The shift in the global loan market from traditional bank lending towards private credit has affected the popularity of private credit in the Finnish market as well, and more and more credit funds are also targeting Finland. Economic conditions and uncertainty, as well as the tightening capital and regulatory restrictions on traditional banks, have made way for the rapid expansion of direct lenders in recent years, and have led to an increase in the availability of private credit compared to bank financing.

In addition, the increased regulatory requirements have led to banks becoming more risk-averse. Bank lending may again become more attractive to borrowers due to the falling interest rates; it is, however, still likely that the demand for private credit will continue to grow.

Competition between banks and private credit funds has increased, with the private credit market gaining market share at the expense of public debt markets over the last six months. However, banks have played a key role in the growth of the private credit market by providing financing to private credit funds and their investors. Additionally, an increasing number of banks are partnering with asset managers to enter the private credit market through various business models.

Despite this, banks remain the most prominent lenders in the Finnish market. Also, certain Finnish banks have stepped up and are offering super-senior revolving credit facilities to private credit borrowers – which entails that the private credit documentation (in particular, the facility agreement and the intercreditor agreement) need to be drafted to accommodate this.

Private credit funds have been significant lenders in Europe and in Finland in the last 12 months, and the preferred lender in sponsor-backed acquisition financings, in particular.

There have not been any significant regulatory obstacles or challenges to the expansion of the private credit market in Finland. However, many private credit funds lending into Finland still face the situation of performing their first deal in Finland, which necessitates a quick learning curve regarding (for example) the types of security available, enforcement proceedings and similar aspects.

In the Finnish market, the loans provided by private credit providers are typically senior-secured (with potentially a super-senior revolving credit facility provided by a traditional bank on top of that). Certain specialty lenders have offered hybrid capital financing, such as convertible notes, typically to distressed publicly traded companies.

The primary focus of private credit providers has been on private equity sponsors and their portfolio companies, though in some cases private credit providers also extend capital to founder-owned or closely held companies. Public companies are only rarely targeted by private credit providers.

There is not currently a large recurring revenue market in Finland; therefore, private credit providers are not yet active in the Finnish markets, apart from general inquiries.

Typically, private credit transactions in Finland range from EUR10 million to EUR100 million, though for larger private credit deals the deal size can go beyond EUR100 million. Finnish funds that are titled private credit funds are predominantly funds of funds investing into much larger, actual private credit funds, and there is no representative fundraising market for Finnish actual private credit funds.

Finnish regulators are currently not focused on private credit lenders, and there are no pending proposals for regulation. However, given the rapid growth of the private credit market, regulators might take a greater interest in this sector in the future (though any regulation will most likely come from the EU level).

Lenders may require a licence to provide loans to Finnish borrowers. Whether a foreign lender needs a licence depends first on whether they have actively solicited a Finnish borrower for the lending transaction.

In cases where the foreign lender has actively solicited an entity in Finland for the lending transaction, it becomes necessary to analyse the position further. Generally, private credit funds do not need to be licensed to lend into Finland or to take the benefit of security over assets located in Finland. Reverse solicitation is also available.

The Finnish Financial Supervisory Authority is the principal local regulatory authority supervising regulated entities within the financial sector.

There are no restrictions on foreign investment in private credit funds in Finland (apart from customary KYC, AML and sanctions checks).

No Finnish compliance or reporting requirements would apply, assuming the foreign lender would originate loans on a cross-border basis to entities in Finland in circumstances where no licence would be required.

There are no significant concerns regarding club lending by private credit providers in Finland, nor is there any specific focus on these providers by local antitrust regulators at present.

Private credit structures are typically fairly similar to structures used in traditional, senior-secured bank lending with full cross-collateralisation across the relevant group. However, since private credit providers do not generally provide revolving facilities, it is quite customary for a bank to provide a super-senior revolving facility to the borrower group. The super-senior status is most typically achieved contractually, not structurally. Delayed draw facilities are a feature offered by private credit providers, most commonly to borrowers planning bolt-on acquisitions.

Private credit transaction documents are typically similar to those used by banks, which are usually based on the Loan Market Association (LMA) standards but are often at least somewhat tailored to the Nordic market. If the loan is granted on a bilateral basis, the lender side will often propose their standard transaction documents. The documentation package usually includes the loan agreement, intercreditor or subordination agreement, security agreements and typical conditions precedent.

