Overview of Latvian Insolvency System

The main law governing insolvency issues in Latvia is the Insolvency Law (Maksātnespējas likums)

The types of proceedings available are as follows:

  •  corporate insolvency proceedings (juridiskās personas maksātnespējas process) serving as liquidation;
  •  two types of restructuring – corporate restructuring proceedings (tiesiskās aizsardzības process) and corporate out-of-court restructuring proceedings (ārpustiesas tiesiskās aizsardzības process);
  •  private bankruptcy proceedings (fiziskās personas maksātnespējas process), providing an opportunity for a fresh start for private individuals.

Both types of restructuring are US Chapter 11-style debtor-in-possession type proceedings. They grant a full stay of enforcement and cram-down applicable to all creditors’ claims.

Restructuring proceedings are conducted pursuant to a restructuring plan, which must be approved by the majority of creditors and accepted by the court. Voting takes place within two classes of creditors – secured and unsecured – with the required majority for approval of the plan being a simple majority among unsecured creditors and two thirds of secured creditors (measured by the amount of principal claims).

It is possible to envisage super priority for fresh money in case restructuring fails.

The maximum length of these proceedings is two years; however, with creditors’ approval this term can be extended for an additional two years.

The difference between the two types of restructuring is that under regular (in-court) restructuring the debtor first files a restructuring application with the court, obtains a statutory stay of execution and then drafts and coordinates a restructuring plan with the creditors under the shield of the stay. In turn, in the case of out-of-court restructuring, the debtor must negotiate with creditors and obtain approval of the restructuring plan confidentially, prior to filing a restructuring application with the court.

Corporate insolvency proceedings can be initiated by the debtor, a creditor (or a group of creditors), an insolvency practitioner in restructuring and a liquidator in main insolvency procedure (to initiate a secondary insolvency procedure).

A debtor must file for insolvency if it has not settled its due debts for more than two months.

There are no specific entry criteria for restructuring proceedings except that the debtor is facing financial difficulties or is about to face them. Only the debtor may apply for restructuring.

In private bankruptcy, only the debtor may file a bankruptcy application with the court.

Under the Commercial Law, the members of the management board are jointly liable for losses incurred by the debtor. A member of the management board must be released from liability on presenting proof of having performed his or her obligations with due diligence. Shareholders are liable for losses caused to the company by decisions taken on matters which are in the competence of the management board.

Only a natural person licenced by the Latvian Association of Certified Insolvency Administrators may become an insolvency administrator.

In all types of proceedings, the insolvency administrator is appointed by the court. However, in corporate insolvency proceedings and private bankruptcy proceedings the insolvency administrator is appointed according to a roster, whereas in restructuring proceedings the insolvency administrator may optionally (and in out-of-court restructuring proceedings must mandatorily) be elected by the creditors, subject to court approval.

The general hardening period for transactions concluded by the debtor prior to insolvency is three years. Prerequisites for avoiding a transaction are losses incurred by the debtor (such as in the case of undervalue transactions) and knowledge of losses by the counterparty. Knowledge is presumed in the case of transactions concluded with related persons. In addition, the law vests with the insolvency administrator the right to reclaim payments made by the debtor prematurely within six months prior to insolvency, if, at the same time, other payment obligations were not honoured in time.

Author: Edvīns Draba

Texts of legislation: http://likumi.lv/about.php

State institution Insolvency Administration (supervisory body): http://www.mna.gov.lv/lv/ (in Latvian)

Insolvency Register: http://ws.ur.gov.lv/urpubl?act=mnp_pjur (in Latvian)

Register of Enterprises: http://www.ur.gov.lv/ (in Latvian)

Association of Certified Insolvency Administrators of Latvia (professional body): https://www.administratori.lv/lv/par-biedribu/aa-aktualitates (in Latvian)

This text was published in INDat 2017, and you can access the publication here also in German >>>

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