According to statistics, at the end of the first half of 2021, bankruptcy proceedings were conducted against 1981 companies, of which 1633 companies were liquidated. On January 1, 2020 the new Enterprise Insolvency Law of the Republic of Lithuania entered into force which merged the Enterprise Bankruptcy Law of the Republic of Lithuania and the Law on Restructuring of Enterprises of the Republic of Lithuania. Given the impact of the pandemic and quarantine, and the fact that a surprising number of companies in Lithuania are in insolvency proceedings and most of them are in liquidation, the new law may increase the chances of businesses surviving in the market, when even a company that has become insolvent can go to the restructuring process. Thus, in some form the new law has changed the conditions and course of this process.

First of all, although the new law refers to the obligation of the manager of an insolvent company to send notices to creditors of an offer to conclude an aid agreement, such negotiations should not be fictitious. This stage of mandatory negotiations can protect the company from further losses and enable it to maintain its viability without going to court, also without going bankrupt or restructuring, because creditors may indeed have an interest in providing financial support to the debtor.

However, if the need to initiate a restructuring case arises, the law provides for three main conditions: firstly, the legal entity must be in financial difficulty (insolvent or likely to become so in the next three months), secondly, when the legal entity is considered viable, and thirdly, when the the legal entity is not liquidated due to bankruptcy (Article 21 of The Enterprise Insolvency Law of the Republic of Lithuania).

In assessing the company’s financial difficulties, it is important to clarify the concept of insolvency, which is what the new law has changed. The previous Enterprise Bankruptcy Law considered a company insolvent if it did not fulfill its obligations and these exceeded half of the value of the assets entered in its balance sheet. That’s why in the past, in an attempt to avoid insolvent legal personality, companies entered into new loan agreements and those funds used to cover outstanding liabilities. The new law has changed the concept of insolvency and companies are now declared insolvent if they meet any of the alternative balance sheet tests: (i) is unable to meet its obligations in a timely manner, or (ii) the liabilities exceed the value of the assets, whether or not those liabilities are past due. Thus, even if a company enters into monetary obligations under new loan agreements and settles with creditors whose obligations have already expired, it will not lose its status of insolvent legal personality. Given this interpretation of the concept of insolvency, companies have to choose between two options: to initiate bankruptcy or restructuring proceedings.

In order to take a step forward in the restructuring process, the further condition – viability of the company laid down by law must also be assessed. This concept is interpreted broadly and is a major pillar for companies to avoid liquidation, whereas the courts take into account a whole range of circumstances and assess: the reasons for the company’s insolvency, what activities it engages in and what are the prospects for those activities, the expected income and profits, whether they will meet future debts to creditors and the number of employees in the company and so on. Therefore, if a company does not engage in economic-commercial activities or such activities do not allow it to meet its debt obligations in the future, this immediately casts doubt on the viability of the company (Order of the Court of Appeal of Lithuania of 7 July 2020 in Civil Case No. 2-1142-407/2020). In one civil case examined by the Lithuanian Court of Appeal no. e2-925-781/2021 the court assessed the amount of receivables, the origin, the terms of execution, which were included in the total mass of the defendant’s assets. The court also took into account the fact that the defendant enters into contracts throughout the period which not only pay for the production but also actually derive income from it, including expanding its activities and operating at a loss. The court even noted that a small number of employees does not call into question the viability of a company if it is able to further develop its activities and meet its taxes and obligations to employees.

Thus, the new law, which introduced a mandatory stage of debtor-creditor negotiations, also introduced new concepts of insolvency and viability will provide an opportunity and help companies to make good use of the opportunity to restore the company’s solvency through negotiations or restructuring proceedings, regardless of the fact that they may be in serious financial difficulties or even go bankrupt.


Černiauskas and Partners Law Firm Lawyer Diana Kuzmenokaitė.