Business trick: How does restructuring help you escape debt?

The restructuring of legal entities in Lithuania is an emergency measure for companies that are still viable but facing financial difficulties. Unfortunately, it is increasingly being used not to cure, but to stall for time. There is a tendency for some companies to initiate restructuring proceedings just to postpone the payment of existing debts - without even having a realistic plan for recovery or reorganisation.

 Restructuring - too easy to achieve? 

Restructuring proceedings are initiated if all the following conditions are met: 1) the legal entity is in financial difficulties; 2) it is viable; 3) it is not being wound up as a result of bankruptcy. In addition, the court shall refuse to open a restructuring case if the restructuring plan is defective.

The conditions are set out in the law, but the courts do not look too closely at them when deciding on the restructuring issue and assess them in a rather formalistic manner.

For example, a company's ownership of luxury cars and creditors with links to the company itself are often not an issue for the court. It would seem that there is no problem because no one will be hurt anyway - after all, this is a restructuring, not a bankruptcy, and no debts will be written off.

Yes, debts are not written off, but the mere filing of a restructuring petition with the court automatically stops the recovery of debts. Creditors are left to wait for the court to decide whether the company has grounds for restructuring proceedings. Once the case has been opened, the payment of debts can be postponed for another five years.

Thus, a dismissive approach to restructuring, which saves one company, can drown others, i.e. those that cannot wait five years to recover their debts from the company being restructured.

One step from aid to fiction 

In practice, there are a growing number of cases where companies know in advance that their business model is no longer viable, but initiate a restructuring process anyway. Usually to:

• suspend enforcement of debts;

• maintain management control within the company;

• to protect against bankruptcy initiated by creditors;

• buying time for negotiations with creditors without a real restructuring plan;

• ultimately avoid repaying some debts.

This practice distorts the whole essence of the restructuring system: instead of saving viable businesses, it supports a fictitious rescue of companies at the expense of creditors.

Who is to blame: entrepreneurs or regulation? 

Although formally speaking the law does not allow anyone to initiate a restructuring, as it requires proof of solvency, a plan and a business perspective, in practice these criteria are applied too formally. Courts often rely only on figures "on paper" and not on the real situation of the company. This allows even hopelessly indebted companies to formally meet the criteria - especially if they are advised by experienced lawyers.

Creditors are powerless in this situation. While the court is deliberating whether to proceed with restructuring, they are deprived of the opportunity to defend their interests, and later it is too late: the assets have been distributed, the documents are "lost", and the responsibility is dissolved among the former directors.

Another increasingly common form of abuse is the artificial creation of creditors who are artificially created or closely linked to the owners of the company. These "creditors" are often related companies, relatives, legal entities controlled by the company's managers or simply "paper" companies to which loans are formally granted without any real money movement.

Their main objective is to obtain a majority of votes at creditors' meetings. As the law often requires a certain majority (based on the size of the financial claims) for creditors' decisions to be taken, it is easier to "push through" decisions that are beneficial - such as the approval of a restructuring plan - by creating "friendly" creditors.

This puts the real creditors - the ones to whom the company really owes money - in the minority, losing real influence over the process. Worse still, sometimes they are not even aware of the creditors' meetings, as official communication is with the alleged main creditors. This practice fundamentally distorts the whole restructuring mechanism and raises legitimate questions about the transparency and fairness of the process.

In summary, the restructuring process has gaps and the question is whether these gaps are in the legal framework or in the interpretations already given by the courts.

However, it should be remembered that restructuring was essentially designed as a last resort for businesses, but in practice it is often also used as a debt avoidance tool.

Prepared by AVOCAD lawyer Egidijus Kieras