Category: Bankruptcy and restructuring law

The story that has come to light in Lithuania—involving nine door showrooms that suddenly ceased operations and hundreds of customers left not only without the goods they had ordered but also without their advance payments—raises questions that go beyond business risk. It also serves as a reminder of the threshold beyond which a company’s financial difficulties can become a matter of legal liability for its CEO.

Customers who had ordered doors from the three affiliated companies had paid advance payments ranging from a few hundred to a few thousand euros. At the end of July, all three companies reported financial difficulties and insolvency. There may be several hundred victims, some of whom have already contacted the relevant authorities regarding the situation.

Egidijus Langys, managing partner and attorney at the AVOCAD law firm, says that in such situations, it is very important to distinguish between ordinary business failure and actions taken by a manager who is already aware of the company’s critical financial situation. “Business is inherently a risky endeavor. A company may lose customers, face supply issues, incur losses, or ultimately become insolvent. The mere fact that a business has failed and failed to settle its debts with creditors does not, in and of itself, imply personal liability on the part of the manager. However, the situation changes fundamentally when a manager knows or should know that the company will no longer be able to meet its obligations, yet continues to enter into new contracts and accept payments from customers,” says E. Langys.

A leader's responsibility is not only to grow the business but also to assess its status in a timely manner

A company director’s responsibilities are not limited to the day-to-day management of operations or the pursuit of business results. A director must act honestly and prudently, be loyal to the company, manage its assets properly, avoid conflicts of interest, and take the company’s actual financial situation into account when making decisions. These duties become particularly important when the company faces financial difficulties. The manager must assess whether the company is capable of meeting its obligations on time, whether its liabilities are being increased unreasonably, and whether newly entered into contracts can actually be fulfilled.

According to E. Langis, in practice, a manager cannot simply argue that he or she hoped the situation would improve. “A manager must constantly understand the company’s actual financial situation—what its obligations are, how much assets it has, which payments are overdue, and whether there are realistic possibilities to fulfill newly assumed obligations. As insolvency approaches, a manager’s decisions are scrutinized much more closely. This is especially true when new orders and advance payments continue to be accepted, even though the objective ability to fulfill the contracts may already be highly questionable,” the attorney notes.

The issue of a manager’s civil liability may arise if he or she fails to respond in a timely manner to the company’s insolvency, unreasonably increases the company’s liabilities, enters into transactions that are detrimental to the company or its creditors, provides misleading information, or causes harm to the company or its creditors through other unlawful actions. In certain cases, the manager’s direct liability to specific creditors may also be considered. Relevant circumstances in this regard may include whether the manager, through his or her actions, misled specific clients, provided information that did not correspond to reality, or encouraged them to enter into contracts or make advance payments, even though he or she was already aware of circumstances that made the fulfillment of the obligations highly doubtful.

When can financial difficulties exceed the limits of civil liability?

In this case, one of the legally significant circumstances is that orders and customer advance payments were accepted by three affiliated companies, which reported their insolvency at nearly the same time. Therefore, when assessing the situation, it is not only the fact of insolvency itself that becomes important, but also when it actually became clear that the companies would no longer be able to fulfill their obligations and what their managers knew at that time. According to E. Langis, it is precisely the chronology of events that becomes particularly significant in such situations. “The fundamental question would be very simple: what did the company executives know about the companies’ financial situation at the time when new orders and payments were still being accepted from customers? If it were determined that advance payments were accepted while already knowing that it would no longer be possible to actually fulfill the orders, this would no longer be merely a story of business failure. Such circumstances could also be evaluated in the context of potential signs of fraud. However, only the authorities conducting the pre-trial investigation and the court can determine this, after evaluating the specific evidence, the flow of funds, the timing of order acceptance, and the actual financial condition of the companies,” emphasizes E. Langys.

An unfulfilled contract, an unpaid advance, or a bankrupt company does not in and of itself constitute fraud. For such an assessment, it is important to determine what the individuals’ intent was at the time the money was accepted, whether customers were provided with misleading information, and whether, at the time their money was accepted, there was a genuine intention and ability to fulfill the obligations undertaken. “This should serve as a very clear reminder to business leaders: when a company is approaching the point beyond which it will no longer be able to meet its obligations, the decision to continue financing operations with advances from new customers can lead to legal consequences that are entirely different from those of a simple business failure. The hope that the situation will improve tomorrow does not replace a manager’s duty to act responsibly today,” says E. Langys.

