SPECIAL ISSUE PREVENTIVE RESTRUCTURING 13. The New Corporate Restructuring Regime in Lithuania

1. Introduction^[1]

Lithuania underwent a substantial corporate restructuring regime overhaul in 2019. This reform was notable for its dual objectives: to consolidate two legal proceedings covered initially by two different laws, namely of bankruptcy and restructuring, into one statute, and to rectify the critical shortcomings in the Lithuanian business rescue framework, which, until then, had been largely overlooked by the domestic businesses. Furthermore, given that the content of the Preventive Restructuring Directive 2019 (PRD 2019)^[2] had already been extensively deliberated upon at the time of enacting the new reform, certain concepts from the PRD 2019 had already been integrated into this reform of Lithuanian insolvency law in 2019. The remaining incongruities with the PRD 2019 were addressed with the enactment of the Amendment to the Law on Insolvency of Legal Entities^[3] on 15 July 2021.

This article examines the transformative changes brought by these reforms on the legal insolvency framework in Lithuania. The purposes of the article are to discuss the evolution of Lithuanian corporate restructuring regime, to present insights regarding the main features of restructuring proceedings in Lithuania, it’s attractiveness and accessibility, to compare the restructuring proceedings reforms in Lithuania with reforms in other countries and to evaluate their overall impact on the sound business framework in Lithuania.

2. Overview of domestic pre-reform restructuring and insolvency law regime

2.1. Evolution of Lithuanian legal insolvency regime

Since the restoration of its independence in 1990, Lithuania began building a national legal insolvency framework following the legal tradition of continental Europe to meet the demands of a modern open economy. The first Company Bankruptcy Law was instituted in 1992 and was aimed at liquidation. This regulation was replaced first with the recast of 1997 and after four years with the third Company Bankruptcy Law, which was adopted in 2001, together with the first insolvency act aimed at rescuing the companies in financial difficulties: the Law on Restructuring of Companies.

The adoption of the restructuring law introduced restructuring as a new legal approach, previously unknown in the Lithuanian legal system, to handle financially distressed companies. The emphasis shifted from the efficient disposal of a company's assets and dissolving insolvent entities to preventing liquidation by reconfiguring a distressed company’s financial and organisational framework, allowing the company to continue operating. As a result, since 2001, Lithuanian companies were offered two options to pursue legal protection in insolvency: they could either file for bankruptcy or opt for restructuring.

In 2004, Lithuania joined the European Union (EU), and EU law became a part of the national legal system. Targeted EU initiatives for improving corporate insolvency regulation,^[4] consistently introduced over the past decade, have prompted Lithuania to reassess its national insolvency regime and compliance with the European trends based on corporate rescue culture.

Simultaneously, the existing Lithuanian legal insolvency framework raised legitimate concerns regarding its lack of efficiency. According to the 2019 Doing Business report carried out by the World Bank^[5], among 190 countries worldwide, Lithuania was ranked in the 14^th place in the overall business environment rating (compared with Germany rank: 24; Estonia: 16, Latvia: 19, Poland: 33) which is a highly favourable result. However, of the ten components that make up the overall rating, such as starting a business and obtaining credit, Lithuania scored the lowest in the ease of resolving insolvency. In this category, Lithuania ranked 85^th, lagging its neighbouring countries and the regional average (Latvia: 54, Estonia: 47, Poland: 25, Germany: 4). Although the World Bank later retracted the Doing Business study as it noted inconsistencies in countries’ ranking,^[6] the poor place in this ranking was evoked as one of the main arguments in political and practical discussions in Lithuania arguing the necessity of reforming the Lithuanian insolvency regime. Moreso, in Lithuania, since its formal introduction in 2001, restructuring as a legal tool to resolve insolvency was unpopular, unattractive to businesses, and rarely successfully completed.^[7]

To tackle domestic issues in the field of corporate insolvency law, a new comprehensive reform was enacted by the Lithuanian legislator in 2019. The legislator tried to consider the newest trends of European insolvency legislation, to adhere to the principles of the United Nations Commission on International Trade Law and follow the World Bank advice. After long considerations and debates in the Lithuanian Parliament, which took about two years, finally, the legislator passed the long-awaited new Law on Insolvency of Legal Entities (Lietuvos Respublikos Juridinių asmenų nemokumo įstatymas^[8], the LILE) on 13 June 2019. This law, which represented a significant reform of Lithuanian corporate insolvency law, came into effect on 1 January 2020. In addition, new amendments to the LILE aimed at transposition of PRD 2019 entered into force on 15 July 2021.

2.2. Comprehensive reform of Lithuanian insolvency law

The new LILE that came into force on the 1 January 2020 marked a significant overhaul of the national insolvency system. Following the European Commission recommendation^[9] to introduce national laws that would shift the focus away from liquidation towards encouraging viable businesses to restructure at an early stage so as to prevent insolvency, the new Lithuanian reform aimed to establish an effective insolvency regime and provide a better mechanism for business rescue.

