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Liability of board members during the current situation of emergency

On 5 April 2020, Delfi published an article by Mārtiņš Mežinskis, partner of PRIMUS DERLING.

In order to mitigate the impact of the economic crisis on businesses and to help entrepreneurs in any way during these difficult times, countries are introducing different forms of company support. The cornerstone of the legislative framework for Latvian aid is the Law “On Measures for the Prevention and Suppression of Threat to the State and Its Consequences Due to the Spread of COVID-19”

Section 17 of the Law provides that by 1 September 2020 creditors are prohibited from submitting an application for insolvency proceedings of a legal person, if any of the features of Section 57, Paragraph one of the Law on Insolvency exists:

  • It has not been possible to comply with a court ruling against a company on the collection of debt;
  • The company (SIA or AS) has not fulfilled one or more debts exceeding EUR 4268, while other types of companies (other than SIA or AS) the default debt threshold exceeds EUR 2134,-
  • The company has not paid salaries to its employees, damages oor made any any social contributions within two months since the day of the payment was due.

Secton 60 paragraph three of the Law on Insolvency sets obligation for the debitor to submit an application for insolvency proceedings without delay, if, inter alia, the undertaking has not settled debts for more than two months for which the due date has entered, regardless of the amount and quantity of outstanding debts. The board members of SIA or AS have an obligation to submit an application for the insolvency proceedings of the legal person without delay.

If the  Board does not submit an application for insolvency proceedings, the members of the Management Board may be personally subject to an administrative penalty of EUR 280 to 700, in accordance with Article 166 of the Code of Administrative Violations (currently in force). A member of the Management Board shall be responsible for the losses caused to the undertaking, as well as the liability of the members of the Management Board for the non-timely filing of an application for insolvency may also be assessed in the context of the insolvency proceedings.

The members of the Management Board have three options in this situation:

  • Reach a written agreement with the creditor on the deleveraging arrangements, such as an agreement on the debt schedule. In the event of such agreement, the obligation to file an application for insolvency proceedings no longer exists.
  • To go to court with an application for the innuation of the Judicial Procedure. An application for insolvency proceedings should not be lodged either.
  • To convey a meeting of members of the board to inform the members about the obligation to file an application for insolvency, to provide explanations on the situation and to offer a solution to the situation. If the meeting of the members does not support the proposals of the board, including the TAP, or other insolvency risk prevention solutions are adopted, the company’s board must submit an application for insolvency proceedings on behalf of the company.

TAP is a plan and activities that include an agreement on debt settlement arrangements, fundraising, debt capitalisation, business optimisation, etc. The sale of TAP may be monitored not only by a certified insolvency practitioner, but also by any person who has not participated in the development of TAP, as well as by other restrictions imposed by law. The TAP supervisor must be aligned with creditors. It has statutory obligations and provides for liability for failure to meet these obligations and has not been waived by anyone in the context of the announcement of the emergency situation of the Covid 19 pandemic. The most logical solution in the light of the above would be, in addition to the statutory ban on creditors not only filing an application for insolvency proceedings, but also temporarily waiving the obligation on the board members of the company to file an application for insolvency proceedings and relieving them of liability for failure to submit an application.

Read the full article in latvian here.