Category: Latvia

Skrastins & Dzenis Partner Vigo Krastins has been appointed an administrator of insolvency proceedings of AS PNB Banka in Latvia.

Krastins’ appointment was recommended by the Financial and Capital Market Commission (the FCMC) and approved by the Court in mid-September 2019.

According to Skrastins & Dzenis, “Vigo Krastins and Senior Partner Verners Skrastins …have taken control over the bank and have started to manage insolvency proceedings taking over the bank’s assets and bank’s subsidiaries to develop and execute a liquidation strategy and plan. The bank owns assets in various jurisdictions, such as the United Kingdom, Russia, Malta, Cyprus, and Bulgaria.”

In addition, the firm reports, “Vigo Krastins is responsible for every day management of the bank, including maintenance and recovery of assets, adoption and implementation of AML/CFT methodology and procedures, [and] cooperation with the FCMC and the Financial Intelligence Unit.”

Finally, the firm reports, “Skrastins & Dzenis [has been] involved from the outset in rendering legal assistance to the insolvent bank and provides administrative and legal support to the administrator’s team in a number of matters related to various disputes, litigation and international arbitration proceedings, including, inter alia, such fora as the International Centre for the Settlement of Investment Disputes and the London Court of International Arbitration).

Ernst & Young Baltic was engaged to support the bank’s insolvency proceedings.

Many commercial businesses are suffering under the current circumstances and are looking to re-negotiate the terms of their lease. Below is a short overview of the opportunities provided by Latvian law to assist tenants with this kind of negotiations.

1. Legal framework

Except for very specific cases (e.g., lease of a point of sale in the customs territory or lease of state or municipality owned land) commercial leases are governed by the provisions of Latvian Civil Law.

The Civil Law contains certain mandatory provisions with respect to commercial leases such as:

• provisions stipulating that the lease price must be fair market price for use of the property;
• requirement of a reasonable notice period prior to termination by the landlord;
• change of ownership provisions.

Except for these mandatory provisions, parties enjoy the freedom of contract.

Consequently, Latvian law commercial lease contracts are very flexible.

2. COVID-19 ad-hoc regulations for commercial premises

A. Payment of rent

The only special COVID-19 measures for commercial leases in Latvia concern lease of property owned by state and municipalities.

The law On Measures for the Prevention and Suppression of Threat to the State and Its Consequences Due to the Spread of COVID-19 that entered into force on the 22nd of March this year provides that state and local government institutions, as well as derived public persons and companies controlled by public persons, freeports and special economic zones shall, for the period of validity of this law, release commercial tenants affected by the spread of COVID‑19 from payment of rent or reduce the amount of rent as well as refrain from applying late payment interest and contractual penalties for late payments (not applicable to payments for electricity, heat, water supply and other property maintenance services).

B. Limitations on the opening of commercial premises

As of the 12th of May there are no longer limitations on opening commercial premises in Latvia. However, the social distancing measures and gathering restrictions are still applicable.

According to the 7th of May amendments to the Order of the Cabinet of Ministers dated 12 March 2020 by which the emergency situation in Latvia was declared, merchants are still obliged to organize visitor flow control, ensuring that no more than 1 visitor per 4 m2 of retail space is present at the point of sale at any one time.

Traders must ensure social distance measures at the entrance to the point of sale (both public and outdoor), preventing crowding and providing a distance of 2 m between visitors. In addition, merchants are recommended to inform customers about the need to observe a distance of 2 meters in the areas adjacent to the point of sale, such as parking lots. In public catering establishments, a distance of two meters between tables must be ensured; the maximum number of visitors at a table is two (unless the visitors are members of the same family). In the cash register and service area, distance of two meters from the visitor standing in front in the queue must be ensure by the use of delimiting signs. In general, there should be one visitor per at least 4 m2 of the total area of ​​the dining hall.

Gathering up to 25 persons is permitted, both indoors and outdoors. The length of the event must not exceed 3 hours; the 2-meter distancing rule must be observed and appropriate hygiene, health and safety measures must be put in place. As far as sports activities are concerned, trainings are permitted subject to compliance with the aforementioned requirements whereas sports competitions are not.