The implemented Lithuanian insolvency law reform was fundamental in nature, leading to significant changes in both the legal regulation and institutional changes. The LILE brought about innovations into the Lithuanian insolvency regime:

• It combined the regulation of bankruptcy and restructuring proceedings, which were previously governed by two separate legal acts, into a single law and harmonised both proceedings (via establishing the same priority rankings for preferred creditors in both types of proceedings, opening the possibility for the creditor to initiate not only bankruptcy, but also the restructuring proceedings etc);
• It introduced a new pre-insolvency agreement on assistance to overcome financial difficulties in order to create the preconditions for solving financial difficulties without involving the court;
• It included new rules protecting the new and interim financing in bankruptcy proceedings and established its higher rank (above the claims of ordinary unsecured creditors);
• It proposed a new mechanism to deal with companies that do not have sufficient assets to cover court and administrative expenses;
• It established the possibility to sell an insolvent company or its substantial part (sale of businesses as a going-concern);
• It created prerequisites for a new approach to the fraudulent bankruptcy and civil liability of management bodies and shareholders of the company by embedding a duty on the court after establishing the bankruptcy as fraudulent by the same ruling to identify the person whose actions or omission caused the fraudulent bankruptcy. Previously such a duty has not existed. New rules aims at making it easier for the creditors to pursue the civil liability of persons who causes the fraudulent bankruptcy (by initiating a new civil proceedings against such persons);
• It established two different voting classes (secured and unsecured creditors) for voting on the restructuring plan and introduced the ‘best-interest-of-creditors’ test;
• It established a new self-governance organisation of insolvency administrators – the Chamber of insolvency administrators of Lithuania, and delegated to it certain functions of supervision and administration of the profession (e.g. enforcement of ethical standards, organising of the qualifications exams for the future insolvency administrators, solving disputes between the insolvency administrators, etc).

These innovations generated a lot of domestic debate among academics, and especially the business community. However, overall, the changes were met positively, recognising that the long-standing Lithuanian insolvency regime needed to be transformed to conform to current business realities. According to a report of the Organisation for Economic Co-operation and Development (OECD), the adoption of the LILE made the Lithuanian insolvency regime from one of the most restrictive and burdensome regimes to one of the most open and balanced ones of the OECD countries.^[10]

2.3. Lithuanian restructuring framework before transposing PRD 2019

One of the main goals behind adopting the LILE was to improve the conditions for preserving viable businesses. Thus, even before the transposition of the PRD 2019 to national law, Lithuania had a restructuring regime in place that was, in essence, aligned with the main concepts of the PRD 2019. 

But the restructuring in Lithuania was (and still is) only possible as a judicial proceeding. The district court commences the restructuring proceedings if the business is viable, and the court can reasonably assume that a company can overcome its financial difficulties. Following the LILE provisions, the management of the company retains control of the business in restructuring proceedings (Debtor in Possession). After the commencement of the proceedings, the management of the company under the supervision of the insolvency administrator (if appointed) should agree with the creditors on a restructuring plan. The restructuring plan should contain appropriate measures (including debt and/or equity restructuring, change of personnel, etc.) to rebuild the company’s long-term solvency. The court approval to the restructuring plan is necessary.

Restructuring proceedings must adhere to strict timelines: the deadline for submitting to a court a draft plan is four months from the day of the commencement of the restructuring proceedings. By that time, the restructuring plan should already be agreed upon by the creditors, who vote on the plan in two separate creditors’ classes, which consists of (1) secured creditors and (2) other creditors. In case the majority of the creditors who are affected by the plan vote in favour of the plan in both creditors classes and the court approves the plan, the period of implementation of the plan shall take no more than four years with the possibility to extend it with a maximum of one year^[11]. Dissenting creditors in restructuring proceedings should receive at least as much as what they would obtain in bankruptcy proceedings.^[12]

However, the formal criteria for carrying on the restructuring were rigid and often challenging to meet for companies. The ‘bottleneck’ of the restructuring proceeding was the requirement for both creditors classes separately to approve the restructuring plan. Which means that the disapproval of one of the creditors’ classes (despite the actual positive perspective and viability of the company) led to an immediate end of the restructuring proceeding. The possibility for the court to approve the plan despite the dissenting creditors (the cross-class cram-down rule) was non-existent in the Lithuanian restructuring regime, although it was highly needed in practice.

The unpopularity of restructuring as a solution for resolving insolvency in the business community in Lithuania can also be attributed to the fact that there has always been (and still is after the transposition of the PRD 2019) only one possible option: the judicial restructuring proceeding. The Lithuanian restructuring regime does not offer any flexible out-of-court mechanisms, which minimises the attractiveness and accessibility of the restructuring, especially for micro and small companies.

3. PRD 2019: reforming domestic preventive restructuring law

The insolvency reform of 2019 did not lead to an increase in the initiation of corporate restructuring proceedings.^[13] Therefore, practitioners hoped that the transposition of PRD2019 would give the impulse needed for the legislator to make restructuring more attractive to Lithuanian companies. Unfortunately, the transposition deadline (July 2021, with an extension option for up to one year^[14]) collided with the global pandemic and immigration crisis in Lithuania^[15]. The diversion of political attention towards these pressing matters, resulted in a transposition via a swift procedure^[16]. Consequently, extensive consultations with the business community were limited, with the emphasis primarily placed on the formal compliance with the PRD 2019. The legislator did not attempt any significant innovative measures to enhance the options for financially distressed businesses to restructure and only introduced the bare minimum to correspond to the imperative requirements of the PRD 2019.^[17]

4. Main features introduced by the PRD 2019 reform

4.1. Objective and scope of the framework/proceeding

It was considered that the Lithuanian legal regime, in general was already in accordance with the PRD 2019’s requirements,^[18] therefore when transposing the PRD 2019, the Lithuanian legislator introduced only several additional provisions.

