Statistics on Finnish Insolvency Proceedings

A total of 58% of all restructuring proceedings pending in Finland in 2022 resulted in a court-certified restructuring programme. The remaining 42% of the restructuring proceedings ended in suspension of the proceedings. The average duration of all restructuring proceedings is approximately six months, varying in all cases somewhere between one and 500 days.

Between January and September 2023, a total of 1,961 companies were placed into bankruptcy in Finland. The corresponding number in 2022 was 1,590 bankruptcies (23.3% increase). The number of bankruptcies increased especially during July and August 2023.

The number of restructuring proceedings commenced between January and September 2023 was 212, which is 50.4% more than the previous year. However, the overall volume of restructuring proceedings is still relatively low in comparison to the number of companies in Finland.

Building and Construction Sector in Crisis

Just as companies are seeing normal financial years after the long and disruptive COVID-19 period, the next financial challenges including rising interest rates and general price and cost escalation have affected in particular the building and construction sector. During the summer of 2023, several construction companies have either filed for restructuring or bankruptcy after making an attempt at restructuring proceedings or at the least announced that they need to undergo change negotiations concerning personnel. It is generally known that contractors, subcontractors and material providers in the construction industry are facing solvency issues. The bankruptcy of a larger player in the construction branch may cause a snowball effect of bankruptcies in the subcontracting chain.

The Finnish government has proposed changes to the transfer tax regulation, which would reduce the amount of transfer tax payable in connection with the purchase of a real estate or shares in housing companies, in order to boost sales in the real estate market.

Other industries and sectors which are dependent on consumer spending are also experiencing lower revenue numbers, which together with rising costs may prove to be fatal to companies that have already been conducting their business at a low profit margin.

Insolvency legislation in Finland provides two alternative procedures for companies experiencing financial difficulties: restructuring (rehabilitation) or bankruptcy (liquidation). Finnish legislation makes a clear distinction between the two proceedings. Bankruptcy is based on the provisions of the Bankruptcy Act and restructuring on the Act on the Company Restructuring (the “Restructuring Act”).

Bankruptcy covers all of the debtor’s liabilities and will typically end the operation of the debtor, whereas the purpose of restructuring is to rehabilitate a distressed debtor’s viable business, make debt arrangements and provide for the debtor’s continued operation. The aim of rehabilitation is for creditors to receive a greater disbursement from the debtor for their receivables than in a bankruptcy.

The company cannot move from bankruptcy proceedings to restructuring proceedings, but failed restructuring proceedings often give cause for the immediate petition for bankruptcy.

The procedure under the Finnish Limited Liability Companies Act frequently referred to as “liquidation” in many contexts aims for the dissolution of a company and is possible when the assets of the company exceed the liabilities of the company, so it is not regarded as being an insolvency process.

Statutory company restructuring or bankruptcy proceedings may be preceded by informal and voluntary reorganisation or debt arrangement negotiations which are not governed by any laws.

The Restructuring Act provides for the possibility of an expedited restructuring process. This would require that the debtor company and the creditors pre-negotiate a restructuring plan and have it approved by the court practically simultaneously with the petition for the commencement of the restructuring proceedings.

See 10.1 Duties of Directors.

See 7.1 Types of Voluntary/Involuntary Proceedings, “Filing for Bankruptcy” and 6.1 Statutory Process for a Financial Restructuring/Reorganisation, “Filing for Basic Restructuring Proceedings”.

See 7.1 Types of Voluntary/Involuntary Proceedings, “Filing for Bankruptcy” and 6.1 Statutory Process for a Financial Restructuring/Reorganisation. Company restructuring proceedings also require insolvency or imminent insolvency in order to be commenced.

Susceptibility to Bankruptcy

Any private individual, corporation, foundation and another legal person may be declared bankrupt. A legal person may be declared bankrupt even if it has been dissolved. Also a decedent’s estate, a bankruptcy estate and a university under public law may be declared bankrupt. Thus, an investment firm and a credit institution may also be declared bankrupt.

The State, a well-being services county or well-being services group, the autonomous Åland Islands, a municipality, a federation of municipalities, another municipal co-operative body under public law, a state enterprise, an independent agency under public law, the Evangelical Lutheran Church, the Orthodox Church, and a parish of the Evangelical Lutheran Church or the Orthodox Church cannot be declared bankrupt.

Some specific provisions concerning the bankruptcy of banks, credit institutions and investment firms may apply with respect to the proceedings, ranking of claims and order of payment as well as the role of the National Financial Supervisory Authority and other authorities.

For example, the Act on Credit Institutions includes specific provisions on the ranking of claims and priority of reimbursable deposits, petition for bankruptcy and notification concerning the commencement of bankruptcy related to credit institutions based in foreign countries having a branch in Finland. The assets of a Finnish branch of a foreign credit institution may be assigned into bankruptcy under Finnish laws when certain preconditions are met.

Scope of Petition Regarding the Finnish Restructuring Act and Restructuring Proceedings

Any private entrepreneur, a general partnership, a limited partnership, a company, a co-operative, a housing company or an association engaged in economic activity may be the subject of restructuring proceedings.

The following entities cannot be the subject of restructuring proceedings:

• a credit institution referred to in the Act on Credit Institutions;
• an insurance company or a pension institution;
• a partnership, company or co-operative in liquidation;
• an institution placed under crisis management (resolution) pursuant to the Act on the Resolution of Credit Institutions and Investment Firms; and
• a central counterparty referred to in the Act on the Book-Entry System and Settlement Activities.

The Financial Stability Authority (FFSA), Resolution and Deposit Guarantee

The FFSA is an independent agency that acts as the national resolution and deposit guarantee authority. FFSA is responsible for resolution-related matters (crisis management) concerning credit institutions, investment firms and the central securities depository. FFSA’s key duties include drafting and maintaining resolution plans for institutions, deciding whether a failing institution is placed under resolution and applying the necessary resolution tools to an institution under resolution.

