Breach of contractual obligations

Lithuania

Latvia

Estonia

Failure to perform any obligation under the contract, including improper performance and failure to perform due date, shall be deemed to be non-performance.

The performance of the obligations, as it is stated in the Civil Code of the Republic of Lithuania, may be secured by contract or by law through forfeiture, mortgage, surety, security, deposit or any other means provided for in the contract.

Forfeiture is the amount of money that a debtor is obliged to pay to a creditor in the event of default or default (penalty, default interest), as determined by law, contract or court. It can be specified as a specific amount of money or as a percentage of the amount of the underlying obligation and be calculated for each day, week, month, etc. of the default.

In the event of forfeiture, the creditor cannot claim from the debtor both the forfeiture and the fulfilment of the obligation, unless the debtor misses the due date to fulfil the obligation.

The debtor who has defaulted on a financial obligation is required to pay five per cent annual interest on the amount overdue, unless otherwise provided by law or contract. Where both parties to the contract are entrepreneurs or private legal persons, default interest shall be payable at the rate of six percent per annum, unless the law or contract provides otherwise.

If a party fails to fulfil its pecuniary obligation, the other party shall usually have the right to claim the obligation in kind.

If the debtor fails to comply with the judgment ordering the performance of a contractual obligation in kind, the court shall impose a fine on the debtor. The penalty may refer to a particular amount of money or a percentage for each day spent. However, the recovery of a fine does not relieve the debtor of his obligation to pay damages.

Rights and obligations arising from legal contracts remain valid and are not generally cancelled of suspended by the emergency measures passed by the government of the Republic of Latvia during the Emergency State period. Thus, unless expressly stated in the Government’s order On Emergency State, the Law On Measures for the Prevention and Suppression of Threat to the State and Its Consequences Due to the Spread of COVID-19, or any of the subsidiary regulations of the Cabinet of Ministers, the contractual and statutory regulations are applicable to execution of contracts.

In the event of delayed payment or other default the defaulting party may be obliged to pay contractual penalty, cover losses, pay to the innocent party interest or suffer other consequences stated in the contract of law.

A Contractual penalty regarding unacceptable performance of the obligation or failing to perform it within due time (time period) may be laid down as a fixed sum or ascending. In case of the latter, no more than 10 % in total of the principal debt or amount of the main obligation.

If someone has to bear contractual penalties, then a creditor may request either its payment or the performance of the contract, unless the contractual penalty was set for failure to perform in the proper time rather than non-performance as such.

The interest rate, unless stated in the contract, is set by law – 6% or in case of contracts for the supply of goods, for purchase or provision of services – 8% on top of the refinancing rate of the European central bank. The total amount of interest the creditor is entitled to can’t exceed 100% of the principal amount of the main obligation.

The creditor is entitled to demand the payment of the contractual penalty only in the amount exceeding the amount of the asked interest.

The losses are to be proven by the creditor in the court.

These are some specific regulations included in the effecting private obligations and breach of contract:

1. The term for voluntary execution of court judgements can be set up to 60 days (normally – 10 days), except for immediately enforceable judgements.
2. Notarial enforcement acts may be submitted for enforced execution no earlier than 60 days after the missed payment term (normally – immediately after fallen due).
3. Measures beneficial to commercial pledge providers are passed, such as extending the registration procedure of announcement of the execution of the commercial pledge to 60 days (normally – 30 days).
4. Merchants of “industries affected by outbreak of Covid-19” as determined by the Chamber of Ministers, and leasing property of a public person are fully or partially exempted from lease payments and related penalties.
5. When initiating the debt recovery procedure from a debtor, a creditor is obliged to first send a written notice to the debtor, indicating the debtor’s rights to rise reasoned objections regarding existence of the debt. The payment term laid down in the written notice must not be shorter than 60 days.
6. It is forbidden for the creditors to submit debtor’s insolvency applications till September 1^st, 2020.   

Parties shall fulfil their contractual obligations as described in the contract. Failure to perform or improper performance of an obligation, including a delay in performance, is deemed as a non-performance.

In the case of non-performance by an obligor and if the obligor is liable for the non-performance, the obligee may use different legal remedies:

1. require performance of the obligation;
2. withhold performance of an obligation which is due from the obligee;
3. demand compensation for damage;
4. withdraw from or cancel the contract;
5. reduce the price;
6. in the case of a delay in the performance of a monetary obligation, demand payment of a penalty for late payment.

Under Estonian law it is presumed that non-performance is not excused, i.e. an obligor is liable for the non-performance.

The non-performance could be excused if it caused by force majeure, meaning the infringer shall not be liable for the breach of its obligations (regarding force majeure please see below).

In these cases, the legal remedies available to the other party are limited, in particular, the other party cannot demand the performance of the obligation, compensation for the caused damages and interest. The injured party still has the possibility to refuse to perform its obligations, to withdraw from or cancel the agreement and demand the reduction of price.

However, it should be kept in mind that at least as of now, the Estonian court practice has deemed that the non-performance of a monetary obligation is not excused even in the case of a force majeure. The practice could change due to the COVID-19 virus if companies cannot sell their products or services and therefore have no money to pay due to the recession that COVID-19 virus can cause.

