A look at corporate, personal and, where relevant, partnership insolvency proceedings in Latvia, with a brief description to explain key features, as part of our Dictionary of Insolvency Terms in EU Member States. In particular, we highlight who controls the procedure and whether it is likely to be accompanied by a moratorium to prevent enforcement.
Tiesiskās aizsardzības process
Legal protection proceedings
- Proceedings aimed at returning a debtor to solvency, in circumstances where it is already or expects to be in financial difficulties.
- The proceedings are initiated by the court at the debtor’s request. Once initiated, the majority of creditors (two-thirds in value of secured creditors and a majority in value of unsecured creditors) appoint a person to supervise the proceedings, whose appointment will ultimately be approved by the court. The court will review the case using the debtor’s address three months before the request was lodged to help reduce the likelihood of debtors changing their registered office address shortly before submitting an application to make it harder for creditors to follow the case or to obtain a more favourable court.
- The appointed person can be anyone, provided they are not barred from taking that responsibility by Latvian law, e.g. by having a previous conviction or by conflict of interests. This is an amendment introduced in 2017, as the previous law had required that only administrators could assume the role of supervisor in relation to legal protection proceedings.
- After initiation, enforcement of judgments against the debtor is suspended. Certain penalties and late payment interest cease to accrue. All creditors are prohibited from initiating insolvency proceedings and secured creditors are prevented from requesting the sale of pledged property.
- Within two months of initiation, the debtor must draw up a plan for overcoming its financial difficulties (the legal protection proceedings plan) and obtain approval of the plan from the majority of its creditors. Persons and companies in the same group of companies as the debtor, such as shareholders, do not have the right to vote on the approval of the legal protection proceedings plan.
- If the plan is not approved, the court terminates the proceedings and the protection for the debtor is revoked.
- If approved, the plan becomes binding on all creditors, including those who voted against it. The plan must be implemented within two years, though implementation can be extended for a further period of two years with the agreement of the majority of the debtor’s creditors.
- During implementation of the plan, the debtor is prohibited from performing any activities that may harm the interests of creditors (unless otherwise stipulated in the approved plan) and is obliged to devote all profits towards implementation of the plan.
- If the debtor fails to implement the plan, the court terminates the proceedings and opens insolvency proceedings in respect of the debtor.
- Legal protection proceedings apply to companies, registered partnerships and natural persons who are registered as individual merchants but are not applicable to unregistered partnerships or ordinary natural persons.
Ārpustiesas tiesiskās aizsardzības process
Out-of-court legal protection proceedings
- Latvian law distinguishes between legal protection proceedings (see previous section titled Tiesiskās aizsardzības process / Legal protection proceedings) and out-of-court legal protection proceedings. However, the only material difference is that in out-of-court proceedings, the debtor in financial difficulties agrees the legal protection proceedings plan and the identity of the supervisor with the majority of creditors in advance, prior to making a request to the court to initiate proceedings.
- The court then merely approves the proposed plan and the elected supervisor.
- The plan can then be implemented in accordance with the same rules that apply to legal protection proceedings.
Juridiskas personas maksātnespējas process
Insolvency proceedings of a legal person
- A procedure to repay as much as possible of creditor claims from realisations of the debtor’s assets.
- Insolvency proceedings are initiated by the court in two stages. First, when the court receives an insolvency application, a court case is opened; however, at this stage, the legal status of the debtor remains unchanged. It is only after the application is considered and the court finds that one of several insolvency criteria is satisfied, that the court declares insolvency proceedings in respect of the debtor.
- An application can be made by the company in financial difficulties (the debtor) or a creditor in various circumstances including a failure by the debtor to pay a principal debt exceeding EUR4,268 (if the debtor is a Limited Liability Company (LLC) or Joint Stock Company (JSC)) or EUR2,134 (if the debtor is an entity other than an LLC or JSC) or where the debtor has failed to perform its obligations for more than two months. The court is entitled to declare insolvency proceedings of its own volition if a debtor has failed properly to implement a legal protection proceedings plan.
- Once insolvency proceedings are declared, the court appoints an insolvency administrator to take over management of the debtor, realise its assets, investigate transactions and pay creditor claims.
- Secured creditors are prohibited from requesting the sale of pledged assets during the two-month period following the declaration of insolvency proceedings.
- Creditors must submit their claims to the insolvency administrator within one month of insolvency proceedings being declared. If that deadline is missed, they must do so within six months of the declaration (although creditors submitting claims in this period will have no voting rights). After six months, the creditor’s claim against the debtor is lost.
- Creditors receive regular updates and can object to and appeal certain of the administrator’s proposals and decisions.
- Once as much as possible has been paid to creditors, the insolvency administrator seeks the removal of the debtor company from the Register of Enterprises (the public register of all companies incorporated under Latvian law). However, if the majority of creditors agree and subject to certain criteria, insolvency proceedings may be transitioned to legal protection proceedings (see section titled Pāreja no juridiskās personas maksātnespējas procesa uz tiesiskās aizsardzības procesu / Transition from insolvency proceedings of a legal person to legal protection proceedings).