3. General negotiations.

Latvian Civil Law provides that a tenant shall be exempt from paying the rent or shall be ensured reasonable reduction of rent when the possibility to use the leased property is limited due to reasons that are beyond the control of the tenant (Arts 2136, 2147-2149 of the Civil Law). The possibility to apply this principle, however, depends on the possibility to argue that the COVID-19 situation qualifies as limitation to use the leased property within the meaning of the Latvian Civil Law. So far, we are not aware of any developed practice.

As regards force majeure, Latvian lawyers have come to a conclusion that the possibility to rely on force majeure in the circumstances of COVID-19 depends on the wording of the specific lease agreement.

Additionally, it may be possible to negotiate the conditions of commercial lease agreements, as well as their termination on the basis of unfair enrichment doctrine.

It follows from the above that the tenants willing to renegotiate their commercial leases (as well as lawyers assisting those tenants) may rely on both, special COVID-19 ad hoc regulations, as well as ever existing provisions of Latvian law and general legal principles, and it is a great opportunity to develop practices that can be applied also post-pandemically and permanently.

By Inese Rendeniece, Senior Associate, and Linda Lielbriede, Legal Assistant, BDO Law

Kronbergs Cukste Levin has advised environment management group Eco Baltia on the sale of a controlling stake in the company to INVL Baltic Sea Growth Fund. Vilgerts and Primus Derling reportedly advised the buyers on the deal, which remains subject to regulatory approval from the Lithuanian Competition Council.

Stephenson Harwood also reportedly advised Eco Baltia.

According to INVL Baltic Sea Growth Fund, “the European Bank for Reconstruction and Development, which currently holds 30.51% of shares, would remain as the second-largest stakeholder in Eco Baltia after the fund closes the transaction. The fund and the EBRD intend to lead the company on a journey of growth-seeking to establish a clear market leader in the Baltics.”

Kronbergs Cukste Levin’s team included Partner Vineta Cukste-Jurjeva and Associate Santa Praulina.

Editor’s Note: After this article was published Vilgerts confirmed that it had advised the INVL Baltic Sea Growth Fund on the deal. The firm’s team consisted of Partner Gints Vilgerts and Senior Associate Vairis Dmitrijevs.

Although amendments to the Commercial Law regarding the possibility for shareholders to participate in meetings using electronic means of communication have been discussed for a long time, the state of emergency due to COVID-19 in Latvia and social distancing restrictions require the legislator to act immediately.

The beginning of the year is busy time for companies: not only there is a necessity to make important and quick decisions regarding the emergency situation, but also annual shareholders’ meetings need to be held to approve financial reports. Taking into account urgency of the situation, on 20 March, the Parliament (Saeima) adopted amendments to the Commercial Law. Although quick amendments ware related to COVID-19, they will continue to apply once the emergency situation ends as well.

Amendments to the Commercial Law provide for significant innovations:

• The right to vote in written form before the meeting;
• The right to participate in meetings by electronic means;
• Also complete transition to e-meetings is possible;
• Electronic process of board and council meetings has been facilitated by simplifying the requirements for signing minutes of board and council meetings.

Remote voting before the meeting

Amendments stipulate that shareholders’ may vote in written form at least one day before the meeting. To exercise these rights, shareholders’ are not obliged to request it nor it has to be specifically provided in the articles of association.

Shareholder may ask the company to acknowledge receipt of the vote to be sure that it has been received.

When convening a meeting, the notice must state that it is possible to vote at a distance and specify:

• the procedures and terms within which this right is to be exercised (for example, by indicating the postal or e-mail address to which the vote is to be sent and the date by which this must be done);
• requirements for the identification of a shareholder (for example, with simple signature, secure electronic signature or notary certified signature).

If a shareholder has voted before the meeting, this does not prevent him / her from attending the meeting in person or participating in the meeting remotely (using electronic means of communication) and accordingly also participating in the voting at the meeting. In this case, the vote previously cast by the participant shall be annulled and the vote cast during the meeting shall be taken into account.

Participation in the meetings by electronic means

COVID-19 pandemic inevitably means the wider use of technology in business environment. Amendments to the Commercial Law also stipulate that meetings of shareholders may be held in part or in full remotely by electronic means (for example, in videoconferencing mode using Zoom, Skype, etc.).

