent JANĮ provisions (ruling of 6 March 2025 in civil case No e3K-3-40-381/2025, para 35). To establish the CEO’s civil liability, the court will examine from what point exactly the CEO’s duty to start the insolvency process arose and when the CEO knew or should have known of the insolvency (same ruling, paras 42–44; ruling of 22 May 2026 in civil case No e3K-3-95-1249/2026, para 47). Either of the two tests in JANĮ Article 2(7) is enough to establish insolvency: the company cannot meet its property obligations on time, or its liabilities exceed the value of its assets. But neither test may be applied mechanically, without regard to the purpose and aims of insolvency law (same ruling, para 46). Simple negligence is enough for liability, and the damage is usually the growth of the company’s debts during the period in which the CEO delayed starting the insolvency process (e3K-3-40-381/2025, paras 51, 52 and 54). The CEO is the person who knows best (and must know) the company’s financial position and its ability to meet its financial obligations when they fall due, and so must act as soon as it is realistically likely that the company will become insolvent within the next three months: inform the members without delay and take steps to protect creditors’ interests (JANĮ Article 2(7¹) and Article 6(1)); once the company is insolvent, the CEO must start the insolvency process without delay. Note that the mere fact that the company carried on business, even at a loss, cannot remove the CEO’s liability for failing to start the insolvency process.

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