This country-specific Q&A provides an overview of Restructuring & Insolvency laws and regulations applicable in Finland.
What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
The Finnish legal regime concerning securities is very heterogenous with no unifying rules between various types of securities and no broad general statements can be made. It is very important to consider each security arrangement separately on a case by case basis with a local counsel to ensure perfection of the security. Immovable property can be mortgaged through operation of law, placing a lien on it, following the formalities set in law.
Some movable property can be mortgaged as well, such as land rent rights to immovable property. Whether a specific movable property can be mortgaged depends on heterogenous legislation enacted separately for various classes of property such asinter alia commercial vehicles, ships, and airplanes. There is also an enterprise mortgage applicable to all availableassets of a debtor company. Certain practical ways of creating securities through a legal retention of ownership have been developed in day to day business life, which is most usable in private car financing. For some types of movable property such as industrial machinery and equipment, creation of an enforceable security may require complex arrangements. There are some other security-like instruments such as the right of a service provider to hold assets as collateral for the payment of services, such as the right of a maintenance company to hold a commercial vehicle or ship as collateral, which rights may sometimes even supersede secured rights.
The failure to comply with required formalities generally results in a non-enforceability(non-perfection) of the security or pledge. The formalities are generally evaluated very strictly in legal practice, with even minor discrepancies in the formalities primarily resulting in voiding of the security arrangement.Some types of security arrangements often used in foreign jurisdictions are unenforceable in Finland.
What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
Generally, a secured creditor needs to involve the courts for enforcing their security. However, in creation of a legally valid and binding pledge, the position of a secured creditor could be described as very strong. Usually a secured creditor can enforce their security with a faster timetable than non-secured creditors.
What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?
The statutory grounds for the initiation of the bankruptcy procedure is the insolvency of the debtor, meaning the inability to pay debts as they fall due other than temporarily. Bankruptcy may be applied by the debtor itself or any of its creditors. In a debtor application, insolvency is presumed and usually not questioned. A creditor requires either a court ruling (or a debt which is enforceable without one) or a debt obligation which is otherwise indisputable enough. The creditor must also provide proof for the debtor’s insolvency. This is typically accomplished by sending out a payment demand with the threat of filing for bankruptcy. If such a payment demand is not paid within a week, the debtor is presumed insolvent.
Under the Finnish Companies Act (624/2006), the directors of a company have a general duty to act in the best interests of the company and to prudently ensure the protection of the interests of the company. There is no obligation to apply for the initiation of insolvency proceedings, but directors and managers may incur criminal or civil liability if they continue to enter into further commitments even while being aware that the company will not be able to meet them.
What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?
Finnish law provides for two procedures to wind up a company: bankruptcy under the Bankruptcy Act; and liquidation of a company under the Companies Act. Liquidation is only available for non-insolvent companies, i.e. when the assets exceed liabilities, and will not be discussed further here.
The statutory bankruptcy process is overseen by the courts in various stages. Firstly, the bankruptcy process is managed by a court-appointed administrator of the bankruptcy estate.Roughly speaking, the management of the debtor company loses all control of the debtor company once the company is declared bankrupt, and the administrator assumes all legal powers of the management with creditors replacing most of the shareholders’ powers with some residual exceptions. The court appoints the administrator based on the views of the largest creditors. Courts are also involved in ending the bankruptcy proceedings and approving the distribution list, as well as resolving various disputes, such as the existence of a creditor’s debt or the enforceability of a security given to a creditor.
The Finnish bankruptcy process is a creditor-driven process. All major decisions are made by the creditors in a creditors’ meeting. Each creditor has one vote for one euro of debt owed to them. Only decisions of lesser implication are done by the administrator of the bankruptcy estate alone. The administrator has also the duty to safeguard the interests of all creditors on equal standing. The duration of a bankruptcy process varies greatly with the size and complexity of the estate. An empty bankruptcy estate with no assets to liquidate does not go through a full bankruptcy process and the process can be done as quickly as a few months. At the other extreme end, the oldest ongoing bankruptcy process that the authors know of involves an insurance company the bankruptcy of which was initiated in the 1990’s. Most bankruptcy processes take starting from roughly a year to several years.
How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?