For a consumer, bankruptcy may mean that it will not be possible to recover the money

The biggest problem for the consumer in such a situation is that even if they have a completely legitimate claim to a refund of the advance payment, that does not mean the money will actually be returned.

In insolvency proceedings, the client becomes one of the company’s creditors. If the company’s assets are insufficient to cover all of its liabilities, the chances of recovering the full amount of the advance payment may be very limited.

The situation is even more complicated when the consumer incurs additional expenses: removing the old door, scheduling other work, hiring contractors, adjusting the repair or construction schedule, and then having to urgently purchase the product from another supplier. Such losses may have to be proven separately, and even a recognized claim does not in itself guarantee actual compensation if the insolvent company does not have sufficient assets.

Therefore, according to E. Langis, consumer protection must begin even before a large advance payment is made.

How can users reduce the risk?

“We often choose the product itself very carefully, but we pay far less attention to who we’re transferring money to. When an advance payment amounts to a thousand, two thousand, or several thousand euros, taking a few minutes to verify the company can be just as important as reading the terms of the contract,” says E. Langys.

Before paying a larger down payment, it's a good idea to:

• Verify the legal entity. Make sure you know exactly which company you are paying and that it matches the seller specified in the contract. It’s also worth finding out how long the company has been in business, whether there is any public information about its financial difficulties, insolvency proceedings, or a significant increase in the number of customer complaints.
• Be cautious about making large advance payments. If the goods will not be manufactured or delivered for several months, it is worth negotiating a smaller initial payment.
• Negotiate installment payments. A portion of the price can be paid at the time of the order, another portion upon receiving confirmation that the goods have been manufactured or delivered, and the balance upon receipt or installation of the goods.
• Carefully evaluate any sudden changes to a contract or payment terms. If, after a contract has been signed, you are asked to pay another company or into a different account, or if the contracting party changes, you should find out the reasons for such a change.
• Keep all documents and correspondence on file. This includes contracts, invoices, payment orders, order confirmations, emails, and messages regarding production and delivery dates. In the event of a dispute, this information may serve as important evidence.
• Respond to the first warning signs. Repeatedly delayed deliveries, unanswered phone calls, recurring promises of “next week,” vague explanations regarding production, or requests for additional payments may be a sign that you shouldn’t wait any longer and should take action.

“This case demonstrates once again that a limited liability company does not mean that its manager remains beyond liability under any circumstances. An honest business failure is one thing. Deliberately taking on new obligations and accepting other people’s money while knowing that it will likely be impossible to fulfill them is something else entirely. “Where this line lies in a specific situation is determined by the authorities and the court, but every business leader must recognize it well before the company’s doors close for good,” concludes the AVOCAD attorney.

A luxury Bentley Continental GT, which belonged to a bankrupt Lithuanian company, was supposed to be handed over to the insolvency administrator and used to secure the interests of creditors. However, instead, the car disappeared from Lithuania and was spotted abroad—in France and Monaco.

At first glance, this might seem like just another dispute over company assets. However, according to the lawyers at the AVOCAD law firm, this case highlights a much broader problem: what happens when authorities take a strictly formal view of the situation, while valuable assets may in fact be lost.

Bankruptcy proceedings were initiated against a Vilnius-based company, and an insolvency administrator was appointed. One of the company’s most significant assets—a Bentley Continental GT—was to be transferred to the administrator. The documents indicate that the company owed more than 72,000 euros to the tax administrator—the State Tax Inspectorate—so the return of the car was directly related to the protection of creditors’ interests.

However, the car was not handed over to the administrator. On the contrary, it was determined that its whereabouts were linked to foreign countries. The applicant contacted law enforcement, requesting that a pre-trial investigation be initiated and a national and international search for the car be issued; however, the authorities initially refused to do so, assessing the situation as a civil dispute.

“In such situations, it is crucial not to limit oneself to a formal response. If the assets of a bankrupt company are located abroad, and they are not transferred by a person who does not have the right to dispose of them, leaving the creditors’ interests unprotected, proactive measures are necessary,” said Mantas Baigys, an attorney with AVOCAD who represented the client in the case .

In this situation, complaints were being prepared, additional explanations were being provided, evidence was being gathered, and communications with representatives of the shareholder who actually controlled the vehicle were being analyzed. The written explanations noted that the applicant had been collecting data on the vehicle’s location and its control.

