## _cr08245 — Sections 1–2

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---

### Executive Summary
- Since the ICR ROSC (2001-02), Lithuania has made significant progress in creditor rights legislation and related institutions.
- Creation and registration of secured transactions: rather easy and affordable.
- Enforcement: efficient, taking "4 to 7 months" to recover a secured loan.
- Privatization of the bailiffs system accelerated recovery and increased enforcement efficiency.
- Enterprise Bankruptcy Law and Law on Restructuring of Enterprises are generally consistent with international standards.
- Insolvency administration infrastructure: newly implemented reforms expected to improve insolvency profession standards.
- Key legal reform suggestions:
  - Amend the Civil Code to allow creation of security interests related to any or all of a debtor’s obligations to a creditor, present or future, and in all types of assets and on a global basis.
  - Eliminate concurrent functions of notaries and judges—mortgage judges should be exclusively dedicated to jurisdictional activities rather than administrative tasks.
  - Review current fee structure for executions—remuneration of bailiffs ("4 to 20 percent" of the amount recovered) considered too high.
  - Make the simplified restructuring procedure more flexible to facilitate reorganization.
  - Enact the UNCITRAL Model Law on Cross-border Insolvency to complement legal infrastructure for international cases.
- Institutional framework for commercial disputes and insolvency proceedings: generally sound; specialization of some judges would improve efficiency.

### I. Background
- 2001-2002 ICR ROSC finding: legal environment for creditor rights and debt enforcement "reasonably effective."
- Identified 2001-2002 weaknesses:
  - Execution stage of collateral realization was inefficient.
  - Insolvency system fragmented: three different insolvency laws (1992, 1997, 2001) governed proceedings by initiation date.
  - Most insolvency proceedings were liquidation cases, averaging more than three years, yielding little benefit to creditors.
  - Insufficient experience with the new Enterprise Restructuring Law (at the time) to assess effectiveness.
- Institutional weaknesses noted in 2001-2002:
  - Court efficiency hindered by lack of specialization among judges.
  - Low standards for licensing, over-licensing, inadequate training, and inconsistent performance of insolvency administrators.

### II. Creditor Rights — Legal framework for secured lending
- Current Lithuanian legal framework for secured lending is generally adequate.
- Under the Civil Code regime, mortgages and possessory and non-possessory pledges are broadly used.
- Leasing contracts frequently used to secure acquisition of movable assets; repossession usually without court intervention, with a simplified judicial proceeding available if debtor does not collaborate.
- Reservation of title allowed by law but not widely used; suppliers occasionally use reservation of title clauses.
- Table 1 totals (mortgages and pledges registered, April 1, 1998 – September 1, 2007):
  - TOTAL: 267,836 registered mortgages and pledges
- Limitations in Civil Code:
  - Creditor cannot obtain a security interest in the universality of a debtor’s assets.
  - Impossible to pledge movable assets to secure future obligations.
  - Requirement to specifically describe every pledged item.
- Suggested enhancements:
  - Allow creation of pledges over movable assets related to any or all of a debtor’s obligations to a creditor, present or future.
  - Allow security interests on a global basis in all types of assets.

### II. Creditor Rights — Creation and registration of security interests
- Creation and registration is easy and affordable.
- Central Mortgage Office records both mortgages and pledges; mortgages are then registered in Real Estate and Land registers.
- All registers computerized and publicly available.
- Total cost of creation and registration of mortgages and pledges is less than "one percent" of the loan amount.
  - "The maximum cost for creating and registering a mortgage or pledge is approximately US$200 (notary and registry fees included)."
- Recommendation: eliminate concurrent functions of notaries and judges because:
  - Notaries can review filings for accuracy and legality.
  - Mortgage judges should focus on jurisdictional activities (enforcement) rather than administrative tasks.

### II. Creditor Rights — Enforcement of secured claims
- Enforcement of pledges and mortgages generally performed in a simplified manner, without dispute.
- Procedure highlights:
  - If borrower does not repay in "20-30 calendar days" after judicial notification, mortgage judge orders foreclosure through a bailiff.
  - Mortgaged and pledged assets sold at public auction.
  - Initial auction price set at "80 percent" of bailiff/expert valuation; if unsold, second auction price at "60 percent" of appraised value.
  - If second auction fails, property may be transferred to secured creditor.
- Average recovery time of secured loans: "4 to 7 months".
- Bailiff system reformed in 2002: privatization following the French model ("huissiers de justice"):
  - Approximately "140 bailiffs" in Lithuania.
  - Old system cost to State: approximately "10 million litas per year"; new system entails no cost to the national budget.
  - Old system enforcement efficiency: "5.5 percent"; new system’s efficiency is "six times higher" according to the Ministry of Justice.
- Concern: bailiff fees considered too high—remuneration "4 to 20 percent" of the amount recovered.
  - Ministry of Justice is reviewing the current fee structure for executions.