FFSA is also responsible for the deposit guarantee system and the management of Finland’s national deposit guarantee fund. Deposit guarantee protects depositors’ assets in the event that a Finnish deposit bank becomes permanently insolvent (bankruptcy or permanent default). Compensation for guaranteed deposits amounts to a maximum of EUR100,000 of a depositor’s deposits in one bank.

It is relatively common for a Finnish distressed company to initiate some negotiations with its creditors prior to applying for insolvency proceedings. These are not subject to any statutory schemes. A voluntary restructuring process may be considered in order to avoid negative publicity, additional interruptions in the daily operations or general mistrust in the business by contracting parties. The Finnish laws do not require any consensual restructuring negotiations before the commencement of a statutory process.

The willingness of creditors to participate in the process depends largely on their security position. In a very general picture, financiers may grant relief on interest rates and extensions to repayment schedules and even lower ranking, but they are not likely to negotiate on a haircut to the principal amount owed. Creditors stay aware of their position in the order of priority when distributing assets in accordance with the statutory process and tend to compare these two situations carefully when considering the proposals of the debtor on any debt arrangement. In some cases especially the secured creditors may feel that the statutory process is functional.

When entering into the statutory restructuring proceedings, secured creditors are not subject to a haircut but rather less intrusive methods, eg, lowered interest rates. However, the statutory restructuring requires that the security asset is valuated in order to confirm if the creditor is fully secured by the assets pledged to it and this might also have an influence to some creditors’ willingness to participate in voluntary restructurings. When no statutory proceedings have been commenced there is no specific cut-off date for the valuation, which also means that the value of the security is not set on a certain financial situation.

Further, the creditor structure varies from case to case. Where the debtor has a very large number of creditors, a consensual restructuring may be impossible or at least certain small-scale creditors are not involved in the debt restructuring negotiations.

If the position of a creditor is very secured, the less enthusiastic they may be to get actively involved in the turnaround arrangements. When the continuation of the debtor’s business is critical to the creditor’s situation, the easier it is to activate the creditor to negotiate on solutions for the debtor. If an informal creditor committee is established from the largest creditors, an attorney or CRO may also be appointed to oversee the debtor’s activities and to report on them. Creditors and the attorney/CRO would be provided full access to the financial information of the debtor. The attorney/CRO would obtain remuneration from the debtor whereas the members of creditor committees seldom are entitled to fees other than those agreed in the original loan agreement.

In voluntary proceedings there is no protection from the law in the form of stay or moratorium and the creditors would need to agree to a stand-still period for the negotiation phase. These are issues which larger lenders may be used to granting but are not as normal for creditors with a public law nature. Also, when the decision-making is dependent on creditors with a public law nature, a restructuring programme prepared by a court-appointed administrator may be easier to adopt than assuming responsibility for decisions related to a voluntary debt restructuring.

In conclusion, the progress and timeline of a voluntary out-of-court workout is dependent on the individual characteristics of the debtor company and its creditor structure.

See 3.1 Consensual and Other Out-of-Court Workouts and Restructurings.

A distressed company may be unworthy of new credit from the bank point of view. Therefore, the more common sources of financing for a distressed company are the owners and/or management. If existing creditors provide new financing, they may insist that owners do the same. Larger creditors may also require that the owners or management demonstrate their faith in the success of any statutory restructuring proceedings as a prerequisite for their support for the commencement of the proceedings.

Any pledge of assets related to new money injections would be, generally, an issue to be agreed with the largest creditors prior to approval due to existing loan and pledge agreements. In cases where the most valuable assets would already be pledged, a super-priority lien would require that the existing other financiers would allow for their ranking to become lower by entering into new inter-creditor agreements and ranking of claims.

There are no specific stipulations on the creditors’ duties towards each other.

The administrator has a duty to provide information to the creditors and the debtor naturally has the duty to provide information and to co-operate with the administrator and the creditors’ committee.

The administrator, a member of the committee of creditors and a creditor shall not disclose or use for personal benefit any information relating to the financial position, business relationships or business secrets of the debtor learned in connection with the proceedings, but this obligation does not extend to information learned about other creditors.

Inter-creditor agreements are common and concluded in connection with larger loan facility arrangements. See 3.1 Consensual and Other Out-of-Court Workouts and Restructurings and 6.4 Claims of Dissenting Creditors on how the approval process of the restructuring programme works.

There are three main types of security interests:

• mortgage over a real estate property;
• business mortgage over movable assets of a business entity; and
• pledge of specified movable assets (including contractual rights).

For a pledge of an asset to be considered valid (in the insolvency proceedings or otherwise), it is required that the asset:

• is adequately specified;
• is transferable and executable; and
• has economic value.

Furthermore, the following requirements must be fulfilled:

• the existence of an underlying indebtedness or other ground;
• the legal capacity of the pledgor to grant a pledge over the asset; and
• perfection of the pledge must take place.

Mortgage Over Real Estate Property

A mortgage over a real property needs to be registered with the Finnish Register of Land Ownership and Mortgages. The mortgage is registered upon application by the owner of the property. The registered mortgage is evidenced by either a physical promissory note or a so-called electronic promissory note (ie, an entry made in the register on the registered mortgage). A mortgage over a real property is perfected only upon handing over of the physical promissory note to the creditor or registration of the electronic promissory note in the name of the creditor.

Business Mortgage

A business mortgage is governed by the Finnish Act on Business Mortgage and the Finnish Decree on Business Mortgage. Pursuant to the Business Mortgage Act, tangible assets used in the course of business may be subject to a business mortgage to secure a claim with no requirement to transfer the possession of such assets to the creditor. The Business Mortgage Act further specifies that mortgageable tangible assets include, without limitation, certain fixed assets (buildings, machinery and intellectual property rights), current assets (materials and products), and financial assets (cash in hand, receivables and securities) that are used in the business activities of the company. A business mortgage may not cover any asset over which a mortgage/charge may be granted pursuant to any other applicable Finnish act (eg, real estate, aircrafts, ships and certain vehicles).

