LATVIA Law and Practice Contributed by: Jānis Kārkliņš, Edijs Brants, Pauls Zeņķis and Kristens Vorslavs, BERG
5.2 Floating Charges and/or Similar Security Interests Latvian law permits the establishment of a commercial pledge which can serve a similar purpose by allow- ing creditors to secure debts with even the entirety of a merchant’s or legal person’s assets. Certain cat- egories, however, are excluded from being pledged in accordance with the commercial pledge rules – such as ships, financial instruments recorded in an account, financial claims under the Financial Collateral Law, monetary funds, and claims arising from cheques or bills of exchange. A commercial pledge becomes effective against third parties only once registered in the Commercial Pledge Register. Until registration, the pledge agreement remains binding between the par- ties, though unenforceable externally. Furthermore, a pledge may secure any claim – wheth- er existing or future – as well as ancillary obligations, provided that the agreement specifies a maximum liability amount. Should the secured obligation remain unfulfilled, the pledgee is entitled to take possession of the pledged property and proceed with its sale. Such a sale is generally conducted through auction, unless the pledgor has expressly granted and regis- tered the pledgee’s right to sell the property directly without auction. 5.3 Downstream, Upstream and Cross- Stream Guarantees Downstream Guarantees There are not many restrictions provided in the Latvian law for situations when a parent company can guar- antee the obligations of its subsidiary and this type of transaction is generally allowed. Upstream Guarantees Upstream guarantees are slightly riskier than down- stream guarantees since they are subject to more restrictions. As laid out in the Commercial Law, a com- pany (the subsidiary) can only make disbursements to its shareholder (the parent company) in the form of dividends, through a reduction of equity capital, or upon liquidation of the company when assets are dis- tributed among shareholders. Accordingly, other types of distributions may be treated as unlawful. To mitigate legal risks, an upstream guarantee must therefore be supported by evidence demonstrating that it does not
constitute an impermissible distribution and that no loss of value arises from providing it. While such guar- antees are possible, they must be carefully justified and substantiated. Cross-Stream Guarantees Like upstream guarantees, cross-stream guarantees have a risk of being interpreted as unlawful transfers between related companies. Potential Credit Support Issues Since upstream and cross-stream guarantees are very vulnerable, the enforceability risk for lenders is reduced. This might result in the lenders insisting on multiple layers of support, such as security over assets. If the lender is a bank, a legal opinion address- ing the confirmation that the guarantees are valid might be required. 5.4 Restrictions on the Target Latvian law is relatively strict regarding this matter and expressly prohibits the financing of the acquisi- tion of the target’s own shares. This may include not only granting loans, but also providing guarantees, pledging collateral, selling assets at a reduced price, or any other transaction that reduces the company’s assets or increases its liabilities in order to facilitate the purchase of shares. Although under national law this restriction applies only to joint-stock companies ( akciju sabiedrība ), a few court cases have extended it to limited liability companies ( sabiedrība ar ierobežotu atbildību ) as well. In contrast to other countries of the European Union, Latvian law does not provide a white- wash or approval mechanism that could legitimise such financial assistance – the prohibition is absolute. 5.5 Other Restrictions Among the risks already listed, the main risks regard- ing the grant of security guarantees may be con- nected to the necessity to receive the approval of the shareholders, as well as the supervisory authorities which may need to approve material guarantees or disposal of assets in some cases if such requirements have been set out in the establishing documents of the company.
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