Performance of contractual obligations under changed circumstances

Lithuania

Latvia

Estonia

Article 6.204 of the Civil Code of the Republic of Lithuania provides that, if in the course of performing a contract, the circumstances, which were not known until the conclusion of the contract, occur (and at the time of the conclusion of the contract these circumstances could not have been foreseen and these circumstances are beyond the control of the aggrieved party as well as the risk of occurrence of these circumstances was not assumed by the aggrieved party), and this is the reason why the cost of performance has essentially increased or the value thereof has essentially diminished, then the aggrieved party shall have the right to make a request to the other party for the modification of the contract. Such circumstances shall be deemed to be a constraint on the performance of the contract and shall be notified as soon as they occur by submitting a reasoned and well-grounded request for the modification of the contract.

It goes without saying that quarantine in the country is a valid reason to request for the modification of the contract. Of course, such a referral itself does not give a party the right to unilaterally modify the contract – the other party must accept the proposed changes.

In the absence of a consensus, the dispute may be submitted to a court which will decide either to terminate the contract or to modify the terms of the contract in order to restore the balance of the parties' contractual obligations.

Under the Section 1589 of the Civil Law of the Republic of Latvia “A contract legally entered into shall impose on a contracting party a duty to perform that which was promised, and neither the exceptional difficulty of the transaction, nor difficulties in performance arising later, shall give the right to one party to withdraw from the contract, even if the other party is compensated for losses”.

Thus, changed circumstances is generally not a legal reason to withdraw from the contract or fail to fulfil contractual obligations. Changed circumstances are also not enabling unilateral amendments in the contract. Any changes in a legal contract, unless otherwise stated in the law, are a subject of a mutual agreement. 

The exception from the general rule is the occurrence of force majeure, which may be used to release the defaulting party from certain obligations under the Law or according to the contract (see more in the related section).

Pursuant to the Estonian Law of Obligations Act it is possible to alter the balance of the contractual obligations if the circumstances under which a contract is entered into change after the entry into the contract and this results in a material change in the balance of the obligations of the parties due to which the costs of one party for the performance of an obligation increases significantly or the value of that which is to be received from the other party under the contract decreases significantly.

The injured party may demand the amendment of the contract retroactively from the other party, but not for the time earlier than the time when the balance of the obligations changed.

The amendment of a contract may be demanded if:

1. at the time of entry into the contract, the injured party could not have reasonably expected that the circumstances might change; and
2. (ii) the injured party could not influence the change in the circumstances; and
3. (iii) the risk of a change in the circumstances is not borne by the injured party pursuant to the law or the contract; and
4. (iv) the injured party would not have entered into the contract or would have entered into the contract under significantly different terms if the party had known of the change in the circumstances.

The modification of the agreement needs the consent of both parties. Furthermore, if the bases for amendment of a contract exist but due to the circumstances amendment of the contract is not possible or would not be reasonable with respect to the other party, the party aggrieved by alteration of the balance of the obligations may withdraw from the contract or, in the case of a long-term contract, cancel the contract.

Force Majeure

Lithuania

Latvia

Estonia

One of possible way of actions is proving that the company is dealing with difficulties due to force majeure. A party to a contract, which has faced force majeure, has the right to suspend the performance of the contract until the circumstances of force majeure disappear, and if such situation lasts for a longer period, there is a possibility to terminate the contract.

The conditions for recognizing force majeure are analogical to those for modification of the contract on the basis of changed circumstances. Of course, in order to apply force majeure rules, the company needs to review its contracts and verify that they provide for the circumstances of the force majeure.

The basis to be exempt from liability arises from the moment of the occurrence of the force majeure occasion (obstacle) or from the moment of notification, if not reported in a timely manner, therefore the counterparty – suppliers, customers, and partners – must be informed immediately after the force majeure situation occurs regarding company’s inability to meet contractual obligations, their expected duration and the extent to which they are due. In the event of failure to report in time, the defaulting party shall be partially liable for damages that could otherwise have been avoided.

In case of force majeure there is no civil liability, i. e. default interest and penalties are not paid, the party shall be exempt from damages and other penalties provided for in the contract (except for the obligation to pay interest).

Given the consequences of the coronavirus for business sectors, the Lithuanian Chamber of Commerce, Industry and Crafts has officially identified Covid-19 as one of the circumstances that could be considered as force majeure. However, it must be proved that not only there are circumstances related to the coronavirus that have made it difficult for the company to fulfil its contractual obligations (the declaration of an extreme situation alone does not relieve the business of its obligations), but also it has to be argued that precisely these circumstances are the ones that led to the failure of performing the contract. The existence of force majeure is determined on a case-by-case basis, in the light of the particular facts. It shall be noted that the force majeure certificate is issued for each eligible contract separately. The certificate is not issued when the company has been operating without a written contract, on individual orders, or verbal agreements.

The Chamber noted that all force majeure cases are dealt with within 20 working days. If all necessary and properly prepared documents are provided, the certificate can be issued more quickly.