Roughly speaking, the highest-ranking claims are those incurred by the bankruptcy estate during the bankruptcy proceedings itself, among which the administrator’s fee takes the top priority. Any such debts must be paid in full before any bankruptcy debts can be paid. All other debts generally get a pro rata share of the liquidated assets of a bankruptcy estate. Exceptions to this primary rule areinter alia secured creditors, creditors holding enterprise mortgages (floating charges), and creditors with debts owed that were incurred during a restructuring procedure that preceded the bankruptcy. Lower ranking (subordinated) debts consist e.g. of statutory capital loans, various statutory sanctions and junior bonds.
There is no concept of equitable subordination in Finnish bankruptcy law. The debts owed to an affiliated creditor are on equal footing to other creditors, provided that the debts satisfy the general requirements on claims in the first place, inter alia that the debt on which the claim is based exist and no other exclusion grounds apply.
Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?
The legislative framework for challenging, and potentially recovering, transactions entered into by a company in financial distress is the Act on the Recovery of Assets to a Bankruptcy Estate (758/1991). The same Act is also applied to a restructuring process and execution proceedings. Any transaction favoring a creditor or other party at the expense of other creditors by either reducing the debtor’s assets or increasing the debtor’s liabilities is potentially recoverable by the bankruptcy estate or the administrator of a restructuring procedure. Primary considerations for recovery are whether the debtor is legally insolvent and whether the creditor was aware of the debtor’s insolvency.
The challenges can be initiated by the administrator or any creditor whose debt has been accepted into the distribution list. In practice, most recovery actions are initiated by the administrator based on the opinions of the creditors. The most significant (but not the sole) ground for a challenge is if a debt was paid during a three-month window prior to commencement of bankruptcy or a restructuring process. Such a payment may be recoverable given three alternative conditions: first, if the method of payment was unusual (usually, anything else than money); second, if the payment was made in advance to becoming due and payable; or, third, in excess of an amount considered significant in relation to the estate’s assets. Court practice has established that any payment in excess of 10% of the assets of an estate at the time of bankruptcy is considered significant in this respect. A counterargument for such recovery is if the payment is considered to have been made in the ordinary course of business.
A successful challenge incurs the counterparty to a transaction entered by the debtor to return the assets or their value to the bankruptcy estate. A third party who later acquired the assets with knowledge of the recovery grounds may incur a liability to return the assets or their value to the bankruptcy estate.
What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?
The initiation of insolvency proceedings, whether bankruptcy or restructuring, itself has the effects of a moratoria by action of law. All creditor claims are enforced only through the bankruptcy proceedings themselves. An insolvency proceeding initiated in Finland generally has an extraterritorial effect in the EU and EEA. Whether an insolvency proceeding initiated in Finland has an extraterritorial effect elsewhere in the world depends on the legal regime applicable to the relationship between Finland and the other jurisdiction.
The primary exception to the moratorium related to the initiation of insolvency proceedings considers secured creditors. A secured creditor can usually enforce their secured claim parallel to the insolvency proceedings and usually receive payment faster, unless the security is challenged by the bankruptcy administrator.
What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?
Finnish legislation provides one formal restructuring process, the restructuring of a company under the Restructuring of Enterprises Act. The purpose of such a restructuring process is adopting a restructuring plan acceptable by the creditors. The restructuring plan allows for changes in the debt obligations, such as repayment schedule, interest, or the principal itself. In practice, the amount of principal owed is reduced almost as a rule. Secured obligations are protected from this, since the principal of a secured debt cannot be reduced below the secured amount.
The Restructuring of Enterprises Act stipulates that a company may enter into restructuring proceedings if it lodges its own application or a joint application with its creditors. Creditors have a legal right to apply for restructuring without the debtor, but in practice this almost never happens. The criteria, one of which must be met, for entry into restructuring are 1) a joint application with, or the consent of, two unaffiliated creditors which represent at least 20% of all the debts of the debtor company, 2) an existing threat of the debtor company becoming insolvent, or 3) the debtor company being insolvent without any of the obstacles of restructuring being present.
A court-appointed administrator manages the restructuring process, but the management remains in control of the day-to-day business with certain actions requiring permission from the administrator. Courts have an overseeing role in the process, by initiating it and affirming the restructuring plan once approved by the creditors. Courts also rule on objections made to individual creditor’s debts.
Creditors may object to the initiation of restructuring by lodging their formal opinion to the court. Typically, an application with required support is accepted even if some creditors object. The commencement of restructuring provides for a relief period from stakeholder pressure. A security cannot be enforced during the preparation phase of a restructuring plan, an exception being if the creditor shows that the secured asset is unnecessary for the debtor’s business.