The right to participate and vote in the meeting of participants by electronic means can be exercised in three cases:

• if The Board offers such an opportunity to members on its own initiative;
• at the request of the shareholders, if the shareholders together represent at least 20 per cent of the share capital of the company and the articles of association do not provide for a lower representation rate,
• by agreement of the shareholders and by providing for such a possibility in the company’s articles of association.

The requirements for the identification of members and the procedure by which members may exercise this right are determined by the board of the company. A shareholder who votes before the meeting of the shareholders or participates in or votes at the meeting of the participants by electronic means of communication is deemed to be present at the meeting of the participants.

E-meetings

The amendments provide for the right of shareholders to decide on a full transition to e-meetings, which excludes the right to attend the meeting in person and essentially provides for the obligation to participate and vote in the meeting electronically.

In order to protect minority members, preventing the majority of shareholders from determining the procedure of the shareholders’ meeting, which potentially prevents any of the shareholder from participating in the meeting and exercising their rights, it is stipulated that e-meetings can be organized only if such procedures are included in the articles of association.

In addition, the adoption of such amendments to the Articles of Association will require the consent of all shareholders. At the same time, companies have the opportunity to determine which issues can be discussed in the form of e-meetings, but which will still require a face-to-face meeting (e.g., share capital increase, amendments to the articles of association, liquidation, reorganization, etc.).

By Alise Valdemare, Associate, and Linda Lielbriede, Legal Assistant, BDO Law

Cobalt has assisted in the drafting of the terms and conditions of moratoria introduced by Latvian banks and liaised with the Latvian competition authority to obtain backing for the process and outcome of negotiation.

According to Cobalt, “under the auspices of the Finance Latvia Association, a number of banks have agreed to introduce standardized deferral of loan repayments in light of the COVID-19 crisis. The moratoria, available to natural persons and businesses, were announced on 29 April and 5 May 2020, respectively.”

In addition, Cobalt reports, “both moratoria are based on European Banking Authority’s guidelines which allow banks to address the short–term operational and liquidity challenges faced by borrowers, without incurring adverse consequences for capital adequacy. The benefit of the guidelines is available only if the deferral scheme covers the national banking industry or a material part of it. The purpose of these exceptional measures is to reduce the risk of an epidemiological crisis morphing into a financial contagion.”

Cobalt Partner Ugis Zeltins led the firm’s team on the project.

A new opportunity for Latvian entrepreneurs was presented on 5 March at The Nasdaq Riga bell ceremony – the European Union (EU) funding program to attract capital on the stock exchange. The new instrument offers a wide range of funding opportunities for the issuance of shares and corporate bonds by small and medium-sized enterprises.

Funding program

To promote the attraction of financing necessary for the development of companies in the capital markets, to increase the international competitiveness of merchants, to develop the capital market in Latvia – with this aim a new European Union (EU) fund support program “Support for attracting financing to small and medium-sized enterprises in the capital markets” has been approved.

High stock exchange costs, insufficient knowledge – these and other factors are often cited as the main reasons that prevent companies from using the opportunity to attract financing in the capital markets.

The total funding for the support program is EUR 1 million, of which EUR 0.8 million is intended to support the issue of shares and EUR 200,000 to support the issue of debt securities (bonds). One company will be able to receive a maximum of EUR 100,000 in support of the share issue, and EUR 20,000 in the case of debt securities (debentures).

Support will be available to cover the costs of preparing a company for listing in stock exchange, such as the costs of raising capital (issuer services), the costs of preparing an issue prospectus (or registration document, securities note and summary), the cost of preparing an offer document or a merchant description, related due dilligence expenses, costs of certified consultants, as well as legal, financial, tax, audit, certified consultant costs.

It is important to note, however, that companies cannot manage to get this support without their own co-financing, as EU support will not exceed 50% of the total costs of the company in attracting the relevant financing.

When applicants are selected?

The Central Finance and Contracts Agency (CFCA, Latvian – Centrālā finanšu un līgumu aģentūra), the project administrator, will hold an open call for funding on a quarterly basis. The first round of application for the selection of the support program was announced on March 5. Taking into account the circumstances of the emergency situation due to COVID-19 and other factors, the deadline for submission of project applications has been set until 5 September.