The force majeure certificate does not exempt the company from all its obligation. The certificate is additional evidence in negotiating with the other party to the contract regarding the circumstances of the force majeure during the period of their existence, default interest, interest, non-payment of fines, deferral, etc.

If the contract does not provide force majeure circumstances, the company shall inform the other party to the contract as soon as possible of any difficulties encountered and agree on a mutually acceptable solution.

In cases where the contract is already started to be performed, restitution may be applied, taking into account the costs incurred by the other party before the occurrence of force majeure, and partial payment for services or goods.

COVID-19 may be construed as a force majeure circumstance, which could release the defaulting party from legal consequences due to failure to fulfil the contractual obligations.

Force majeure, or “superior power”, is not defined in the Latvian law and is determined by court in every case individually. Therefore, contractual parties generally choose to define it in the contract. Thus, the possibility to apply the force majeure as a legal justification for default would largely depend on the contract wording.  

Nonetheless, there are some instances where Force majeure is applicable under the law. I.e., under Section 1657 of the Civil law of the Republic of Latvia „A court may release the debtor from consequential losses due to default also in other cases where the debtor cannot be considered at fault due to lack of care, recklessness or negligence, or if performance did not occur due to force majeure.“ Force majeure may be used to release the defaulting party from obligation to cover losses.

It should be noted that the general existence of CIVID-19 and the resulting health crises is not on its own a force majeure circumstance towards any and all obligations arising from contracts. The COVID-19 pandemic and the governmental orders related therewith can be used as a force majeure only in case the defaulting party can show and prove that these circumstances directly have caused the default of obligations without the fault of the defaulting party. The existence of force majeure is determined by the parties or court on a case-by-case basis, in the light of the particular facts.

It is clear at this time that for any future contracts and amendments thereof the parties must pay extra attention to formulate the force majeure clause considering the type of contract and obligations therein. It is highly suggested to include in the definition of force majeure such circumstances as an epidemic, pandemic and Emergency state announced by the government. 

Pursuant to the Estonian Law of Obligations Act force majeure are circumstances which are beyond the control of the obligor and which, at the time the contract was entered into or the no contractual obligation arose, the obligor could not reasonably have been expected to take into account, avoid or overcome the impediment or the consequences thereof which the obligor could not reasonably have been expected to overcome.

Force majeure consists of four parts:

1. the existence of an impediment;
2. the impediment must not have been caused by the debtor’s own conduct or inactivity;
3. the enforceability of the circumstance; and
4. the inevitability and insurmountability of the circumstance.

Thus, the existence of an impediment is the first criteria which shall be met for a person to be exempted from a contractual liability. Although it should be kept in mind that the concluded agreement shall have been conducted before the occurrence of the force majeure. Persons cannot rely on a force majeure clause in the case the contract has been concluded within the timeframe when the circumstance considered as force majeure was already present.

Furthermore, if the effect of the force majeure is temporary, the non-performance of the obligation is excused only for the period during which force majeure impeded performance of the obligation.

The force majeure clause does not have to be added to the contract as it comes from the law, but all contracts should be reviewed as they may contain specific clauses that exclude the application of force majeure.

It should also be noted that in the case of non-performance, the other party still has the right to use certain legal remedies like withhold its performance, withdraw from or cancel the contract or reduce the price regardless of fact that the obligor’s non-performance could be excused due to force majeure.

Protection of Personal Data

Lithuania

Latvia

Estonia

Andrea Jelinek, Chair of the European Data Protection Board (EDPB), responded to nowadays’ situation: “Data protection rules (such as GDPR) do not hinder measures taken in the fight against the coronavirus pandemic. However, I would like to underline that, even in these exceptional times, the data controller must ensure the protection of the personal data of the data subjects.“ 

Although the GDPR provides for a general prohibition on the processing of health data, but in the case of epidemics, there is an exception where the processing is necessary for reasons of public interest in the area of public health. Without prejudice to the GDPR, the employer has the right to receive the information from its employees about whether they have symptoms of COVID-19, whether they have been diagnosed with COVID-19 (please see the exception for Estonia below), whether they have travelled abroad, or have contact with COVID-19 and other information necessary to protect employees, clients and to fulfil their duties as an employer. Important to note that this information cannot be made public or documented without reasonable justification (unless required by law to prove the employer's obligations or required by law). It also should be taken into account that the employer is not entitled to exercise the functions of other competent authorities, such as informing others that the particular employee is ill with COVID-19, unless the situation to protect others immediately so requires.

Even though the GDPR applies directly in every EU member state, there are national legislations which may change the interpretation of the relevant data processing rules. For example – the Estonian Data Protection Inspectorate has found that the employer cannot enforce the employee to disclose whether he or she has symptoms of or has been diagnosed with COVID-19. Giving out such information is voluntary. However, the employer can request the employee to disclose information whether the employee has visited any risk countries, has had encounters with people who have been infected with COVID-19 and ask a confirmation that the employee does not impose threat to the other employees and to the work environment. The employer can request such information because it is not regarded as health data. 

