Does bankruptcy need shareholder consent? How insolvency is established

No. Bankruptcy proceedings are started by the company’s manager (for a company in liquidation, the liquidator) or by a creditor, not by the shareholders. The Law on Insolvency of Legal Entities of the Republic of Lithuania (JANĮ) gives the manager the right to start the process as soon as insolvency is merely likely, and a duty to do so once the company is insolvent. A creditor needs the time for performance of the obligation owed to it to have passed (JANĮ Article 4(1)(2)), and the obligation stated in its notice must be undisputed (JANĮ Article 9(2)). The shareholders are informed, but their approval is not needed for bankruptcy. Where the case goes to court, the court establishes insolvency by checking two criteria: whether the company performs its property obligations on time, and whether its liabilities exceed the value of its assets (JANĮ Article 2(7)).

When the manager must file, what the manager risks by not filing, which documents go with the petition and what happens when the assets do not even cover the expenses of the bankruptcy, we have answered briefly in the company law FAQ (in Lithuanian). We have also written a separate article on the manager’s duty (in Lithuanian). This article covers who has the right to start, what shareholders can do and how insolvency is proved.

Who can start bankruptcy proceedings

Article 4(1) of the Law on Insolvency of Legal Entities (JANĮ Article 4(1)) gives two persons the right to initiate insolvency proceedings.

• The company’s manager, where there is a likelihood of insolvency (JANĮ Article 4(1)(1)). Likelihood of insolvency is a situation where it is realistically likely that the company will become insolvent within the next three months (JANĮ Article 2(7¹)). If the legal entity has no single-person management body, the right belongs to another person who, within their competence, may apply for insolvency proceedings. This matters, for example, for associations run by a collective body (Article 7(5) of the Law on Associations of the Republic of Lithuania).
• A creditor whose obligation has fallen due (JANĮ Article 4(1)(2)). A creditor can initiate restructuring only where its overdue claims exceed 10 Government-approved minimum monthly wages (MMA) (JANĮ Article 4(2)). The law sets no such threshold for bankruptcy.

The duty to initiate proceedings lies with the manager if the company is insolvent, and with the liquidator if it turns out during liquidation that the company is insolvent (JANĮ Article 5). What the liquidator should do we discussed in the article on the UAB liquidation process.

Is shareholder approval needed?

This question arises for companies whose articles of association say that important decisions are taken by the meeting of members. The articles may even say that the meeting of members decides on bankruptcy, while convening it with the required quorum may be practically impossible.

JANĮ Article 5 places the duty to initiate proceedings on the manager and does not make it conditional on the members’ approval. So the manager does not need to wait for a meeting that may never take place. The duty and the liability are personal to the manager. The manager must compensate damage caused by failing to perform, or improperly performing, the duties set out in JANĮ (JANĮ Article 13(1)). The court may, for 1 to 5 years, restrict the manager’s right to act as a manager or to sit on a collective management body if the manager did not initiate insolvency proceedings when obliged to (JANĮ Article 13(2)(1)). From 1 January 2027 this ground is widened: the right may also be restricted where the manager did not file a petition with the court for insolvency proceedings when obliged to do so (JANĮ Article 13(2)(1), version from 2027-01-01).

Shareholders still have a part to play, in these places.

• Being informed. Once the company is insolvent, the manager must immediately inform the members of the insolvency and propose that they address restoring solvency (JANĮ Article 6(2)(1)). Once the court has accepted the petition, the manager or liquidator informs the members no later than the next working day (JANĮ Article 18). The members can be informed by a letter describing the situation and the intended application to court, and it is worth attaching a copy to the petition.
• Extraordinary meeting. In a public limited company (AB) or a private limited company (UAB) (ABĮ Article 1(1)), an extraordinary general meeting of shareholders must be convened if the company becomes insolvent or it is known that it will become insolvent (Article 24(2)(6) of the Law on Companies of the Republic of Lithuania, ABĮ). The meeting can look for ways to restore solvency, for example by putting more money into the company. In our view, its decision does not suspend the manager’s duty.
• Restructuring. Here the shareholders’ say is decisive. Decisions on restructuring in the cases set out in JANĮ are taken by the general meeting of shareholders (ABĮ Article 20(1)(26)). Where the company itself applies for restructuring proceedings, the petition must be accompanied by the draft restructuring plan and the members’ meeting decision approving it (JANĮ Article 17(3)(1)).

