Finnish insolvency proceedings
Insolvency legislation in Finland provides two alternative procedures for companies facing financial difficulties: (i) restructuring (rehabilitation); or (ii) bankruptcy (liquidation). Finnish law makes a clear technical distinction between the two proceedings, and consequently, they are regulated by different legislation (the Finnish Bankruptcy Act (120/2004, as amended) and the Finnish Restructuring of Enterprises Act (47/1993, as amended), which provide for distinct proceedings.
While bankruptcy covers all of the debtor’s liabilities, and as such, will typically end the operations of the debtor, the purpose of restructuring is to reorganise the distressed debtor’s business, make debt arrangements and provide for the debtor’s continued operation. The goal, as well as a prerequisite, for rehabilitation is that all creditors receive a greater disbursement from the debtor for their receivables than in a bankruptcy. In Finland, the District Court appointed bankruptcy estate administrator or restructuring administrator is typically an attorney who is known to be competent, qualified and suitable for the appointment.
Even though the current Finnish Bankruptcy Act has undergone some amendments, bankruptcy law fundamentally originates from the Bankruptcy Code of 1868 and continues to follow its principles. The Bankruptcy Code of 1868 covered only the liquidation procedure and not the rehabilitation of companies. The Finnish Restructuring of Enterprises Act was not enacted until much later in 1993 and, consequently, companies could not pursue rehabilitation or corporate restructuring prior to such date. This Act was enacted separately from bankruptcy legislation as an alternative to the traditional bankruptcy procedure, and the US Bankruptcy Code’s Chapter 11 procedure was used as a model. Generally, the Finnish bankruptcy system and the corporate restructuring process are less court-dominated and require less court intervention or management than in many other countries such as France, Germany and the United States.
Commencement of proceedings
Bankruptcy commences by a District Court order. The order is handed down by the local District Court where the general legal seat of the debtor is located. As a prerequisite, bankruptcy requires the debtor to be insolvent. The debtor is deemed insolvent if, other than on a temporary basis, it is unable to repay its debts as they become due. Either the debtor or the creditor may file a bankruptcy application. The vast majority of bankruptcies are commenced by an application submitted by a creditor.
In order for a creditor to be entitled to petition for the bankruptcy of another company, the creditor must have a clear and undisputed claim against the debtor. A creditor may apply for bankruptcy if the creditor’s claim against the debtor is based on: (i) a res judicata judgement (ie, a court decision that has gained legal force); (ii) a commitment signed and not contested by the debtor; or (iii) if the creditor’s claim is otherwise so clear that its validity cannot justifiably be doubted. If the debtor itself files for bankruptcy, it is enough for the debtor to declare that it is insolvent in its petition. The decision to file is made by the board of directors of the debtor or creditor, as applicable.
If the creditor files the bankruptcy petition, the court serves the petition to the debtor and allows the debtor an opportunity to present a written statement contesting the petition. Usually, the debtor is allowed one to two weeks to prepare such statement. The relevant District Court will declare the debtor bankrupt without allowing the creditors the same opportunity if the debtor files the petition.
At the onset of bankruptcy proceedings, the debtor loses its authority over the assets and decision-making of the company. All available assets and legal competence related thereto are transferred to the bankruptcy estate. The creditors ultimately exercise decision-making power in the bankruptcy estate. In practice, this power is largely transferred to the bankruptcy administrator.
The statutory obligations of the bankruptcy administrator are to represent the estate and handle its routine administration, draw up the estate inventory and debtor description, scrutinise and sell the assets of the estate and determine whether it is possible to reverse transactions and recover assets, receive documents lodging claims, and draft a proposed distribution list. The administrator takes care of the sale of the assets belonging to the estate. The bankruptcy estate may also decide to continue its business or a part thereof. The creditors always make this decision.
Each individual creditor is entitled to participate in the bankruptcy administration by voting in the administrator’s decision-making, receiving information, lodging claims and receiving a disbursement from the estate’s assets.
