The state of emergency due to the spread of the Covid-19 epidemic also affects the relationship between creditors and debtors and the regulation of insolvency proceedings. The Saeima of the Republic of Latvia has adopted the Law “On Measures for Prevention and Management of the Threat to the State and Its Consequences Due to the Proliferation of Covid-19”, which significantly restricts the rights of creditors.
The purpose of the law is to lay down measures to prevent and cope with state threats and its consequences, provide specific support mechanisms and expenditures directly related to controlling the spread of Covid-19. It provides for the right of taxpayers in the affected sectors to apply for tax deferral, abolishes personal income tax advances from operating income, provides for 75% wage compensation for employees in crisis-affected sectors, and other tax support and economic stimulus measures.
At the same time, the said law imposes restrictions on creditors to exercise their statutory rights against the debtors:
The said law came into force on March 22, 2020, but its provisions have been applicable since the declaration of the emergency, that is, March 12, 2020. As a result, the provisions of the law have retroactive effect, including insolvency applications that have already been brought before a court and are not currently pending.
In order to protect debtors during an emergency, Saeima has decided to significantly restrict the rights of creditors, effectively rendering impossible the recovery of any creditors’ claims and the exercise of their rights for at least 60 days. First, such a limitation of the creditor’s rights extends to cases where the creditor can pursue recovery or enforce a debt out-of-court or pursue simplified and expedited procedure by extending deadlines for commencement of unchallenged enforcement of obligations, use of commercial pledge, and submission of creditor’s insolvency application against the debtor.
Secondly, creditors should note that it is currently impossible to sue for any debt unless the creditor has notified the debtor in writing of the existence of the debt and invited the debtor to voluntarily comply with the delayed payment obligation, stating the possibility of making a valid written objection and setting a time limit not less than 60 days from the date of receipt of the notification. It should be noted that under Article 129 (2) 2) of the Code of Civil Procedure, when bringing a court action, the application must be accompanied by documents certifying that the case has been subject to previous mandatory out-of-court procedures.
Law Office LUMOS in Riga provides legal assistance to creditors in debt collection and insolvency proceedings, as well as to other creditors in the exercise of their rights. Amendments to the law adopted by the Saeima significantly restrict the rights of creditors and, in certain cases, raise concerns about violation of the principle of proportionality, completely denying creditors access to the courts for a long period of time. Amendments to the law may not achieve the intended result and may fail to keep the debtors actually solvent while at the same time completely suspending procedures of the Insolvency Law. In this way, fraudulent debtors may have the opportunity to unravel their property without interruption.
Amendments to the law also provide ample opportunity for debtors to object to the claims raised against them by creditors. For example, the rule that a commercial pledge notice may be challenged in court when exceptional circumstances prevent the use of the commercial pledge refers to declared emergency due to Covid-19. Thus, the legislature has implicitly stated that such circumstances can be considered as force majeure circumstances which justifiably prevent debtors from fulfilling their obligations to creditors.