General Meeting of Shareholders

Lithuania

Latvia

Estonia

As in Lithuanian, under the Law on Companies of the Republic of Lithuania, a time for convening an ordinary annual General Meeting of Shareholders is coming – it shall be done no later than 4 months after the end of the financial year, i. e. companies whose financial year coincides with a calendar year have to convene the General Meeting of Shareholders by May – it is worth noting that with the intention of convening the General Meeting of Shareholders it is recommended to comply with the Government-approved restrictions and recommendations in the context of the spreading coronavirus.

The annual ordinary General Meeting of Shareholders makes decisions on:

1. approval of the set of annual financial statements;
2. company’s profit (loss) distribution;
3. dividend distribution;
4. payment of annual bonuses to members of the Management Board and the Supervisory Board;
5. the selection and cancellation of the auditor or audit firm for audit of the set of annual financial statements purposes, and the terms of payment for such audit services;
6. the formation, use, reduction and liquidation of company’s reserves;
7. collegial management bodies, i. e. Supervisory Board and Management Board, whose term of office expires in the year of this regular General Meeting of Shareholders, re-election;
8. reduction of the authorized capital in order to pay the company's funds to the Shareholders.

If the planned Meeting has not been announced yet, it is best to convene it after the quarantine period. However, if the General Meeting of Shareholders is already scheduled, there are several ways to proceed: postpone the date of the Meeting, cancel the Meeting, or invite Shareholders to attend the General Meeting and vote in writing on the general ballot paper by electronic means.

Under the Commercial law of Latvia, the general meeting of shareholders shall convene at least once a year in order to approve the annual financial statement, to take a decision on distribution of profit, and to elect an auditor (Section 213 for limited liability companies, Section 269 for joint-stock companies).

The time of the general meeting of shareholders must be set considering the statutory term for submitting the annual financial report. Such term is either 4 months or 7 months after the ending of the respective financial year, depending on the size of the company.

However, according to Law On Measures for the Prevention and Suppression of Threat to the State and Its Consequences Due to the Spread of COVID-19, the term for submitting the Annual financial report for 2019 is extended for 3 months.

Furthermore, according to the government order on Emergency state, all meetings and gatherings are forbidden regardless on the number of participants. Even though not expressly stated, this prohibition may be applicable to on-site meetings of shareholders.

Nonetheless, On March 20^th, 2020 the legislature has passed amendments to the Commercial law including regulation on remote attendance and voting in the general meeting of shareholders (Section 214.¹ of the Commercial law). The new regulation states that the shareholder is entitled to vote in writing for all items in the agenda of the meeting before the meeting takes place. Furthermore, all shareholders may attend the meeting by electronic means. In both instances the board ensures identification of the shareholders.

It is advisable not to held physical shareholders meetings until the emergency situation is terminated by the Estonian Government. In addition to reducing health risks for shareholders, physical meetings may contradict with governmental orders adopted in connection with the emergency situation which may change often and are available at: https://www.riigiteataja.ee/viitedLeht.html?id=8

Holding shareholders meetings without physical meeting.

Private limited company (Osaühing).

Option 1. If all shareholders agree with the resolution, make a written resolution that will be signed by all shareholders and must set out the names of shareholders, the number of votes and the time of passing the resolution. In certain cases, for example in connection with electing management board member, at least one shareholder should sign digitally with Estonian digital signature.

Option 2. Adoption of resolutions without holding a meeting. The management board shall send a draft of shareholders resolution in a format which can be reproduced in writing (e.g. by e-mail) to all shareholders, specifying the term during which the shareholder must present the shareholder’s position on it in a format which can be reproduced in writing. If a shareholder does not give notice of whether the shareholder is in favour of or opposed to the resolution during this term, it shall be deemed that the shareholder votes against the resolution.

The management board shall prepare a record of voting concerning the voting results and shall promptly send it to the shareholders. A record of voting shall set out: (1) the name and registered office of the company; (2) the name of the recording secretary; (3) the adopted resolution together with the voting results (including the shareholders who voted for the resolutions by name); (4) at the request of a shareholder who maintains a dissenting opinion with regard to a resolution, the content of the shareholder’s dissenting opinion; (5) other circumstances of importance with regard to the vote.

In case of unavoidable need to have a shareholders meeting (and this does not contradict with emergency situation orders), try to reduce the number participating people so that shareholders provide written or digitally signed power of attorneys to one ore few people.

Alsocheck your company’s articles of association (“AoA”) if it contains possibility and the procedure to carry out the voting by “mail in writing” and/or “electronically”.  Electronic voting means that shareholders vote during or prior to meeting by signing resolutions with Estonian digital signature.  If so set out in the AoA or a resolution of the management board or the supervisory board, the meeting may be transmitted in full or in part in real time via the Internet, using two-way communication or any other technically secure manner. However, watching the transmission shall not be considered participation in the meeting.

Public limited company (Aktsiaselts).

If all shareholders agree with the resolution, make a written resolution that will be signed by all shareholders and must set out the names of shareholders, the number of votes and the time of passing the resolution. In certain cases, for example in connection with electing supervisory board member, at least one shareholder should sign digitally with Estonian digital signature.