After submitting the project applications, the evaluation commission will have to make a decision on the approval, conditional approval or rejection of the project application within 3 months after the submission deadline. To facilitate the application process, CFCA has published Round 1 documents and materials on its website.

Who is eligible for funding?

Companies registered in the Commercial Register of the Republic of Latvia:

• “Small and medium-sized enterprises” – enterprises with less than 250 employees and an annual turnover not exceeding EUR 50 million and/or an annual balance sheet total not exceeding EUR 43 million;
• Companies that have successfully listed shares (i.e. with funding of at least EUR 500,000) or debt securities (bonds) on the Nasdaq Baltic Regulated Market or the Baltic Alternative Market First North no later than two years after concluding the agreement with the CFCA.

Company’s benefits

Before applying for the new support program and submitting a project application, we offer an insight into what small and medium-sized companies gain by listing the company’s shares or bonds on a regulated market or the First North market:

• new investors – an opportunity to develop new products and services;
• raising capital – additional financial resources for faster growth;
• recognition of the company – popularity and reliability of the services and goods provided by the company;
• opportunity to increase equity – an efficient market and an opportunity to promote capital efficiency;
• competitiveness – rapid development and leading the way;
• opportunity to develop the industry – with a successful start in the financial markets, the industry represented by the company is growing rapidly.

BDO Latvia – Nasdaq Certified Consultant in the First North market

Finally, it is important to note that a company wishing to include its shares/debt securities in the Baltic Alternative Market First North has to enter into a cooperation agreement with First North Certified Adviser (in case of shares – the agreement with certified advisor must be valid for the whole listing period, in case of debt securities – at least until the securities are admitted to the First North market).

BDO Latvia has been a Nasdaq Certified Consultant in the First North market since 2017. The task of BDO Latvia as a Certified Adviser is not only to assist the company when it has decided to start listing shares/debt securities in the market, but also to advise and monitor the company’s compliance with the stock exchange requirements after stock listing.

By Alise Valdemare, Associate, and Linda Lielbriede, Legal Assistant, BDO Law

Sorainen has represented YIT Latvija in a dispute regarding the legality of a construction permit.

According to Sorainen, “In this matter, more than 40 applicants challenged a construction permit issued to YIT to build an apartment building. Although the application challenging the construction permit indicated several alleged technical deficiencies in the particular construction scheme (all of them were rejected by the court as unproven and unsubstantiated), during the case review it became clear that the applicants’ principal objections were aimed at the particular construction scheme as such. Namely, the applicants wanted the particular land plot to remain vacant.”

The Regional Court ruled in favor of YIT and the Senate of the Republic of Latvia agreed with the Regional Court in its review. “Likewise the Senate rejected the applicants’ arguments that construction on the YIT land plot should not be allowed at all because the land plot was needed for parking by local residents,” Sorainen reported.

Sorainen’s team included Partner Lelde Lavina and Senior Associate Jorens Jaunozols.

The same as the majority of the European countries, Latvia also, first of all, thinks about solidarity between the state and entrepreneurs on the prevention of the immediate unemployment situation. In order to motivate entrepreneurs affected by the crisis not to discharge employees, having idle-time, and to try to wait for the transfer from the crisis and restrictive measures, the state offers to pay out idle-time benefit for employees of the companies, temporarily not being able to employ and pay out a salary to them during the period of idle-time as a result of the crisis. Since the Cabinet of Ministers extended emergency situation until 9 June, idle-time benefit will be available until 30 June.

It should be noted that the case of each company requires an individual approach, examining whether the company fully qualifies for the receipt of idle-time benefit, as quite a large number of criteria should be complied with. On the basis of the current practice and problems identified based on the cases of customers, we have established a consolidated and transparent summary of the regulation on idle-time benefit.

Idle-time benefit. Who can apply for it?

