Insolvency proceedings of a natural person with cross-border elements in the Republic of Latvia

Insolvency proceedings of a natural person with cross-border elements in the Republic of Latvia

The European Union’s internal market shall comprise an area without internal frontiers, in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties.[1] A person can also face financial difficulties in exercising freely his or her EU rights and it raises questions:

- Whose EU Member State’s insolvency law is applicable?

- Whether the debtor will be able to enter into insolvency proceedings in respective Member State?

REGULATION (EU) 2015/848 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 20 May 2015 on insolvency proceedings (Insolvency Regulation) has been adopted to promote the EU internal market and the area of freedom, security and justice.

1) The scope of Insolvency Regulation:

The applicability of the Insolvency Regulation is not limited only to a cross-border elements, therefore any insolvency proceedings of a natural person of a Member State may be subject to it. It is important to highlight that the legal provisions of the Insolvency Regulation do not have a “universal” applicability, so that means the applicability of each legal norm is assessed separately on the basis of the circumstances and facts of the case.

2) The Centre of Main Interest:

2.1) Legal framework of the Centre of Main Interest:

Article 3 of the Insolvency Regulation provides that the courts of the Member State within the territory of which the centre of the debtor's main interests (COMI) is situated shall have jurisdiction to open insolvency proceedings. The COMI shall be the place where the debtor conducts the administration of its interests on a regular basis and is ascertainable by third parties. In the case of an individual exercising an independent business or professional activity the COMI shall be presumed to be that individual's principal place of business in the absence of proof to the contrary. In the case of any other individual the COMI shall be presumed to be the place of the individual's habitual residence in the absence of proof to the contrary.[2]

The first paragraph of the Article 127 of the Insolvency Law of the Republic of Latvia (LR) states that a subject of insolvency proceedings of a natural person may be any natural person who has been a taxpayer in the Republic of Latvia in the previous six months and who is in financial difficulties (debtor)

2.2) Status of Taxpayer:

LR case law has established that the determination of the taxable person does not depend solely on taxes paid, since the failure to fulfil this obligation does not yet exempt the person from the status of the taxable person.[3] It can be concluded that it is necessary to prove the continued preservation of the status of taxpayer for six month not the payment of taxes. Also the status of the taxpayer alone does not establish the COMI.

2.3) Habitual Residence:

The principle of habitual residence is regulated in the various EU legal acts based on the areas governed by the legislation in question. Article 3 of the Insolvency Regulation states that the COMI is the place where the debtor regularly manages his or her interests.[4] In the light of the foregoing, habitual residence is the place where interests are managed and not the place where the person might reside. In order to establish the COMI various circumstances and facts are taken into consideration, e.g. declared residence, marital status, employment, etc.

2.4) Notification to creditors

The definition of the COMI referred to in Article 3 of the Insolvency Regulation also includes legal condition “ is ascertainable by third parties.” Article 28 of the preamble of the Insolvency Regulation states that special consideration should be given to the creditors and to their perception as to where a debtor conducts the administration of its interests. In the event of a shift of COMI informing creditors of the new location from which the debtor is carrying out its activities in due course.[5]

3) Features, Prerequisites and restrictions of Insolvency Proceedings

If the COMI is located in Latvia, the next step is to ascertain features, prerequisites and restrictions for insolvency proceedings under the LR Insolvency Law. The features of natural person’s insolvency proceedings have been established in the first paragraph of Article 129 of LR Insolvency Law. It is the responsibility of the person to prove the financial obligation due date. A form is not specified, but it is clear that it has to be done in the form of a procedural document. The second paragraph of Article 129 of LR Insolvency Law determines a prerequisite for submitting an application for insolvency proceedings of a natural person the payment of a deposit in the amount of two minimum monthly salaries into an account specially created by the Insolvency Administration. Clear and understandable obligation, but its fulfilment can also indicate COMI’s establishment in another Member State or legal basis for refusal to initiate or terminate insolvency proceedings. Article 130 of LR Insolvency Law form restrictions on the application of the insolvency proceedings of a natural person. Consequently, even if the COMI is established in Latvia and features and prerequisites are accomplished, the right of a natural person to enter insolvency proceedings can still be restrained. The limitations of Article 130 of LR Insolvency Law are applicable on the basis of the their legal nature, without narrowing legal framework to only to the Latvian jurisdiction. Furthermore, if actions or proceedings mentioned in Article 130 of LR Insolvency Law have taken effect in another jurisdiction, the initiation or successful completion of insolvency proceedings will not be possible.[6]

4) Bankruptcy Procedure:

After proclamation of the insolvency proceedings of a natural person, the bankruptcy procedure shall be commenced.[7]

In bankruptcy proceedings, the administrator shall be required to investigate the debtor’s property and obligations, as well as to request and receive from the debtor information necessary within the scope of the insolvency proceedings of a natural person.[8] The debtor is obliged to supply the administrator with the information necessary for the course of the insolvency proceedings.[9] The debtor must cooperate with the administrator to ensure the lawful and effective conduct of insolvency proceedings. Misreporting can be classified as knowingly provided false information that is contrary to the principle of good faith in Article 6 subparagraph 8 of LR Insolvency Law - persons involved in proceedings shall use their rights and fulfill their duties in good faith. Accordingly, knowingly provided false information can be legal basis for a court to terminate bankruptcy proceedings without releasing the debtor form obligations.