Unitranche structures with “first out, last out” elements and an agreement between lenders are used; however, they have not been very prevalent in recent years with the rise of unitranche facilities having a senior term loan with a super-senior revolving credit facility, where the priority and waterfall provisions are included in the intercreditor agreement, to which the borrower is also a party.

In sponsor-backed financings, the sponsor often plays a key role in drafting the relevant finance documents and holds a good negotiation position.

Foreign lenders may require a licence to be able to provide loans in Finland, as outlined in 2.1 Licensing and Regulatory Approval. Other than that, there are no restrictions on providing private credit or taking security.

The borrower’s use of proceeds in acquisition financing is limited, in particular by the Finnish rules on financial assistance. However, this typically has very little or no relevance for the use of the acquisition facility itself by the borrower, and much more for the use of the target group assets as collateral.

Debt buybacks are generally permitted under Finnish law in private credit transactions and others.

There have been no significant, recent legal or commercial developments that would have required changes to the legal documentation, though the status of Finnish interest deductibility rules and their impact on the scope of secured obligations is slightly in flux.

Junior capital is generally provided in a similar manner to more traditional bank led financings with junior lenders. Typically, this involves an intercreditor agreement, and sometimes structural subordination is used. Hybrid financing is less common and is usually structured as a convertible note when used. In junior capital deals, the security package is similar to that in senior deals, but is of course subordinated either contractually or structurally. In hybrid deals, the security package tends to be more limited.

Since major-sponsor holding companies (“HoldCos”) tend to be outside Finland, Finnish HoldCo deals are scarce to say the least. Nonetheless, HoldCo deals are typically secured, though the security package is generally more limited compared to operating company (“OpCo”) deals. For example, the security package may include a security over shares, intra-group loans and bank accounts held by the HoldCo.

Payments in kind are a common feature in private credit. Private credit funds typically offer more flexible funding structures compared to traditional bank loans, with private debt often lacking amortisation requirements and having longer maturities.

In recent years, the levels of call protection have gone down and make-whole provisions have become rarer. First permitted call dates usually fall around 12 months after utilisation, with the second-level call dates varying between 18 and 48 months from utilisation. During the first year, a make-whole requirement is still fairly common; however, from then onwards there is typically only a prepayment fee, which varies between 1% and 3% depending on the timing – and there might well be no prepayment fee after the three-year mark, for example.

Generally, the Finnish market can be expected to follow London market trends in this regard.

Based on domestic law, Finnish withholding tax is generally not levied on interest payments made on loans to non-Finnish resident lenders. The same applies to the repayment of loan principal.

Due to Finnish-sourced interest payments being largely exempt from Finnish withholding tax, very little structuring is required in customary private credit/non-bank lending transactions in Finland.

As a rule, no other taxes, duties or charges are payable on the issuance or transfer of loans in Finland.

Transfer Taxation

If the loan is regarded as a collateral for Finnish transfer tax purposes, the transfer thereof would be subject to Finnish transfer tax at a rate of 1.5%. Loans can be considered as collateral for transfer tax purposes if:

• the interest payable on the loan is dependent on the profits or dividends payable by the company;
• the loan grants the holder of the note a right to the company’s annual profits or surplus; or
• the loan is transferred in connection with a share deal.

In addition, if a Finnish tax resident borrower has placed Finnish shares or real estate located in Finland as collateral for the loan, and where the collateral would be enforced due to a default, it is possible that a non-Finnish tax resident lender would have to pay transfer tax on the shares or real estate received due to the enforcement of the collateral (with Finnish real estate being subject to transfer taxation at a rate of 3%).

Thin Capitalisation and Interest Deductibility Limitation Rules

While Finland does not have any thin capitalisation rules per se, the general interest deductibility limitation rules may effectively limit the deductibility of interest on loans if certain thresholds are exceeded. This could potentially restrict the debt servicing capability of a Finnish borrower.