- Insolvency proceedings apply to registered partnerships and natural persons who are registered as individual merchants as they do to companies. However, they are not applicable to unregistered partnerships or ordinary natural persons.
Pāreja no juridiskās personas maksātnespējas procesa uz tiesiskās aizsardzības procesu
Transition from insolvency proceedings of a legal person to legal protection proceedings
- Latvian law permits insolvency proceedings to be transitioned to legal protection proceedings provided that the majority of creditors agree on a legal protection proceedings plan and none of the specific prohibitions against the transition, which are set out in the law, are applicable (generally, where the debtor has previously failed to adhere to a legal protection proceedings plan).
- Once the court has decided to implement the new legal protection proceedings plan, insolvency proceedings are terminated and the debtor regains management and control of its business and property.
Fiziskas personas maksātnespējas process
Insolvency proceedings of a natural person
- Aimed at satisfying creditor claims as much as possible from a debtor’s property and provide a natural person whose property and income are insufficient to cover all obligations with a way of being released from those obligations and restored to solvency.
- With some exceptions, generally, the rules that apply to insolvency proceedings of legal persons also apply to insolvency proceedings of natural persons.
- Insolvency proceedings initiated by a debtor who has been a taxpayer in Latvia for the previous six months and who is not able to settle current debts of more than EUR5,000 or debts payable within a year of more than EUR10,000.
- The proceedings comprise a two-part process: bankruptcy procedure and debt release procedure.
- The bankruptcy procedure is initiated when insolvency proceedings in respect of the natural person are declared whereupon an insolvency administrator is appointed, the debtor loses the right to deal with their property and hands it over to the administrator (except for two-thirds of their income and property required to generate income).
- In consultation with creditors, the debtor prepares a plan to settle their obligations.
- The bankruptcy procedure is completed by the recovery and sale of the debtor’s property, with realisations being used to pay creditors’ claims as much as possible.
- It is then followed by a debt releasing procedure where the debtor provides the court with a plan to settle the balance of creditors’ claims. If they cannot fulfil their obligations pursuant to the plan during the time period initially proposed (which cannot exceed one-and-a-half years), the debt releasing procedure may be extended for up to three years, depending on the total amount of the person’s debt.
- Once the debtor has fulfilled their obligations under the plan, they are released from remaining debts with some exceptions (including compensation in criminal proceedings). If they fail to meet their obligations under the plan, the court can terminate the insolvency proceedings without releasing the natural person from their debts.
- In legal protection proceedings, insolvency proceedings and insolvency proceedings of a natural person, a secured creditor is a creditor whose claim is secured by either a commercial pledge or a mortgage.
- The proceeds of sale of the pledged or mortgaged asset are devoted to settling the relevant secured creditor’s claim, in addition to any auction costs, certain other administrative costs, and the remuneration of the insolvency administrator.
- Secured creditors are treated differently and separately to unsecured creditors in respect of voting and claims.
- Secured creditors are not entitled to request the initiation of insolvency proceedings of a legal person.
- During legal protection proceedings, a secured creditor is prohibited from requesting the sale of the pledged asset altogether, except if the court permits such sale because the secured creditor suffers material losses from such prohibition. However, during insolvency proceedings, the secured creditor is prohibited from requesting such a sale only during the two month period following the declaration of insolvency proceedings.
Anticipated changes in the next two years
The EU Directive on Restructuring and Insolvency1 requires Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021. The intention of the Directive is to reduce barriers to the free flow of capital stemming from differences in Member States’ restructuring and insolvency frameworks, and to enhance the rescue culture in the EU.
Notable features required to be included in Member States’ national laws include:
- An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
- A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
- An ability to cram down dissenting classes of creditors.
- Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
- Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.
Regulation of the administrators’ profession
- A new procedure exists for the appointment and termination of insolvency administrators whereby appointments are made by the director of the Insolvency Administration. Consequently, the state will be responsible for all issues arising out of the administrators’ profession.
- In order to be appointed, administrators must pass a mandatory exam, which remains the same as the existing procedure, only now they must repeat that exam every two years.
- A commission has also been established to deal with disciplinary issues within the profession. In particular, disciplinary cases can be brought for:
- Material violation of the law.
- Material violation of professional ethical standards.
- Regular violations of the law detected by the Insolvency Administration.
- Abuse of powers detected by the Insolvency Administration.
- Losses caused to the state, debtor or creditor, if the amount exceeds 20 minimal monthly salaries and this fact has been found in a court ruling that has come into effect.
- Disciplinary penalties:
- Remark with or without a fine not exceeding EUR150.
- Reprimand with or without a fine from EUR150 to EUR15,000.
- Removal from the position of administrator.
- The Insolvency Administration is allowed to visit the administrator’s place of business and inspect documents, and can publish data relating to violations by administrators on the Insolvency Administration website to foster greater transparency within the profession for those appointing administrators.
With thanks to Raivo Raudzeps of Sorainen for writing this chapter of the dictionary.
1 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.