• companies, the revenues of which in April 2020 have decreased by at least 30%, in comparison with the relevant month of 2019;
• companies, the revenues of which in April 2020 have decreased by at least 20%, if the export volume in 2019 constitutes 10% of the total turnover or constitutes at least EUR 500,000, or the paid out monthly average gross salary in 2019 is at least EUR 800, or long-term investments in fixed assets on 31 December 2019 constitute at least EUR 500,000;
• newly established companies shall calculate the decrease in revenues from the average monthly turnover in 2019;
• an employer, employing an employee in Latvia, for which taxes are paid in Latvia (SIA, AS, branch, union, etc.), may apply for it;
• it is possible to apply for idle-time for a part of employees, while continuing to employ the remaining part of employees. However, if idle-time is declared for the whole company, board members may also receive idle-time benefit;
• employees, who are employed by several employers, may also receive the benefits;
• self-employed persons whose income does not exceed minimal wage except for those who receive income from royalty payments are eligible;

employees who also receive income up to 460 euro may be eligible to receive benefit.

Those who cannot receive idle-time benefit:

• Companies, which do not have tax debts exceeding EUR 1000 and have not requested to prolong the payment thereof or distribute it in timeframes, which have not submitted declarations and annual reports, have been deleted from the VAT Register or the operation of which has been suspended, which have an insolvency proceeding, and the declared monthly taxes of which during the period of the last 6 months have been below EUR 200 per month, cannot apply for idle-time benefit;
• Members of the board of the companies may only receive idle-time benefit in the case if all employees of the company have idle-time;
• Members of the council may not receive idle-time benefit;
• If the employee is incapable of work (sickness), then it is not possible to receive idle-time benefit;
• Employees, who have commenced employment relations after 1 March 2020;
• Employees, who are at the same time employed by the state or a municipal authority or capital company, or perform commercial activity;
• Companies, the employees of which are leased as a labour force;
• Companies, for which additionally payable taxes have been determined as a result of a tax audit;
• Companies, which (or members of board of which) are punished for violations of tax, customs, employment regulation.

Regulations on the receipt and use of the benefit

• If the company has any tax debts, it should first request to postpone tax payments and afterwards request granting of the idle-time benefit;
• The company should substantiate this and how the Covid-19 crisis has caused the idle-time of employees;
• Application of the benefit may be submitted once per month for a period of one month;
• The employer shall not employ the employee, while the benefit is paid;
• The employer is restricted to give a notice of termination of the employment contract for one month after submission of the application;
• The employee shall not hire new employees for work while employees receive the benefit;
• Idle-time benefit shall not be subject to taxes;
• Decision regarding granting of the benefit shall be adopted within a time period of 5 days.

The amount of the idle-time benefit in Latvia is determined in the amount of 75% of the monthly average gross labour payment for the previous six month period before the announcement of the emergency situation, or according to the actually declared data regarding the employee during the previous six months, however, not exceeding EUR 700. Employees, having children in their supportive custody, may receive an additional payment of EUR 50 for every child.

! It is important to indicate that the employer may decide, whether it is possible for it to provide a pay-out of the salary of the employee in the actual amount during the period of idle-time; however, it is not an obligation, and it shall be at the discretion of every employer to decide whether the compensation of the employee during the idle-time will be the same as it is determined in the employment contract. This condition shall only refer to those employees, for which the idle-time benefit is applied for and is paid out.

It should be noted that as of 7 May Government’s decision employers may apply for idle-time benefit only for the next period and not for previous periods. If the State Revenue Service has declined to grant idle-time benefit, only employer may challenge this decision. However, following the latest development Government decided to introduce idle-time assistance benefit up to 180 euros to those who either received idle-time benefit less than 180 or did not receive it all.  

The Parliament (Saeima) on 7 May adopted amendments to the Crisis Law, thus allowing employers who meets the criteria set for a participant in the Advanced Cooperation Program may reduce the employee’s compensation for idle-time specified in the Labor Law from 100 to 70 percent of the employee’s salary. By applying a reduced downtime payment, the employer will be able to pay the employee compensation, the amount of which cannot be less than the minimum monthly salary, which is currently 430 euros per month. Furthermore, amendments also stipulate that in collective-agreement there might be included provisions that allow part-time work in the event of a temporary fall in production.