### III. Corporate Insolvency Framework — Liquidation
- Number of bankruptcy (liquidation) proceedings steady in recent past.
- Table 2 summary (Bankruptcy Proceedings: Number of Cases, 1993-2006):
  - Initiated total: "5264" cases (per cent 100)
  - Completed total: "3948" cases (per cent 75)
  - Pending total: "1316" cases (per cent 25)
- Fragmentation of insolvency legal framework now almost irrelevant:
  - As of July 2007: "8" cases under law of 1992; "14" cases under law of 1997; "1,207" cases under Bankruptcy Law of 2001.
- Average duration improvements:
  - Contemporary typical duration for all bankruptcy proceedings: "1.8 years".
  - Introduction in 2003 of a "simplified bankruptcy procedure" (assetless enterprises) average duration: "10.5 months".
  - Distribution of durations (1993-2006):
    - "10 percent" Up to 1 year
    - "40 percent" 2 years
    - "28 percent" 3 years
    - "22 percent" More
  - Simplified Bankruptcy Proceedings: "0 .87 year"
- Specialization of judges recommended to further shorten average duration.

### III. Corporate Insolvency Framework — Reorganization
- Restructuring proceedings not frequently used:
  - Upon bankruptcy commencement, restructuring via amicable agreement historically used in "26" cases.
  - Before bankruptcy adjudication, Law on Restructuring of Enterprises (2001) applicable; since enactment, "36" cases filed, of which "5" successfully completed.
- Simplified (prepackaged/abbreviated) restructuring is notable but rigid:
  - Under formal reorganization, restructuring plans may be adopted by majority creditor vote.
  - Under simplified procedure, unanimity of creditors is required.
  - The unanimity requirement makes the simplified procedure difficult and rare.
- Recommendation:
  - Eliminate the unanimous consent requirement in abbreviated reorganizations to improve voluntary restructuring and capacity to handle larger numbers of business reorganizations.

### Abbreviated reorganization and voluntary workouts (Section 2)
- Existing culture of voluntary restructuring agreements (workouts) in Lithuanian banking practices could be complemented by an abbreviated reorganization procedure to convert workout agreements into restructuring plans even if unanimity is not obtained.
- Without amendment, voluntary restructurings without unanimous consent will not be processed through an abbreviated reorganization and will not bind holdouts, creating a weakness.
- If the court could cram down all creditors (including dissenting creditors, provided that a legally defined majority of creditors subscribed the restructuring agreement) in the context of an abbreviated reorganization procedure, the system would gain a prompt and cost-efficient mechanism for numerous insolvencies.
- This improvement requires an amendment to the Law on Restructuring to allow utilization of the simplified procedure where the plan has been accepted by the same majority legally established for plans approved in full reorganization proceedings.

### Cross-border insolvencies
- Cross-border insolvencies within the European Union territory governed by EU Council Regulation 1346/2000 since Lithuania joined the European Union.
- The EU Regulation governs cross-border insolvencies where the main place of business is within the EU.
- Consideration should be given to adopting the UNCITRAL Model Law for Cross-border Insolvency to cover cases involving foreign countries outside the EU.

### Institutional framework — Courts
- Institutional framework for insolvency proceedings generally sound although specialization of a number of judges would enhance the system.
- Insolvency cases are dealt with by judges also competent in all kinds of civil and commercial matters; some judges lack training in complex commercial and economic topics needed in insolvency cases, in particular restructurings.
- In large commercial centers, specialization of a number of existing judges would significantly enhance overall efficiency of insolvency proceedings.
- Necessary training of judges and judicial staff as well as on-the-ground resources should be provided to ensure that specialized judges or courts produce measurable improvement.
- Specialization would improve capacity to deal with cases linked to increasingly complex financial transactions and issues in Lithuania’s financial sector.

