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Legislative Proposal on Amending the Enterprise Bankruptcy Law

2 Jan 2013

On December 18, 2012 the Parliament of the Republic of Lithuania adopted a legislative proposal on amending articles 2, 10, 11, 20, 21, 28, 29, 30, 33, 35 and 36 of Enterprise Bankruptcy Law (Nr. XIP-4927(2)).

Special attention in the project is paid to regulating cases of intentional bankruptcies of companies in order to reduce the probability of intentional bankruptcies and protect the interests of creditors.
 
It is proposed that the concept of intentional bankruptcy provided in the Enterprise Bankruptcy Law will be extended, including cases when a company is brought to the state of bankruptcy by deliberate mismanagement (by act or omission) and (or) by concluding transactions when it was known or should have been known to the manager that such conclusion violates the rights and (or) legitimate interests of creditors.
 
According to this project the bankruptcy may be considered by the court as an intentional bankruptcy if:
 
1) The company’s management bodies did not carry out their duties or did it improperly; or
2) Unprofitable or useless to the company transactions were concluded or unprofitable or useless decisions were made; or
3) The assets of the company were sold at a lower than market price to persons who have close ties with the company or to persons who have family, marriage or partnership relationships with a person who had the right to make the respective decision in the company; or
4) The assets were transferred free of charge or the payment of the costs of assets was deferred for an economically unprofitable period of time; or
5) Company’s business was organised in such a way that the feasibility of creditors directing recovery to the assets of the company was reduced or eliminated; or  
6) The priority to recover debts was deliberately given to the creditors of the same ranking, liabilities to whom appeared later and (or) were not overdue or were less overdue, knowing that the creditors, liabilities to whom were overdue or overdue more, will in fact have no assets towards which they could direct their recovery as the company will not have sufficient assets;
7) A deceptive and (or) negligent accounting was carried out in the company and thus it is impossible in all or in part to identify the business of the company, its structure, the amount of its assets, equity or liabilities, and (or) the avoidance of value added tax (VAT) or other taxes was adjudged. 
 
It is proposed to assume that the bankruptcy is intentional if:
 
1) The activities and assets were transferred to another company by reorganizing the company or separating its part, when the activities are further carried out and financial commitments are made by a company that does not possess any assets, another operating or newly formed company takes over the unperformed contracts of the company and (or) rights of claim, and employees and (or) managers and (or) persons related to them are moved to work to such company.
2) Payments prior to the bankruptcy proceedings were carried out in violation of the Civil Code provisions stating the order of making settlements in cash and non-cash and other requirements of this or other laws related to compulsory initiation of the company’s bankruptcy proceedings have not been carried out, when the salaries and other employment-related payments are not paid to employees for more than 3 months in a row.
 
Upon receiving a request from the creditor or the bankruptcy administrator to adjudge intentional bankruptcy the court shall no later than within 10 working days notify all other company’s creditors and the administrator (if the request was not issued by the administrator). If the court hearing the company’s bankruptcy case adjudges the bankruptcy intentional, the administrator must verify the transactions concluded by the company during a five-year period prior to the bankruptcy proceedings, and must bring actions before the courts in order to pursue with invalidation of transactions that are opposed to the company’s interests and (or) may have influenced the company becoming unable to settle with creditors.
 
The proposal on amending the law provides that if the company was liquidated due to intentional bankruptcy, the persons liable for such intentional bankruptcy should be liable before the creditors with its personal assets. 
 
It is proposed that the information on cases of intentional bankruptcies and persons related shall be published on the website of the Department of Enterprise Bankruptcy Management. 
 
In order to protect creditors’ interests it is proposed that the creditors or their designated representatives shall have the right with the courts’ contest to examine at their own cost and expense the documents and other information of the company under the bankruptcy proceedings. It is also proposed to grant the creditors the right to challenge the transactions of the company under bankruptcy proceedings (actio Pauliana).
 
The full text of the proposal can be found here.
 

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