Payment of the sick-leave certificate from the State budget

The state has introduced another change in the area of employment, trying to motivate employees and employers to comply with the self-isolation measures. In a general case, when an employee gets sick, an employer has to pay the sick-leave certificate for the employee for up to 10 calendar days. Taking into account the course of the Covid-19 disease, it is currently determined that the state shall pay for sick-leave instead of employers, already starting from the second day, for the following employees:

• Employees, who suffer from Covid-19;
• Employees, who have been in contact with a Covid-19 patient and where the epidemiologist has determined quarantine.

Tax holidays

One more mechanism for the support of entrepreneurs during the circumstances of crisis, introduced by Latvia and almost all European countries, is tax holidays. Companies that qualify for certain criteria are entitled to request the State to postpone an income tax payment or to distribute it in timeframes for a time period of up to 3 years, and in such a case the late payment fee shall not be applied for companies and they will not be included in a list of tax debtors (which, for example, prohibits them from participating in procurements).

Companies, which qualify for the application of tax holidays

• companies, the revenues of which in April 2020 have decreased by at least 30%, in comparison with the relevant month of 2019;
• companies, the revenues of which in April 2020 have decreased by at least 20%, if the export volume in 2019 constitutes 10% of the total turnover or constitutes at least EUR 500,000, or the paid out monthly average gross salary in 2019 is at least EUR 800, or long-term investments in fixed assets on 31 December 2019 constitute at least EUR 500,000;
• Newly established companies shall calculate the decrease in revenues from the average monthly turnover in 2019.

It is important to indicate that companies have to carefully and accurately prepare the application for tax holidays, because we have noticed in practice that companies make mistakes and apply for the postponement of the tax payment term according to the general procedure, rather than in accordance with the procedure of the emergency regulation, which means shorter periods of postponement, inclusion on the list of debtors and the fact that a late payment fee in the amount of ¼ will be applied to the company anyway.

The Parliament decided that donations of goods or services to social groups adversely affected by the emergency situation will be considered as expenses related to the economic activity of the corporate taxpayer. In order to receive this aid, a number of criteria must be met and it will be applicable until 31 December, 2020. For example, the recipient of the donation is not a person related to the taxpayer, company publicly informed about the donation and information regarding these expenses was submitted to the State Revenue Service.

Regulation of the commercial activity crisis

The Latvian government has not only determined support mechanisms for entrepreneurs in relations with the state and entrepreneurs, but has also determined temporary regulation on the issues affecting private relations between entrepreneurs and their cooperation partners.

The most important news, introducing changes in the current procedure and targeted towards the temporary protection of companies affected by the crisis, is as follows:

• Until 1 September 2020, creditors and employees shall be prohibited from bringing an application regarding insolvency to the court;
• When commencing the recovery of debts, a debtor shall be warned and a time period of 60 days should be provided for expressing of objections;
• A prolonged period of 60 days for different enforced legal activities (execution of judgment, implementation of the commercial pledge, execution of the mortgage rights etc.) is determined.
• Limitation period of the rights of claim is suspended in emergency circumstances, providing a possibility for creditors to wait for the performance of recovery and not to lose the right of claim;
• From 1 April to 1 September, creditors may only apply the lawful late payment interest (6% or 8% and additional 8% + the half-a-year refunding rate determined by the European Central Bank) to debtors;
• During the crisis the legal protection proceeding is determined by a court for a time period of up to 4 years (previously: 2 years with a possibility to prolong, receiving the approval of creditors and a court).

Another support mechanism is rent exemption or rent fee reduction up to 90% if the company leases premises from a public person, for example, local municipality. To receive this aid, the same criteria for income decrease and tax debts of up to 1000 euro apply.

It should be concluded that the Latvian government works at a very dynamic pace on the regulation in order to minimise the adverse economic consequences of the crisis in the short-term and long-term perspective. Undoubtedly certain inaccuracies and errors arise in a hurry, but it is to be approved that a number of errors are rectified by further amendments to the regulation and the government tries to listen to the opinion of representatives of the industries. We have to say that the dynamics of changes in the regulation are challenging for representatives and the management of companies, trying to follow up on the procedure and pre-conditions, to understand whether the company may apply for state support measures, which is even more challenging for companies with foreign management.

