Liquidation or bankruptcy: what to do when a company runs short of assets

Liquidation and bankruptcy are two different ways of closing a company, and which one applies depends not on what the shareholders want but on whether the company is solvent. Shareholders may decide to liquidate only a solvent company: the general meeting of shareholders may not adopt a decision to liquidate an insolvent company (Article 73(3) of the Law on Companies of the Republic of Lithuania (ABĮ)), and an insolvent company is liquidated through bankruptcy under the Law on Insolvency of Legal Entities (ABĮ Article 73(4)). If it turns out during liquidation that the assets are not enough to pay the creditors, the liquidator must stop all payments and start bankruptcy proceedings without delay (Article 7 of the Law on Insolvency of Legal Entities of the Republic of Lithuania (JANĮ)). The shareholders then receive only what is left after the creditors’ claims are satisfied and the bankruptcy costs are paid (JANĮ Article 93(3)).

Who else can start bankruptcy and how the court establishes insolvency is covered in our article Does bankruptcy need shareholder consent? How insolvency is established. How liquidation runs when the company is solvent is described in What happens during a UAB liquidation. This article covers how the two routes differ and what a liquidator should do when the assets run short.

How liquidation differs from bankruptcy

Article 2.106 of the Civil Code of the Republic of Lithuania (CK) treats them as separate grounds for liquidation: a decision of the members to end the entity’s activities, and a decision of a court or of the creditors’ meeting to liquidate the entity due to bankruptcy (CK Article 2.106(1) and (2)). The differences are these.

• When it is available. A decision of the shareholders can liquidate only a solvent company (ABĮ Article 73(3)). Bankruptcy is for an insolvent company. Insolvency is the state in which a legal entity cannot meet its property obligations on time or its liabilities exceed the value of its assets (JANĮ Article 2(7)). One of the two criteria is enough.
• Who runs the company. The liquidator is elected by the general meeting of shareholders or appointed by the court (ABĮ Article 73(5)). Once a bankruptcy case is opened, the management bodies lose their powers from the day the court ruling takes effect, and their rights and duties pass to the insolvency administrator (JANĮ Article 56(1) and (2)).
• Order of creditors. When a solvent company is liquidated, the order in CK Article 2.113 applies (ABĮ Article 73(13)): taxes to the budget are in the second rank there (CK Article 2.113(1)(3)). In bankruptcy the order is different. The first rank covers employees’ claims, new or interim financing, social and health insurance contributions and certain other claims, and the second rank covers all remaining claims (JANĮ Article 94(2)). In addition, in bankruptcy claims are first paid without interest and penalties, and interest and penalties are paid only in a second stage (JANĮ Article 94(3)).
• Debt enforcement. From the day the ruling opening a bankruptcy case takes effect, it is prohibited to enforce debts against the company and to accrue penalties and interest on obligations that arose before (JANĮ Article 28(1)(2) and (4)). The ABĮ and CK provisions on liquidating a solvent company set no such prohibition.
• Deadline for creditors’ claims. In bankruptcy, creditors file their claims within 30 days of the publication of the ruling opening the case (JANĮ Article 41(1)). If they miss it, the right to claim ends, subject to the exceptions in the law (JANĮ Article 41(6)). For the liquidation of a solvent company the law sets no such cut-off deadline (ABĮ Article 73; CK Article 2.112). Assets may be distributed to shareholders no earlier than 2 months after all the notification steps in ABĮ Article 73(10) are completed (ABĮ Article 73(14)).

What a liquidator should do when the assets are not enough

The liquidator has a duty to start insolvency proceedings if it turns out during liquidation that the legal entity is insolvent (JANĮ Article 5(2)). No shareholder approval is needed. The steps are these.

1. Assess insolvency. Compare the liabilities with the value of the assets and check whether the company meets its obligations on time (JANĮ Article 2(7)). If either test fails, the company is insolvent.
2. Stop all payments (JANĮ Article 7(1)). From this point the liquidator no longer pays creditors in the order of CK Article 2.113.
3. Start bankruptcy proceedings without delay under JANĮ Article 8 (JANĮ Article 7(2)). The notice to creditors is sent by registered post, through bailiffs or courier service providers, or by electronic means, provided the security of the information transmitted is ensured and the person’s identity can be established; where the notice is sent by electronic means, confirmation of receipt must be obtained (JANĮ Article 8(1)). The liquidator does not have to offer the creditors an assistance agreement or wait for the period set for it (JANĮ Article 8(4)(2)).
4. Apply to the court. The right to apply arises when the liquidator’s notice is served on the creditors (JANĮ Article 16(1)(3)). A notice not sent by electronic means is deemed served 7 days after dispatch (JANĮ Article 8(1)). Once 3 months have passed since that right arose, JANĮ Articles 8 and 9 apply again to starting the insolvency process (JANĮ Article 16(2)).

