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01.06.2020

Insolvency proceedings during times of Covid-19

On June 2020, Dienas Bizness published an article by Kristīna Markeviča, lawyer of PRIMUS DERLING

In view of the emergency situation announced in Latvia, which aims to limit the risk of Covid – 19 spread, the Law on Measures for the Prevention and Suppression of Threat to the State and Its Consequences Due to the Spread of COVID-19 was adopted on 22 March (hereinafter the Crisis Law).

In order to maintain the possibility for economic operators to continue their economic activities fully, also in the context of a limited economic situation, as well as in order to ensure financial and legal stability in the country, the Crisis Law imposed restrictions on creditors’ right to apply for insolvency proceedings of a legal person.

Crisis Law Section 17 establishes that creditors are prohibited, until 1 September 2020, from submitting an application for insolvency proceedings of a legal person if any of the features of insolvency proceedings of a legal person referred to in Section 57, Paragraph one, Clause 1, 2, 3, or 4 of the Insolvency Law exists.

At the same time, it should be stressed that the Crisis Law does not impose restrictions on the lodging of an application for insolvency if the characteristics of the insolvency proceedings of the other legal person were to materialise. In particular, the creditor is still entitled to file an application for the insolvency proceedings of the legal person if:

  • the debtor has not settled debts for more than two months for which the deadline has been fulfilled
  • according to the financial statement of the opening of liquidation, the debtor does not have sufficient assets to satisfy all reasonable claims of creditors, or this is revealed in the course of liquidation.
    In cases determined by the Insolvency Law, the court terminates the legal redress process and declares the insolvency proceedings of the legal person
  • the debtor has not carried out the activities identified by the Insolvency Law or provided false information in the course of the legal protection plan
  • the debtor has failed to comply with the legal protection plan for more than 30 days and has not submitted amendments to the plan to the Court
  • the debtor violates the limits of action established in the Insolvency Law
  • the debtor shall submit an application for insolvency proceedings to the court, while at the same time requesting the termination of the legal protection proceedings if he is unable to settle the obligations laid down in the judicial protection plan

It is important to note that if an application for insolvency proceedings is filed by a creditor, the creditor should be obliged to notify the debtor before filing an application for insolvency proceedings. The Insolvency Law shall lay down the procedures for notifying the debtor in respect of the filing of an application for insolvency proceedings by a legal person.

It should be noted that the above section of the Crisis Law did not alter the scope of the debtor’s rights and obligations to submit an application for insolvency proceedings. The Crisis Law has also not imposed restrictions on the opening of the insolvency proceedings of a natural person. Moreover, despite the restrictions imposed by the Crisis Law on the filing of an application for the insolvency of a legal person, the creditor may offer the debtor other legal solutions in order to restore the debtor’s ability to settle his or her obligations.

Alternative options

Apart from the insolvency proceedings of a legal person, the Insolvency Law distinguishes two further insolvency proceedings of the debtor- legal person- with the involvement of the court:

  • Legal protection proceedings (hereinafter LPP)
  • Implementation of Legal Protection Proceedings (hereinafter ILPP)

It is also possible to deal with financial difficulties without the involvement of the court – extrajudicial restructuring of debts (hereinafter ERD). In the continuation of the article, let us briefly and concisely look at each of these restructuring processes, as well as the cases where they would be applicable.

Legal protection proceedings

LPP is one of the main proceedings of the trial, opposite the General or Claims Procedure. It is characterised by a departure from the adversarial principle inherent in the procedure, since there is usually no opposite party to the proceedings, which may raise objections and requests, and provide evidence (See. Decision of the Supreme Court on 7 February 2019 in Case No. C30595817, SPC — 1/2019). It should be noted that LPP is a voluntary choice by the debtor – that process is not compulsory for him.