VAT

Certain goods and services are excluded from VAT, such as financial and insurance services. The issuance and transfer of loans generally qualifies for this exemption. However, servicing and debt collection may be subject to Finnish VAT at the standard rate of 25.5%. That said, services that are not deemed to be supplied in Finland for VAT purposes are not subject to Finnish VAT.

Tax-Reporting Obligations

Non-Finnish lenders that provide loans to Finnish borrowers, and which do not operate in Finland through a branch or permanent establishment, are, at the outset, not subject to Finnish domestic tax-reporting rules or obligations. Foreign lenders may, nonetheless, be required to provide certain information to the Finnish tax authorities upon request (eg, for tax audit purposes).

The EU’s Anti-Hybrid Rules

While rarely applicable, attention should be drawn to the EU’s anti-hybrid rules when debt investments are carried out for Finnish tax-resident borrowers.

In typical private credit/non-bank lending transactions, foreign lenders do not generally face any particular Finnish tax concerns when providing loans to Finnish borrowers, notably due to Finnish-sourced interest payments being largely exempt from Finnish withholding tax and the non-applicability of Finnish transfer tax.

Notwithstanding the above, it is still customary to include standard tax gross-up clauses in loan agreements, for example.

No specific tax incentives are available to foreign private credit lenders in Finland.

There are no additional tax considerations for non-bank lenders as such.

In Finland, a common market-practice security package in private equity sponsor-backed deals consists of pledges over shares, bank accounts and intra-group receivables, as well as floating charges.

Shares

Security over shares of a private limited liability company (which are typically in non-dematerialised form) is created by the parties entering into a share pledge agreement. If share certificates have been issued by the target company, the pledge is perfected by the pledgor delivering the share certificates to the possession of the pledgee, endorsed in blank. If no share certificates have been issued, the pledge is perfected simply by notifying the target company of the pledge and instructing it to register the pledge in its shareholder register.

Assuming non-dematerialised form, there are no registration fees, stamp duties or other costs involved in a pledge of shares (and in the case of dematerialised shares, only minor registration fees apply).

Bank Accounts and Receivables

A bank account pledge is created by entering into a security agreement and is perfected by a notice to the account bank, including instructions to block or remove the pledgor’s rights to withdraw or otherwise dispose of the funds held in the pledged bank account. The same principles apply to receivables. Accordingly, a pledge over receivables (whether account/trade receivables or intra-group receivables) is created by entering into a security agreement and is perfected with a notice to the underlying debtor. In order to duly perfect the pledge, the underlying debtor needs to be notified of the pledge and instructed to make payments directly to the pledgee from day one (and not, for example, only upon a later trigger event). A contrary interpretation can also be argued, though the traditional view taken in Finnish legal doctrine is strict on this.

Accordingly, owing to commercial reasons, it is rare that pledges over bank accounts or receivables would be fully perfected under Finnish law outside receivables-based financing structures. Instead, final perfection measures are typically taken only upon the occurrence of an event of default or similar trigger event. Such delayed perfection may, however, entail that the pledge will be subject to a hardening period and claw-back. Partially for this reason, it is common that floating charges are provided to give additional comfort and protection for the lenders.

No registration fees, stamp duties or other costs are involved in a pledge of bank accounts or receivables.

Floating Charge

A floating charge (also known as a business or enterprise mortgage) will, by operation of law, cover all the chargor company’s movable assets in so far as any specific assets have not been separately pledged. Assets capable of being subject to a mortgage (generally land and buildings thereon, certain vehicles, aircraft and vessels) are always outside the scope of the floating charge. Consequently, a floating charge will typically cover inventories (finished and semi-finished goods), raw materials, tools and equipment, as well as receivables and bank accounts, to the extent they are not specifically pledged.

A floating charge is created by the chargor company issuing one or more so-called floating charge promissory notes of a notional principal amount agreed with the secured lender. This establishes the maximum amount that can effectively be secured by the floating charge, but does not need to reflect the actual value of the assets or even the amount of debt secured by the floating charge. Consequently, it is common for the principal amount to considerably exceed the actual asset value of the relevant chargor company; the principal amount is therefore no indication – in insolvency proceedings or otherwise – of the actual recovery available for claims secured by the relevant floating charge. By market practice, the principal amount of the promissory note is the total commitments under the secured facilities plus a reasonable buffer, most often 30%.