The issue of separating the shareholder’s assets from those of the company also became a key point in the case. The lawyers’ position was clear: a company shareholder is not the owner of the company’s assets and cannot treat the company car as personal property. This is especially true when bankruptcy proceedings have been initiated against the company, and all assets must be managed for the purposes of the insolvency process and to safeguard the interests of creditors. “This case serves as a reminder of a very simple rule that is sometimes overlooked in practice—a company’s assets are not the shareholder’s personal property. In bankruptcy proceedings, every such asset becomes important to creditors, so concealing it, delaying its disclosure, or attempting to sell it independently cannot be considered a mere civil dispute,” notes Egidijus Langys, managing partner and attorney at AVOCAD .

Additional information reinforced suspicions that the car had not only not been handed over to the administrator but may also have been intended for sale to third parties. On April 27, 2025, photographs of the car were received, and the surroundings visible in them, as indicated in the documents, showed that the vehicle is not and cannot be in Lithuania.

This situation serves as an example of why time is of the essence in bankruptcy cases. Valuable assets, especially those located abroad, can quickly be transferred, hidden, or become difficult to access. Therefore, mere promises to “return them later” cannot replace the actual transfer of assets. “A lawyer’s job in such cases is not merely to draft a procedural document. One must see the whole picture and ensure that the process moves forward,” says E. Langys.

According to the lawyer, this “Bentley” story is ultimately not about a luxury car. It is about how important it is to protect creditors’ interests when a bankrupt company’s assets disappear abroad and the authorities initially see no reason to take active measures.

A few days ago, the car was brought back to Lithuania—its transport and return were organized at the initiative of the attorneys. This shows that even in complex situations involving international elements, consistent legal work and proactive action can still yield tangible results.

When debt begins to dictate the rhythm of life and financial obligations start pushing people to the margins of society, a natural question arises: is there still a way out? Rokas Puodžiūnas, a lawyer with the law firm AVOCAD, comments on one of the realistic solutions—personal bankruptcy .

Today, large debts affect both people with lower incomes and those who are financially better off. A failed business, ill-considered financial decisions, inherited obligations, or unexpected life situations—there can be many reasons. However, the consequence is usually the same: limited opportunities to live with dignity, actively participate in economic life, and plan for the future.

Although bankruptcy is still often associated solely with the end of a business, in reality it is a legal tool available to individuals as well. The personal bankruptcy framework, in effect in Lithuania since 2013, offers the opportunity to get back on one’s feet: to manage debts, return to financial stability, and avoid long-term social decline.

“It’s not an easy or quick path, but if done right, it can be a real opportunity to regain control of your life,” says the lawyer.

Petition for Bankruptcy

According to AVOCAD attorney Rokas Puodžiūnas, before filing for bankruptcy in court, an individual must first notify all of their creditors. This must be done in writing no later than one month before the petition is filed with the court. This is important because the court will later require proof that this obligation was properly fulfilled.

Only after this one-month period following notification of the creditors has elapsed may a petition be filed with the court to initiate bankruptcy proceedings.

Under the Law on Personal Bankruptcy (FABĮ), an individual may initiate bankruptcy proceedings only if they meet all of the following conditions: they are insolvent, their insolvency arose in good faith, and there are no other obstacles provided for by law.

What constitutes insolvency?

The law defines insolvency as a situation in which a person is no longer able to meet their overdue financial obligations, and the total amount of those obligations exceeds 25 times the minimum monthly wage (MMA). At the time of this article’s publication, the MMA in Lithuania is 1,153 euros, so insolvency is established when debts exceed 28,825 euros.

However, according to an AVOCAD lawyer, the numbers alone are not enough—the courts take a broader view of the situation. Insolvency is not merely a temporary financial hardship, a refusal to pay, or simply the fact that the value of one’s assets is less than the amount of debt.

For insolvency to be recognized, all of the following conditions must be met:

1. The total amount of debt exceeds 25 times the minimum monthly wage;
2. The payment deadlines for the debts have passed;
3. The individual has no realistic means of repaying the debt, either from assets or from income.

According to Rokas Puodžiūnas, it is very important to understand that the assessment is not merely a formality. If a person, despite having significant debts, earns sufficient income and is able to pay them off within a reasonable period of time, they are not considered insolvent. “On the other hand, even a high income does not automatically mean solvency. If it is insufficient to meet obligations, insolvency may be declared. Therefore, in each case, the actual financial situation is assessed: income, obligations, and necessary living expenses,” notes the AVOCAD lawyer.