### Institutional framework — Insolvency administrators
- Reforms implemented:
  - New Rules of Entitlement and Rules of Control of Bankruptcy Administrators approved in 2006.
  - Regulations for the Commission for Certification of Bankruptcy and Restructuring Administrators passed in 2007.
  - A Code of Ethics applicable to insolvency administrators approved by the Ministry of Economy.
  - University degree in law or economics is now mandatory to obtain a license; experience, training and good conduct are also qualification criteria.
  - Recent reforms to licensing, supervision and performance evaluation, and certification programs under preparation, are expected to improve insolvency profession standards.
- Licensing and numbers:
  - During the period 1997-2006 the right to provide services of bankruptcy administration was granted to 800 natural persons and 126 legal entities.
  - From 2001 to 2006, 80 natural persons and 24 legal entities were entitled to provide services in restructuring administration.
  - At the end of 2006, there were approximately:
    - (i) 284 individuals and 95 legal entities licensed to act as bankruptcy administrators, and
    - (ii) 31 individuals and 19 legal entities licensed to provide services in restructuring cases.
  - The actual number of practicing administrators would be lower.
  - Licenses should now be revalidated every three years.
  - After a second revalidation and with approval of the Commission for Certification of Bankruptcy and Restructuring Administrators, an insolvency administrator may keep the license for the next ten years.
  - During 2007 a few licenses were canceled.
- Professional development:
  - Continued education provided by National Association of Bankruptcy Administrators (21 members) and National Association of Business Administrators (110 members).
  - Courses held every month with an average participation of 30-40 attendees.
  - Participating in training courses, at least 32 hours per year, is mandatory for all licensed administrators.

### Recommendations (mid-term legal reforms)
- Amending the Civil Code to allow the simple creation of:
  - (i) pledges (over movable assets) related to any or all of a debtor’s obligations to a creditor, present or future, and,
  - (ii) security interests on a global basis in all types of assets.
- Eliminating the concurrent functions currently performed by notaries and judges at creation and registration of secured transactions.
- Reviewing the current fee structure for remuneration of bailiffs at executions.
- Making the simplified restructuring procedure more flexible, allowing judicial approval of reorganization plans approved by a legally established majority of creditors even if unanimous consent of creditors had not been obtained.
- Enacting the UNCITRAL Model Law on Cross-border Insolvency.
- Specializing and training a number of judges to deal with insolvency proceedings and complex commercial/financial disputes.

*Source: IMF Country Report No. 08/245, April 2008, Republic of Lithuania: Financial Sector Assessment Program Update — Technical Note — Insolvency and Creditor Rights Assessment.*

### Section 1

### _cr08245 - Section 1

### Executive Summary
- Since the ICR ROSC (2001-02), Lithuania has made significant progress in creditor rights legislation and related institutions.
- Creation and registration of secured transactions: rather easy and affordable.
- Enforcement: efficient, taking "4 to 7 months" to recover a secured loan.
- Privatization of the bailiffs system accelerated recovery and increased enforcement efficiency.
- Enterprise Bankruptcy Law and Law on Restructuring of Enterprises are generally consistent with international standards.
- Insolvency administration infrastructure: newly implemented reforms expected to improve insolvency profession standards.
- Key legal reform suggestions:
  - Amend the Civil Code to allow creation of security interests related to any or all of a debtor’s obligations to a creditor, present or future, and in all types of assets and on a global basis.
  - Eliminate concurrent functions of notaries and judges—mortgage judges should be exclusively dedicated to jurisdictional activities rather than administrative tasks.
  - Review current fee structure for executions—remuneration of bailiffs (4 to 20 percent of the amount recovered) considered too high.
  - Make the simplified restructuring procedure more flexible to facilitate reorganization.
  - Enact the UNCITRAL Model Law on Cross-border Insolvency to complement legal infrastructure for international cases.
- Institutional framework for commercial disputes and insolvency proceedings: generally sound; specialization of some judges would improve efficiency.

### I. Background
- The 2001-2002 ICR ROSC found the legal environment for creditor rights and debt enforcement "reasonably effective."
- Identified weaknesses in 2001-2002:
  - Execution stage of collateral realization was inefficient.
  - Insolvency system fragmented: three different insolvency laws (1992, 1997, 2001) governed proceedings by initiation date.
  - Most insolvency proceedings were liquidation cases, averaging more than three years, yielding little benefit to creditors.
  - Insufficient experience with the new Enterprise Restructuring Law (at the time) to assess effectiveness.
- Institutional weaknesses noted in 2001-2002:
  - Court efficiency hindered by lack of specialization among judges.
  - Low standards for licensing, over-licensing, inadequate training, and inconsistent performance of insolvency administrators.