These new provisions, geared towards advancing preventive restructuring, can be categorised into two classes. The first set of modifications can be likened to the stick in the ‘carrot and stick’ analogy. They pertain to the legal mandate for businesses to adopt preventive restructuring measures early on, coupled with the repercussions for failing to do and introducing new statutory duties for directors of companies facing imminent insolvency.

The second category of changes serves as the carrot: their objective is to enhance the attractiveness of business restructuring. Among the newly introduced statutory measures aimed at creating a more favourable legal landscape for corporate rescue are as follows: the cross-class cram-down rule; prohibition against terminating essential executory contracts; state support to cover debts owed by the restructured company to its employees; restriction against legally challenging transactions that provided new or interim financing within the restructuring proceeding; elimination of expenses for the restructured company associated with appointing a insolvency administrator at the creditors' request.

These new measures improved the conditions for corporate rescue, although they did not fundamentally alter the existing legal restructuring framework and its scope^[19]. With such a rather narrow approach, Lithuania did not take the opportunity to create a genuinely early access proceeding that might be attractive to businesses. Even after the transposition of the PRD 2019, there is still only one form of restructuring available for business: an entirely judicial, public restructuring proceeding.

4.2. Criteria to enter restructuring proceedings

The right to initiate restructuring proceedings is given to both: the manager of the company or other person authorised under the founding documents of the company, and to the creditor whose overdue claims exceed 10 minimum monthly salaries (as approved by the Lithuanian government from the 1 January 2023, one minimum monthly salary is EUR 840).^[20] The restriction related to the minimum amount of claims determines that the creditors with relatively small debts are not able to initiate the restructuring proceedings.

The person initiating the restructuring proceeding (the company or the creditor) must notify the other party about the outstanding obligations and inform that the petition for the judicial restructuring will be filed if, during the timeframe prescribed in this information letter (from 15 to 30 days), the creditors and the company will not agree on how to overcome the financial difficulties.^[21] The aim of this provision is to promote the amicable resolution of pre- insolvency (in case when the company applies for restructuring) or insolvency situation (insolvent company and it’s creditors can apply for restructuring or bankruptcy in Lithuania) without the involvement of the court. Such an arrangement could be concluded between the company and those creditors who agree to provide support to overcome the financial difficulties. However, in practice, creditors in Lithuania almost never agree to provide actual financial assistance to a distressed company. Therefore, this mandatory stage (sending a notice) is usually carried out formally solely to acquire a legal right to submit a restructuring petition to the court.

When a company submits a petition to the court for the commencement of the restructuring case, it must also present the prepared restructuring plan proposal and a decision from the legal entity’s shareholders’ meeting approving the restructuring plan proposal.^[22] So, a company’s shareholders’ approval is a necessary precondition for companies to apply for judicial restructuring.

Three general statutory conditions must be fulfilled to commence the restructuring proceedings.

The first condition is that the company must be in a state of insolvency or alternatively in the state of ‘likelihood of insolvency’. In the Lithuanian legal framework, the common ground for the opening insolvency proceedings is the insolvency of the company , which is defined as the state of the company when it is unable to fulfil obligations that are due and payable (cash-flow test), or its total liabilities exceed the value of its assets (balance-sheet test).^[23] After transposing the PRD 2019, the new definition of the likelihood of insolvency was introduced as an alternative test for commencing insolvency proceedings. But the Lithuanian legislator did not introduce a completely new concept. Prior to the reform, the existing concept of financial difficulties of a company was defined as a situation where the company is insolvent or there is a real probability of insolvency within the next three months.

With the new changes to the LILE, the Lithuanian legislator simply singled out the category of ‘the likelihood of insolvency’ from the concept of ‘financial difficulties’ as a separate legal definition and defined it as ‘a situation in which the is realistically likely to become insolvent within the next three months’. Such an approach which limits the concept of likelihood of insolvency to a short term of three months does not offer the access to the preventive restructuring measures at earlier stages^[24]. There are currently no established court practice on opening restructuring proceedings based on the condition ‘the likelihood of insolvency’ , so it is not clear if the courts would be open to apply this rule more flexibly in cases where the company is in pre-insolvency situation and based on operational intricacies and market dynamics is in need of preventive restructuring protection (e. g. if the conditions for commencing the restructuring proceeding would be considered by the court as fulfilled in situations of seasonal market fluctuations longer then 3 months and the company's leadership would provide proof that there is strong likelihood of insolvency after 6 months without the help of preventive restructuring proceedings).

The second condition is the viability of the company, which is understood as ‘the state of the company when it continues its economic and commercial activities which enable it to fulfil its obligations in the future’.^[25] Active engagement in economic and commercial activities is necessary to maintain the continuity of the business to return to profitability. Thus, the viability of the company is an essential precondition of entering the restructuring proceedings as the law foresees that the company, which already stopped its commercial activities, is no longer viewed as viable and, therefore, can only apply for bankruptcy proceedings.^[26]

The third condition is that the company is not in a state of liquidation in the already undertaken bankruptcy proceedings, i.e. has not already entered formal bankruptcy proceedings.^[27]

After receiving an application for the initiation of a restructuring case, the court considers whether the company meets all the formal criteria, whether the appropriate subject has applied to the court, and whether all necessary documents have been submitted. After examining all the evidence, the court decides to initiate the restructuring case or refuses to initiate it.