The promissory notes are registered against the chargor company in the register of floating charges maintained by the Finnish Patent and Registration Office. After registration, the promissory notes are, legally speaking, pledged under a security agreement for the benefit of the pledgee and are delivered to the pledgee in original. There are only minor registration fees, and no stamp duties or similar are levied.

Furthermore, a floating charge has certain drawbacks under Finnish law – namely as follows.

• The chargor company retains the right to dispose of the assets covered by the floating charge in the ordinary course of business.
• The floating charge will not crystallise until enforcement, where, in practice, only 50% of the net proceeds of the assets covered by the floating charge are used to satisfy the secured claims of the beneficiary of the floating charge with priority. The remaining 50% will be distributed to unsecured creditors (where the floating charge holder will stand pari passu and pro rata for the amount of its unsatisfied claim).
• The floating charge may not cover all assets of the company, as the chargor company may have pledged some assets separately.

Finnish law recognises and permits a floating charge over all present and future qualifying movable assets of a chargor company, as outlined in 5.1 Assets and Forms of Security.

Finnish law does not recognise the concept of a fixed charge similar to English law (for example), nor are the US-style UCC filings available.

Private credit providers lending into Finland have typically agreed to lighter security packages than traditional Finnish banks, which commonly insist on a very heavy security package. The approach taken by international private credit providers with regard to the scope of a typical security package is in line with the approach used for decades by international banks lending into Finland.

Guarantees in General

The borrower, its parent companies, subsidiaries and group companies may provide collateral and guarantees for financing purposes (ie, the guarantees may be upstream, downstream and cross-stream). Finnish financial assistance rules, as well as the rules on the unlawful distribution of assets (both of which are related to the concept of corporate benefit), will, in practice, impose limits on which entities can effectively grant guarantees and security. Financial assistance rules are discussed in more detail in 5.4 Restrictions on the Target.

Corporate Benefit

All arrangements entered into by a Finnish limited liability company must provide “adequate” corporate benefit for the relevant Finnish company. This is something that cannot be mathematically measured under Finnish law, and there is no universal definition for corporate benefit either. Therefore, the matter needs to be assessed on a case-by-case basis, taking into account the unique properties of each company, the then-current circumstances and the information available to the company/board of directors. To address concerns regarding corporate benefit, it is beneficial to be able to structure the transaction so that at least the key guarantors and security grantors receive a direct benefit from the transaction – eg, via on-lending of loan proceeds.

The corporate benefit related to certain individual actions may be difficult to assess or prove. When assessing the existence of corporate benefit in retrospect, the analysis is to be made without hindsight and based on the circumstances current at the time when the relevant action was taken (and not, for example, on subsequent events that the board of directors could not reasonably foresee, or which were statistically remote, when making the decision).

Unlawful Distribution of a Company’s Assets

The concept of unlawful distribution of a company’s assets included in the Finnish Companies Act in essence entails any acts that diminish the company’s assets or increase its debts without a business rationale. Since the concept of unlawful distribution of a company’s assets is linked to the concept of business rationale, it is much entwined with the concept of corporate benefit, though they are two separate issues. Consequently, provided that a Finnish company receives adequate corporate benefit from entering into the relevant transactions, it is less likely that the rules on unlawful distribution of assets would be breached as well.

Financial Assistance

Under the mandatory provisions of the Finnish Companies Act, Finnish limited liability companies are prohibited from providing loans, funds or guarantees/security for the purpose of the acquisition of shares of the company or of any of its direct or indirect parent companies. This prohibition extends to the acquisition of existing shares, subscription of new shares as well as option or subscription rights (and similar), and applies before, during and after the time of the acquisition. Therefore, any refinancing of acquisition debt is also generally considered to fall within the scope of the financial assistance prohibition.

To mitigate the risks where, for example, a facility has multiple purposes (such as acquisition financing, working capital and refinancing), from a Finnish perspective it would be advisable to divide the facility into tranches, with the acquisition debt being its own tranche. The relevant loan and security documentation also typically includes an appropriate Finnish law limitation clause.

