Do Insolvency Evaluation Criteria in Lithuanian Republic Enterprise Bankruptcy Law Ensure that Bankruptcy Procedures would not be Initiated for Companies with Temporary Financial Issues?

Abstract

Company insolvency and bankruptcy legislation is based on the discipline of economics, under such circumstances the law itself and any act, norms, provisions falling under the law are subject to micro economic problems arising in companies. Under such circumstances law has to serve economy while making reasonable decisions regarding company financial status (solvency). Unfortunately, only recently Lithuanian legal doctrine has given it a thought of using economic analysis of law. In general bankruptcies of companies cause consequences such as – loss of productivity capacity which eventually causes overall loss of national competitiveness, unpaid national taxes to many different government bodies and other institutions, unsatisfied claims of other creditors, also social problems such as growing unemployment, decline in living conditions, unsatisfied and insecure residents about country’s economy, government and their own future. According to Lithuanian Republic Department of Enterprise Bankruptcy Management under the Ministry of Economy conducted study on bankruptcies for the period between January 1st, 1993 and March 31st, 2014 total number of declared bankruptcies for companies is 14 912. Significant 70% of companies that went bankrupt were in business for more than 5 years. All of collected experience in technologies, optimized processes, workplaces etc. is most likely lost with bankruptcies of such developed companies. In the article the economic analysis of law, comparative analysis, systematic analysis, logical analysis, document analysis, analytical-critical analysis, linguistic analysis methods were used to support the answer to legal question of whether insolvency evaluation criteria in Lithuanian Republic Enterprise Bankruptcy Law ensure that bankruptcy procedures would not be initiated for companies with temporary financial issues. Part one of the article states that European Union Law does not regulate company insolvency concept, but does obligate all Union countries to follow principle of universality. Proper evaluation of company’s absolute insolvency and bankruptcy initiation decision are extremely important steps in decision-making process so that bankruptcies would not be initiated to companies, which only have short-term financial difficulties. Although in 2004 Lithuania joined European Union, which does have directly applicable European Council regulation of 2000, May 29th (EB) Nr. 1346/2000 regarding enterprise bankruptcy policy, since then not in any other Act or regulation of the Union have been clearly stated or added regarding regulation (evaluation) of company insolvency, bankruptcy evaluation proceedings, which leaves an open area for each Union country to freely compose their own proceedings within boundaries of principle of universality. Part two of the article is intended to identify the issues of Case law in Lithuanian court system in the area of initiated enterprise bankruptcy proceedings, whereas at bankruptcy initiation proceedings interests of creditors are prioritized and balance of interests of all other involved parties is mostly excluded from bankruptcy initiation evaluation conditions. Even though courts are trying to amend, guide faulty legislation through Case law, but from legislative perspective such actions are not fully legitimate. In part three company insolvency concept in Lithuanian Enterprise bankruptcy law and in Case law is analyzed, compared and evaluated with assistance of economic disciplinary theoretical and practical methods. In Lithuanian Enterprise bankruptcy law there is only a single ratio according to which courts make their verdict regarding proceedings of companies’ insolvency – overdue liabilities to assets ratio. Despite that there is no clear detailed proceeding of solvency evaluation in Lithuanian law whatsoever, in Case law it is stated that case by case basis additional requirements, regulations, proceedings or rules shall be evaluated regardless of current sole indicating company insolvency datum, which is ratio of overdue liabilities to assets. Under such circumstances courts have to look back at Case law which is formulated by subjective opinions of judges from past cases, and that leads to irregular and with discrepancies from economic theories and practices evaluation of companies’ insolvency. As specialists of economic field state that a single ratio of one aspect does not reflect company’s true solvency status, analysis of company insolvency is a complex process of using different financial ratios from company’s financial data. In order to determine company’s financial status economists mostly suggest to use at least ten financial ratio indicators. In order to correct such unsound and unbalanced evaluation of companies’ insolvency, clear regulations have to be stated in Lithuanian Enterprise bankruptcy law for it to have financially and legally correct and just companies’ insolvency evaluation. In the end of the article after all the analysis, in the last part reasoned recommendation is stated to initiate amendment of Lithuanian Enterprise bankruptcy law.