4.3. Involved actors

4.3.1. Company (Debtor)

The Lithuanian legal regime is aligned with Article 5 PRD 2019 regarding the company’s involvement in restructuring proceeding as a DIP. The LILE foresees that during a restructuring proceeding of a company , its director(s) or another person executing the duties of the management body is in control of the company and its business activities.^[28] The director is also responsible for the implementation of the restructuring plan.^[29] Since an insolvency administrator is appointed only in particular cases, if an insolvency administrator is not appointed, the company’s director exercises the insolvency administrator’s statutory rights and obligations mutatis mutandis during the whole restructuring proceeding (convenes meetings of creditors and executes their decisions, prepares reports on the implementation of the restructuring plan, provides information to the court and other institutions, etc.).^[30]

4.3.2. Court

Since the single option for companies to pursue a corporate rescue in Lithuania is a judicial restructuring proceeding, the court is considered a key actor in the legal restructuring framework. One of the main principles of the insolvency proceedings is the principle of the judge’s guidance which, according to the LILE, means that the court can collect evidence ex officio if needed, on its own initiative oblige the participants of the proceedings to perform concrete procedural steps, control actions of all participants of the proceedings to ensure the efficiency of the insolvency proceeding and the public interest^[31]. In the restructuring proceedings the court decides on the commencement of the proceedings, is responsible for appointing an insolvency administrator and removing him/her from the position when needed, limiting or allowing some economic activities of a company, approving creditors’ claims, confirming the restructuring plan, terminating the restructuring proceedings when necessary, etc. The supervision of the overall efficiency and legitimacy of the restructuring proceeding is also assigned to the court. The recent changes of the LILE implementing the PRD 2019 inter alia the possibility for a cross-class cram-down^[32] and the provision allowing the court to decide on the mandatory insolvency administrator appointment^[33], have further strengthened the already essential role of the court in the Lithuanian legal restructuring regime.

4.3.3. Practitioner in the field of restructuring

The insolvency practitioner in Lithuania is called an ‘insolvency administrator’. An insolvency administrator is a court-appointed natural or legal person who has the right to provide insolvency administration services in the fields of bankruptcy and restructuring.^[34]

The LILE, as adopted in 2019, already established that appointment of an insolvency administrator in the restructuring proceedings is optional, and that the director of the company can perform the administrator’s responsibilities and duties. With recent amendments to the LILE, the Lithuanian legislator further implemented the provisions of Article 5 PRD 2019 by defining cases when the insolvency administrator must be appointed.

According to the current regulation, the insolvency administrator must be appointed in the following cases: (1) if the court decides that the appointment of an insolvency administrator is necessary to ensure the protection of the company and its creditors' interests; (2) if the court confirmed the restructuring plan regardless of the dissent of the company’s shareholders or creditor classes affected by the plan; (3) upon the request of the company or creditors whose claims constitute more than 1/2 of the total amount of claims approved by the court; (4) when the bankruptcy case of the company has been terminated, and the restructuring case has been initiated.^[35]

The introduction of this list of mandatory grounds for appointment of an insolvency administrator is seen positively since the involvement of an impartial professional in complex situations where there is no agreement among (classes of) creditors, or when the company is transitioning from bankruptcy to restructuring would help to reconcile interests and ensure a smoother proceeding. The aforementioned list is intentionally kept somewhat flexible, allowing for the potential appointment of an insolvency administrator based on creditors' petitions or the court's judgment ex officio.

If appointed, the insolvency administrator supervises the activities of the management of the company, while the power to manage the company still remains vested in the management of the company. The insolvency administrator protects the interests of all creditors, consults the management on the questions related to the drafting of the restructuring plan, supervises how the restructuring plan is implemented, and timely informs the governing bodies of the company and the meeting of the creditors if the plan is not being implemented. In the latter case, the insolvency administrator has the duty to request the court to terminate the restructuring proceedings. The insolvency administrator has the right to participate in the creditors’ meetings, receive the relevant information about the company, obtain copies of all its documents, etc. The remuneration of the insolvency administrator (if such is appointed) is indicated in the restructuring plan and the decision about it is taken together with the voting on the plan by the creditors of the insolvent company. The legal framework is silent on the possible tariffs or indicative amounts, so this question is left solely for the consideration of the company itself and its creditors.

4.3.4. Creditors

A key aspect of Lithuanian insolvency law is the active involvement of creditors in insolvency proceedings, incl. restructuring. The meeting of creditors is the main structure that facilitates creditors’ participation and upholds the principle of creditors’ autonomy. In cases where there are multiple creditors, a creditors’ committee may also be established to enable effective monitoring and participation in the insolvency proceedings.^[36]

The essential rights of creditors’ meeting are to approve and amend the restructuring plan^[37], on which the entire proceeding depends. The creditors’ meeting exercises other important functions, which includes to make decisions related to the creditors’ committee formation and activities^[38], apply to the court with the request to dismiss the appointed insolvency administrator^[39], apply to the court with the request to terminate restructuring proceedings^[40], etc.