Decision-making in a bankruptcy estate
The creditors have the authority to decide on matters pertaining to the bankruptcy estate, such as the sale of the bankruptcy estate’s assets and the continuation of its business. The estate administrator’s duty is to oversee the sale of the estate’s assets in accordance with the decision of the creditors.
With regard to the realisation of the assets, the creditors may assign authority to the estate administrator to sell the assets on terms the administrator considers best under the law and in the good conduct of estate administration. The creditors may also impose restrictions on such authority, and if necessary, may amend or cancel the authorisation. Despite the assignment of authority, it is part of the good conduct of the administrator to submit for prior approval of the creditors any terms and conditions concerning a specific assignment or sale that are clearly out of the ordinary.
It is common that the assets of the bankruptcy estate are sold fairly quickly after the commencement of the bankruptcy. Each significant sale of assets is subject to the decision of major creditors, and if necessary, a meeting is summoned to discuss the terms and conditions of the sale. A sale can also be made by the administrator subject to final approval by the creditors. However, it is in practice complicated to sell a going-concern business on such terms.
Authority of the estate administrator
In order to secure the interests of the bankruptcy estate, the estate administrator has the right to sell the assets of the bankruptcy estate before the creditors’ meeting to the extent that it is necessary to avoid any loss or to pay the costs incurred for the administration of the bankruptcy estate. For example, perishable assets and assets whose value will otherwise decrease may be sold prior to creditor involvement. This authority may also arise where storing assets would cause the estate significant costs that cannot be justified by the assets’ expected sale price.
Before such sale, the estate administrator should allow the major creditors an opportunity to voice their position. The proper conduct of an estate administration requires, in any case, for the estate administrator to notify the relevant parties of these sales, at the creditors’ meeting at the latest. Administrators are generally reluctant to conclude any major transactions without prior authorisation from major creditors.
Continuation and sale of a debtor’s business operations
The bankruptcy administrator may be financially justified to continue the business activities of the debtor in order to sell the business, or a part thereof, as an operational entity, or in order to increase the estate’s assets with the profits gained from the continued operations.
The decision to continue the debtor’s business operations must be based on calculations provided to or prepared by the estate administrator. Such calculations will form the basis to determine the appropriateness of such action by the major creditors or the creditors’ meeting, as applicable. Matters regarding the taxation of the bankruptcy estate are taken into account in such deliberation.
The sale of the debtor’s business operations or assets, or a part thereof, as an operational entity is subject to greater scrutiny at the creditors’ meeting if the receiving party is associated with the debtor or a creditor.
Decision-making in bankruptcy by creditors
All decisions in a bankruptcy estate are made by a majority vote of creditors in accordance with their receivables.
However, a qualified (two-thirds) majority is required when the bankruptcy estate proposes to assign the business of the debtor to the debtor’s owner or a creditor. In such situations, a majority of both secured debt and unsecured debt is required.
Finnish Act on the Ranking of Claims
Whether dealing with a bankruptcy or enforcement case, the Finnish Act on the Ranking of Claims (1578/1992, as amended) provides for the order of priority in which claims are paid in a bankruptcy liquidation if the debtor does not have sufficient funds to pay all of the outstanding claims. It also provides for a reference in terms of the fairness and adequacy of restructuring programmes in the context of rehabilitation. While the main principle is the equal rights of the creditors, the basic order of priority is as follows:
- debts secured by a pledge, mortgage or lien on a specific asset;
- debts that have arisen in the context of company restructuring;
- debts secured by a floating charge up to a maximum of 50 per cent of the value of the underlying assets;
- other (unsecured) debt; and
- lowest priority claims.
The priority of secured creditors applies not only to the principal amount of any debt but also to its interest for up to three years. With respect to floating charges, its priority is only applicable to 50 per cent of the value of the underlying asset, with the remaining amount treated as unsecured debt.
Prior to extensive financial distress, companies may also pursue a voluntary restructuring or pre-pack. These are not subject to any statutory schemes. The term ‘pre-pack’ (or ‘pre-packaged sale’) refers to an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator, and the administrator effects the sale immediately on, or shortly after, their appointment. Pre-packs are rarely used, as the related legal norms and guidelines are somewhat unclear.
