Company restructuring in Lithuania: when can it help avoid bankruptcy?

Written by attorney-at-law and insolvency administrator Tadas Ugintas.

Restructuring can help a company avoid bankruptcy if the business is still viable but the company cannot properly meet its obligations because of accumulated debts, a shortage of working capital or other temporary difficulties.

In practice, the first question is whether the company could generate enough cash to meet its current obligations if the burden of its existing debts were reduced and their payment terms rearranged. This is not a separate legal test, but the answer helps assess the company’s viability and whether a future restructuring plan is realistic.

The decision on restructuring should be taken before the company loses its key staff, customers, contracts or ability to carry on trading. Restructuring is designed not to wind up a company that has stopped trading, but to save a business that has prospects.

The Law on Insolvency of Legal Entities (in Lithuanian) defines restructuring as a set of procedures aimed at overcoming a legal person’s financial difficulties, preserving its viability and avoiding bankruptcy, with the assistance of creditors and through economic, technical, organisational and other measures.

Restructuring is not just a deferral of debt payments. It is a broader reorganisation of the company’s business and obligations. A restructuring plan may change payment terms, spread creditors’ claims over time, close loss-making activities, sell part of the assets, bring in financing or take other measures to restore solvency.

During restructuring the company usually keeps trading, and its management bodies retain their powers, subject to the restrictions set by law, by court rulings and by the restructuring plan.

Yes. Insolvency does not in itself rule out restructuring.

What decides the matter is not only the company’s current financial condition but its ability to keep trading and overcome its financial difficulties within a reasonable period. The case law of the Court of Appeal of Lithuania takes the position that restructuring may be applied to an insolvent company if the evidence shows that it is viable.

If a company is not only insolvent but also not viable, restructuring would not serve its purpose. In that case the opening of insolvency proceedings may be considered.

Restructuring usually makes sense where the company’s core business has prospects and its financial difficulties were caused by circumstances that can be removed or brought under control.

These may include:

• non-payment by one large customer;
• a temporary shortage of working capital;
• a large payment burden built up over a short period;
• a sudden rise in the price of raw materials, energy or financing;
• a loss-making part of the business that can be closed;
• a mismatch between long-term obligations and the company’s real cash flow;
• a temporary market or supply chain disruption;
• a need to sell assets not required for the business;
• the possibility of bringing in shareholder or investor financing.

The prospects are also better where it can be shown that creditors would recover more through restructuring than in bankruptcy.

Restructuring is usually not suitable where the company has in fact stopped trading and has no employees, customers, sources of income or assets that could be used to restart the business.

Doubts about restructuring also arise where:

• the business has been loss-making for a long time and the plan provides for no real change;
• income forecasts are not based on objective data;
• the accounting records do not allow the true financial position to be established;
• the company pays old debts only by taking on new ones;
• the planned measures depend on financing that has not been confirmed;
• the company cannot meet its current obligations;
• the restructuring plan rests on declarations alone.

It is especially important that the company pays its current taxes during restructuring. The court cannot approve a restructuring plan if the company has not been paying taxes since the ruling opening restructuring proceedings.

Restructuring is not a tax holiday. The company must be able not only to carry out the future plan but also to fund its current business.

The restructuring plan is the key document. It must explain how the company will overcome its financial difficulties and pay its creditors.

The plan must set out the causes of the financial difficulties, the company’s assets and liabilities, creditors’ claims, the planned measures to reorganise the business, the sources of financing, income and cash flow forecasts and the order in which creditors’ claims will be paid.

The plan must also compare what creditors would receive in restructuring with what they could expect if the company went bankrupt.

The court will not approve a plan whose measures clearly will not help overcome the financial difficulties, preserve the company’s viability and avoid bankruptcy.

So it is not enough for the plan to say in general terms that income will be increased, costs reduced or an investor sought. It must explain what specific steps will be taken, when, at what cost and with what expected financial result.

Implementation of a restructuring plan usually cannot exceed four years. The plan must therefore show how the company’s solvency and ability to pay its creditors will be restored within a clearly defined period.

The plan is voted on by the creditors affected by it, divided into classes set by law. But opposition from one or several creditors does not necessarily mean the plan cannot be approved.

In cases set out in the Law on Insolvency of Legal Entities, the court may approve the plan even if one of the affected classes of creditors does not support it, provided the conditions protecting dissenting creditors are met.

