Changes to the insolvency law in Lithuania related to COVID-19

25 April 2020 The Law on the Effects of the New Coronavirus of the Republic of Lithuania (COVID-19) on the Application of the Law on Insolvency of Legal Entities of the Republic of Lithuania (hereinafter – the “COVID-19 Law”) has entered into force. It provides for various changes applicable to legal persons that have encountered financial difficulties and/or have become insolvent as a result of the global spread of COVID-19 after the quarantine in Lithuania on 16 March 2020.

Initiation of insolvency proceedings of a legal entity during (and after) the quarantine period

Duty of the manager to initiate insolvency proceedings:

• The COVID-19 Law provides that if the notice to creditors provided for in the Law on Insolvency of Legal Persons of the Republic of Lithuania (hereinafter “Insolvency Law”) has been sent beforehand, the obligation of the manager of the legal person to apply to the court for initiation of insolvency (or restructuring) proceedings is not applicable during the quarantine period and for a 3 months period after its lifting.
• It should be noted that under the Insolvency Law, the director must write to creditors and offer to enter into an arrangement to help resolve financial difficulties (offer to postpone the time limits for the fulfilment of an obligation, to cancel or replace an obligation, etc.). The notice to the creditors must allow at least 15 days for a decision to be taken on the arrangement. The COVID-19 Law provides that for the duration of the quarantine and for 3 months after its lifting, this period of at least 15 days is also suspended.
• The COVID-19 Law provides that the Government is also empowered to extend the above deadlines, taking into account the economic situation and other factors, up to a maximum of 31 December 2020.

Right of creditors to initiate insolvency proceedings:

• The Insolvency Law provides that creditors also have the right to apply to the court for the opening of insolvency proceedings against a legal person if they have sent a notice to the debtor setting a deadline of at least 15 days for the fulfilment of the overdue obligations, or to conclude an agreement on the assistance to resolve the financial difficulties, or to adopt a decision on the conduct of an out-of-court bankruptcy procedure.
• The COVID-19 Law provides that this period of at least 15 days is also suspended for the duration of the quarantine. Thus, during the quarantine period, it will be considered that this period set by the creditors has not expired and the courts will not open insolvency proceedings.

Termination of restructuring proceedings

• The court shall terminate the restructuring proceedings on the grounds set out in Article 114(1) of the Insolvency Act. In the context of the application of the COVID-19 Law, two of them are the inadequate (or non-existent) implementation of the restructuring plan and the non-payment of all or part of the taxes by the legal entity. On these grounds, the court will normally dismiss the case if these circumstances have persisted for at least 3 months.
• During the quarantine period and for 3 months after the revocation, the courts will not be able to terminate the restructuring proceedings on any of the above grounds due to the amendments introduced in the COVID-19 Law.
• The COVID-19 Law also provides that, depending on the economic situation, the Government is empowered to extend this period as well (during the quarantine period and for a period of 3 months thereafter), up to a maximum of 31 December 2020.