At the time of the initiation of the LPP (with the application of the LPP and proposing the LPP case):

  • Suspension of enforcement proceedings against the debtor
  • Prohibition to request the secured creditor to claim the sale of the pledged property of the debtor, except in case that the abovementioned prohibition causes significant harm to the interests of that creditor (including the threat of destruction of the pledged property, the value of the pledged property has decreased significantly)
  • Prohibition to submit an application for insolvency proceedings of a legal person to the creditor
  • Liquidation of the debtor is prohibited
  • The increase in contractual penalty is suspended
  • An increase in interest exceeding the statutory interest is suspended
  • The increase in arrears is suspended
  • Calculation of arrears of tax claims is suspended

Following the initiation of the LPP process, the debtor should draw up a plan of measures which, at the outset, should be reconciled with all creditors and then submitted to the court for approval. In particular, it should be emphasized that the coordination of the plan of measures with creditors, as well as its approval in court, is an essential prerequisite for the debtor to initiate the implementation of the LPP plan.

During the implementation of the LPP action plan, the debtor must comply with both the conditions agreed in the plan and the restrictions imposed by the Insolvency Law.

If the plan of measures is successfully met, the LPP is terminated, while the restrictions imposed on the debtor and his creditors in the plan are abolished and the debtor continues its business, as before the implementation of the LPP. However, in the event that the debtor fails to comply with the requirements laid down in the LPP plan or does not comply with restrictions established in the Insolvency Law, the court shall terminate the LPP and declare the insolvency proceedings of the legal person.

Implementation of Legal Protection Proceedings

In addition to the legal protection process, the Insolvency Law also provides for extrajudicial redress. ILPP is provided for those cases where the debtor does not need urgent judicial protection from the creditor and both parties are able to agree on the restructuring of the indebtedness. The most significant difference between the LPP and the ILPP is that, in the case if LPP, the debtor is beginning to enjoy legal protection at the time of the initiation of the LPP case, while in the case of ILPP, the time of the approval and implementation of the ILPP measures plan.

As indicated by the Insolvency Control Service, from a practical point of view, the ILPP may be used by a debtor who has good prospects for reaching agreement with a majority of creditors and there is no danger that certain creditors with individual recourse to the debtor could seriously undermine the design, harmonization and further implementation of the LPP plan (See. The “Frequently Asked Questions” section of the Insolvency Control Service website).
The general provisions of the Insolvency Law on LPP apply to its implementation at the time the Court has approved the plan for the implementation of the LPP. However, it should be emphasized that the plan of LPP measures in the ILPP process should not affect the interests of the tax administration if the implementation of this plan requires the consent of the tax administration.

Extrajudicial debt restructuring

If the financial difficulties of the debtor can be resolved, and it is possible to achieve the economic performance of the debtor in the long term, it would be appropriate to consider, before proposing the case of insolvency proceedings, the idea of extrajudicial restructuring.

In the result of EDR, the debtor and the creditor mutually agree on a change in debt repayment, which gives the debtor the opportunity to continue the economic activity without interruptions and to recover the solvency.

However, it is crucial to keep in mind that, during EDR, the debtor does not enjoy judicial protection, so it is essential to understand that the proceedings are based on an agreement which neither threatens nor negatively affects the rights of the debtor or creditor.

Usually EDR is associated with a certain number of largest and most significant creditors. Amongst these creditors almost always is the debtor’s servicing bank. EDR may also involve other main creditors, such as rental of premises or land and major suppliers (see guidelines for “extrajudicial restructuring of debts in Latvia”)

In conclusion

The restrictions imposed by the Crisis Law to submit an application for insolvency of a legal person are temporary and valid until 1 September 2020. It is anticipated that, after a certain period of time it will lose its current status. Meanwhile, at the moment, it is essential for all the involved stakeholders to find a more successful solution to the situation. Clearly, in the post- crisis period such an approach must be even more topical. Therefore, before adopting the final decision on the initiation of insolvency proceedings, it would be valuable to consider whether any other prudent alternatives exist to resolve the financial difficulties that exist.