In case of unavoidable need to have a shareholders meeting (and this does not contradict with emergency situation orders), try to reduce the number participating people so that shareholders provide written or digitally signed power of attorneys to one ore few people.

Also check your company’s AoA if it contains possibility and the procedure to carry out the voting by “mail in writing” and/or “electronically”.  Electronic voting means that shareholders vote during or prior to meeting by signing resolutions with Estonian digital signature.  If so set out in the AoA or a resolution of the management board or the supervisory board, the meeting may be transmitted in full or in part in real time via the Internet, using two-way communication or any other technically secure manner. However, watching the transmission shall not be considered participation in the meeting.

Listed public limited companies have also possibility to carry out special electronic participation at the meeting which is not dealt here in more detail.

Inability to Pay Taxes or Credit on Time

Lithuania

Latvia

Estonia

In case of inability to pay taxes on time, the company is entitled to apply to the State Tax Inspectorate (STI) under Article 88 of the Law on Tax Administration of the Republic of Lithuania due to deferral or spreading the time limit for discharging arrears in payments. Likewise, if there are no late tax payments at the moment, but it is clear that the company will not be able to pay taxes on time, it has a right to submit a request due to deferral or spreading the time limit for discharging arrears in payments before they are formed, but not earlier than 20 days prior to the due date.

However, such a request does not oblige the STI, therefore the company should justify why it cannot pay the full amount of taxes at time (for example, loss of income due to the state order to stop certain activities during a pandemic; making the necessary payments would put the company in a critical situation; the company would be at risk of insolvency and would be unable to fulfil other obligations, such as paying salaries to employees, and so on), and that deferring payment of taxes or spreading the time limit for discharging arrears in payments would stabilize company’s financial situation and make payment of the tax possible.

In cases where taxpayers are temporarily out of business activities due to the quarantine and coronavirus pandemic (do not enter into or execute any transaction; do not settle transactions with economic entities; receive no income other than interest on the cash funds held in the taxpayer's bank accounts), they may be temporarily exempt from submission of tax returns and / or other documents specified in legal acts to the STI submission.

Due to COVID-19 caused quarantine, lot of the time limits for submitting documents, information or declarations to the Registers or STI are extended (mostly for 2 months) as well.

Companies with customs debts for customs-administered taxes (import VAT, excise duties) can also apply to the customs for suspension of recovery of excise duties and VAT, conclusion of tax loan agreements without interest and exemption from interest on arrears.

The STI informed that assistance provided by entrepreneurs supporting medical institutions with money, food, security measures and charity as well as assistance provided by fund-raising charities and support funds is recognized as support for tax purposes, therefore entrepreneurs will be able to benefit from tax benefits; there will be no additional charges for medical and medical institutions that have received support.

Lenders of real estate and consumer credit are obliged to defer payment of the instalments at the request of the borrower when at least one third of the income of the borrower or his spouse is lost.

According to Latvian tax law the taxpayers might be entitled to use statutory measures to request extensions of the tax payment terms for the maximum period of 3 years. 

On May 26^th, 2020 the Chamber of Ministers passed regulations “On Provisions for employers affected by the Covid-19 crisis who qualify for downtime state benefit or deferral or payment schedule for the delayed tax payment for up to three years”.

The taxpayers representing the sectors affected by the crisis (as determined by the government) have the right to apply for an extension of the term for the payment of taxes, as well as to request that an extension of the term for the payment of taxes is granted to such late tax payments the term for the payment of which has been extended in accordance with Section 24 of the law On Taxes and Duties if the delay in the payment term has occurred due to the spread of COVID-19. The taxpayer shall, not later than within two months after setting in of the term for payment or the day of coming into force of the Law On Emergency State, the Law On Measures for the Prevention and Suppression of Threat to the State and Its Consequences Due to the Spread of COVID-19, submit a justified application to the tax administration. The tax administration has the right to divide the payment for late tax payments in instalments or to defer it for a period of up to three years as of the date of the submission of the application. No penalty payments are applied in this case.

The taxpayer is entitled to apply for the deferral or division of the payment for late tax payments in instalments if it complies with one of the following criteria:

1. taxpayers income from commercial activity in March or April of 2020, comparing to the same month in 2019, have decreased at least 30% due to spreading of COVID-19;
2. tax payers income from commercial activity in March or April of 2020, comparing to the same month in 2019, have decreased at least 20% due to spreading of COVID-19 and simultaneously the tax payer meets one of the following criteria: a) the export amount of the employer affected by the crises is at least 10% of the total turnover or no less than EUR 500 000; b) the average gross monthly salary paid by the employer in 2019 is at least EUR 800; c) the long-term investments in the employer’s fixed assets on December 31^st, 2019 was at least EUR 500 000.

It should be noted that tax payers are entitled to continue applying for deferral or division of the payment for late tax payments in instalments under general procedural regulations, in case the reason for delayed tax payment is not related to COVID-19. In such case every decision is made on case-to-case bases in the discretion of the tax administration.