Liquidation is not a way out for an insolvent company. The general meeting of shareholders may not decide to liquidate an insolvent company (ABĮ Article 73(3)). How liquidation is started for a solvent company we described in the article on starting a UAB liquidation.

How the process starts: a notice before court

As a rule, nobody goes to court straight away. A notice is sent first.

When the company starts it. The manager or liquidator sends a notice to the creditors by registered letter, through bailiffs or through courier service providers. Electronic means of communication may also be used, if the security of the information is ensured, the person’s identity can be established and a confirmation of receipt is obtained. If the notice is not sent by electronic means of communication, it is deemed served 7 days after it was sent (JANĮ Article 8(1)). The notice states the unperformed obligation and warns that, without an agreement on assistance or a decision to carry out the bankruptcy out of court, the company will apply to court (JANĮ Article 8(2)). The deadline set is no shorter than 15 days and no longer than 30 days from service of the notice on the creditor (JANĮ Article 8(3)). The offer and the deadline may be dispensed with if an earlier agreement on assistance is not being performed or is being performed improperly, if the liquidator initiates the bankruptcy, or if a bailiff (court enforcement officer, antstolis) has returned the enforcement documents to the creditor because the company has no assets or income (JANĮ Article 8(4)).

The manager must initiate insolvency proceedings immediately (JANĮ Article 6(2)(2)). From 1 January 2027 the law says this in so many words: if, within the deadline in JANĮ Article 8(3), no agreement on assistance is concluded and no decision to carry out the bankruptcy out of court is taken, the manager must immediately file a petition with the court (JANĮ Article 6(2)(2), version from 2027-01-01). If a concluded agreement on assistance is not being performed or is being performed improperly, the manager initiates the process no later than 5 working days from the day this became, or should have become, known (JANĮ Article 6(2)(3)).

When a creditor starts it. The creditor sends a notice to the company at its registered office in the same way (JANĮ Article 9(1)). The notice states the unperformed, undisputed obligation and warns that the creditor will apply to court for restructuring or bankruptcy proceedings (JANĮ Article 9(2)). The deadline is the same: no shorter than 15 days and no longer than 30 days from service (JANĮ Article 9(3)). The requirements on the content of the notice and the deadline may be dispensed with if an earlier agreement on assistance is not being performed or is being performed improperly, or if a bailiff has returned the enforcement documents to the creditor because the company has no assets or income (JANĮ Article 9(4)(1) and (2)). The right to apply to court then arises from service of the notice (JANĮ Article 16(1)(2) and (4)).

Can a creditor start bankruptcy without a court judgment? JANĮ Article 9 does not require a judgment. It requires the obligation to be undisputed. So, where the debtor disputes the debt on the merits, the creditor first has to obtain a judgment for the debt and only then take the bankruptcy route. Where the debt is not disputed, the notice is real pressure: within the deadline it sets, it is worth either paying or proposing an agreement.

Ordinarily, the right to apply to court arises when the deadline set in the notice expires (JANĮ Article 16(1)(1)). This right does not last forever. Once 3 months have passed since it arose, the process has to be initiated again by notice under JANĮ Articles 8 and 9 (JANĮ Article 16(2)).

How the court establishes insolvency

Insolvency is a state in which a legal entity cannot perform its property obligations on time or its liabilities exceed the value of its assets (JANĮ Article 2(7)). The criteria are separate: one is enough. A company with a positive balance sheet that has not paid its suppliers for months may be insolvent. So may a company that pays on time but whose debts already exceed its assets.

Bankruptcy proceedings are opened if the legal entity is insolvent and no restructuring proceedings are being opened for it (JANĮ Article 21(2)). The court has tools to establish the facts. It may order creditors, members, members of management bodies, the person keeping the financial accounts and other responsible employees to submit additional documents, and it may summon them and require written explanations (JANĮ Article 20(1)). Where a creditor files the petition, the manager must, within 5 working days of receiving notice that it was accepted, submit to the court the company’s lists of creditors and debtors and the other information listed in JANĮ Article 17(2), points 3–8 (JANĮ Article 20(2), JANĮ Article 17(2)). From 1 January 2027 this information also includes information on the company’s waste, contaminated soil, ground or mining plot, if the company holds unmanaged waste (JANĮ Article 17(2)(8), version from 2027-01-01).