A business mortgage is established by registering the relevant business mortgage promissory notes with the Finnish Patent and Registration Office. However, a business mortgage is only perfected upon delivery of the registered business mortgage promissory notes to the creditor.

Once a business mortgage has been created, the debtor is prohibited from granting any pledge over the mortgaged assets. If a pledge were created over such assets, the pledge would not be binding on the creditor holding the business mortgage. This restriction does not, however, apply to securities or monetary receivables. Therefore, even if a pledge is created over securities or monetary receivables after the business mortgage were pledged, such later pledge would have priority over an earlier business mortgage.

Pledge of Other Movable Assets (Shares, Housing Company Shares, Receivables, Bank Account Assets)

A share pledge is perfected by transferring the relevant share certificates to the pledgee, or, if no such share certificates have been issued, by notification of the pledge to the relevant company whose shares are pledged. If the shares are incorporated in the book-entry system, the perfection would be carried out by registration of the pledge in the pledgor’s book-entry securities account.

In case of a pledge of shares in a housing company (limited liability company, the shares of which entitle the shareholder to possess a separate dwelling unit), the pledge is perfected by transferring the relevant share certificates to the pledgee. Pursuant to new legislation, a pledge over housing company shares is perfected through registration of the pledge with the recently established electronic housing data system.

Generally, any existing and properly identifiable receivables may be validly pledged. In case of a receivable, the perfection of a pledge is carried out by way of notification of the pledge to the debtor. The notification needs to sufficiently identify the debt, the underlying creditor–borrower relationship and the date of the pledge. The notification should be made in a verifiable manner, so that the pledgee can later present evidence of such notification. After the debtor has received a notification of the pledge, the debtor may no longer pay the debt to the original creditor unless otherwise agreed.

A pledge of a bank account is perfected in a similar way as a pledge of a receivable (the proper addressee of the notification of the pledge being the relevant account bank). After the bank of the relevant account has received a notification of the pledge and unless otherwise agreed, the pledgor may not make any withdrawals from the pledged account. Banks may have differing practical arrangements when it comes to a pledge of bank account assets.

See 6.7 Restrictions on a Company’s Use of Its Assets, 6.8 Asset Disposition and Related Procedures and 6.9 Secured Creditor Liens and Security Arrangements concerning secured assets in the company restructuring proceedings.

Realisation of a Pledged Asset in Bankruptcy

In the bankruptcy proceedings the administrator and the secured creditor generally co-operate and agree on the manner of realisation of a pledged asset. In case of disagreement, both parties may apply for the court’s permission to realise the asset. The proceeds of the security accruing during the bankruptcy shall come to the benefit of the creditor. On the other hand, the costs of the management and sale of the pledged asset should be covered by the creditor (from the realisation proceeds).

Rights and Remedies of Secured Creditors Prior to Insolvency Proceedings

An enforcement of a security interest depends on the nature of the asset over which the security has been granted. Enforcement of obligations usually requires that the creditor first obtains a judgment or arbitral award ordering the particular obligations to be fulfilled (eg, debt to be paid) after which the actual enforcement is carried out by a public execution officer (bailiff) in an execution procedure regulated by law. The enforcement of a business mortgage and mortgage over a real estate property, as well as any other charge, must be carried out through official enforcement proceedings by a bailiff, whereas the enforcement of movable assets is a much more straightforward process.

Enforcement of a Pledge Over Movable Assets

The Finnish Commercial Code sets some limitations to the realising of movable assets; however, the parties generally agree upon granting the pledgee full discretion over the means of realising the assets. It is customary that, after a relevant debt has fallen due and remains unpaid, the pledgee may sell the pledged assets immediately, without consulting the pledgor, in the manner and on such terms as the pledgee deems appropriate.

The pledgee may, instead of selling the pledged assets to a third party, redeem them and transfer the title to the relevant assets to itself. However, any sale or redemption of the pledged assets by the pledgee should be done on arm’s length basis at fair price.

Enforcement of Business Mortgage

Prior to bankruptcy, a business mortgage may be enforced only through the official enforcement proceedings set forth in the Enforcement Code and by the bailiff. No private enforcement of a business mortgage is possible.

A business mortgage creditor may require payment under the mortgage even if the debt is not yet due in the event that:

• the operations of the company or the part of the company over whose business the business mortgage has been established have ceased or the company or part of it is disposed of or if the company sells the assets subject to the business mortgage:
1. in whole or a majority of them, or
2. outside the ordinary course of business;
• the assets or the majority of them are destroyed in a fire or in similar accident;
• the company refuses to provide the creditor with certain information to which the creditor is entitled under the Business Mortgage Act; or
• the assets subject to the business mortgage are badly managed or they have decreased and the value of the security interests has therefore substantially decreased.

Enforcement of a Pledge Over Real Estate Property

The only means of enforcement available to enforce a mortgage over a real estate property is realising the property through the official enforcement proceedings set forth in the Enforcement Code after obtaining a judgment. The pledgee may seek a judgment confirming the debtor’s obligation to repay the relevant debt on the basis of which the bailiff decides to direct the enforcement to the debtor’s assets and will typically sell them in an auction. Alternatively, the pledgee may directly make a petition to the court for the enforcement of the receivable under the particular pledge.

In the company restructuring proceedings, the treatment of the secured creditors includes the following:

• restructuring has no effect on the security;
• principal cuts are not allowed; and
• secured creditors are entitled to interest payments under the credit terms regardless of the interdiction of repayment during the restructuring proceedings.

In the case of bankruptcy and rights of the secured creditor, see 5.1 Differing Rights and Priorities on the ranking of claims.

All creditors must be treated equally within their own class of creditors.

Ranking of Claims in Bankruptcy

The Finnish Act on Ranking of Claims provides for the order of priority in which claims are paid in a bankruptcy liquidation. While the main principle is the equal right of the creditors, the basic order of priority is the following:

1. debts secured by a pledge, mortgage or lien on a specific asset;

2. debts concerning the unpaid restructuring administrator’s fees;

3. debts arising during company restructuring proceedings (new debt);

4. debts concerning maintenance payments to a child;

5. debts secured by a business mortgage; and

6. other (unsecured) debt.