4.3.5. Shareholders

The role of shareholders in the restructuring proceedings is essentially manifested through two key functions: first, to approve the restructuring plan proposal so that the company can file a petition with the court to initiate the restructuring proceedings,^[41] and secondly, to approve the restructuring plan subsequently before submitting it to the approval for creditors.^[42]

The transposition of the PRD 2019 in the national law has introduced the cross-class cram-down rule. However, it would be inaccurate to claim that the intention of Article 12 of the PRD 2019 has been fully implemented, i.e., the aim to prevent entity holders from obstructing the restructuring of a company. Without obtaining shareholders’ meeting’s approval for the restructuring plan proposal, the company loses the right to initiate the restructuring proceedings altogether. Transposing PRD 2019 Lithuania introduced a new provision enabling cramming down the dissenting shareholders later in the restructuring proceedings (when approving the restructuring plan). However, shareholders’ consent is still necessary to initiate the restructuring proceedings. So, according to the current regulation in Lithuania, a shareholders meeting’s consent remains a crucial threshold. Therefore, it is worth considering abolishing the provision for mandatory shareholders meeting approval of the restructuring plan proposal when initiating the restructuring proceedings.

4.3.6. Employees

When implementing Article 13 of the PRD 2019, a new Article of the LILE called “Regulation of employment relationships in restructuring proceedings”^[43] was included, which stipulates the obligation of the company’s director to inform employee representatives and consult with them before initiating restructuring. Documents proving that employee representatives were informed about the prepared restructuring plan and consulted on employment conditions must be submitted to the court along with the proposed restructuring plan for approval.^[44]

Another important innovation related to employment regulation is the adopted legal provisions foreseeing that the state’s Guarantee Fund^[45] reimburses employees’ creditor claims not only in bankruptcy proceedings, but also in restructuring proceedings. Such expression of the state’s solidarity is a genuine aid to the distressed businesses seeking restructuring. It addresses the practical issue where employees, unwilling to wait for the debt coverage envisaged in the restructuring plan, would terminate their employment, thereby hindering the continuation of the company's commercial activities.

4.4. Stay

When a restructuring petition is submitted to the court and if enforcement documents have been previously issued against the company, the recovery and realisation of the company’s assets shall be suspended.^[46] Once a restructuring case is opened, stay protection is also automatically granted to the company. Maximum duration of a stay is six months^[47]. From the date when the court’s decision to initiate the restructuring proceedings comes into force to the date of the court’s ruling to confirm the restructuring plan or terminate the restructuring proceedings comes into force, individual enforcement actions is prohibited.^[48]

Companies are granted a stay of individual enforcement actions for four months, i.e., during the statutory period for the preparation and negotiations of the restructuring plan. The court has the right to extend the deadline for submission of the restructuring plan upon the request of the insolvency administrator or the company if the request is approved by the creditors’ meeting and substantiated by significant progress in the negotiations of the restructuring plan. However, the general deadline for submitting the restructuring plan to the court, thus also the stay of individual enforcement actions, cannot exceed six months from the effective date of the court decision to initiate the restructuring case.^[49] There is no possibility to impose the stay only in relation to specific subjects, instead the automatic stay covers all obligations of a company. However, the court can lift the moratorium related to specific assets that are essential to carry on of the company’s business and ensure its viability during the restructuring proceedings. The court can do so if it considers that partially lifting the stay would facilitate the adoption of the restructuring plan and if such a request has been lodged by the company, insolvency administrator or secured creditor.^[50]

4.5. The plan

The restructuring plan is proposed by the management of the company which retains control over the whole business and assets.^[51] The requirements for the content of the restructuring plan corresponds to the requirements set out in Article 8 of the PRD 2019.^[52] The plan also should describe concrete guidelines of how the assets should be administered during the plan implementation period^[53]. If new financing is needed for the successful continuation of the business this should also be described in the plan^[54].

The state institution responsible for the national insolvency control service developed the Restructuring Plan Guide,^[55] this is a novel digital tool designed to facilitate small and medium-sized companies in completing and forming a restructuring plan (including its draft) in accordance with legal requirements. The guidance functions as a step-by-step process, comprising in total of 10 steps.^[56] Once the necessary information is input at the relevant juncture, it will be automatically employed in subsequent steps. While primarily aimed at small and medium-sized companies, the guidance is accessible to all companies.

Article 3 of LILE foresees the principle of transparency, which signifies that information about the insolvency proceedings should be promptly accessible to all individuals participating in the insolvency proceedings, aiming to ensure the safeguarding of their rights and legitimate interests, except in cases where the protection of legally protected personal data or information constituting commercial (manufacturing) secrets is required by law.

The duration of the implementation of the restructuring plan cannot be longer then four years with the possibility to extend it to one additional year.

4.6. Adoption and confirmation of the plan

The Lithuanian rules on the adoption and confirmation of the plan corresponds to the rules established in Articles 9-11 of the PRD 2019. According to the LILE creditors who vote for the plan are classified in two separate creditors’ classes, which consists of (1) secured creditors and (2) other creditors.^[57]

If the majority of creditors impacted by the plan vote (only affected creditors can vote) in favour of the plan within both creditor classes and the court grants approval for the plan (or approves it under the cross-class cram-down rule), the plan's implementation period will be limited to a maximum of four years, with the option to extend it by up to 1 additional year.^[58] The court assumes a crucial role in verifying whether the restructuring plan contains all the necessary information and whether it is reliable.