A restructuring plan is put to creditor vote and it does not need to be adopted unanimously. Adopting the plan requires reaching a majority in the different creditor groups, most typically secured and unsecured creditors. Once a restructuring plan is approved, the legal restructuring process ends. The implementation of a restructuring plan is legally considered to take place after the restructuring process. In the implementation stage of a restructuring plan, the debtor usually resumes full control of their business. If the restructuring plan is not followed, a creditor can apply for a stay of the restructuring plan or for bankruptcy of the debtor.
Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?
Yes, a debtor in restructuring can obtain new financing normally as a going concern. Any liabilities incurred by the debtor company after the initiation of restructuring proceedings must be paid in due course and they are not subject to haircuts. The same holds true for any obligations agreed prior to restructuring but fulfilled only after the initiation of restructuring. Failure to satisfy new debts accrued after starting the restructuring is sufficient grounds for cessation of the provision of further services or supply of further goods.
Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?
Generally speaking, the restructuring proceeding has legal effect only on the debtor company itself, but not for any stakeholders (group companies or director’s personal liability). For example, any group companies are evaluated independent of the debtor company. To achieve changes in the liabilities of other group companies, they need to apply into restructuring individually.
Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities do they have? Are they permitted to retain advisers and, if so, how are they funded?
The Restructuring of Enterprises Act allows for the establishment of a creditor committee either at the initiation of the restructuring process (application stage) or later. The creditor committee is appointed at the request of the applicant, the administrator or individual creditor, unless the court deems the committee unnecessary e.g. due to small number of individual creditors. In practice, a creditor committee is typically established in all but the smallest restructuring processes. The creditor committee is primarily an advisor to the administrator as well as overseeing the administrator to the benefit of all the creditors. The term of the committee can be extended at the maximum to the completion of the restructuring program, where it acts as an overseer of the implementation of the restructuring plan. Members of the committee can retain advisers. All expenses related to the creditor committee are borne by the respective creditors in the committee unless the accepted restructuring plan says otherwise.
How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any ability for either party to disclaim the contract?
Both the Restructuring of Enterprises Act and the Bankruptcy Act have the force of mandatory legislation, superseding all conflicting contractual terms agreed by the debtor. Both processes have their own rules concerning existing contracts. In general, termination provisions are not enforceable when they conflict with law. Retention of title and set-off provisions may be enforceable, provided that they correspond with local requirements. In restructuring, the debtor company, but generally not creditors, has the ability to disclaim pre-existing contracts. In bankruptcy, both parties may disclaim pre-existing contracts, but if the bankruptcy estate sets a sufficient security for future liabilities, a creditor cannot disclaim pre-existing contracts unilaterally.
What conditions apply to the sale of assets / the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?
From a legal standpoint, bankruptcy and restructuring processes differ greatly in this respect. Sale of assets or the entire business during restructuring generally requires the consent of both the administrator as well as the debtor company itself. These require careful case by case analysis.
In bankruptcy, all sales of assets or even the entire business of the debtor are carried out free and clear of claims and liabilities. Sale of assets with enforceable securities on them generally involve the consent of the secured creditor. Credit bidding is permitted, but the transfer of any secured assets must be done at arm’s length pricing. Pre-packaged sales are possible; however, the statutory framework provides no tools for forcing such actions. Pre-packaged sales in the form used in, e.g., the United States or the UK, are not used in Finland.
What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?
Under the Finnish Companies Act (624/2006), the directors of a company have a general duty to act in the best interests of the company and to prudently ensure the protection of the interests of the company. The duties of the directors and managers do not differ greatly when managing a company in financial difficulties. However, a key consideration is that directors and managers may incur criminal or civil liability if they continue to enter into further commitments even while being aware that the company will not be able to meet them. A safe course of action for directors in such a situation is to file for bankruptcy or restructuring if emergency financing is not available. Additionally, payment of dividends from a company in financial distress is limited.
Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?
No. The initiation of restructuring or insolvency proceedings has no direct effect on the liability of directors and other stakeholders.
Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?
The primary legislative framework for international insolvency in Finland is the recast regulation (EU) 2015/848 of the European Parliament and of the Council of May 2015 on insolvency proceedings (the “Recast Insolvency Regulation”), applied both to bankruptcy and restructuring. The Recast Insolvency Regulation leads to the automatic recognition of insolvency processes started in other EU Member States. No action from Finnish courts is required for the recognition of such an insolvency process. Under the Recast Insolvency Regulation, such insolvency processes are construed according to the laws of the EU Member State in which such a process was initiated in.
