Management and control of the enterprise bankruptcy process

The National Audit Office conducted an audit to assess the efficiency of the management and control of the corporate bankruptcy process. The management of the corporate bankruptcy process requires effective insolvency policy to help protect the interests of creditors and reduce the risk of delayed initiation of corporate bankruptcies. So far, the level of claims of the creditors of bankrupt enterprises which are settled is as low as 13 per cent.

Between 2009 and the 1st quarter of 2014, the creditors of the bankrupt enterprises did not recover the amount of LTL 8.4 billion, including LTL 1.5 billion lost to the state budget. It should be noted that the majority of enterprises become subject to the bankruptcy process when they have already significantly crossed the threshold of insolvency. Over the period 2011-2013, the claims of the creditors at the beginning of the bankruptcy process of as many as 70 per cent of the enterprises were two times higher than the existing assets; the assets of 20 per cent of the enterprises could not even cover the administration costs. “It is clear that bankruptcies are initiated too late, since most of the creditors cannot recover their funds even if the bankruptcy process were organised in the most efficient way. It is therefore important that corporate bankruptcies are initiated in time and are properly coordinated and that enterprise managers and owners are subject to the legislative liability for a breach of duty to initiate bankruptcy in the event of the grounds and terms laid down in the Enterprise Bankruptcy Law,” said Auditor General Giedrė Švedienė commenting on the audit results.

The auditors also pointed out that the managers and/or owners of enterprises are not deterred from illegal action aimed at intentional insolvency, because proving fraudulent bankruptcies requires a lot of time and financial costs; however, even if such bankruptcy has been proved, responsible persons are not identified. In many cases, pre-trial investigations of criminal bankruptcies are terminated due to the lack of evidence and the expiry of the period of limitation. There were 400 pre-trial investigations started in the period 2009-2014, of which 72 (18 per cent) completed ones reached the court, and responsible persons were prosecuted in 20 criminal cases (28 per cent) of those that had reached the court. It should be noted that the liability for fraudulent bankruptcy – imprisonment of up to three years, with no pecuniary sanctions – is not sufficiently effective.

The audit found that higher-value assets of the enterprise in bankruptcy are not always realized without auction at the market price, so creditors are not able to recover part of the debts. In the auditors' opinion, the possibility to sell assets, to different extents, at auction or without an auction allows to avoid transparent sales of assets.

It should be noted that part of the employees of bankrupt enterprises or enterprises in bankruptcy who are entitled to benefits from the Guarantee Fund are not found, so they do not receive benefits due to them. In the period from 2011 to April 2014, the amount of such benefits totalled LTL 3.8 million.

The auditors also found weaknesses in the regulation of the payment of salaries to bankruptcy administrators and other administrative expenses, as well as qualifications, performance, and supervision of the performance of administrators.

Taking into account the results of the audit, the National Audit Office issued recommendations to the Government and to the Enterprise Bankruptcy Management Department under the Ministry of Economy to help shape and implement more effective insolvency policy.