Among other things, the court assesses whether the plan harms creditors’ interests, whether they are left worse off than in bankruptcy and whether the order of priority of creditors’ claims is respected.

Before applying to court to start insolvency proceedings, the company usually has to send its creditor a notice of the unperformed obligation and an offer to conclude an agreement on assistance.

If no agreement is reached within the set period, the legal person may apply to the regional court for the place of its registered office to open restructuring proceedings.

The application must be accompanied by the financial and business documents required by law. Depending on the chosen route and the situation, a draft restructuring plan may also be submitted.

Restructuring proceedings can be started not only by the company’s director but also by a creditor whose overdue claims against the legal person exceed ten minimum monthly wages approved by the Government.

When opening restructuring proceedings, the court determines from which of the company’s accounts, and up to what amount, funds may be used for current payments and interim financing. This allows the company to keep trading, pay wages and taxes, and pay for goods and services needed for the proceedings and the business.

A creditor’s application for bankruptcy does not in itself rule out restructuring. If applications for bankruptcy and restructuring are heard at the same time, the court must assess whether the company is viable and whether restructuring can help it avoid bankruptcy.

If insolvency proceedings have already been opened, restructuring is decided under a special procedure set out in the Law on Insolvency of Legal Entities within those proceedings. In that case a separate new application to open restructuring proceedings is not enough.

A move from insolvency proceedings to restructuring is possible as long as the court ruling to liquidate the legal person for insolvency has not become final. A proposal to restructure the company that meets the requirements of the law and a restructuring plan must be submitted.

From the moment set by law, payment of the company’s financial obligations that arose before the insolvency proceedings, and their individual enforcement, are restricted. This protects the company’s assets and allows all creditors’ claims to be dealt with in a single process.

But the company must meet current obligations that arise after restructuring proceedings are opened. It must also comply with the restrictions set by the court and with the approved restructuring plan.

Creditors gain the right to take part in the proceedings, comment on the plan, vote on it and monitor its implementation through the means provided by law.

New and interim financing is protected by law. This matters for investors and creditors who provide funds to a company in restructuring to keep trading or carry out the plan.

What this means for a foreign creditor

A foreign supplier, lender or investor whose Lithuanian debtor opens restructuring proceedings can no longer enforce earlier debts individually; the plan decides how and when they will be paid. In practice a foreign creditor should check that its claim is included in the proceedings at the correct amount and in the correct class, review the debtor’s viability and the comparison with bankruptcy, vote on the plan and raise objections in good time if the plan treats it unfairly. More on representing creditors.

Where insolvency becomes likely, the director must promptly inform the members of the legal person about its financial position, propose ways of dealing with the financial difficulties, protect creditors’ interests and avoid actions that would endanger the company’s viability.

Once the company becomes insolvent, the director must start insolvency proceedings without delay.

It is important for the director not only to take decisions but also to document them properly. Cash flow forecasts, information given to shareholders, records of negotiations with creditors, financing proposals, decisions of the management bodies and other documents showing that the company’s position was assessed responsibly should be kept.

Restructuring started in time can help save the company. But unjustified delay should not be used for a non-viable company merely as a way of postponing an inevitable bankruptcy.

For more on directors’ duties and possible liability, see the article Director liability when a Lithuanian company goes bankrupt.

Whether a company can be restructured again depends on how the earlier proceedings ended and on the circumstances of the new application.

If earlier restructuring proceedings were terminated and five years have not passed since the termination ruling became final, new restructuring proceedings may be opened only together with approval of a restructuring plan.

Successfully completed restructuring does not in itself prevent new proceedings later. But the court will assess whether the new proceedings are merely aimed at extending the earlier plan, rearranging the same obligations again or unjustifiably postponing payment to creditors.

The prospects of a second restructuring must be based on new circumstances, a changed position of the company and a realistic new plan.

It is worth assessing restructuring while the company is still trading and has prospects but is already facing a significant cash shortfall, overdue payments, pressure from creditors or a foreseeable threat of insolvency.

The earlier the company’s viability, future cash flow and possible restructuring measures are assessed, the better the chance of preparing a sound solution for creditors and the court.

If your company is facing financial difficulties but its business still has prospects, or your Lithuanian debtor has started restructuring, you can contact attorney-at-law and insolvency administrator Tadas Ugintas.

This article provides general information. Each situation must be assessed individually, taking into account the facts, the company’s financial data and the version of the law in force at the time.