Company separation: statutory time limits and what to plan

The law sets no overall duration for a company separation. It depends on how long it takes to prepare the terms and documents, on whether creditors demand additional security for performance, and on the registration steps. The law sets several mandatory time limits, and the main one: the decision on separation may be taken no earlier than 30 days after the register announces that it has received the terms of separation. The law does not deal separately with whether a bank account passes to the new company, so it is worth discussing this with your bank in advance and putting it into the timetable, because payments and the transfer of contracts depend on the account.

What time limits the law sets

The main time limit is set in two acts. Article 2.96(3) of the Civil Code of the Republic of Lithuania (CK) allows the decision to be taken only after thirty days have passed since the public announcement that the terms have been drawn up. Article 62(2) of the Law on Companies of the Republic of Lithuania (ABĮ) counts these 30 days from the day the registrar announces receipt of the terms or of the link to the company website where they are published. The law provides no way to shorten this time limit.

Before these 30 days comes the preparation: drafting the terms of separation, dividing the assets and liabilities, and preparing the draft decisions. The terms are filed with the register no later than on the first day of the public announcement (Article 63(8) ABĮ), and the register records the status “participating in a separation” within three working days at the latest (point 150 of the Regulations of the Register of Legal Entities (JAR nuostatai)). The decision, once adopted, is filed with the register within 5 days at the latest (Article 62(4) ABĮ). Once it has the final documents and confirmation that the registration fee has been paid, the register checks them and, if there are no obstacles, takes its decision within three working days at the latest (point 128 JAR nuostatai).

A creditor can push the end back: documents may not be filed for registration until performance has been additionally secured for a creditor who has demanded it, or, if this is disputed in court, until the court’s judgment becomes final (Article 66(4) ABĮ). Throughout that time, more than just the legal steps has to be planned.

The 30 days after publication are not idle time

These 30 days look like downtime. They are not – if this time is wasted, the separation is registered and the business may then stand still.

Here is what is worth doing during these 30 days. Review your credit and other financing agreements: do they make a separation subject to the bank’s consent? Inform employees: they must be notified in writing of the forthcoming transfer of the business or part of it no later than ten working days in advance (Article 51(5) of the Labour Code of the Republic of Lithuania (DK)). Partners and suppliers whose contracts will have to be re-signed in the new company’s name are informed. The documents that will be needed immediately after the decision are prepared.

Anyone who does not use this time gets it a second time – only then it comes after the separation, with a company that is up and running but cannot yet do anything.

The bank account: a question for the bank, not the register

The law does not provide that an existing bank account passes to the new company together with the separated part. Assets, rights and obligations are assigned to the companies under the terms of separation (Article 68(1) ABĮ), but the account agreement is a contract with the bank. Whether it can be assigned to the new company, or the new company will need to open a new account, is worth asking your bank in advance.

If the new company opens an account from scratch, the consequences for the timetable are concrete. Until the account is opened, the new company cannot receive payments. Nor can it make them. In the contracts transferred to the new company, the payment details will be different, so counterparties have to be notified of this separately. If the purpose of the separation was to transfer an operating business unit, the date the account is opened becomes the real starting point of operations, not the registration date.

That is why the bank question should be raised in the first week, not the last.

The list of creditors: the company’s management body is responsible for it

Creditors’ rights in a reorganisation are governed by Article 2.101 CK and Article 66(1) ABĮ.

Who is responsible: the person submitting documents and data to the register is responsible for their accuracy (point 41.2 of the Regulations of the Register of Legal Entities (JAR nuostatai)), and in the case of a company that person is its management body (point 38.2 JAR nuostatai). The notary certifies that the obligations laid down by law have been fulfilled (point 54 JAR nuostatai), but does so on the basis of the documents provided. From those documents the notary cannot tell whether everyone is on the list, whether the amounts are correct, or whether someone has been forgotten – someone whose dealings with the company ended six months ago but whose debt remained.

This means that compiling the list is not a formality but work that has to be done together with the accounts department. A creditor who is left out does not disappear – they turn up later, and with a claim.

The document that is easy to forget

It is worth putting the information needed for the separation documents into one numbered list. The aim is simple: the data are collected in one go, not one item at a time.

One item on this list stands on its own: the interim set of financial statements. It is needed when the terms of separation are drawn up 6 or more months after the end of the financial year; the set must be drawn up no earlier than 3 months before the terms are prepared. It need not be prepared if all the shareholders agree to that (Article 65(2)(3) ABĮ, which applies to separation under Article 71(2) ABĮ). It is also not needed where the new company’s shares are allocated to the shareholders in proportion to their holdings in the share capital (Article 67(3) ABĮ). This document is easy to forget – if it is remembered only when everything else is already prepared, it alone can push back the whole process.

If you will be drawing up the terms once six months have passed since the end of the financial year, order this set from your accountants in the same week as you decide to begin, or collect the consent of all the shareholders not to prepare it straight away.

Why the bank question is noticed too late

The bank account agreement is mentioned only if the terms of separation deal with it. If they do not, it appears neither in the draft decisions nor in the list of documents filed with the register. In every place anyone looks during the separation, it is simply not there.

So it goes unnoticed until the day the new company needs to receive its first payment. Then it turns out that, legally, everything has been done, but the company cannot operate yet.

In the timetable this point should go on a separate line alongside the legal steps. Three questions need answering in advance: who approaches the bank, when, and how the company operates on the days when it does not yet have an account.

What to decide in advance

• When the terms of separation will be drawn up. This, together with how the shares are allocated, determines whether an interim set of financial statements will be needed.
• Which contracts pass to the new company, and which of them require the consent of the counterparty or the bank.
• When the new company’s bank account is opened, and who is dealing with it.
• Who compiles the list of creditors, and by what date.

More on reorganisation

• Reorganisations and separations of companies: service page
• Terms of separation: what they must contain and what goes with them
• Division or separation: how a Lithuanian company can be split
• Spin-off and share exchange in Lithuania: tax for shareholders

How to start

Tell us which part of the business you want to separate and when it needs to start operating on its own. Send us your latest set of financial statements and a list of the contracts you want to transfer.

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

More about this service: Reorganisations and separations of companies.