The court refuses to open bankruptcy proceedings if, before the ruling, the company satisfies the claims of the creditor that filed the petition, or if the company is not insolvent (JANĮ Article 22(3)(1) and (2)). It also refuses where the assets are insufficient to cover the bankruptcy administration expenses, unless the applicant pays in the amount set by the court or an insolvency administrator agrees to take on the risk of those expenses (JANĮ Article 22(3)(4), JANĮ Article 23(1)). If, within 30 days of the court’s notice of this possibility, no insolvency administrator submits a consent-declaration to the court, the court refuses to open bankruptcy proceedings and orders the liquidation of the company to be initiated on the initiative of the data controller of the Register of Legal Entities (JANĮ Article 23(4)).

Insolvency is proved in a company’s petition in a simple way: the situation and the debts are described, and the documents supporting the debts and the balance sheet are submitted. The balance sheet shows whether liabilities exceed assets. A list of overdue invoices, taxes and wages shows whether the company is performing its obligations on time.

Who establishes the causes of insolvency

Creditors may want to know not only whether the company is insolvent, but why. That question is answered not by the petition but by the bankruptcy process.

• Within 6 months of receiving the documents on transactions, the insolvency administrator reviews the transactions concluded during a period of at least 3 years before the bankruptcy proceedings were opened and, where needed, applies to court: to have transactions declared invalid, under the actio Pauliana, or to have the bankruptcy declared intentional (JANĮ Article 64(1)). The administrator reports the results of the review to the creditors’ meeting (JANĮ Article 64(4)).
• To the first creditors’ meeting the administrator submits, among other things, the balance sheet and the list of assets as at the date the ruling opening the bankruptcy became final, information on purchases, sales and write-offs of long-term assets, and the number of transactions to be reviewed, over a period of at least 3 years (JANĮ Article 60(3)).
• A creditor that wants to challenge transactions or ask for the bankruptcy to be declared intentional may, on a reasoned request and with the court’s permission, inspect the company’s documents itself (JANĮ Article 65(1)). Such an inspection may not last longer than 3 months (JANĮ Article 65(2)).

The court declares a bankruptcy intentional if it finds that the insolvency was caused by deliberately bad management and/or by transactions concluded when it was known, or should have been known, that they infringe the creditors’ rights and/or legitimate interests (JANĮ Article 70(1)). What this means for creditors we explained in the article on intentional bankruptcy (in Lithuanian).

When an administrator asks for help answering creditors’ questions about the causes of insolvency, it is worth knowing where the line is. These are questions of fact about the company’s business. A lawyer can help to put them precisely and link them to the law, but the facts themselves must come from those who ran the company.

Out-of-court bankruptcy

Bankruptcy may also be carried out without the court if, on the day of the decision, there are no court cases and no pre-trial out-of-court dispute resolution in which property claims have been brought against the company, including employment-related claims, no enforcement has been directed against its assets, and no tax investigation or tax audit is under way (JANĮ Article 11(1)). If these conditions are not met, the out-of-court route is possible only with the consent of the tax administrator, the claimant and/or the enforcement creditor (JANĮ Article 11(2)). From 1 January 2027 a fourth condition is added: the company has no unmanaged waste, contaminated soil, ground and/or mining plot (JANĮ Article 11(1)(4), version from 2027-01-01). This condition cannot be overcome by consent, because from that date the exception applies only to the first three (JANĮ Article 11(2), version from 2027-01-01).

The decision is deemed adopted if it is approved by creditors whose claims make up at least 3/4 of the total liabilities of the company, including those not yet due (JANĮ Article 11(3)). In that case, the matters that would otherwise be for the court are decided by the creditors’ meeting, which also appoints the insolvency administrator (JANĮ Article 12(1) and (2)). Shareholder consent is not needed here either: the creditors decide.

How to start

Send us the latest balance sheet, a list of overdue debts and the company’s articles of association. We will assess whether the company is insolvent, who has to act and by when, and prepare the notice to creditors or the petition to the court.

Phone +370 5 212 1506, email info@linden.lt

More about this service: liquidation of companies.