In addition, Finland is a party to several conventions on the recognition of foreign judgments, including the Brussels and Lugano conventions. These have been largely replaced by applicable EU legislation between Member States. If no convention applies, the recognition of a restructuring or insolvency process initiated out of the EU requires an exequatur from a Finnish court.
Finland has not adopted either of the UNCITRAL model laws and to the authors’ knowledge they are not currently under serious consideration. Many legislative choices adopted in Finland correspond in principle with the model laws.
Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?
The Recast Insolvency Regulation grants jurisdiction to the courts of the Member State in which the center of a debtor’s main interests is situated. The centerof main interests is the primary place in which the administration of the debtor is conducted, which, unless proven otherwise, is assumed to be the place of registered office. This being considered, the jurisdiction of incorporation is not relevant if the centerof a debtor’s main interests is situated within Finland, which grants jurisdiction to Finnish courts over such a debtor.
If a debtor having its centerof main interests in another EU Member State has an establishment in Finland, secondary bankruptcy proceedings (but not restructuring) may be initiated in Finland. Such a secondary bankruptcy proceeding is limited to the debtor’s assets located in Finland. Additionally, the Member State in which a real property involved in insolvency proceedings has exclusive jurisdiction over such real property.
In addition, a treaty between the countries results in Finnish courts having no jurisdiction over debtors that have entered into bankruptcy proceedings in Iceland, Norway or Denmark, provided that the debtor was domiciled therein.
The legal situation concerning restructuring or bankruptcy of companies incorporated in other non-Member State jurisdictions is unrefined. A principle of international law is the equal treatment of bankruptcy and insolvency proceedings (and similar). As such, it could be entirely possible for a company incorporated out of the EU to enter into restructuring or bankruptcy in Finland. However, the foreign company must have a business presence in Finland for the restructuring or bankruptcy to have any desired results. To the authors’ knowledge, such restructuring or bankruptcy proceedings of non-EU companies are almost unheard of.
How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?
Finnish company law and insolvency legislation treats each company as a fully independent legal entity, regardless of whether it has group interests. Thus, the insolvency process of each group entity proceeds separately. Legally, a group company does not differ in a material way from other stakeholders.
It should be noted that, from a recovery standpoint, transactions between related parties are evaluated more stringently and the critical period, during which challenges to transactions are possible, is longer. Care should, therefore, be taken to make sure that any significant transactions with related parties are done on an arms-length basis, which may also be required for other reasons (e.g. tax or corporate law).
Is it a debtor or creditor friendly jurisdiction?
Finland is more of a creditor-friendly than debtor-friendly jurisdiction. Both the legal framework and the praxis support the enforcement of debt obligations through bankruptcy and execution. The position of a secured creditor is strong in the event of proceedings. Overall, the bankruptcy process is creditor driven.
Simultaneously, the statutory restructuring procedure available to debtors is a debtor-friendly process. Entering into restructuring gives the debtor an extensive protection from the enforcement of pre-existing debts. In court practice, debtors are often allowed to enter into restructuring. However, a successful restructuring process requires co-operation between the debtor and the various stakeholders.
Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?
Employees and pensions are protected through mandatory legal regimes operated by public legal entities. The state guarantees salaries and pensions to an extent in insolvency proceedings through special-purpose public legal entities. On a practical level, the public legal entity in question pays outstanding salary and pension debts where applicable and takes on the role of a creditor in the insolvency proceeding. Thus, sociopolitical factors are usually absent from insolvency proceedings. Naturally, in the insolvency proceeding of a very large employer, several extralegal political considerations may apply, such as preservation of jobs. However, the insolvency proceedings themselves are well shielded from these considerations. There are various state-funded funding options available to distressed companies. The state operates primarily through Finnvera Oyj (the Export Credit Agency of Finland) and Business Finland (the Finnish government organization for innovation funding and trade), but also as a major shareholder and stakeholder in various big companies.
What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?
In general, the restructuring and insolvency proceedings in Finland are very efficient and no great barriers exist. The primary barrier that the authors are aware of is that the legislation sometimes provides insufficient statutory support for the preservation of pre-existing business value. For example, it is often difficult, but not impossible, to sell the entire businesses or assets of bankruptcy estates as whole going concerns in the absence of pre-packaged sales. There is little to no statutory support for informal workouts. Currently, there are no current on-going proposals for any large reforms concerning either of the statutory insolvency proceedings.
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