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, which shall be covered by the value of the pledged asset. If the value of the asset is not sufficient to cover the entire debt, the remaining part of the debt is treated as unsecured debt.

With respect to business mortgages, if 50% of the value of the underlying mortgaged assets does not cover the entire debt, the remaining part of the debt is treated as an unsecured debt.

The Available Debt Arrangements in Company Restructuring Proceedings

An unsecured debt may be restructured in any of the following ways:

• changing the payment schedule;
• payments made by the debtor can be deemed to apply first in amortisation of the principal amount of the debt and only thereafter as payments of other debt-related costs;
• reducing debt-related costs; and
• reducing the amount of the unpaid debt.

Restructuring can also include paying the whole debt or part of it as a bullet payment.

In the debt arrangements, interest and other credit costs accruing during the restructuring proceedings to restructuring debts other than secured debts shall be deemed to be lowest priority debts; the lowest priority debts after such debts shall be those that would be paid last in a bankruptcy. The creditors having lowest priority debts do not have the voting right when voting for the approval of the restructuring programme, if a creditor with a higher-priority claim will not receive full payment.

Unsecured trade creditors are treated equally within the group of all other unsecured creditors. The Restructuring Act provides that, despite of the interdiction on payment which commences upon petition for the restructuring proceedings or at the latest upon the court’s decision to commence the restructuring proceedings, the administrator may decide that the debts to creditors who have small claims may be paid off, if this is appropriate from the point of view of the proceedings. Furthermore, it may be included as a term of the restructuring programme, if deemed to be appropriate from the point of view of the proceedings, that creditors with small claims are to receive payment in full. The limit of “small claim” is always dependent upon the individual company under restructuring.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

If applied for, a stand-still period takes effect by the court’s interim decision preventing repayment of restructuring debt and enforcement actions against the debtor even prior to the formal commencement of the restructuring proceedings ruling of the court.

See 5.1 Differing Rights and Priorities for ranking of claims in bankruptcy. Employee, pension and tax claims are not awarded special priority. During the company restructuring proceedings the debtor may not repay the restructuring debt, excluding specific situations which include employee receivables that have arisen within three months preceding the filing of the petition.

Stages of the Restructuring Proceedings

The stages are as follows:

• Debtor files the petition with the relevant court (creditors may support).
• Court commences restructuring proceedings and appoints an administrator.
• Administrator prepares a draft restructuring programme.
• Court approves the restructuring programme and the restructuring proceedings end.
• Debtor carries out the terms of the restructuring programme (typically three to five years).

Filing for Basic Restructuring Proceedings

The following apply, according to the particular circumstances.

• Debtor’s petition supported by creditors:
1. support of at least two creditors that are not closely related to the debtor and whose combined receivables represent at least one fifth of the debtor’s known debts; and
2. other creditors are not heard on the petition, the court process is faster.
• Debtor’s own petition:
1. imminent or actual insolvency as precondition;
2. extensive auditor’s report is required;
3. content requirements for the petition are extensive; and
4. major creditors have the opportunity to provide their statement.
• Creditor’s petition:
1. possible pursuant to the law but very unusual.

Barriers to the Commencement of Restructuring Proceedings

The following obstacles may arise:

• debtor is permanently insolvent and it is probable that the insolvency cannot be remedied;
• insufficiency of assets to cover the costs of the proceedings;
• inability to repay any new debts;
• petition is aimed at violating the creditor’s rights;
• the necessary conditions for the preparation or approval of a restructuring programme do not exist;
• debtor’s books are materially incomplete or erroneous; and
• other barriers related to criminal charges.

After the Commencement of Proceedings

The debtor may not repay the restructuring debt or provide security for the restructuring debt. The creditors may not collect restructuring debt, realise security or otherwise utilise a security to repay the restructuring debt, terminate the debt due to a delay in payment or make an administrative decision that is detrimental to the debtor.

Restructuring debts are assessed and rearranged as part of the restructuring programme which the court will certify. See 5.1 Differing Rights and Priorities for the possible debt arrangements. See 6.4 Claims of Dissenting Creditors on the division of creditors into groups.

Secured debt means a restructuring debt where the creditor holds, as against third parties, an effective real security right to property. The security is valuated according to the date of the commencement of the proceedings and it secures the creditor’s receivable only to the extent of its value on the date in question. The commencement of the restructuring proceedings does not prevent the collection of restructuring debt from a guarantor or from the value of a security pledged by a third party.

Furthermore, the restructuring proceedings entitle the debtor to terminate some agreements on a shorter notice period than normal, provided that the administrator agrees to the same. See 6.14 Rights of Set-Off.

In principle, the commencement of restructuring proceedings should have no effect on the existing undertakings of the debtor. The debtor will continue to have control over its assets and operations, and the management will continue in their roles, but the administrator’s permission is required for more significant decisions.

In restructuring proceedings, the creditors cannot directly influence the debtor company’s activities. The creditors are divided into groups as set out under 6.4 Claims of Dissenting Creditors for purposes of the restructuring programme and voting.

The court may appoint a committee of creditors unless this is to be deemed unnecessary owing to the small number of creditors or some other reason. The composition of the committee shall be determined so that various groups of creditors are equally represented (minimum three members). The committee assists the administrator in the performance of their duties and monitors the activities of the administrator. The committee has extensive rights to debtor information.

In the restructuring proceedings creditors are divided into groups:

1. secured debts;

2. business mortgage debts;

3. ordinary, unsecured debts (public law unsecured debts to be separated as their own group); and

4. lowest priority debts (with no voting right if the claims of the other creditors have been cut).

When adopting the restructuring programme, the creditors vote on a one vote per one euro basis. The restructuring programme may be adopted if the vote results in:

• approval by all creditors;
• majority in all creditor groups; or
• majority in at least one creditor group and the creditors that voted for the programme represent at least one fifth of the total amount of restructuring debt.

