Comments on new bankruptcy bill

LFMI analysed a draft law on enterprise bankruptcy and submitted comments and recommendations to the parliament. LFMI warned the law-makers that the proposed legislation had serious flaws that would prevent an effective solution of insolvency problems and would threaten the operation of profitable enterprises.

LFMI noted that certain provisions of the bill, such as shorter bankruptcy proceedings and two stages of satisfying creditors’ claims, would help simplify bankruptcy procedures. However, the proposed insolvency criteria, provisions on the institution of bankruptcy proceedings as well as the sequence of satisfying creditors’ claims would have disastrous effects.

According to the bill, a company will be regarded as insolvent if it fails to meet its liabilities to creditors in due time as well as if these liabilities amount to no less than ten thousand litas and exceed half of the company’s assets at balance value.

The latter criterion, LFMI argues, would create conditions for instituting bankruptcy proceedings at an earlier stage and for better satisfying creditors’ claims. However, there is a danger that these provisions would make it possible to institute bankruptcy even against companies that are able to meet financial obligations to their creditors without bankruptcy procedures. In addition to that, the balance value of a company’s assets is usually much higher than the market value, therefore applying this criterion is likely to slow down bankruptcy processes. LFMI proposed that a company’s wilful failure to discharge financial liabilities to its creditors be the main criterion for instituting bankruptcy proceedings.

Another important concern is that a company may go bankrupt because of its indebtedness to the state, while the state itself may be indebted to the company. It is the opinion of LFMI that instituting bankruptcy proceedings against such entities on the initiative of state institutions would be incorrect.

According to the bill, second in sequence of satisfying creditors’ claims (after employees’ claims connected to labour relations) shall be taxes and other payments to the budget. LFMI has noted that such discrimination against private creditors is unacceptable as it would threaten their activities and reduce their ability to fulfil their own liabilities. LFMI has proposed that priority in fulfilling creditors’ claims be given to employees’ claims and the claims of other creditors, while taxes and other payments to the budget be paid upon fully satisfying the aforesaid claims. It should be noted that the granting of preferential treatment to the state in satisfying creditors’ claims contradicts the position of the European Commission.

LFMI urged the lawmakers to revise the bankruptcy bill and to create conditions for justified and effective bankruptcy proceedings as well as a proper satisfaction of creditors’ claims.