By Rolands Valdemars, Attorney at Law, BDO Law

In August 2007 crime fiction admirers in Latvia were thrilled to read a book, Kitchen Justice, describing an influential litigation attorney, the trial cases his office handled, and his secret relationship with judges and public figures. The protagonist was immediately recognized by readers, and the legal community was able to identify heroes less known to the public: the judges in the legal proceedings, who were privately communicating with the prominent attorney about the cases they were working on. It was apparent that the disguised author had based his fictional novel on a real-life characters and cases, and without delay, Latvia’s Chief Justice convened an extraordinary session of Supreme Court judges to set up a special panel of five reputable judges with a mandate to investigate the novel’s plot. The commission interviewed dozens of judges who had been identified in Kitchen Justice.

In November 2007, the commission delivered its report, revealing a rather grim picture: a crooked system in which judges were meeting and discussing cases with attorneys in private, and in which lawyers sometimes transferred their files to judges so their reasoning could be implemented into judgments.

A few judges admitted to such ex-parte communications and conceded that the conduct was inappropriate. At the same time, a considerable number of the judges allegedly portrayed in the book vehemently denied any involvement or relationship with the protagonist. Their line of defense was plain and simple: there was no proof of their wrongdoing; only the dubious literary text of an anonymous author. Moreover, they said, even if specific evidence had been presented, the statute of limitation protected them from criminal prosecution or disciplinary proceedings. And finally, they stated, the principle of judicial independence meant that they had no duty to explain their deeds to anyone. The special commission of Supreme Court justices concluded that the communications between attorneys and judges constituted an ethical violation. At the same time, however the commission assured the public that Kitchen Justice was a reflection of days long gone, since the events depicted in the book most likely occurred between 1998 and 2000. Courts were under-financed then and lagged behind radical transformations in the society, and the ethical position of judges corresponded to the realities of that time.

This episode is a feature of the tumultuous nineties – an inevitable and painful component of the Baltics’ enormous transformation from its totalitarian past to a democratic society with independent court systems. The reputation of the court system in the Baltics continues to rise, with 63% of Estonians expressing trust in their courts, significantly above the EU’s average of 51%, and although Lithuania’s 43% and Latvia’s 37% is lower, trust in those courts is growing as well.

Twelve years on, the case of Kitchen Justice demonstrates how radical the reform of the judiciary in the region has been, in a compact period of time. The 2007 report of the investigative commission represents a snapshot of events in the court system ten years earlier. It exposed a lack of understanding of basic standards of professional conduct by many judges and lawyers. The common feature in the region in the last decade of the 20th century was the deconstruction of the heritage of fear and formal obedience imposed by totalitarian systems. In the new millennium judges and lawyers have become accustomed to a new paradigm – dealing with ethical dilemmas openly and with accountability.

The subsequent decade was a fast-forward learning experience. European integration brought synergies, with the development of international rules of professional ethics and deontology for judges and lawyers. An increasing number of cases with international dimension diminished the borders of different professional regulations and ethics guidelines between the former East and West.

In the third decade of the 21st century the legal profession is facing entirely new challenges. Judges and lawyers must now be well-versed in technological advancements, since the courts in the Baltic States are undergoing a digital transformation. Courts are moving to fully digitalize case contents and management, judges and lawyers can now openly discuss cases in professional networks and training sessions, and lawyers are required to share files digitally so that courts can use their reasoning for more efficient case management. With every step in the judicial process made accessible online, there is no chance to hide in ivory towers or secluded kitchens. Ironically, instead of alienating judges and lawyers, LegalTech has solved issues that concerned the legal profession and diminished the reputation of courts back in the days of Kitchen Justice.

By Lauris Liepa, Managing Partner, Cobalt Latvia

This Article was originally published in Issue 7.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

 

Sorainen has advised NEFCO on its investment in the Second Mezzanine Fund, which is managed by FlyCap.

According to Sorainen, “NEFCO is an international financial institution established in 1990 through an intergovernmental treaty between Denmark, Finland, Iceland, Norway and Sweden, with the objective of generating positive environmental impact through its investments, with a particular focus on Eastern Europe, as well as the Baltic Sea, Arctic, and Barents regions.”

The Sorainen team consisted of Managing Partner Eva Berlaus, Senior Associates Janis Bite and Santa Rubina.

Sorainen did not reply to our inquiry on the matter.