Majority within the group requires the approval of more than 50% of the creditors participating in the voting and their euros forming over 50% of the claims of the creditors participating in the voting. However, any approval of the restructuring programme may be prevented if it is evidenced that, eg, creditors are treated unequally or a bankruptcy would yield a better result for the creditors.

Restructuring does not prevent trading of claims.

All entities belonging to a group of companies must separately apply for the commencement of restructuring. The same administrator may be appointed to act in all group companies unless there is a conflict of interest.

After the commencement of proceedings, the debtor may not repay restructuring debt or provide security for restructuring debt. The administrator’s permission is required for more significant decisions.

Assets of the debtor may be disposed of during the restructuring proceedings provided that the debtor, administrator and the relevant creditors agree to the disposal.

The main rule is that once the proceedings have commenced, the creditor may not realise its security or otherwise utilise a security to repay the restructuring debt. Another main rule is that restructuring debt may not be paid during the restructuring proceedings. However, certain exceptions apply.

The creditor may file an application to the court requesting that the security may be realised. Furthermore, the administrator may decide to prematurely repay a secured debt if this is appropriate from the point of view of the financial arrangements of the debtor.

If a secured creditor agrees to a sale and the administrator resolves on premature repayment, a secured debt can be paid also during the restructuring proceedings. A repayment of secured debt and release of the security is often a measure agreed in the restructuring programme and necessary in order to refinance the company.

See 5.1 Differing Rights and Priorities on the ranking/priority of new debt taken during the restructuring proceedings.

For a company in restructuring proceedings, new money is not easy to obtain despite of the priority granted to it under the Restructuring Act and the Act on the Ranking of Claims. New loans may be taken and assets pledged with the administrator’s consent.

The Restructuring Act also provides that the court may, pursuant to an application by the administrator, decide that the debt associated with a loan made available during the restructuring proceedings has a pari passu or even higher ranking right to the assets granted as security than any debt that has arisen before that debt. In order for the court to make such a decision, the arrangement must be necessary to obtain financing required during the restructuring proceedings and the arrangement may not significantly increase the risk to the creditors whose priority is decreased as a result thereof.

The amount of each creditor’s claim must be stated in the restructuring programme drafted by the administrator. If there is a dispute between the administrator, the debtor and the creditor on the amount of the claim, then the issue shall be settled either by the restructuring court in connection with the certification of the restructuring programme or in a separate trial.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation and 6.4 Claims of Dissenting Creditors.

After the commencement of the restructuring proceedings, any redundant lease agreements and employment agreements can be terminated by the debtor with two months’ notice. The recent amendment of the Restructuring Act extended the possibility to also terminating agreements other than lease agreements wherein the debtor is committed to repeated or continuous non-monetary obligations. Such agreements may be terminated to end on the date the restructuring programme is certified regardless of the contractual notice periods if the termination is necessary in order to secure the preconditions for the implementation of the restructuring. The loss caused by the premature termination to the creditor is considered as restructuring debt.

The statutory procedure does not release a party from liability.

During the restructuring proceedings, a creditor shall have the right to set off a claim against a debt owed to the debtor at the commencement of the proceedings under the same conditions as in bankruptcy proceedings. A set-off by a credit institution against funds that the debtor has on deposit at the institution when the interdiction of collection takes effect, is prohibited.

Non-compliance of the court-certified restructuring programme may result in its early termination as set out in the programme. The court may, on the request of the supervisor or a creditor, order that the restructuring programme is to lapse if, eg, the debtor has violated the programme in order to favour a creditor. At the request of a creditor, the court may order that a debt arrangement in the restructuring programme pertaining to this creditor is to lapse, if the debtor has materially neglected its obligations to the creditor under the programme.

A prohibition of the distribution of any assets (including dividends) to the owners lasts until the conclusion of the restructuring programme, with the exception of compensation related to work.

Bankruptcy is a liquidation procedure where all of the debtor’s assets are realised in order to obtain the best possible value to the creditors. The proceeds are distributed to the creditors in accordance with the Finnish Act on the Ranking of Claims.

Filing for Bankruptcy

A bankruptcy petition must be filed with the relevant court by the debtor or a creditor in order to obtain the court’s ruling on the commencement of the bankruptcy proceedings. The bankruptcy declaration requires that the debtor is to be considered insolvent, ie, the debtor cannot repay its debts as they fall due other than on a temporary basis.

A majority of all bankruptcies are initiated by creditors. In order for a creditor to be entitled to petition for the bankruptcy, 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 one of the following:

• a court decision that has gained legal force;
• a commitment signed and not contested by the debtor; or
• if the creditor’s claim is otherwise so clear that its validity cannot justifiably be doubted.

The debtor is granted an opportunity to contest the creditor’s claims, the premise of insolvency status and defend against the bankruptcy petition.

Insolvency assumption

The debtor can be deemed insolvent, if:

• the debtor has discontinued its payments;
• it has been determined in enforcement proceedings during the six months preceding the filing of the petition for bankruptcy that the debtor cannot repay the claim in full; or
• under the obligation to keep accounts (book-keeping), it has not repaid the clear and due claim of the creditor within a week of the receipt of a reminder.

The most general way to prove that the debtor is insolvent is for the creditor to deliver a claim for payment (reminder) including the threat of bankruptcy to the debtor, under which the debtor would be obligated to pay all of its debts to the creditor within one week of receipt of the claim for payment.

If the debtor itself files for bankruptcy, it is enough for the debtor to declare in the petition that it is insolvent. The court will declare the debtor bankrupt without a court hearing, and the court proceedings in such a case are significantly faster.

The decision to file is made by the board of directors of the debtor or creditor, as applicable.

The court shall hear the most significant creditors’ views on who shall be appointed as the bankruptcy estate administrator prior to the declaration of bankruptcy. The court shall, in connection with the declaration of bankruptcy, appoint the bankruptcy estate administrator and issue the estate administrator with a separate certificate of appointment.