As for the credit (loan) payments, these are considered a private contractual obligation and therefore are not postponed by the government order. Nonetheless, ALTUM, the state development financial institution, is planning to provide two loan programs for entrepreneurs affected by COVID-19: the current assets loan and ‚credit vacation‘ loan guarantee.

The former provides liquidity support to entrepreneurs suffering negative financial consequences due to COVID-19.

The latter includes issuing an ALTUM credit guarantee allowing postponing of loan payments in banks for entrepreneurs who are unable to repay loans in due time due to financial problems caused by COVID-19.

Tax and other filings should be made by deadlines set out be the law.

The penalty interest (rate - 0.06% per day) on tax debts has been cancelled for a period 1.03 - 01.05.2020 and will be reduced by half to 0.03% per day after 01.05.2020.

If the company envisages that it is possible to pay the taxes by the beginning of May 2020, there is no need to contact the Estonian tax authority and to apply for the payment of tax arrears in instalments. If a company wants to participate in a public procurement procedure or apply for grants or permits from the state or a local authority, you should consider applying for the payment of tax arrears in instalments. The same applies to the situation where it is evident that your financial troubles are going to last longer.

Managing the Situation of Employees

Lithuania

Latvia

Estonia

If the employee has returned from abroad or had contacts with persons from countries at risk, the employer must oblige the mentioned employee to work from home and take any additional measures necessary to protect the remaining employees. In case where the remote work is not possible, the newly adopted amendment of the Article 49 of the Labour Code shall be applied: in the event of an emergency or quarantine announced by the Government of the Republic of Lithuania, in order to ensure the health protection of workers and third parties, the employer must offer to the employee, whose health condition threatens the health security of other employees, to work remotely in a motivated written form. If the employee refuses to work remotely or fails to respond to the employer's offer to work remotely, the employer, no later than one working day from the deadline for the employee to reply to the employer's offer, shall dismiss the employee in writing, not allowing him to work and denying him / her payment of wages.

Therefore, due to virus spreading, the safest option would be to ensure the remote work for employees. Using this method of work, written requirements for the workplace are applied (if there is any), working tools are made available for work, arrangements shall be made for their provision, rules on the use of work equipment are adopted, the workplace unit, department or person in charge (to which the employee must report for the work performed in accordance with the procedure established by the employer) shall also be indicated.

The refusal of an employee to work remotely cannot be a valid reason for termination of the contract of employment or for alteration of the working conditions. However, it can be a reason for idle time as well as when the employee does not have the opportunity to work remotely or he refuses another job offered to him. The State Labour Inspectorate must be informed regarding the idle time within 1 business day.

In the event of a reduction in workloads, the employer may grant leave (annual paid or unpaid) on employee‘s request. However, the employer cannot force employees to take annual leave at exactly the time when it is advisable not to perform work duties in the workplace due to the spread of the new coronavirus.

Possible compromise also could be reduction of working time rate, when it is agreed that, for example, instead of the usual 40 hours a week, an employee would temporarily (until coronavirus threat is reduced or eliminated) perform the job duties for 30 hours a week or less, or working time regime would be changed.

Parents, adoptive parents, grandparents and guardians, i. e. employees raising children, when due to setting up an infection control regime in educational institutions need to care for young children (kindergarten, elementary school) occurs, may receive sick leave for 60 days, but not longer than until the end of quarantine or the end of the emergency situation.

Due to mentioned situation, employers may introduce an idle time, and the state will contribute. The costs incurred by employers will be reimbursed as a subsidy to the employer. Subsidy rates:

1. 60% of the salary calculated to the employee, but no more than EUR 607 gross.
2. 90% of the salary calculated to the employee, but not more than EUR 607 gross (in those sectors where government's restrictions are imposed).

The subsidy from the state will be paid for 3 months or until the end of the emergency and the employer undertakes to retain the place of employment for a further 3 months.

For self-employed persons, the guarantee fund will pay EUR 257 per month, but it will not be paid to those self-employed persons who also work under an employment contract.

Article 48 of the Labour Code introduces one more option – short-time working. Short time may be established when, due to valid economic reasons that objectively exist in a certain territory or sector of economic activity and that are recognised as such by the Government, the employer is unable to provide employees with work and there are preconditions for the dismissal of a group of employees. In that case, there exists the possibility to set shorter working hours up to half the employee's working time rate, when reduced wages due to the reduction of working time are compensated to the employee by paying short-time work benefit in accordance with the Law on Unemployment Social Insurance of the Republic of Lithuania.

Managing the work of employees is every employer’s responsibility. In the government order of March 12, 2020 On Emergency State Employers are urged to ensure the possibility of remote work.

The employee who has returned from abroad (from any country) shall self-isolate in the residence for the period of 14 days. The employer must ensure remote work option, if possible. In case the employee is COVID-19 positive, they are prohibited to leave residence till clearance from the attending doctor. State paid sick leave is available only to employees tested positive to COVID-19 and employees officially places in quarantine (does not include self-isolation).

Work trips to abroad are not generally forbidden, but do to suspension of all passenger transport, including air, water and land, options to go on work trips abroad are highly limited.