A liquidator who fails to perform the duties set in CK Article 2.110 and the ABĮ, or performs them improperly, must compensate the resulting damage in full (CK Article 2.110(4)). JANĮ Article 7 requires payments to be stopped and the process to be started without delay, so take these steps as soon as the insolvency becomes clear.

When the assets do not even cover the bankruptcy costs

The court refuses to open a bankruptcy case if it finds that the assets are not enough to pay the costs of administering the bankruptcy (JANĮ Article 22(3)(4)). The case is still opened if the applicant pays the amount set by the court into the court’s deposit account, or an insolvency administrator agrees to take on the cost risk (JANĮ Article 23(1)). The court offers the applicant a period of no more than 14 days to pay the amount, so where the applicant is the company itself, the offer is made to the company (JANĮ Article 23(2)). If the shareholders want the bankruptcy case to be opened, they can provide the company with funds to pay it.

If the amount is not paid, the court notifies insolvency administrators that they may administer the bankruptcy while taking on the cost risk (JANĮ Article 23(3)). If within 30 days of that notice no insolvency administrator files a consent-declaration with the court, the court refuses to open the bankruptcy case and instructs that liquidation be initiated by the operator of the Register of Legal Entities, the Centre of Registers (Registrų centras). That ruling cannot be appealed (JANĮ Article 23(4)). Employees’ claims are then paid under the Law on Guarantees to Employees upon the Insolvency of their Employer and on Long-Term Employment Benefits (JANĮ Article 23(6)).

CK Article 2.70 then applies. The registry operator initiates liquidation (CK Article 2.70(1)(7)). An applicant who did not pay the amount set by the court may not deny that the ground for liquidation exists (CK Article 2.70(4)). No liquidator is appointed in this case (CK Article 2.70(8)). From the day the entity acquires the status of “entity for which liquidation is being initiated”, creditors have one year to bring a claim for performance of obligations or for the opening of insolvency proceedings (CK Article 2.70(6)). If they do not, the registry operator decides to liquidate the entity (CK Article 2.70(7)), and once the status “in liquidation” (likviduojamas) is registered, it deregisters the company within five working days at the latest (point 200 of the Regulations of the Register of Legal Entities (JAR nuostatai)). How this route works is covered in The Centre of Registers initiated liquidation: what to do.

The JANĮ provisions cited in this article do not change in the JANĮ versions entering into force on 1 January 2027 or on 1 May 2028.

What this means for shareholders

• A decision to liquidate an insolvent company cannot be adopted (ABĮ Article 73(3)). If insolvency becomes clear after the decision, the company moves to the bankruptcy route (JANĮ Article 7).
• Assets are distributed only after the creditors. When a solvent company is liquidated, the remaining assets go to shareholders only after the creditors are paid (ABĮ Article 73(13)). If court disputes over payment of debts are pending, the assets may not be distributed until they are resolved and the creditors are paid (ABĮ Article 73(15)). In bankruptcy, shareholders receive only the assets left after the creditors’ claims are satisfied and the bankruptcy costs are paid (JANĮ Article 93(3)).
• Personal liability. If the company was liquidated on the registry operator’s initiative because of dishonest actions of its members, the members are jointly and severally liable for three years for the damage the creditors suffered as a result (CK Article 2.70(9)).

More on liquidation

• Liquidation of companies: service page
• Liquidation initiated by the Centre of Registers
• Does bankruptcy need shareholder consent? How insolvency is established
• Closing a Lithuanian company: liquidation, bankruptcy, merger or share sale
• The company no longer trades – do you have to liquidate it?
• Liquidation notice from the Centre of Registers: what to do and when
• Liquidating an MB in Lithuania: who decides, who liquidates, who gets what
• Liquidating a UAB with a shareholder abroad: what can be done remotely
• Liquidation in Lithuania: archive certificate and state land lease tax
• Liquidation in Lithuania: annual financial statements and the AGM
• Shares in other companies during liquidation: act before deregistration
• After bankruptcy opens: CEO duties and what shareholders can still do

How to start

Send us the latest balance sheet, a list of creditors with amounts and due dates, and the decision to liquidate the company. We will assess whether the company is solvent and prepare the liquidator’s notice to creditors or the application to the court.

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

More about this service: Liquidation of companies.