The court checks ex officio the existence of conditions for confirmation of the restructuring plan (even in cases where both creditors classes vote in favour of the restructuring plan) and issues a ruling not to approve the restructuring plan if at least one of the following circumstances exists: (1) after checking each of the content requirements the court establish that some information is missing or incorrect; (2) the extent of satisfaction of the claims of creditors who did not endorse the measures specified in the restructuring plan project would be lower than in the case of bankruptcy; (3) the new financing measures envisaged in the restructuring plan project are not necessary for the implementation of the restructuring plan and unjustifiably curtail the interests of creditors who did not support the restructuring plan project; (4) the measures stipulated in the restructuring plan project would evidently not assist the company in overcoming financial difficulties, preserving viability and averting bankruptcy; (5) the restructuring plan project does not comply with the requirements for providing state aid; (6) from the day the court receives the case for restructuring, the company is not tax compliant.^[59]

The LILE includes also new for Lithuanian insolvency system cross-class cram-down rules which foresee that if the affected creditors voting in both classes do not approve of the plan, at the initiative of the company’s director or upon the proposal of creditors and subsequent agreement of the company’s director, the court may still confirm the restructuring plan, provided that all of the following conditions are met: (1) the formal requirements on restructuring content are met; (2) the restructuring plan project is approved by the creditors whose claims are secured by a pledge and/or mortgage, or by the class of other creditors; (3) if the creditors of those classes would not have their claims satisfied in the event of bankruptcy, also taking into account the potential satisfaction of creditors' claims upon the expression of interest in the case of the sale of the company; (4) the restructuring plan ensures that the claims of the creditor classes affected by the restructuring plan, who do not approved it, are satisfied according to the priority sequence of satisfying requirements set forth in Article 94 of the LILE (which establishes strict order of satisfaction of creditors claim, including the rule that at each stage, the claims of creditors in each subsequent rank are satisfied after the claims of creditors in the preceding rank of the same stage have been fully satisfied).

In the Lithuanian model a cram-down on dissenting creditors requires a simple majority of more than 50% of all votes of creditors in the approving class, in addition to the other requirements for a cross -class cram-down as laid down in the LILE^[60] (as stated above, including best interest of creditors test and absolute priority rule). A creditor’s cram-down on dissenting shareholders requires a qualified majority of two thirds of all votes in both creditor classes.^[61] The final confirmation (approval) of the restructuring plan lies with the court. The review of the relevant court practice shows that courts are thoroughly checking each of law requirements needed for the confirmation of the restructuring plans.

4.7. Possibilities for a debt-for-equity swap

There are no rules expressly regulating the debt-for-equity swap under the restructuring framework in Lithuania. However, in practice it is possible if the company and creditors agrees on that in restructuring plan.

4.8. Executory contracts

One of the important novelties after the transposition of the PRD 2019 was the introduction of the concept of ‘essential executory contracts’ which was previously unknown in Lithuanian restructuring law. ‘Essential executory contracts’ are now defined as those contracts that are necessary to ensure the continuity of a company’s activities and upon termination of which the company would be prevented to carry out its economic and commercial activities (e.g. water supply, electricity supply, lease etc.).^[62]

Although it is forbidden to terminate such contracts by the creditor,^[63] the law does not specify whether a precondition of this prohibition is that the company itself be properly fulfilling its obligations under these contracts. By now, this is still not clarified by Lithuanian case law and doctrine.

The list of essential executory contracts needs to be approved by the court during the commencement phase of restructuring proceedings. Creditors retain the right to challenge the decision to include specific contracts in the list of essential executive contracts if continuation of the performance of the contract would unreasonably prejudice their interests.^[64] 

4.9. Jurisdiction for and recognition of court decisions in Europe

The national legislator did not ask to include any new proceedings to the Annex A of the EIR 2015, mainly due to the fact that the transposition of the PRD 2019 didn’t result in the creation of any new type of the proceeding (there is only one of restructuring proceeding in Lithuania). Therefore, questions related to international insolvency law in Lithuania are solved by applying the EIR 2015 (Lithuanian restructuring proceedings were included into the Annex A from the start).

5. Response of the practice to the reformed restructuring framework

In our assessment, the 2021 reform can be characterised as a primarily technical transposition of the PRD 2019. It formally implemented its provisions but neglected to offer remedies for the ongoing challenges prevalent in Lithuania's business rescue domain. There has been limited use of the new restructuring proceeding so far. In 2022 a total of 9 restructuring proceedings were initiated in the whole country, which is 69% fewer than in 2021 (29 proceedings).

Further improvement of the legal environment for restructuring could come from two directions: first, the legislator should take into account the reason for the current reluctance to use existent restructuring proceedings. As mentioned above, Lithuania does not offer any out-of-court, non-public proceedings, but only a universal judicial insolvency proceeding designed for large companies containing all possible safeguards and guarantees. There is a need for a separate real preventive proceeding which could ensure the needed confidentiality and also the possibility for financial restructuring only (e.g. working only with a specific group of financial creditors and applying the stay not automatically to all obligations but specifically tailored to the needs of the company). The second direction is to develop specialised proceedings aimed at business rescue of micro companies because the Lithuanian model of universal judicial restructuring proceedings does not correspond to the needs of the micro companies to have more efficient framework without the close oversight from the court.

