Reorganising a company: do you need the consent of creditors and employees?

Reorganisation does not require the creditors’ consent. Creditors have rights, but they are not the ones who take the decision. The bank’s consent may be needed – not because of the law, but because of the agreement with the bank. Employees’ consent is not needed either, and no new employment contracts need to be concluded: the employment relationships continue. Neither of these two questions is a reason to put a reorganisation off. Below – which of this is law and which is a contract term.

Creditors: no consent needed, but they have rights

Creditors’ rights during a reorganisation are set out in Article 2.101(1) and (2) of the Civil Code (CK) and in Article 66(1) of the Law on Companies (ABĮ).

The difference between a right and a consent is fundamental. A creditor cannot stop a reorganisation merely because it does not like it. But it has rights. It may demand additional security for performance if there are grounds to believe that the reorganisation will make performance harder (Article 66(1) ABĮ). If no security is provided, it may demand that the obligation be terminated or performed early and that its losses be compensated (Article 2.101(2) CK). It has the same right where the contract provides for it. Until such a demand is met, or while a court dispute over it is pending, documents may not be filed for registration (Article 66(4) ABĮ).

A simple rule follows from this: the creditors are dealt with through a proper notification procedure, not by negotiating for permission. The terms are announced publicly three times at intervals of no less than thirty days, or once together with written notice to all creditors (Article 2.101(1) CK).

The bank: here consent may be needed

The bank is a creditor, so it has the same creditor’s rights. The law does not require a separate bank consent to a reorganisation. It may be needed where the agreement with the bank itself requires it.

This means that reviewing the agreement with the bank is the first task, not the last. Credit and leasing agreements may contain a clause that makes a reorganisation, a transfer of assets or a change of control subject to the bank’s consent. That clause applies regardless of what the rules governing reorganisation say: it is an agreement between the parties.

If this review is done at the end, the worst outcome follows – the documents are prepared, the time limits are running, and nobody has yet asked for consent.

Employees: no consent needed, and no new contracts either

The transfer of a business or part of a business is governed by Article 51 of the Labour Code (DK) – Article 51(1), Article 51(2), Article 51(5) and Article 51(6) DK. The essence is one: the employment relationships continue. However, where a business or part of it is transferred, the employee is notified of this in writing no later than ten working days in advance, and may, within five working days, object in writing to the continuation of the employment relationship (Article 51(5) DK); the employment contracts are amended within ten working days of the transfer of the employment relationships (Article 51(6) DK).

The conclusion is twofold. There is no need to ask for the employee’s consent. And there is no need to sign new employment contracts – the existing ones remain in force. This does not mean employees are told nothing; it means that informing them is informing, not asking for permission.

What is still worth doing with the documents

Two things the law does not require, but which help explain later what happened. The employment contracts being transferred are listed in the asset transfer and acceptance certificate. And it is worth stating in the preamble to the documents that the steps are being taken because of the reorganisation.

Both of these are a recommendation, not a statutory requirement. We say this openly, because the difference matters: if you do not do them, the documents will not be unlawful. They will simply be harder to explain two years later, when someone – an auditor, a buyer or an inspector – asks on what basis an employee ended up in another company.

Notices to foreign creditors

A question that comes up when there are foreign creditors: does a notice to a foreign creditor have to be translated?

Where the terms are announced only once, the Law on Companies requires all creditors to be notified in writing and sets out what the notice must contain, but it does not set the language of the notice (Article 65(1) ABĮ). At the end, the notary confirms that the obligations laid down by law have been fulfilled (point 54 of the Regulations of the Register of Legal Entities (JAR nuostatai)). So it is worth checking in advance with the notary who will certify the documents what proof of dispatch they will need.

What matters is being able to prove dispatch. So it is decided in advance who sends the notices and when, and where the receipts are kept. The receipts must be kept from day one, not collected at the end.

Which forms can be merged

Before planning, it is worth checking whether the chosen combination is possible at all. Which legal forms of legal entities may be merged and converted is determined by Article 2.98(1) CK and Article 61(3) ABĮ; Article 2.104(1) CK defines conversion, and the forms into which an entity may be converted are set by the law on its legal form (for example Article 29(2) MBĮ).

The time limit to build into the timeline is the same as for other forms of reorganisation: under Article 2.96(3) CK, thirty days must pass between the public announcement and the decision.

Converting an MB into a UAB

A separate case is the conversion of a small partnership (MB) into a private limited liability company (UAB). It is governed by Article 29(2) of the Law on Small Partnerships (MBĮ), Article 2.104(4) CK and Article 72(15) ABĮ.

The law sets no overall duration for the conversion. Among other things, it depends on the chosen way of announcing it: the decision is announced three times at intervals of no less than 30 days, or once together with written notice to all creditors (Article 29(4) MBĮ). The new company’s documents are submitted to a notary before they are filed with the register (point 48 JAR nuostatai). The time limits are covered in detail in Converting an MB into a UAB: decision, capital, creditors, timing.

In what order it is done

1. The agreements with the bank and other financiers are reviewed – whether they contain a consent clause.
2. The terms of reorganisation are drawn up and published.
3. Thirty days of waiting. During that time consents are agreed, and employees and partners are informed.
4. The decisions are adopted and the documents are filed.

The order here is not a formality. The bank consent question, raised at step four, stops all four.

More on reorganisation

• Reorganisations and separations of companies: service page
• Creditors’ rights in a Lithuanian company reorganisation: what to demand
• Employees in a company reorganisation: Article 51, CEO and works council
• Merging an MB and a UAB in Lithuania: why conversion comes first

How to start

Write to us with the structure you want to end up with, and by when. Send us your agreements with the bank and other financiers: we will assess whether the bank’s consent will be needed, what employees and creditors will have to be told and which statutory time limits apply.

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

More about this service: Reorganisations and separations of companies.