A person's integrity

The lawyer emphasizes that it is very important to understand that the legal framework in force in Lithuania is designed to help only honest individuals restore their solvency. Therefore, honesty is one of the essential conditions for filing for personal bankruptcy.

This is assessed in two respects: whether the person, when applying to the court, disclosed all information in good faith, and whether the person became insolvent while acting in good faith.

Dishonesty may serve as grounds for refusing to initiate bankruptcy proceedings only if it had a material impact on the onset of insolvency—in other words, a causal link must be established between the dishonest acts and the resulting financial situation.

In practice, dishonesty most often manifests itself when a person:

• provides inaccurate or misleading information about their financial situation (debts or assets);
• conceals important facts;
• does not disclose all of its liabilities or sources of income.

Courts may also deem a person to be acting in bad faith if it is determined that they deliberately allowed their debts to accumulate—for example, by borrowing money in the expectation that their obligations would later be written off, or by acting in a highly irresponsible manner with regard to their finances.

However, each situation is assessed on a case-by-case basis. The assessment takes into account not only the actual financial situation, but also the individual’s behavior and motives—whether they genuinely sought to resolve the issues or, on the contrary, exacerbated them.

For example, the mere fact that a person has entered into numerous consumer credit agreements does not necessarily imply dishonesty. It is important to determine:

• what the borrowed funds were used for (whether for essential needs or not);
• whether there were other ways to meet those needs;
• whether the borrowing was proportionate and justified;
• what steps the person took to prevent the debt from increasing.

Even a careless assessment of one’s financial circumstances does not in itself imply dishonesty—if there is no evidence that the person acted intentionally or with gross negligence, bankruptcy proceedings may be initiated.

It is also important to note that good faith is generally assessed over a three-year period preceding the filing of the petition. If, during this time, the individual acted in good faith but was unable to restore solvency, they should not be prevented from initiating bankruptcy proceedings.

However, in exceptional cases, the court may consider a longer period—for example, if it is clear that the insolvency was caused by prior dishonest acts.

When does a court refuse to initiate bankruptcy proceedings?

Even in cases of substantial debt, bankruptcy proceedings will not always be initiated. The law specifies clear circumstances under which a court may refuse to do so.

First of all, according to the lawyer, bankruptcy will not be permitted if a person’s insolvency was caused by their harmful habits—such as alcohol abuse, drug abuse, or compulsive gambling.

The court may also refuse to hear the case if the person has been convicted of certain financial crimes and that conviction has not yet been expunged, and if those specific acts contributed to the person’s insolvency.

Bankruptcy proceedings cannot be repeated too frequently—if less than 10 years have passed since the conclusion or termination of the previous bankruptcy, a new case will not be filed.

Finally, an obstacle may arise if a person is associated with a company (a legal entity with unlimited civil liability) against which bankruptcy proceedings have already been initiated.

In other words, according to an AVOCAD lawyer, bankruptcy is an option, but not in all cases—the court always considers not only the debts but also the circumstances surrounding their origin.

What happens after bankruptcy proceedings are initiated?

If a court declares a person insolvent and finds no obstacles, bankruptcy proceedings are initiated against them. A bankruptcy administrator is then appointed to oversee the entire process and ensure that it proceeds smoothly and fairly.

Next, a solvency restoration plan is drawn up—a clear agreement on how and over what period of time creditors will be repaid. This plan must be approved by the creditors and subsequently confirmed by the court. The plan is implemented over a period of 3 years. Once all payments specified in the plan have been made, the process is concluded with an official act.

Important considerations before deciding to file for bankruptcy

Lawyer Rokas Puodžiūnas warns that personal bankruptcy is not an “easy way” to get rid of debts. It is a mechanism designed to help honest people return to a normal financial life while also protecting the interests of creditors. Once a solvency restoration plan is implemented, any remaining unpaid debts may be discharged. However, he notes that it is important to understand that not all debts are eliminated. Debts are not written off if they result from criminal activity, child support, fines imposed by the state for violations, or debts secured by a pledge or mortgage, provided an agreement is reached to retain the property.

Furthermore, these debts are not even taken into account when determining whether a person meets the criteria for bankruptcy.

Therefore, before deciding to file for bankruptcy, it is important to realistically assess your situation: where the debts came from, whether they can be repaid within a reasonable time frame, and whether the court will consider you to be a person of good faith. You also need to understand that your debts will not be eliminated immediately—you will have to live under financial restrictions for some time. For these reasons, it is always worth consulting with lawyers before going to court.

 

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