Recovery and clawback
Typically, a chartered accountant will carry out a special audit of the debtor’s books and operations once the respective decision of a creditors’ meeting has been made. This report reviews the debtor’s transactions from the three-month period, or two-year period for affiliated transactions, preceding the insolvency proceedings (the ‘critical period’). As a result of this report, the administrator may, after discussing the matter with major creditors, file clawbacks or claims against a certain creditor, member of the management or shareholders.
The most common clawbacks faced by a creditor are the recovery of a payment or the recovery of a security. In the recovery of a payment, the relevant payment becomes subject to clawback if the payment was made by exceptional means or prior to being due, or if the payment is significant in relation to the assets of the debtor’s estate.
In the recovery of a security, the relevant security becomes subject to clawback if the security was not delivered contemporaneously and perfected without undue delay with the underlying debt. Otherwise, any payment or other legal act the debtor engaged in while it was insolvent or which caused the debtor’s insolvency may be subject to recovery. Clawbacks are available mechanisms in both bankruptcy and restructuring, but they are more common in bankruptcies.
Restructuring proceedings are undertaken to rehabilitate the distressed debtor’s viable business, to ensure its continued viability and to achieve more lenient debt arrangements.
Finnish law recognises an expedited restructuring option, which has been in effect since the Finnish Restructuring of Enterprises Act was partially revised in 2007. However, in practice, expedited restructuring proceedings are very seldom used.
Commencement of proceedings
Under the Finnish Restructuring of Enterprises Act, restructuring proceedings may be commenced if:
- at least two creditors, whose total unrelated claims represent at least one-fifth of the debtor’s known debts, file a joint application with the debtor or declare that they support the debtor’s application;
- the debtor faces imminent insolvency; or
- the debtor is insolvent and no other outcome ensues from the barriers to restructuring.
Restructuring proceedings are initiated by a restructuring application filed by the debtor, a creditor or a probable creditor (ie, a guarantor). The application may result in an interim interdiction (interim moratorium), which is a temporary prohibition of the payment, collection and execution of debts. An interim interdiction is sought in order to obtain a standstill until the relevant District Court has decided to commence restructuring proceedings. The relevant District Court will determine in its order whether or not the company may undergo restructuring proceedings. If such order is issued, a moratorium is in force until the reorganisation programme has been confirmed.
Restructuring proceedings are not commenced if it is deemed probable that:
- the restructuring programme will not remedy the insolvency or prevent its recurrence other than for a short period;
- the debtor’s assets are not sufficient to cover the costs of the restructuring proceedings; or
- the debtor will not be able to repay debts arising after the commencement of the proceedings.
Another reason for rejecting a restructuring application is that there are reasonable grounds to believe that the application’s primary purpose is to hinder creditors’ collection actions or otherwise violate creditors’ rights. An application will also be rejected if there are reasonable grounds to suspect that the restructuring programme cannot be drafted or confirmed. In general, creditors will have the opportunity to object to the application, but the threshold to begin the proceedings is rather low.
Effects of the commencement of proceedings
During restructuring proceedings, the debtor’s board of directors and the shareholders maintain their decision-making powers, although some material decisions require the administrator’s consent. Notwithstanding, the commencement of proceedings has some immediate legal effects. Namely, the District Court will appoint one or more administrators and in certain cases, a creditors’ committee. The administrator will manage and supervise the restructuring proceedings, for example, by preparing a report regarding the debtor’s assets, monitoring and supervising the debtor’s activities, filing recovery claims, preparing drafts of the restructuring programme and undertaking other measures in order to realise the purpose of the proceedings and protect the interests of the creditors.
In restructuring proceedings of larger companies (eg, publicly listed companies) a committee of creditors representing different groups of creditors is also formed. This committee acts as an advisory body during the proceedings, assists the administrator in the performance of duties and monitors the activities of the administrator.
