2015-10-08
National Audit Office: so far the restructuring of the companies is only the alienation of the bankruptcy
Insolvency policy carried in Lithuania provides the preventive measure that helps to avoid bankruptcy- a restructuring process. This measure is applied to the companies that have financial difficulties, but they are not yet insolvent.
Insolvency policy ant its practical implementation do not provide an effective restructuring process, does not prevent the way to misuse restructuring opportunity in order to stave off bankruptcy procedures, the process is not properly maintained, interests of creditors are not sufficiently protected, the participation of restructured companies in the public procurement and other measures is limited, in addition, the preventive measures, which would promote to perform restructuring on time, were not created. Such conclusions were provided by the public auditors, who evaluated the organisation of company restructuring process.
In Lithuania each year averagely 1.5 thousand companies are brought to bankruptcy proceeding, resulting in negative social and economic consequences, creditors recover only about 13 percent of requirements, and the state budget loses part of its revenues. During the audit it was found that 5.8 percent of restructuring processes during the I quarter of 2001- 2015 ended successfully, and after the termination of restructuring even 81 percents of companies bankrupted. The coverage level of state creditor requirements is only 7 percents, and the amount of requirements of unsatisfied creditors in the end of 2014 was more than 20 million euros. In addition, the number of started processes is reducing: in 2011- 58, in 2014- 31.
The inefficiency of the restructuring process is due to the fact that in practice restructuring proceedings are raised also for the insolvent companies, which have no prospects (during the audit 37 % of analysed 30 cases were insovlent, and whole companies went bankrupt), so the granting of such possibility to the insolvent company in the alienation of bankruptcy and reduction of creditor‘s possibilities to recover their funds. For example, the company had a restructing proceedings when the company have been already insovlent, its obligations amounted to 97 percents of assets, later the company went bankrupt. As a result, the creditors‘ possibilities to recover their requirements from the start of the restructuring until the bankruptcy reduced by 2.5 million euros.
Process efficiency is determined by the fact that the court receives the documents, which do not reflect the true financial condition of the company. In this case the court raises the restructuring case for insolvent companies and the creditors approve the resutructirization plan, which is not implemental.
There is a lack of preventive measures that ensure and promote companies that have financial difficulties to start restructuring process on time. The law of company restructuring does not provide the state creditors the obligation to timely inform borrowers about the restructuring possibility, but it could encourage companies to timely address financial difficulties by the restructuring method and ensure bigger possibility to recover both tax arrears and to protect partners of companies with financial difficulties from large losses.
It is important to note, that due to appliance of two separate insolvency proceedings (bankruptcy and restructuring) the insolvency in the cases of restructuring and bankruptcy is evaluated differently, there is no smooth transition from the restructuring process to the bankruptcy process, which delays the opening of bankruptcy case, reduces the recovery level of creditor requirements and increases the process time costs.
In most cases the possibilities of creditors to recover the funds during the restructuring process reduces, because the proper process maintenance is not ensured, there is no obligation to follow the company‘s insolvency status and timely apply for the termination of the restructuring case, and the content of the report about the plan implementation and submission period to creditors and court is not adequately regulated.
Other important restructuring process factor is the administrator maintenance carried out by Department of Enterprise Bancruptcy Management. Auditors have found that the attention paid and the scope of carried out routine inspections is not sufficient, the inspections are not comprehensive, it is not ascertained that the administrator performed significant responsibilities assigned to him by law.
Public auditors also pay attention to the fact that restructuring cases are difficult cases of economic nature. To solve them not only insolvency law is needed but also other economic business analysis knowledge. However, there is a lack of organised trainings for judges to deepen their expertise. 89 percent of judges say that such trainings would be necessary and useful when examining the restructuring proceedings.
National Audit Office presented its conclusions and recommendations to the Government, the State Tax Inspectorate, Department of Enterprise Bancruptcy Management, the National Courts Administration, the proper implementation of which could increase the number of successfully ended restructuring proceedings and the level of recovery of creditor requirements. It could reduce the number of companies which have bankruptcy cases after the restructuring, in addition, it could contribute to the promotion of business and company‘s long-term viability restoration by providing one more opportunity to honest businessmen.