### II. Creditor Rights

#### Legal framework for secured lending
- Current Lithuanian legal framework for secured lending is generally adequate.
- Under the Civil Code regime, mortgages and possessory and non-possessory pledges are broadly used.
- Leasing contracts frequently used to secure acquisition of movable assets; repossession usually without court intervention, with a simplified judicial proceeding available if debtor does not collaborate.
- Reservation of title allowed by law but not widely used; suppliers occasionally use reservation of title clauses.
- Table 1 (mortgages and pledges registered, April 1, 1998 – September 1, 2007) highlights totals:
  - TOTAL: 267,836 registered mortgages and pledges
- Limitations noted in Civil Code:
  - Creditor cannot obtain a security interest in the universality of a debtor’s assets.
  - Impossible to pledge movable assets to secure future obligations.
  - Requirement to specifically describe every pledged item.
- Suggested enhancements:
  - Allow creation of pledges over movable assets related to any or all of a debtor’s obligations to a creditor, present or future.
  - Allow security interests on a global basis in all types of assets.

#### Creation and registration of security interests
- Creation and registration is easy and affordable.
- Central Mortgage Office records both mortgages and pledges; mortgages are then registered in Real Estate and Land registers.
- All registers computerized and publicly available.
- Total cost of creation and registration of mortgages and pledges is less than "one percent" of the loan amount.
  - Note: "The maximum cost for creating and registering a mortgage or pledge is approximately US$200 (notary and registry fees included)."
- Recommendation: eliminate concurrent functions of notaries and judges because:
  - Notaries can review filings for accuracy and legality.
  - Mortgage judges should focus on jurisdictional activities (enforcement) rather than administrative tasks.

#### Enforcement of secured claims
- Enforcement of pledges and mortgages generally performed in a simplified manner, without dispute.
- Procedure highlights:
  - If borrower does not repay in "20-30 calendar days" after judicial notification, mortgage judge orders foreclosure through a bailiff.
  - Mortgaged and pledged assets sold at public auction.
  - Initial auction price set at "80 percent" of bailiff/expert valuation; if unsold, second auction price at "60 percent" of appraised value.
  - If second auction fails, property may be transferred to secured creditor.
- Average recovery time of secured loans: "4 to 7 months".
- Bailiff system reformed in 2002: privatization following the French model ("huissiers de justice"):
  - Approximately "140 bailiffs" in Lithuania.
  - Old system cost to State: approximately "10 million litas per year"; new system entails no cost to the national budget.
  - Old system enforcement efficiency: "5.5 percent"; new system’s efficiency is "six times higher" according to the Ministry of Justice.
- Concern: bailiff fees considered too high—remuneration "4 to 20 percent" of the amount recovered.
  - Ministry of Justice is reviewing the current fee structure for executions.

### III. Corporate Insolvency Framework

#### Liquidation
- Number of bankruptcy (liquidation) proceedings steady in recent past.
- Table 2 (Bankruptcy Proceedings: Number of Cases) summary (1993-2006):
  - Initiated total: "5264" cases (per cent 100)
  - Completed total: "3948" cases (per cent 75)
  - Pending total: "1316" cases (per cent 25)
- Fragmentation of insolvency legal framework now almost irrelevant:
  - As of July 2007: "8" cases under law of 1992; "14" cases under law of 1997; "1,207" cases under Bankruptcy Law of 2001.
- Average duration of bankruptcy cases has improved:
  - Contemporary typical duration for all bankruptcy proceedings: "1.8 years".
  - Introduction in 2003 of a "simplified bankruptcy procedure" (assetless enterprises) average duration: "10.5 months".
  - Distribution of durations (1993-2006):
    - "10 percent" Up to 1 year
    - "40 percent" 2 years
    - "28 percent" 3 years
    - "22 percent" More
  - Simplified Bankruptcy Proceedings: "0 .87 year"
- Specialization of judges recommended to further shorten average duration.

#### Reorganization
- Restructuring proceedings not frequently used:
  - Upon bankruptcy commencement, restructuring via amicable agreement historically used in "26" cases.
  - Before bankruptcy adjudication, Law on Restructuring of Enterprises (2001) applicable; since enactment, "36" cases filed, of which "5" successfully completed.
- Simplified (prepackaged/abbreviated) restructuring is a notable feature but currently rigid:
  - Under formal reorganization, restructuring plans may be adopted by majority creditor vote.
  - Under simplified procedure, unanimity of creditors is required.
  - The unanimity requirement makes the simplified procedure difficult and rare.
- Recommendation:
  - Eliminate the unanimous consent requirement in abbreviated reorganizations to improve voluntary restructuring and capacity to handle larger numbers of business reorganizations.