Decisions that are beyond the scope of the debtor company’s day-to-day operations require the administrator’s approval. The debtor company may not, without the administrator’s consent, take certain actions, such as file a petition for bankruptcy proceedings with a District Court, acquire any new debt, transfer or convey current assets or grant a right of use or any other right to such assets, unless such actions are performed in connection with the debtor’s regular operations.
The commencement of restructuring proceedings will prevent the further accrual of overdue interest on restructuring debts (debts that have arisen before the filing of the application, including secured debts). The debtor is also prohibited from repaying restructuring debts or providing security for such debts, and any such payments and securities must be returned. Notwithstanding, a secured creditor has the right to be compensated for any decrease in the value of its collateral property where such decrease resulted from the use of the property in the operations of the debtor.
Commencement of the proceedings also prohibits the creditors from taking direct measures against the debtor to collect debts, such as terminating agreements if the cause of termination is an unpaid restructuring debt. The restructuring procedure does not prohibit the collection of restructuring debts from a third party (guarantor).
In general, restructuring does not affect the debtor’s agreements. However, restructuring enables the debtor to terminate or cancel certain types of agreements (ie, lease agreements and employment contracts) with a shorter notice period. Debtor’s debts that arise after the application has been filed must be paid when due. Neglecting such payment may lead to the termination of the restructuring proceedings in their entirety.
The restructuring proceedings do not usually affect the ownership of the company. The debts may be restructured without the restructuring proceedings having any impact on the ownership of the company. A debt-to-equity conversion, which is rarely used, requires the acceptance of the current shareholders.
Course of the proceedings and voting on the restructuring programme
After the commencement of restructuring proceedings, the administrator will begin drafting the restructuring programme. The creditor payment prohibition and other measures described above are intended to stabilise the debtor’s finances until the programme has been drafted and approved.
The restructuring programme must be approved by all of the known creditors or a majority in each of the groups of creditors, after which it is approved by the relevant District Court.
The majority required for the approval of a programme will be deemed to exist if more than half of the creditors participating in the vote in each group of creditors vote for approval and the total claims of the creditors in favour of approval in each group of creditors is more than half of the total claims of the creditors participating in the vote per group. In assessing whether a majority exists, no consideration will be given to a creditor or a group of creditors due to receive full payment for their claims according to the draft within one month after the programme is approved, or whose legal position will not be changed by the programme or will change only in that a default in payment that occurred before the proceedings had been commenced is rectified and the terms of the debt remain as they had been before the default. Creditors with the lowest priority are not able to vote if, according to the programme, creditors with a higher-priority claim do not receive their full payment or their legal position will otherwise worsen.
Even if the majority referred to above does not exist, the restructuring programme may nonetheless be approved if a majority has voted for its approval in at least one group of creditors and the claims of all of the creditors who have voted for approval represent at least one-fifth of the known claims that are to be taken into consideration (the so-called minimum voting rule) and certain other special conditions are met.
The restructuring programme
Once the restructuring programme has been approved by the District Court, the terms of the debts and the other legal relationships covered by the programme will be defined in accordance with the programme.
The restructuring programme must specify the measures and arrangements designed to improve the debtor’s activities, and the measures and arrangements that affect the status of the debtor and the creditors. The programme may include many kinds of measures and arrangements related to the debtor’s business and corporate structure. The following debt arrangements may be applied in the restructuring programme, subject to the restrictions noted below:
- a change in the payment schedule of a specific debt;
- an order that payments made by the debtor must first be applied against the principal and only later against interest and costs;
- a reduction in the obligation to pay credit costs for the remaining credit period; and
- a reduction in the balance of the principal.
The debt arrangement may also incorporate the full or partial refinancing of the debt:
- as a one-off payment with new debt incurred for this purpose; or
- with substitute performance that is reasonable in view of the creditor’s field of activities and status or priority.
No measures that would restrict the rights of a creditor beyond what is necessary for the achievement of the restructuring programme in light of the priority between creditors may be used in the debt arrangement.