The Sale of Assets and Creditors’ Authority

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. The assets of the bankruptcy estate are often sold fairly quickly after the commencement. The creditors generally grant the estate administrator a general authorisation to sell the assets of the bankruptcy estate in the manner and at a price that is deemed most appropriate by the administrator. The bankruptcy administrator may have to, as one of the first courses of action, decide whether to continue the business activities of the debtor to some extent in order to sell the business as an operational entity, or in order to increase the estate’s assets with the profits gained from the continued operations. In bankruptcy, the notice period applied to all employees is two weeks.

The creditors exercise their authority in creditors’ meetings. The first creditors’ meeting is normally held at the latest within six months of the commencement of the bankruptcy. It is also common practice that even before the first formal creditors’ meeting, the bankruptcy estate administrator seeks the written approval of the most significant creditors for important decisions related to the realisation of the assets, the scrutiny of the estate or other specific issues.

Commitment to Debtor’s Existing Contracts

If, in the beginning of bankruptcy, the debtor has not performed a contract to which it is a party, the other contracting party may request a notification from the estate administrator on whether the bankruptcy estate commits itself to the contract. If the administrator within a reasonable time declares that the estate commits to the contract, the contract cannot be terminated. If the bankruptcy estate does not commit to the contract, the contracting party is entitled to damages as a result thereof, which will be taken into account among all bankruptcy claims.

Estate Inventory and Debtor Description

The estate administrator shall draw up an inventory of the assets and liabilities of the debtor. The estate inventory shall indicate, in sufficient detail, the assets of the debtor at the beginning of bankruptcy, an estimate on the result of their liquidation, as well as the debts and other liabilities of the debtor. The estate inventory shall be drawn up within two months of the commencement of bankruptcy unless the time limit is extended. Simultaneously, the administrator shall draw up a debtor description describing the pre-bankruptcy operations, other information concerning the debtor and the reasons for bankruptcy.

Termination of the Bankruptcy at an Early Stage

After the inventory of the bankruptcy estate has been drawn up by the administrator, the court may order the bankruptcy to lapse, if the assets of the estate are not sufficient for the payment of the costs of the proceedings or if the payments to the creditors would be insignificant. Any remaining assets of the estate are surrendered to the enforcement authority.

Public Receivership

The court may also, on the recommendation of the Finnish Bankruptcy Ombudsman, order that the bankruptcy proceedings continue as public receivership, if the bankruptcy estate lacks sufficient assets or if there are other special grounds to continue the settlement of the activities of the debtor or the bankruptcy estate at the expense of the Bankruptcy Ombudsman. The public receivership is carried out by a public receiver appointed by the Bankruptcy Ombudsman, which is generally the estate administrator.

Lodgement of Claims and Distribution of Assets

Following the completion of the estate inventory, the estate administrator shall set a date for the lodgement of claims by the creditors. The administrator shall examine the claims and prepare a disbursement list on the basis of the lodgment of claims, which shall be certified by the court and act as the basis of the eventual disbursements to the creditors of the assets in the estate. In case of disagreement between the administrator and a creditor on the final amount or priority of a claim, a separate trial may be necessary. The disbursements to the creditors shall be paid in accordance with the Act on the Ranking of Claims. The last creditors’ meeting shall decide on the final disbursements and the termination of the bankruptcy.

Set-off is possible pursuant to the general preconditions for set-off, with some exceptions.

The duration of full-scale bankruptcy proceedings is approximately two to five years. Typical issues affecting the duration are criminal proceedings, claw-back trials and realisation of assets.

In practice, disposals of assets in distressed companies are always subject to the approval of the (largest) creditors or the secured creditors. If an approval is not obtained, a risk of claw-back exists.

Decision-Making

All major decisions in a bankruptcy estate are made by a majority vote of creditors in accordance with their receivables. Each creditor shall have a voting strength equal to their current claim in bankruptcy. A conditional, disputed or otherwise unclear claim shall be assessed to a realistic and probable amount. If the business operations or the assets of a debtor company are to be assigned as a going concern to an assignee which is connected to the debtor, special voting provisions apply.

Creditors’ Committee

The creditors may establish a creditors’ committee, an advisory body that assists the estate administrator and fulfils the tasks granted by the creditors’ meeting. The creditors’ committee shall have a composition where the main creditor groups are represented (at least three members). The creditors’ committee and its members have the right to receive information from the estate administrator to the extent necessary.

See 8.5 Recognition and Enforcement of Foreign Judgments.

In Finland, the general definition of a cross-border insolvency case is still somewhat undetermined. When an insolvency case arises, which is commenced in another country but has a connection to an entity or a person residing in Finland or an asset located in Finland, the first questions are related to the choice of law (lex concursus/lex situs or lex rei sitae) applicable to the formal insolvency proceedings. Correspondingly, the perspective in a cross-border insolvency case may be that the insolvency proceedings are commenced by a Finnish court but there are assets belonging to the estate which are located abroad or the administrator must operate in other jurisdictions due to the operations of the debtor.

Cross-border insolvency cases are mainly led by the administrators who are appointed by the court. The role of the court in the insolvency proceedings is rarely related to co-ordination with foreign courts. Especially in European insolvency cases where the Regulation (EC) 2015/848 on insolvency proceedings is applied and the primary proceedings in one member state and secondary proceedings in all other member states concerning the same debtor is a possibility, the lack of co-ordination among courts might create a challenge.

Finland, being an EU member state, applies the Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast). The Regulation sets out the effects in other member states when the insolvency proceedings have commenced in one member state (excluding Denmark). The Regulation does not, however, constitute a complete statute book of supranational insolvency proceedings.

In Finland, three types of international bankruptcy cases are distinguished:

• European bankruptcy (Regulation on insolvency proceedings applied);
• Nordic bankruptcy (including all five Nordic countries, Bankruptcy Treaty among the Nordic countries applied); and
• autonomous bankruptcy which applies to the relationship between Finland and all other countries in case of a cross-border insolvency case and where the national legislation of each country is applied depending on the case.