Employees of international passenger or freight transport companies are excluded from the self-isolation obligation and can continue work, unless suffering any indications of a respiratory tract infection and provided that they have not tested positive for COVID-19.

The allowed maximum weekly overtime is increased, stating that it may not exceed 60 hours a week (before – 56 hours) for employees in certain fields, including medical personnel.

The obligation to ensure mandatory health examination for employees is suspended during the emergency state, excluding employees working in special conditions” as defined by law.

In case employer is not able to provide employees with work causing idle-time, employees are entitled to “downtime compensation” equal to the employee’s regular salary.

In case downtime (idle time) occurs in workplaces of merchants of “industries affected by outbreak of Covid-19”, as determined by the Chamber of Ministers, employers are entitled to receive a state funding payment for employees in the amount of 75% of the average income of the employee, but no more than EUR 700 per month.  The preconditions for employees to qualify for the state funding are stated in the regulation of the Chamber Of Ministers No.165 of March 26, 2020.

Employers are not allowed to unilaterally reduce salaries. Reduction may be offered to employees, but in case the employee refuses, the employer has two options – to keep existing salary and, if possible, apply for idle-time state support or release the employee due to staff reduction.

Employers are entitled under law to release employees, following regulations of Labour Law.  The law allows the employer to terminate employment contract in case the number of employees are being reduced, liquidating certain positions in the company. In such case the Employer can issue a termination notice 1 month prior to termination date. Employees are entitled to termination compensation in the amount of 1-4 monthly salaries depending on how long the employee was employed with the particular employer.

In case the number of employees to be released is 5 or more within a 30-day period, the employer may be obliged to follow the procedure of collective redundancies. The procedure requires notifying the State Labour Inspectorate of the upcoming redundancies no less than 30 days before the termination notices are issued.

As from 12 March 2020, the Government of the Republic of Estonia has declared in relation to the spread of COVID-19 an emergency situation until 1 May 2020. This means wide restrictions which have influence also to normal working routine.

Arrangement of work. In certain cases, a doctor will issue an employee with a certificate of incapacity to work. However, if the employee who has to remain at home has no symptoms of illness and no known exposure to the infected person, then the employee and the employer should agree on how the temporary work arrangement will be arranged. This principle applies irrespective of whether the employee remains away from work at the initiative of the employee or the employer.

One solution is for the parties to agree to remote work on a temporary basis. However, it must be remembered that the employer cannot force the employee to do telework and the employee cannot demand telework. Also, without the agreement of the parties, remuneration conditions must not deteriorate as a result of teleworking. In theagreement for teleworking it is usually agreed on how to communicate with each other, what the security measures are, how employment safety is organized, and so on.

If teleworking is not possible or if one of the parties disagrees, the employer and the employee may agree to provide either unpaid or paid (additional) leave. The employer may not prescribe for vacation or cancel salary payments (except for the purposes of § 37 of the Employment Contracts Act, see below).

There is also no legal basis for an employee to require an employer to be released from the obligation to work. There is no obligation on the employer to allow the employee time off without good reason, but in a situation where the authorities have issued a recommendation to stay home, finding a common solution is probably inevitable.

Salary reduction. Establishing a state of emergency and banning many events and limiting the activities of companies also damage the economy and create difficulties for employers. According to § 37 of the Employment Contracts Act, the employer may reduce an employee’s pay for up to 3 months over a period of 12 months if, due to unforeseen economic circumstances beyond the employer’s control (for instance as occurred with COVID-19), the employer cannot provide the employee with the agreed amount of work and payment of the agreed remuneration would be an unreasonable burden on the employer. The remuneration may be reduced to a reasonable extent, but not below the minimum wage established by the Estonian Government (584 euros per month or 3.48 euros per hour). An employee has the right to refuse to perform work proportionally to the pay reduction.

Before reducing pay, the employer must offer the employee other work (including remote work) if possible and also inform and consult with the employees pursuant to the procedure provided for in the Employees’ Trustee Act. The notice of pay reduction shall be submitted by the employer at least 14 calendar days in advance.

An employee has the right to terminate the employment contract upon a pay reduction, notifying the employer five working days in advance. Upon the termination of the contract, the employee is entitled to compensation in the amount of one month’s average salary of the employee and to an unemployment benefit under.

Salary subsidy. Temporary salary subsidies will be paid in Estonia to those employees whose employers are significantly impacted by the current extraordinary circumstances. The subsidy is paid, when an employer is in a situation where they comply with at least two of the following terms:

1. The employer must have suffered at least a 30% decline in turnover or revenue for the month they wish to be subsidized for, as compared to the same month last year
2. The employer is not able to provide at least 30 percent of their employees with work.
3. The employer has cut the wages of at least 30% of employees by at least 30% or down to the minimum wage.

The amount of the subsidy will be 70% of the average monthly wage of the employee. The maximum amount of the subsidy is €1000. In addition to that, the employer must pay a wage of at least €150 to the employee.

If the employer terminates the contract with the employee due to redundancy in the course of the same or the following calendar month, they have received the temporary subsidy, the subsidy is to be returned to the Unemployment Insurance Fund.