*Source: IMF Country Report No. 08/245, April 2008, Republic of Lithuania: Financial Sector Assessment Program Update — Technical Note — Insolvency and Creditor Rights Assessment.*

### Section 2

### _cr08245 - Section 2

### Abbreviated reorganization and voluntary workouts
- Given the existent culture of voluntary restructuring agreements (workouts) in Lithuanian banking practices, it would be very helpful to complement this practice with an abbreviated reorganization procedure through which workout agreements could be converted into restructuring plans even if unanimity is not obtained.
- Otherwise, voluntary restructurings without unanimous consent of creditors will not be able to be processed through an abbreviated reorganization, and those voluntary restructuring agreements will not bound those who opted for holding out, in this way creating a weakness in the system.
- If the court could cram down all creditors (including the dissenting creditors, provided that a legally defined majority of creditors subscribed the restructuring agreement), in the context of an abbreviated reorganization procedure, the system would be equipped with an invaluable mechanism for the prompt and cost-efficient resolution of numerous insolvencies.
- This improvement would require an amendment to the Law on Restructuring to allow utilization of the simplified procedure where the plan has been accepted by the same majority legally established for plans approved in full reorganization proceedings.

### Cross-border insolvencies
- Cross-border insolvencies within the European Union territory are governed by the EU Council Regulation 1346/2000 since Lithuania joined the European Union.
- The EU Regulation governs cross-border insolvencies where the main place of business is within the EU.
- Consideration should be given to adopting the UNCITRAL Model Law for Cross-border Insolvency to cover cases involving foreign countries outside the EU.

### Institutional framework — Courts
- The Lithuanian institutional framework for insolvency proceedings is generally sound although specialization of a number of judges would enhance the system.
- Insolvency cases are dealt with by judges also competent in all kinds of civil and commercial matters; some judges lack training in complex commercial and economic topics usually needed in insolvency cases, in particular restructurings.
- In large commercial centers, specialization of a number of existing judges would significantly enhance overall efficiency of insolvency proceedings.
- Necessary training of judges and judicial staff as well as on-the-ground resources should be provided to ensure that specialized judges or courts produce measurable improvement in handling insolvency cases.
- Specialization would also improve capacity to deal with cases linked to increasingly complex financial transactions and issues in Lithuania’s financial sector.

### Institutional framework — Insolvency administrators
- Reforms implemented:
  - New Rules of Entitlement and Rules of Control of Bankruptcy Administrators approved in 2006.
  - Regulations for the Commission for Certification of Bankruptcy and Restructuring Administrators passed in 2007.
  - A Code of Ethics applicable to insolvency administrators approved by the Ministry of Economy.
  - University degree in law or economics is now mandatory to obtain a license; experience, training and good conduct are also qualification criteria.
  - Recent reforms to licensing, supervision and performance evaluation, and certification programs under preparation, are expected to improve insolvency profession standards.
- Licensing and numbers:
  - During the period 1997-2006 the right to provide services of bankruptcy administration was granted to 800 natural persons and 126 legal entities.
  - From 2001 to 2006, 80 natural persons and 24 legal entities were entitled to provide services in restructuring administration.
  - At the end of 2006, there were approximately:
    - (i) 284 individuals and 95 legal entities licensed to act as bankruptcy administrators, and
    - (ii) 31 individuals and 19 legal entities licensed to provide services in restructuring cases.
  - The actual number of practicing administrators would be lower.
  - Licenses should now be revalidated every three years.
  - After a second revalidation and with approval of the Commission for Certification of Bankruptcy and Restructuring Administrators, an insolvency administrator may keep the license for the next ten years.
  - During 2007 a few licenses were canceled.
- Professional development:
  - Continued education is provided by the professional associations of insolvency administrators—the National Association of Bankruptcy Administrators (21 members) and the National Association of Business Administrators (110 members).
  - Courses are held every month with an average participation of 30-40 attendees.
  - Participating in training courses, at least 32 hours per year, is mandatory for all licensed administrators.

### Recommendations (mid-term legal reforms)
- Amending the Civil Code to allow the simple creation of:
  - (i) pledges (over movable assets) related to any or all of a debtor’s obligations to a creditor, present or future, and,
  - (ii) security interests on a global basis in all types of assets.
- Eliminating the concurrent functions currently performed by notaries and judges at creation and registration of secured transactions.
- Reviewing the current fee structure for remuneration of bailiffs at executions.
- Making the simplified restructuring procedure more flexible, allowing judicial approval of reorganization plans approved by a legally established majority of creditors even if unanimous consent of creditors had not been obtained.
- Enacting the UNCITRAL Model Law on Cross-border Insolvency.
- Specializing and training a number of judges to deal with insolvency proceedings and complex commercial/financial disputes.

*Source: _cr08245 - Section 2*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08245.pdf_