In a bankruptcy matter where the centre of the main interests (COMI) of the debtor is located in Finland or in another member state of the EU subject to Regulation (EU) 2015/848, the jurisdiction of the Finnish courts shall be governed by the said Regulation. If the centre of the main interests of the debtor is located in a state other than a member state applying the Regulation, the Finnish courts shall have jurisdiction if the debtor has business premises in Finland or holds such assets in Finland that it can be deemed expedient to have the bankruptcy begin in the Finnish jurisdiction. The Finnish courts shall not have jurisdiction if the debtor has been declared bankrupt in Iceland, Norway or Denmark and the debtor has been domiciled in the same state.

From the autonomous bankruptcy law principle, it is derived that in cross-border insolvency cases the law of the bankruptcy country (lex concursus), eg, the Finnish Bankruptcy Act and other Finnish legislation, applies, but there may be exceptions to the rule where the law of the country where the assets are located applies and cases when the debtor has made an agreement on the choice of law with its contracting party.

Foreign creditors are in general dealt with in the same way as Finnish creditors. However, some language barriers may exist and cause the need for a Finnish counsel. The language of the insolvency proceedings and documentation is Finnish or Swedish. If there are several foreign creditors, certain documents may be translated into English.

Regardless of nationality, residence or domicile, a creditor has the right to lodge their claim and collect on it in insolvency proceedings, as well as to exercise the other rights of a creditor.

Regulation (EU) 2015/848 on insolvency proceedings is applied in Finland. All creditors who have their place of residence or domicile or their statutory domicile in another member state of the EU are delivered specific forms for the notification of their claims. An administrator will always seek to contact all creditors to inform them of their rights to lodge a claim and participate in the decision-making.

Civil judgments issued in a foreign country are not recognised or enforced in Finland. A judgment is recognised and enforced only if this has separately been agreed upon in an international treaty or bilateral agreement binding on Finland or provided for in the national or EU legislation.

EU legislation is given priority over international treaties and national legislation in relationships between the EU member states. Civil judgments are directly enforceable within the European Union. This means that a Finnish court does not need to declare a judgment issued in another EU member state separately enforceable before it may be enforced in Finland. The application for enforcement is made directly to the Finnish enforcement authorities. The enforcement of judgments issued in other countries – in practice in Iceland, Norway or Switzerland – requires that a Finnish court, upon application, first declares the judgment enforceable.

Bankruptcy Estate Administrator

The administrator of a bankruptcy estate is usually an attorney. A person may be appointed as an administrator in bankruptcy, if they consent to the appointment, have the ability, skills and experience required for the duty, and are also otherwise suitable for the duty. The administrator shall not have a relationship with the debtor or the creditor that would compromise their independence of the debtor or their impartiality towards the creditors, or their ability to perform the task in an appropriate manner.

Administrator in Restructuring Proceedings

The administrator appointed in the company restructuring proceedings is usually an attorney. A person may be appointed as an administrator in company restructuring, if they are an adult, known to be honest, not bankrupt and possesses full legal competency. The administrator shall have the ability, skills and experience needed for the position. The administrator shall not have such a relationship with the debtor or with any of the creditors that may compromise their independence from the debtor or their impartiality as regards the creditors.

The Role of the Administrator in a Bankruptcy Estate

The administrator shall represent the bankruptcy estate. The administrator’s role is to undertake all of the necessary measures for taking possession of the assets of the bankruptcy estate and for their management, as well as the safeguarding of the financial interests of the bankruptcy estate and the prevention of losses.

Notwithstanding any provisions on secrecy, the administrator shall have the same access as the debtor to information on the debtor’s bank accounts, payments, financing arrangements and commitments, assets, taxation and other circumstances on the debtor’s financial situation or economic activity, as is necessary for the scrutiny and administration of the estate.

The administrator must be independent from the creditors and treat them equally, however, also taking into account the rights of the debtor.

The Role of the Administrator in the Company Restructuring Proceedings

In order to perform their duties, the administrator is entitled to enter the business premises of the debtor and to peruse the debtor’s books, business correspondence and other business documents and data files. Notwithstanding any provisions on secrecy, the administrator is in their duties entitled in the same way as the debtor to obtain information on the debtor’s bank accounts, financial transactions and agreements, assets, taxation, and other factors concerning the financial position and activities of the debtor.

The most important task of the administrator is to negotiate and draft the restructuring programme in co-operation with the debtor and the creditors. The restructuring programme should be realistic, meet the requirements of the law and include such terms as the debtor is committed to fulfilling and the creditors are willing to accept.

The debtor is not allowed to take certain measures or legal acts in the company without the pre-approval of the administrator, eg, take on new loan, terminate material agreements or assign company assets outside the normal course of business.

The administrator shall, at regular intervals and whenever necessary, inform the creditors’ committee or the creditors, of the measures taken and the observations made in the performance of their supervision duties, and consult with them on any significant decisions before decisions are made. If the administrator becomes aware that the debtor has failed in a material way to repay debts other than restructuring debts, the administrator shall provide this information to the creditors without delay.

Please see 9.1 Types of Statutory Officers for the requirements set forth for administrators in both bankruptcy and restructuring proceedings. In Finland, the administrators in both insolvency proceedings are almost without exception attorneys even though this is not a strict requirement of the law. Independence from the debtor and the creditors is emphasised, as well as ability, experience and other skills, which would include education and training.

Appointment of the Administrator in a Bankruptcy Estate

The court shall appoint an estate administrator upon petition. Usually the creditor or debtor filing the bankruptcy petition has included in the petition a proposal on the nominee for the position and their consent for the position. Before the appointment of the estate administrator, the court shall reserve the main creditors, the nominee and, at its discretion, the debtor and the other creditors an opportunity to be heard. Where the debtor and creditors disagree on who should be appointed as the administrator, the court takes into account the extent of the bankruptcy estate and the experience and the resources of the nominees as well as the total amount of the claims of the creditors supporting each nominee.

