Insolvency Law in Latvia- “IKI” insolvency case in Latvia resolved

The Private person S.G. applied to Riga city Kurzeme district Court with the Insolvency application against shop "IKI" and "Cento" manager "Palink".

"Palink" was founded in 2003, and its share capital is 60 million Lats. In 2010 "Palink" worked with the turnover of 72.97 million Lats what is 66% more that a year before and reduced its losses more than double.

S.G. indicated that construction company "Landekss" has assigned him the right to claim against "Palink".

The application was based on obligations, arising from Construction Company "Landekss' invoices for facility maintenance and rent of mold.

From the Warning regarding intention to submit an application for the insolvency proceedings sent to "Palink", S.G. justified his claim according to invoices, deriving from Contractor agreement.

Riga city Kurzeme district Court on January 5, 2012 declared the insolvency procedure of "Palink".

The Court declared the insolvency on the ground that after termination of Contractor agreement, Oral agreement was in force and "Palink" did not fulfill the obligations of the Oral agreement, as well as did not raise justified objections to the claim.

The Prosecutor general office submitted the Objection for first instance Court Judgment, indicating, that the Judgment has to be reversed because of the breach of substantive and procedural rules and infringement of fundamental rights.

On March 7, 2012, the Senate of the Supreme Court reversed the Riga city Kurzeme district Court Judgment, indicating that Court has infringed the rights of everyone to fair court, established in Constitution.

The Constitution of Republic of Latvia establishes that everyone has the right to defend his or her rights and lawful interests in a fair court.

The Senate considered, that Riga city Kurzeme district Court heard on the merits the dispute about Oral obligation and the existence of the debt arising from it, as well as "Palink" obligation to pay for it. Such case had to be heard in the Court Proceedings by Way of Action, not by Special Adjudication Procedure.

According to that, Court has violated the fundamental rights of the Party, established in the Constitution.

The applicant based the insolvency application upon the features of Latvian Insolvency Law, what includes 4 criteria: 1) the debtor has not honored one or more debt obligations, from which the basic debt amount separately or in total exceeds LVL 3000, 2) the deadline for debt obligations has expired, 3) the creditor or creditors have issued or sent a warning to the legal address of the debtor regarding their intention to submit an application for the insolvency proceedings of a legal person, 4) the debtor has not paid his debt or raised justified objections to the claim within three weeks following the handing over of the warning to the postal merchant.

The Senate indicated that Court had to ascertain all 4 criteria at the same time, but Riga city Kurzeme district Court did not interpret and adjust the legal standards correctly, what anticipated, that Court had to establish the insolvency procedure feature, what was indicated in the Insolvency application.

Also Senate established that the Debtor shall be considered as insolvent only if it is not fulfilling the obligations, what are not in dispute. In this case Riga city Kurzeme district Court established that the part of the debt is disputed, and the dispute is heard in the Court.

The Senate holds a view that Riga city Kurzeme district Court did not have a ground to acknowledge "Palink" as insolvent, as between the Parties, in relation to Contractor agreement, is a dispute, what has to be settled in Riga Regional Court.

If in the insolvency procedure case, what has to be heard by Special Adjudication Procedure, raises a dispute for rights, what has to he settled in the Court Proceedings by Way of Action, the application has to be left without consideration, or litigation has to be suspended.

Valters Gencs

Attorney at Law

Gencs Valters Law Firm

T: +371 67 24 00 90

Email: valters.gencs@gencs.eu