Lithuania: When things get tough. How to deal with debt and liquidity issues?

Many companies will likely be forced to deal with debts and liquidity issues – one must act smart and early to keep the problems from snowballing.

Advice to creditors: stop the snowballing effect

Set a credit limit and ask for advance payments. First, take a good look at the credit limits you have set for your clients. In order to keep liquidity, you will be wise to specify a credit limit for each client. Once the client reaches the limit, no longer provide goods or services to the client, unless advance payment is made. This will avoid larger debts and sets an alarm system in place.

Setting up guarantees and collateral. If credit limits and advance payments are not an option, a guarantee given by a shareholder or managing bodies on behalf of the buyer may help. Or, you could require collateral from the parent company. That way you will be more likely to receive the payment and the guarantor will also be more interested in resolving any problems that may arise, as guaranteed obligations will be prioritised.

Fast invoicing. Consider sending invoices more often than once a month, allowing you to notice any payment problems sooner.

Settlement agreements approved by court. Once debts have occurred, it is advisable to speak with the debtor to understand their attitude and to find out how they intend to overcome payment difficulties. If the debtor is actively searching for ways to resolve issues, the creditor can agree to a court-approved settlement agreement with a payment schedule.

This will make the payment schedule mandatory. If the borrower fails to perform the obligations set in the settlement agreement in a timely and proper manner, the creditor can then ask the court to issue an order for payment before applying to the bailiff for enforcement of the settlement agreement.

Although it takes longer for the creditor to receive payments, it also provides increased security. If the debtor wishes to save his company, it will give him a chance to do so.

Using right of pledge to extend payment deadlines. Another way to guarantee debts is to use the right of pledge. For example, extending payment deadlines can be tied to a mortgage on the debtor’s property. If the debtor has another firm in his name, shares can be considered as collateral.

Conditional ownership share in debtor company. In some cases, it may be a good idea to use conditional acquisition of shares in the debtor company as collateral. If the debtor fails to pay on schedule, the creditor will acquire shares in the debtor’s company as previously agreed. Of course, this is a reasonable option only if the debtor is not on the verge of bankruptcy and the shares have value.

Deliver a statutory demand to the debtor with a notice of intent to open insolvency proceedings at court. If the debtor cannot be reached, or refuses to cooperate, you may wish to deliver a statutory demand. In your claim, you should explain the circumstances of how the debt occurred and give a minimum 15-day deadline to settle the debt. You should also note that this claim also serves as a warning that court proceedings for insolvency will be started if the debt remains unsettled. This usually serves as a wakeup call for debtors and they become willing to negotiate.

Advice to debtors

When facing bankruptcy proceedings, react fast!

Creditors seldom start insolvency proceedings after serving a statutory demand, since it does not serve their interests, but it may indeed happen. Once it does, you should present your arguments opposing the claim that the insolvency petition is based on, and do it within the term set by the court.

If you miss this deadline, an insolvency administrator may be appointed and you lose the right to oppose the claim and the court will only assess the financial situation of your company.

While doing so, the court will also reply on the claim that forms the basis of the insolvency petition. This means that your company can be declared insolvent while not actually being bankrupt, since the claim itself may be unjustified. So make sure you file your arguments on time.

If the claim is justified, yet you wish to save the firm from insolvency, pay the debt or provide collateral. If you cannot do either, you will have to convince the court of your company’s ability to satisfy the claims. If you can convincingly demonstrate the circumstances, no bankruptcy will be declared.

Also you should never forget to use restructuring as an alternative in order to save your company and its business.

Management’s obligations to file for bankruptcy

A company’s management must file for insolvency when the company is insolvent. According to Lithuania’s Law on Insolvency of Legal Persons a director is obliged to initiate insolvency proceedings when their company becomes insolvent, i.e. 1) the company is unable to fulfil its property obligations, including financial obligations, in time or 2) the obligations of the company exceed the value of its assets.

By law, the manager of a company is obliged to immediately initiate insolvency proceedings (bankruptcy or restructuring (if it restructuring is possible). If they fail to do so, a creditor may do it instead, which constitutes a breach of the duty of care. This means that both the liquidator and creditors have the right to file an action for damages against the manager.

Criminal liability follows if the court finds that the management has intentionally caused insolvency or concealed assets in bankruptcy proceedings.

Advice to creditors in bankruptcy proceedings: file your claim on time and pursue the case

To use the opportunities provided by bankruptcy and restructuring proceedings, you must act fast and pursue your interests actively.

It is important to follow the deadline for filing your claim (in the term set by the court). This will allow you to vote at creditors’ meetings, bearing an influence on creditors’ decisions.

It is a good idea for a creditor to be active in the proceedings, take a stand at creditors’ meetings, and cooperate with the insolvency administrator.

If you feel that the process is a waste of time, don’t rush to conclusions. Each case is different, and so are the options to improve your chances.

Sometimes, an insolvent company has conducted transactions shortly before filing for bankruptcy, harming creditors’ interests. The insolvency administrator then has the obligation and the legal tools to overturn those transactions. Also, if the company’s assets have been transferred unlawfully, the insolvency administrator may turn the claims against the company which received the assets, or it may be possible to file a claim against the management body. Such action may also be taken by the creditors if the insolvency administrator is inactive. These options improve the creditors’ chances to satisfy their claims, at least to a larger extent.

When can restructuring be used?

If payment difficulties are not permanent, restructuring would be the right option to choose. The key for success is the management’s faith in it and their ability to cooperate with the restructuring advisor and creditors, since this will determine the outcome of any restructuring plan.

To restructure claims, payment schedules can be put into place, deadlines can be changed, or claims can be reduced.

As a creditor, always find out if your claim is included in the restructuring plan, since this will determine your rights in the proceedings.