The court may also dismiss the estate administrator if they are unqualified or disqualified, they neglect the proper discharge of the duty or act in breach of proper administrative practice, thus showing that they are unsuitable for the duty, or if there is another important reason for dismissal.

Appointment of the Administrator in Company Restructuring Proceedings

The administrator shall be appointed on the proposal of a creditor or the debtor in connection with the decision on the commencement of the proceedings. If there is no valid proposal included in the petition, the court shall appoint a suitable and willing person as the administrator. The law provides an opportunity to not appoint any administrator to oversee the restructuring proceedings but this does not occur often.

A request by the creditors for the replacement of the administrator is possible if submitted within one month of the commencement of the restructuring proceedings and if certain majority amount creditor groups are obtained.

The administrator must always fulfil the requirements of the law as listed and mentioned under 9.1 Types of Statutory Officers. A person who is related to the debtor or a creditor may be appointed as administrator if at least two thirds of the known creditors in each group of creditors is in favour of their appointment.

The court may, on its own initiative or at the request of the committee of creditors or a creditor, and after having reserved the administrator and other parties to the matter an opportunity to be heard, dismiss the administrator if they materially neglect their duties or there is another important reason for dismissal. The court may also relieve the administrator of their position upon request, if there is valid reason for the same.

No precise obligation for the management to commence insolvency proceedings is mandated by Finnish law and there is no civil or criminal penalty arising solely as a consequence of continuing to operate a business that is in financial difficulties. However, it is seen as part of the duty of care obligating the board to file for a bankruptcy if the debtor company is insolvent and the continuation of the business is likely to cause more damage to all parties concerned.

Pursuant to the Finnish Limited Liability Companies Act, a member of the board of directors or supervisory board and the managing director are liable for the loss that they, in violation of their duty of care or the Companies Act, have deliberately or negligently caused to the company.

The number of claims filed by administrators in insolvency proceedings for damages against former board members, managing directors, as well as auditors, has been increasing lately. These claims are usually filed in connection with bankruptcy proceedings.

The claims that an administrator typically files against former directors and board members concern a loss caused to the company by an unlawful distribution of assets, eg, transactions between closely related companies or other transactions that have no evident corporate benefit justification and have resulted in significant loss for the company.

In several cases, the administrator has filed charges against the former management based on their criminal responsibility. In connection with bankruptcy proceedings, the administrator is often faced with the obligation to prepare a request for police investigation concerning members of the debtor’s management. Typically, these relate to the need to investigate whether any member of the management has acted in violation of the duties concerning book-keeping obligations or committed a debtor’s crime as set forth in Chapter 39 of the Finnish Criminal Code. In accordance with the Companies Act, a person may also be guilty of a company law offence if they have intentionally violated the protection of the shareholders or the creditors by an unlawful distribution of assets. If a police investigation leads to a criminal charge being filed by the prosecutor, the bankruptcy estate presents its damages claims in connection with the criminal trial.

A member of the board or supervisory board and the managing director is likewise liable in damages for the loss that they, in violation of provisions of the Companies Act (other than the duty of care) or the company’s articles of association, have in office deliberately or negligently caused to a shareholder or a third party. Therefore, the liability for damages would exist only if the management could not utilise the Business Judgment Rule in their defence. Furthermore, compensation on such breach would be primarily payable to the company, ie, bankruptcy estate.

The management liability for damages towards a creditor directly is a relatively challenging exercise but may be achieved when the management has neglected its specific duty under the Companies Act to register the loss of the company’s share capital in the Finnish Trade Register upon noticing that the company has negative equity. However, the causal connection between the loss/damage and the neglect must naturally be shown.

Recovery or Claw-Back

The Finnish Act on Recovery to the Bankruptcy Estate set outs the claw-back provisions applicable to, among other legal acts and transactions, recovery of payments and recovery of a security interest to the bankruptcy estate. In addition to the bankruptcy proceedings, the provisions are applicable in the company restructuring proceedings.

Recovery of Payments

A payment of debt made during the critical period may be subject to recovery if the payment is made by exceptional means (instruments) or the payment is made prematurely or with an amount considered substantial to the assets of the bankruptcy estate. A payment, however, shall not be recovered if it is considered ordinary.

Recovery of Security Interest

A security interest may be subject to recovery if it is granted by the pledgor during the critical period (see 11.3Claims to Set Aside or Annul Transactions), provided further that such security interest was not agreed upon when the debt which that security interest secures arose or if the pledge was not perfected without undue delay after the secured debt arose.

General Grounds for Recovery

A payment or other legal act may be subject to recovery if the debtor was insolvent at the time of the legal act or the legal act caused the insolvency. In order to be recoverable, the legal act should have inappropriately favoured a creditor at the cost of other creditors, transferred assets from the possession of the debtor or increased the overall amount of debt to the detriment of the creditors. Further, it is required that the counterparty knew or should have known of the insolvency or the impact of the legal act to the financial condition of the debtor and the impropriety of the legal act.

A transaction of an insolvent company may be subject to recovery if it takes place during the so-called critical period, which is generally within three months prior to the date the petition for the insolvency proceedings was first filed with the court. The critical period can even be extended to two years where a payment was made or a security was established for the benefit of a closely related party. In the case of a gift, the critical period is one year, and three years where the act involves a closely related party. Where the claw-back is based only on the general grounds for recovery and the transaction has involved a closely related party, the look-back period may be five years.

Recovery claims are possible in both bankruptcy and company restructuring proceedings but more common in connection with bankruptcy proceedings.

The estate administrator and a creditor who has lodged their claim in bankruptcy or whose claim has otherwise been taken into account in the disbursement list has a right to claim for the recovery of assets. An action for recovery of assets must be filed within one year of the commencement of the bankruptcy or restructuring proceedings. A creditor in the restructuring proceedings may also file an action for recovery if the administrator has refused to bring the action.