6. Conclusions

In essence, Lithuania has adopted a strategic approach centred on the punctual and technical transposition of the rules outlined in the PRD 2019 into the existent insolvency framework. It has chosen not to create any new separate proceedings specifically tailored to pre-insolvency situations but rather expand the existing judicial restructuring rules (which also apply after an insolvency event) and include new and needed instruments such as a cross-class cram-down, protection of new financing, prohibition of termination of essential contracts etc. Unfortunately, this approach also meant that Lithuania implemented only bare minimum - essential requisites mandated by the PRD 2019, without extending its scope to adding extra solutions and encompass potential new modern remedies for struggling businesses in Lithuania aimed at prevention of the insolvency.

So, in contrast to jurisdictions such as the Netherlands, where the WHOA (Wet Homologatie Onderhands Akkoord)^[65] came in effect, Lithuania did not put forth an analogous new instrument tailored to businesses encountering financial turmoil in the early stage. Also, despite the fact that in legal doctrine there is unanimous agreement that the role of the court in preventive restructuring systems should be minimal^[66], this approach was not implemented in the restructuring framework of Lithuania. As a result, currently the businesses facing financial difficulties in Lithuania are limited to choose either insolvency proceeding aimed at liquidation (bankruptcy) or public restructuring proceedings in court which in pre-insolvency situations are accessible only in a very advanced stage, starting not earlier then three months prior to occurrence of insolvency event.

Lithuanian legal restructuring regime does not offer any flexible out-of-court mechanisms, which minimises the attractiveness and accessibility of the restructuring, especially for micro and small companies. There are still no possibilities to bind dissenting creditors in an out-of-court debt restructuring.

From the other side, the current court-controlled restructuring regime after the reforms of 2019 and 2021 encompasses a majority of modern features required for the insolvency framework and in theory is considered as the biggest step forward until now towards effective business rescue solutions in Lithuania. Still there is very limited practical experience in applying the new framework making the assessment of its practical significance rather challenging.

^[1] Paper submittion date: 2023 12 04.

^[2] Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (PRD 2019), O.J. L 172/18.

^[3] The Law on Insolvency of Legal Entities (Law No. XIII-2221, published in the Register of Legal Acts on 27.06.2019, Nr.10324, the date of coming into force: 01.01.2020).

^[4] Commission Recommendation (EU) 2014/135 of 12 March 2014 on a new approach to business failure and insolvency, O.J. L 74/65 (Commission Recommendation); Regulation (EU) 2015/838 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast), O.J. L 141/19 (EIR 2015); Proposal of Directive (EU) 2016/0359 of the European Parliament and of the Council of 22 November 2016 on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU.

^[5] World Bank, Doing Business Report, available at: <https://www.worldbank.org/en/businessready/doing-business-legacy> (last viewed 13 April 2023).

^[6] The World Bank’s Doing Business Report was discontinued in 2021. Available at: <https://www.worldbank.org/en/news/statement/2021/09/16/world-bank-group-to-discontinue-doing-business-report> (last viewed 13 April 2023).

^[7] Based on the Ministry of Finance’s statistical data, from the date of coming into force of the Law on Enterprise Restructuring (1 July 7 2001) until 30 June 2019 (in total in 18 years), a total number of 495 companies have been restructured, of which only 48 have been restructured successfully (and still afterwards 3 of them have subsequently been declared bankrupt), 348 restructuring proceedings were terminated with the outcome that 287 went to the bankruptcy). Available at: <http://www.avnt.lt/assets/Veiklos-sritys/Nemokumas/Nemokumo-duomenys-ir-analize/2019-I-pusmAPZVALGA2019-07-30-1.pdf> (last viewed 13 April 2023).

^[8] The Law on Insolvency of Legal Entities (Law No. XIII-2221, published in the Register of Legal Acts on 27 June 2019, Nr. 10324, the date of coming into force: 1 January 020).

^[9] Commission Recommendation (EU) 2014/135 of 12 March 2014 on a new approach to business failure and insolvency, O.J. L 74/65 (Commission Recommendation).

^[10] Organisation for Economic Co-operation and Development, OECD Economic Surveys: Lithuania 2020, Paris: OECD Publishing, 2020, p. 16, available at: <https://read.oecd-ilibrary.org/economics/oecd-economic-surveys-lithuania-2020_62663b1d-en> (last viewed 14 April 2023).

^[11] Articles 105 and 107 of the LILE. 

^[12] Article 111(3) of the LILE. 

^[13] Based on the Ministry of Finance statistical data of, 29 restructuring procedures were initiated in 2020 and only 9 in 2021, available at: <https://avnt.lrv.lt/uploads/avnt/documents/files/2022-03-04_Nemokumo%20APZVALGA_2021%20m.pdf> (last viewed 15 April 2023).

^[14] The final deadline for the transposition of the PRD 2019 was 17 July 2022).

^[15] Lithuania experienced a migration crisis in 2021 when several thousand migrants, mainly from the Middle East and Africa, crossed into the country from Belarus. This irregular migration was called ‘hybrid aggression’ against Lithuania.

^[16] The draft of the LILE recast to implement the PRD 2019 was registered in Lithuanian Parliament on 17 June 2021, was passed on 29 June 2021 and came into force on 15 July 2021.

^[17] The transposition of the PRD 2019 was implemented by introducing several additional provisions to the LILE.