The debtor has an obligation to earn income according to his or her possibilities, in order to satisfy the creditors' claims as fully as possible.[10] The opening of bankruptcy proceedings should not affect the debtor’s income. Due to the objective reasons the debtor may no longer be able to earn at the previous level or find a new job. There can also be a need to prove these objective reasons.

In Bankruptcy proceedings the administrator shall also evaluate the transactions concluded by the debtor. The transactions can be appealed, if they have been concluded within the period specified by law, losses have been caused to the debtor and creditors and the parties have been aware of the damages and/or transaction has been closed with an interested party. In the context of LR Insolvency Law transactions resulting in losses are not limited to only to transactions that reduce the property. Precise documentation of transactions can demonstrate the practice in good faith and the absence of losses.

5) Extinguishing Obligations:

The debtor whose bankruptcy procedure has been completed is a subject of the procedure of extinguishing obligations. The main objective of the procedure of extinguishing obligations is to release the debtor from the financial obligations by balancing the interests of the debtor and creditors, provided that the debtor in good faith has transferred his or her income to cover creditor claims according to the plan for extinguishing obligations. The precondition for releasing the debtor from the uncovered liabilities is the execution of the plan for extinguishing obligations.[11] If the debtor has executed the plan for extinguishing obligations, the remaining obligations shall be extinguished and enforcement proceedings shall be terminated.[12] Drawing up appropriate plan of extinguishing obligations is essential because otherwise plan of extinguishing obligations may receive disapproval from the court and/or the debtor may not be released from the obligations.

Conclusions:

When interpreting and analysing EU and LR regulations, it should be understood that persons have the right to migrate and establish their business freely in any EU Member State, but the abuse of these rights is prohibited and unlawful. It is very important to avoid inconsistencies with the obligations laid down in the Insolvency Regulation and LR Insolvency Law, since otherwise insolvency proceedings, even while exercising rights in good-faith, may not be commenced, terminated or the debtor may not be extinguishing from obligations.

The immediate opening of insolvency proceedings is in the interest of the debtor because the consequences of commencement of insolvency proceedings is the execution proceedings in the matters on the recovery of the amounts adjudged, but not recovered shall be suspended, and in matters regarding the honoring of the debtor's obligations through court. The increase in interest for the use of the loan (credit), the lawful increase in interest, the increase in the penalty (including the penalty increment expressed in per cent), the increase in the late payment charges ceases. The calculation of late payment charges, which are specified as interest payments for missing the deadline for the payment of taxes, duties and penalties, shall be suspended for tax claims. A court decision proclaiming the insolvency proceedings of a natural person shall be the grounds for a stay of proceedings against the debtor.[13] The opening of insolvency proceedings depends on feature and prerequisite identification, non-existence of restrictions and evidence collection concerning the COMI.

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[1] Consolidated version of the Treaty on the Functioning of the European Union. Adoption: 13.12.2007. Entry into force: 01.12.2009. Article 26. Available: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A12012E%2FTXT

[2] REGULATION (EU) 2015/848 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 20 May 2015 on insolvency proceedings. Adoption: 20.05.2015. Entry into force: 25.06.2015. Available: https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX%3A32015R0848

[3] Judgement of the College of Civil Courts of Riga Regional Courts of 11 April 2011, case No.3-10/0025/6

[4] REGULATION (EU) 2015/848 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 20 May 2015 on insolvency proceedings. Adoption: 20.05.2015. Entry into force: 25.06.2015. Available: https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX%3A32015R0848

[5] Ibid

[6]Insolvency Law of the Republic of Latvia. Latvijas Vēstnesis. Adoption: 26.07.2010. Entry into force: 01.10.2010. Available: https://likumi.lv/ta/en/en/id/214590-insolvency-law

[7] Insolvency Law of the Republic of Latvia. Latvijas Vēstnesis. First paragraph of Article 134. Latvijas Vēstnesis. Adoption: 26.07.2010. Entry into force: 01.10.2010. Available: https://likumi.lv/ta/en/en/id/214590-insolvency-law

[8] Insolvency Law of the Republic of Latvia. Latvijas Vēstnesis. 3rd and 4th subparagraph of Article 137. Adoption: 26.07.2010. Entry into force: 01.10.2010. Available: https://likumi.lv/ta/en/en/id/214590-insolvency-law

[9] Insolvency Law of the Republic of Latvia. Latvijas Vēstnesis. 5th subparagraph of Article 139. Adoption: 26.07.2010. Entry into force: 01.10.2010. Available: https://likumi.lv/ta/en/en/id/214590-insolvency-law

[10] Insolvency Law of the Republic of Latvia. Latvijas Vēstnesis. 1st subparagraph of Article 139. Adoption: 26.07.2010. Entry into force: 01.10.2010. Available: https://likumi.lv/ta/en/en/id/214590-insolvency-law

[11] Explanations and findings of the Insolvency Administration 2018.12.-2019.06.

[12] Insolvency Law of the Republic of Latvia. Latvijas Vēstnesis. First paragraph of Article 164. Adoption: 26.07.2010. Entry into force: 01.10.2010. Available: https://likumi.lv/ta/en/en/id/214590-insolvency-law

[13] Insolvency Law of the Republic of Latvia. Latvijas Vēstnesis. Second paragraph’s 1st and 3rd subparagraph and forth paragraph of Article 134. Adoption: 26.07.2010. Entry into force: 01.10.2010. Available: https://likumi.lv/ta/en/en/id/214590-insolvency-law