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It will be more difficult for creditors of an insolvent company to abuse their rights 2017-06-06

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Renata Jankutė

On 12 May 2017, the Supreme Court of Lithuania issued a ruling, which further contributes to the case-law concerning setting of the procedure and price of the realisation of assets with regard to a bankrupt company. The ruling recognises that, in certain exceptional cases, a decision on the price and procedure for the realisation of assets may be made by a court independently and in disregard of the principle of autonomy of the creditors’ meeting of a bankrupt company.

Subject of the proceedings: the creditors of the bankrupt company holding the majority of votes in the creditors’ meeting did not follow the proposals of the mortgage creditor and failed to set the selling price and the procedure for the realisation of the pledged assets. On the contrary, the pledged assets were used during the bankruptcy proceedings, while rent proceeds were distributed among all creditors in proportion to the creditor’s claims. As a result, the claim of the mortgage creditor, which ought to be satisfied as first priority following the realisation of assets, remained neglected.

Having assessed that the proposals of the mortgage creditor with regard to the selling price and the procedure for the realisation of the assets were rejected on the basis of insufficiently justified arguments of the majority of creditors, the Supreme Court of Lithuania ruled that, by its decision to rent the pledged facilities, the creditors’ meeting of the bankrupt company substantially prejudiced the legitimate interests of the mortgage creditor, ignored the objectives of the bankruptcy proceedings and unreasonably delayed setting of the selling price and the procedure for the realisation of the assets.

The Court pointed out that the right of creditors as a whole to handle the issues of an insolvent company constitutes a manifestation of the principle of creditors’ autonomy, however, the autonomy of the creditors’ meeting is not absolute. Decisions made by the creditors’ meeting must be in conformity with the legislation, the principle of equal treatment of creditors and other legitimate interests of creditors.

As a rule, having found that a decision of the creditors’ meeting is unlawful, the court annuls the decision, specifies its non-compliances and refers it to the creditors’ meeting for reconsideration. However, the Supreme Court of Lithuania established a new rule, which was also applied in the proceedings at issue. According to it a court may, in certain exceptional cases, intervene in the handling of a matter within the remit of creditors and solve the issue on its merits in the case in question.

It follows from the clarifications of the Court that two conditions lead to an exceptional situation allowing a court to pass a decision on a matter, which normally comes within the competence of the creditors’ meeting.

First, this is non-exercise of competence by the creditors’ meeting. It should be understood in its widest sense, i.e. not only as the failure to make any decisions in general, but also as taking of decisions that do not ensure timely progress of bankruptcy proceedings and compromise the interests of the insolvent company and other creditors, for example, in the case of a decision to refuse the approval of the proposed selling procedure and price of the assets.

Second, this concerns the delay in bankruptcy proceedings. An insolvent company that does not cease to exist in due time usually increases creditors’ losses; it is likely to cause creditors’ bankruptcy and market distortion and to undermine market stability. In this regard bankrupt proceedings should seek to finalise bankruptcy procedures as soon as possible. Disproportionately lengthy bankruptcy proceedings delayed as a result of unfair action/omission by the creditors’ meeting might lead to resolution of the matter regarding the procedure and price of the realisation of assets on its merits in order to prevent further delay of the bankruptcy procedure.

Earlier, i.e. on 19 April 2017, in its ruling passed in civil case No e3K-3-196-313/2017, the Supreme Court of Lithuania held that where the creditors’ meeting fails to perform its functions, thus harming the interests of the creditors themselves and impeding the proceedings, any creditor concerned has the right to request a court to approve his proposal for setting a specific selling procedure and price, while the insolvency administrator has the obligation in such cases to file a proposal with the court for handling the assets of the bankrupt company.

It should be noted that the proceedings in question specifically focused on setting of the selling procedure and price of the assets of the bankrupt company. However, the arguments of the Supreme Court of Lithuania quite reasonably suggest that a court is entitled to decide that it has the right to intervene in terms of the competence of the creditors’ meeting also in other cases where the creditors’ meeting fails to carry out its functions and delays bankruptcy proceedings.

To conclude, the Court forms the case-law, which is beneficial to creditors that hold the minority of votes in the creditors’ meeting of a bankrupt company. From now on, creditors with the majority of votes will not be able to abuse their rights, to set an unfair selling procedure and price of assets or do nothing in this respect – in such cases creditors concerned will have access to a court and seek review of the matter in a judicial procedure.

For further details see the ruling of the judicial panel of the Civil Division of the Supreme Court of Lithuania of 12 May 2017 in civil case No 3K-3-253-219/2017

 

By Renata Jankutė, Senior Associate, Attorney at Law at GLIMSTEDT Law Firm


Teisininkai: Renata Jankutė - Timofejenko

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