Redundancy. If the continuance of the employment relationship under the agreed conditions becomes impossible due to a decrease in the work volume or reorganisation of work (including as a result of COVID-19), an employer may extraordinarily terminate an employment contract (lay-off). The general lay-off regulation stipulated in the Employments Contract Act shall be followed.

Restructuring of the Company

Lithuania

Latvia

Estonia

Restructuring the company may be the last chance to save the business when it is facing serious problems.

Restructuring is possible when the company is insolvent, i. e. the company is unable to fulfil its property obligations in due time or the liabilities of the company exceed the value of its assets, but has current transactions and the ability to restore solvency in the future.

Advantages of the restructuring process:

1. a compulsory out-of-court settlement solutions scheme for financial support, i. e. the possibility for a legal person to reach an agreement with the interested parties – creditors whose civil rights and / or obligations are directly created, modified or eliminated by this agreement – helping to save a business, giving the company a chance to survive and, in the event of bankruptcy, securing these creditors in the front row;
2. to bring a restructuring case it is enough of the half of the creditors the claims of which represent more than 1/2 of the total amount of the court-approved claims of the relevant group of creditors with the approval of the restructuring plan (creditors in the restructuring process are divided into: 1) creditors whose claims are secured by a pledge and / or mortgage; 2) other creditors);
3. default interest and interest payment during restructuring process is suspended;
4. the Enterprise Insolvency Law provides the possibility of cancelling bankruptcy case and initiating restructuring process, so due to changed circumstances this Law provides an easier way to save a business. Once a restructuring case has been opened, the approved creditors' claims in the bankruptcy case will be considered as claims in the restructuring case. Thus, even after the bankruptcy process is started and bankruptcy proceedings have been opened, there is a realistic opportunity for the business to recover.

The Enterprise Insolvency Law also provides the possibility to sell a legal entity that is no longer able to fulfil its obligations as a property complex or to extract a substantial part of a legal entity. In this way, the value depreciation of the property can be avoided and it is possible to transfer the entire business as a property complex, thus enabling the investor to "revive" the chosen business. It is also beneficial to the seller, creditors and employees of the company.

Companies are entitled to apply for a Legal Protection Process (LPP), which in its essence is debt restructuring.   Under Section 3 of the Insolvency Law “Legal protection proceedings are an aggregate of measures of a legal nature, whose purpose is to renew the ability of a debtor to settle their debt obligations, if a debtor has come into financial difficulties or expects to do so”.

LPP is carried out according to the Plan of Measures of Legal Protection Proceedings developed by the debtor and confirmed by creditors and court.

Advantages of the LDD process:

1. possibility to postpone payment obligations;
2. possibility to increase the basic capital of a debtor - capital company (including the investing of the right of the creditor to claim against the debtor in the equity capital);
3. possibility to erase or suspend the side claims, such as accrued interest for delayed payments and contractual penalties;
4. all known creditors must be introduced to the Plan of Measures of LPP, but it must be confirmed and accepted by only a part of creditors –  the secured creditors, claims of which constitute at least 2/3 of the total secured creditors‘ claim amount and over 50% of the creditors representing the unsecured claims. The Plan of Measures of LPP is mandatory and binding to all creditors, including those who have not given their consent.

Specific regulations apply to handling tax debts in the LPP, including ban to reduce or erase the basic tax debt, divide the basic tax debt in instalments or postponing the payment for more than 6 months, etc.

The process is initiated by court on the bases of the debtor’s application.

The maximum term for the execution of LPP is 2 years, which by consent of creditors may be extended for another 2 years. This means that LPP may enable the debtor to divide the debt payments in instalments for a total of 4 years.

In order to open restructuring proceedings in Estonia the company must substantiate that:

1. the company is likely to become insolvent in the future;
2. the company requires reorganisation;
3. the sustainable management of the company is likely after the reorganisation.

Therefore, the application for restructuring must be submitted prior to the company being insolvent.

Main advantages of the restructuring proceedings:

1. calculation of a fine for delay or a contractual penalty which increases in time on claims against the undertaking is suspended until the restructuring plan is approved. Also, enforcement proceedings are suspended. The court may also adjudicate the validity of measures for securing actions and of enforcement actions of a tax authority or of seizure of the bank account of a tax authority i.e. if money has been seized on Company‘s bank account, it may be released if instrumental to the success of restructuring.
2. Any bankruptcy applications brought against the company are put on hold until the approval of restructuring plan or termination of restructuring proceedings.
3. Provided the critical mass of creditors votes for the restructuring plan, the claims of creditors may be transformed as follows:

 1)  terms for the performance of obligations are extended;
 2) monetary claims may be fulfilled in instalments;
 3) amount of debt may be reduced;
 4) an obligation may be replaced with the holding or shares of the company.

For the restructuring plan to be accepted by the creditors, half of all creditors who hold at least two-thirds of all the votes (sum of claim) vote in favour of the plan. It is therefore crucial that negotiations with the creditors are commenced prior to submitting the application to the court and not a moment would be lost if insolvency of the company is imminent.