^[18] The reform of 2019 already introduced a viability test, institutes of new and interim financing, temporary stay, etc.

^[19] It also didn’t offer any additional consideration regarding the debtors that are part of the companies group. The reform of 2019 also foresaw only one general norm in the law regarding the group insolvency basically stating that the creditors' meeting has the right to decide on the participation of a legal entity in the coordination proceedings of a group of companies, as provided for in Article 64(3) of Regulation (EU) 2015/848, when the legal entity belongs to a group of companies (Article 44 of LILE).

^[20] Article 4 (2) of the LILE. 

^[21] Articles 8 and 9 of the LILE. 

^[22] Article 17 (3) of the LILE.

^[23] Article 2 (7) of the LILE. 

^[24] Noteworthy that the Lithuanian government took additional steps to help businesses to identify impending insolvency on time. Following one of the goals set in the PRD 2019 – to create early warning tools the voluntary Early Warning System (EWS) for SMEs was launched in Lithuania in July of 2021. The main responsible subjects managing the EWS are Lithuanian State Tax Inspectorate and the non-profit Export Development Agency ‘Enterprise Lithuania’. Implementation of the EWS means that a tax administrator identifies, based on an analysis of available data, companies that might encounter financial difficulties in the next 6 months and informs them personally via a self-service platform of their option to benefit from a consultation with the non-profit agency ’Enterprise Lithuania’. The participation of informed companies at further steps of EWS (getting consultations) is voluntary, and the consultations shall be provided only at the request of the representative of the legal person itself. All services in the EWS are provided free of charge (Lithuanian State Tax Inspectorate, Early Warning System, available at: <https://www.vmi.lt/evmi/juridinio-asmens-likvidavimo-proceduros-/-ankstyvojo-perspejimo-sistema?lang=en> (last viewed 16 April 2023)).

^[25] Article 2 (6) of the LILE. 

^[26] Article 21 of the LILE.

^[27] Ibid.

^[28] Article 102 (1) of the LILE.

^[29] Article 102 (2) of the LILE.

^[30] Article 103 of the LILE.

^[31] Article 3 of the LILE.

^[32] Article 111 ¹ of the LILE.

^[33] Article 35 (2 ¹) of the LILE.

^[34] In Lithuania, bankruptcy and restructuring administration services falls under the unified profession of insolvency administrator. Thus, the practitioner in the field of restructuring is generally referred to as the insolvency administrator in the LILE. (Article 2 (17) of the LILE).

^[35] Article 35 (2³) of the LILE.

^[36] Articles 44 and 53 of the LILE.

^[37] Articles 107 and 112 of the LILE.

^[38] Articles 43 (3) and 44 (1) of the LILE.

^[39] Article 44 (4) of the LILE.

^[40] Article 44 (9) of the LILE.

^[41] Article 17 (3) of the LILE.

^[42] Article 106 of the LILE.

^[43] Article 102³ of the LILE.

^[44] Article 102³ of the LILE.

^[45] The Guarantee Fund is a fund of state resources intended to ensure guarantees for employees if the company in insolvency lacks the necessary funds and fails to discharge its obligations to employees (There is an established upper limit for the compensatory amount). The main source of the Guarantee Fund are the employers' contributions, the state budget and other funds. The Guarantee Fund is administrated by the State Social Insurance Fund Board under the Ministry of Social Security and Labour (The Law of the Republic of Lithuania of Guarantees for Employees in Case of their Employer’s Insolvency and Long-term Wage Payments (Law No XII-2604, published in the Register of Legal Acts on 19 September 2016, No. 23708, the date of coming into force: 1 January 2017)).

^[46] Article 19(5) of the LILE.

^[47] Articles 28 (1) and 110 of the LILE.

^[48] Article 28(1) of the LILE.

^[49] Article 110 of the LILE.

^[50] Articles 28 (1) (3) and 28 (1) (7) of the LILE.

^[51] Article 102 of the LILE.

^[52] Article 104 (2) of the LILE.

^[53] Article 104 (2) (13) of the LILE.

^[54] Article 104 (2) (11) of the LILE.

^[55] Wizard for completing the restructuring plan, available at: https://nemokumovedlys.lrv.lt/restructure/step/forms_start_1 (last viewed 12 October 2023).

^[56] Ibid.

^[57] Article 108 of the LILE.

^[58] Article 105 of the LILE.

^[59] Article 111 (3) of the LILE.

^[60] Article 111¹ (2) of the LILE.

^[61] Article 111¹ (1) of the LILE.

^[62] Article 2 (2¹) of the LILE.

^[63] Article 102¹ (1) of the LILE.

^[64] Article 102¹ (3) of the LILE. Additionally, based on legal rules and court practice ipso facto clauses are not effective in restructuring in Lithuania. Article 102¹ (1) (2).

^[65] Special Issue Preventive Restructuring 8. The WHOA: the Breaktrhrough for a Dutch Business Rescue Culture, available at: <https://www.online-hero.nl/art/4464/special-issue-preventive-restructuring-8-the-whoa-the-breakthrough-for-a-dutch-business-rescue-culture> (last viewed 13 October 2023).

^[66] See e.g. Jose M. Garrido ir kt., supra note, 33, Ioannis Bazinas, ‘Preventive Restructuring Frameworks and the Separate Domain of Cross-Border Restructuring Law’ (2022).