According to the 2004 European Bank for Reconstruction and Development (EBRD) Insolvency Sector Assessment, which measured the compliance of insolvency legislation with international standards set by the World Bank, the Asian Development Bank, the International Monetary Fund (IMF) and the United Nations Commission on International Trade Law (UNCITRAL), the Latvian Law on the Insolvency of Undertakings and Companies, which governs bankruptcy and insolvency in Latvia, received an overall score of "low compliance." The EBRD assessment was based solely on the content of the insolvency law. The EBRD characterizes Latvia's Insolvency Law as deficient in many key areas. It fails to define "insolvency" clearly enough to prevent creditor abuse and confers inadequate powers to the courts for the supervision of restructuring. The most compelling concern is the problem of effective implementation. According to the EBRD's 2004 Legal Indicator Survey on Insolvency, Latvia's insolvency regime was deemed to be too slow, too expensive, unnecessarily complex, unpredictable, and lacking in transparency, for both debtor-initiated and creditor-initiated proceedings.

General Overview

The Latvian Law on the Insolvency of Undertakings and Companies (LIUC 1996), governing bankruptcy and insolvency in Latvia, received an overall score of "low compliance" in the European Bank for Reconstruction and Development's (EBRD) 2004 Insolvency Sector Assessment, which measured the compliance of insolvency legislation with international standards set by the World Bank, the Asian Development Bank (ADB), the International Monetary Fund (IMF), and the United Nations Commission on International Trade Law (UNCITRAL) (p. 11). The assessment, which restricts its evaluation to the content of the laws, assigns the following compliance levels: (1) very high; (2) high; (3) medium; (4) low; and (5) very low. (Harmer & Cooper 2004, pp. 6-8)

According to the EBRD's 2005 publication entitled "The Commercial Laws of Latvia: An Assessment," Latvia's insolvency law displays many key deficiencies. For example, it employs a definition of insolvency so lacking in clarity that it cannot prevent creditor abuses. It also fails to allocate adequate supervisory power to courts during the course of restructuring processes. Latvia's law also shares in the problem of inadequately addressing other issues of reorganization that is common to insolvency laws in EBRD countries of operations. The EBRD's assessment argues that "meaningful reorganization schemes should allow for the compromising of obligations, in a timely fashion, to facilitate recovery" (p. 13). Latvian law, however, makes no such provision, and there is no requirement for an independent, outside assessor to evaluate any plans for restoration. Since Latvia is increasingly participating in commercial relationships that extend beyond its borders, it must also begin to address insolvency in the international context.

The EBRD's 2004 Legal Indicator Survey, in evaluating the "effectiveness" or practical application of insolvency law, examined Latvia's performance in the context of both creditor-initiated and debtor-initiated insolvency proceedings. Here, too, serious deficiencies were noted. In both contexts, the EBRD deemed that "the process is too slow, too expensive, unduly complex and lacking in both predictability and transparency" (EBRD 2005, p. 14). Additionally citing, serious barriers to debtor access to the process, particularly when the goal is restructuring, the EBRD found that Latvia's insolvency law failed both as an inducement to fundamentally sound but currently insolvent firms to attempt to salvage their businesses, or as a deterrent to bad-faith actions on the part of debtor firms. On the positive side, provisions contained in the 1996 Insolvency law are sufficiently detailed to militate against fraudulent, pre-bankruptcy transactions, but, in the EBRD's estimation, "there are serious concerns as to whether these provisions could be effectively implemented" (p. 13).

There is no English translation of Latvia's insolvency legislation, but in its 2005 assessment of the subject for the European area, PricewaterhouseCoopers (PWC) notes that Latvia's 1996 Insolvency law sets the basic legal underpinnings for the conduct of insolvency proceedings, and it is supplemented by a number of other pieces of legislation. In the case of insolvency in financial institutions and insurance companies, the Law on Credit Institutions (1995), and the Law on Insurance Companies (1998) offer specific additional requirements. The Civil Procedure Law (1998) sets out procedural rules, and other regulations and legislation cover the areas of administration composition and supervision and employee rights protection.

The 2005 PWC report went on to note that "Latvian legislation gives priority to continuing the business of a troubled company." By law, there must be an initial attempt by the creditors to reach a settlement with the debtor firm. If this fails, the possibility of rehabilitating the failing firm must be explored. Only when all other options fail should bankruptcy be pursued. The law allocates very few rights to the debtor, however, and clearly prioritizes creditor interests. The PWC report goes on to note that, although the law appears to favor less drastic options, bankruptcy is, in fact, the most likely route to be taken. In the PWC's assessment, however, this is "indicative of problems in the enforcement of the insolvency legislation and shortcomings in other legislation." Alternatively, it may be due to loopholes or inadequacies in the law. The PWC report cites the example of an insolvent company that wishes to undertake rehabilitation. To do so, its administrator may need to borrow funds on the company's behalf, or put up the company's physical assets as security. As the 2005 PWC assessment notes: "He [the administrator] cannot do so if a decision has not been made with regard to the company's rehabilitation. Very often, however, funds are required to preserve the company's business so that a decision on possible rehabilitation can be made in a properly structured way; and thus the purpose of the legislation is defeated."

The PWC's 2005 assessment notes that the legislative environment in Latvia is constantly changing, and suggests that this hinders the practical implementation of current law. According to PWC, the Insolvency Administration (IA) was created in 2002, with the express mandate to serve a supervisory function over administrators and the insolvency process. The Law on Insurance Companies and the Supervision thereof (1998) was amended in 2004 to add new regulations to the processes used for reorganizing and liquidating insurance companies, and to implement the European Union (EU) Insurers' Reorganization and Winding-Up Directive (2001/17/EC). The PWC reports that there have been further amendments to this law that took place in 2003 and 2005, but that a replacement statute is in the works to replace it. According to the 2005 PWC report, the draft of this replacement law is expected to "strengthen the authority of the IA and improve the supervision of administrators so as to enhance the legitimacy and effectiveness of insolvency proceedings; and accelerate insolvency proceedings in order to achieve satisfactory solutions within a reasonable timeframe."

Latvia became an EU member on May 1 2004 and is therefore bound by the EU's Insolvency Regulation. It therefore must recognize insolvency proceedings in other member states, subject only to limited exceptions for public policy and moral hazard. According to the World Bank's Doing Business in Latvia guide, as of 2006, the time and cost required to resolve bankruptcies is considerable. Latvia's recovery rate, expressed in terms of how many cents on the dollar claimants recover from the insolvent firm, is 34.8, compared to a regional average of 29.5 and the Organization for Economic Co-operation and Development (OECD) average of 74.0. The amount of time on average to resolve bankruptcies in Latvia is 3 years, compared with a regional average of 3.5 years and an OECD average of 1.4 years.