The restructuring programme can include provisions requiring the debtor to make additional payments to the creditors if the debtor’s finances improve between the approval and conclusion of the restructuring programme. However, assets that the debtor reasonably needs to continue its activities may not be subject to such payments. Those creditors, excluding creditors with the lowest priority, whose claims have been reduced as a result of the programme may receive such additional payments pro rata prior to other creditors.
The programme also includes a payment plan indicating the contents, assets and terms of the debt arrangement and a payment schedule itemising the payment of each debt. There are various methods to achieve debt arrangement, but usually a significant reduction in the balance of unpaid debt is applied. Secured debts are treated differently in that they will receive, in principle at least, a payment corresponding with the deemed liquidation value of their security.
Once the restructuring programme has been approved, the restrictions on the debtor’s powers are lifted and the administrator’s authority expires. However, the debtor must adhere to the restructuring programme in its continued operations. A supervisor for the programme is nominated when the programme is approved by the District Court. Usually, the administrator will be nominated to act as the supervisor.
Notwithstanding the potential debt arrangements, secured debt is protected in that its principal amount may not be reduced. The restructuring programme can only affect its repayment terms. This applies, however, up to the deemed value of the property given as security. The security cannot be sold, except as approved in the restructuring programme. The Finnish Restructuring of Enterprises Act sets out special provisions on the status of secured debt.
Conclusion of the restructuring proceedings
A restructuring programme generally expires when it has been fully concluded; ie, when all the restructuring debts have been paid to the extent provided for in the programme and the other actions stipulated therein have been duly accomplished.
The duration of the proceedings may vary significantly. If creditors object to the application, it may take several months for the application to be later accepted (or rejected again) and for the proceedings to commence. Proceedings will usually commence within a month of filing the application.
After proceedings have commenced, it may take anywhere from six months up to more than a year to draft and approve a programme. This depends on the performance of the administrator and the approval or objection of the creditors. Furthermore, the sale of certain parts of the business activities may prolong the restructuring proceedings.
A restructuring programme itself may last anywhere from a few months to 15 years. Four to seven years is a standard duration for a restructuring programme, but in some cases, this may be exceeded or proceedings may conclude rapidly.
Cross-border issues are regulated by Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast). The Finnish Bankruptcy Act has some provisions on cross-border matters such as jurisdiction of the Finnish courts.
Under the EU Regulation, insolvency proceedings commenced in an EU member state must be recognised in all other member states. With regard to jurisdiction, the nexus of main interests of the debtor must be in that particular EU member state. The location of the debtor’s registered office will be presumed to be such nexus if not proven otherwise. The law applied to insolvency proceedings and their effects will be that of the member state within the territory of which such proceedings are commenced.
In a situation where the nexus of the debtor’s main interests is not in an EU member state, Finnish courts have jurisdiction to commence insolvency proceedings if the debtor has business premises or holds assets in Finland and the Finnish Bankruptcy Act confers such jurisdiction to the courts. However, the Finnish courts do not have jurisdiction if the debtor has been declared bankrupt in Iceland, Norway or Denmark and the debtor has been domiciled in such state.
There are very few cross-border insolvency cases in Finland, and the courts have not rendered decisions on commencing secondary insolvency proceedings. However, in practice, the EU Regulation imposes a significant amount of additional legislation with which the bankruptcy estate and the restructuring administrator, creditors and courts have to comply.
Nordic Bankruptcy Convention 35/1934
Finland is also a member of the Nordic Bankruptcy Convention on insolvency proceedings. This convention provides a legal framework for the cross-border recognition and enforcement of bankruptcies between Denmark, Sweden, Norway, Iceland and Finland. The main principle of the treaty is that a bankruptcy declared in one Nordic country is recognised in the other Nordic countries and is automatically applied to the debtor property in such other countries. The Convention itself is succinct, and it empowers the courts in the Nordic countries to cooperate in the field of insolvency proceedings. Furthermore, there is little legal literature or legal praxis on the Convention.