There are no set whitewash procedures available in Finland or specific time limits after which the limitation would cease to apply, though there is an understanding in the market that the financial assistance cannot prevent refinancing forever. However, while no whitewash procedures are available, post-closing legal mergers in particular can be used to eliminate or mitigate the effects of financial assistance limitations.

Hardening Periods

A transaction, series of transactions, arrangement or any other act relating to the assets of the debtor can be challenged pursuant to the Act on Revocation of Transactions in Insolvency, if made during a critical period preceding insolvency or foreclosure proceedings, provided that the conditions described below are met. The critical period is calculated backwards from the filing for insolvency proceedings or enforcement of a claim by foreclosure, and depends on the type of transaction. These are discussed in more detail in 7.6 Transactions Voidable Upon Insolvency.

Retention of Title

Retention of title (ROT) is recognised under Finnish law and is considered valid under the following requirements:

• the ROT has to be clearly agreed and specified between the parties prior to the buyer getting the object into its possession;
• the object has to be identified and it must be separable from other assets of the buyer (eg, by name plates);
• the ROT can only cover the purchase price and other costs incurred to the seller in connection with the sale of the object; and
• the buyer must not be entitled to resell or consume the object, attach the object to another, or otherwise dispose of the object like an owner.

There is no requirement to register ROT interest in order for it to be enforceable, and there is no such register in Finland.

Extended ROT is not recognised under Finnish law.

Anti-Assignment

Under Finnish law, receivables are generally freely transferrable without any prior consent from the debtor. However, where the underlying contract includes an anti-assignment clause/restriction on transfer, assignment or pledge, such restriction would generally be enforceable against the assignor by the debtor, and the sale or assignment of such receivable would generally not be effective to vest the contractual rights in the assignee. There are, however, some exceptions to this.

Generally, security is released by unwinding the perfection measures taken when the security was granted. For example:

• registered security is deregistered;
• possession of floating charge promissory notes and share certificates is transferred back to the pledgor; and
• relevant third parties are notified of the release.

Subordination requires an express consent/agreement from the creditor being subordinated to other creditors. Contractual subordination – such as LMA template-based intercreditor agreements – are commonly used.

Structural subordination is also used, and certain types of security have a registration-based priority system – in particular, floating charges and real estate mortgages, which can be used to create a structural type of priority order between secured creditors.

There are no material statutory security interests or priming liens under Finnish law. For example, tax, employee and pension claims do not enjoy any super-priority but instead rank pari passu with normal, unsecured debt.

Cash pooling is relatively common in Finland. Cash pooling accounts and intra-group receivables arising from cash pool arrangements are often excluded from the security package in private credit transactions.

Secured hedging is often provided by the bank providing the super-senior revolving credit facility, which simplifies intercreditor matters somewhat. If hedging is needed and the providing bank is adamant on security, private credit providers may seek to limit such security to hedging proceeds only, thereby effectively limiting the impact of this competing security interest to the broader financing arrangements.

No licence is required for the taking or holding of security under Finnish law. The concept of a security agent is commonly used and recognised in Finland. No parallel debt provisions are needed.

As regards loan assignments, in most cases, security does not need to be re-taken, as the assignment is usually covered by the relevant finance and security documents. Re-taking of the security should be avoided where possible, since it may also reset the clock for the hardening period, potentially exposing the security to claw-back.

Non-bank secured lenders may enforce their collateral similarly to secured bank lenders. The process for a secured lender to enforce its security depends first on the type of security, the terms and conditions of the relevant security agreement, and the nature of the relevant security assets. The Finnish Commercial Code stipulates a default method for the enforcement of a security of movable property. However, the parties may contract out of most parts of the default process, and this is commonly done.

However, the parties’ discretion with regard to enforcement methods is limited by:

• the statutory invalidity of a contractual provision providing that title to the security assets shall automatically transfer to the pledgee upon default (the pledgee may, however, enforce the security by assuming ownership of the security assets, thereby effectively discharging secured obligations in full or in part); and
• the pledgor’s general duty of care towards the pledgee.

Within the limits set out above, the method by which the security assets are realised is typically agreed to be fully at the pledgee’s discretion. It is often possible to commence enforcement proceedings outside formal insolvency proceedings.

As regards enforcement of security over specific movable property, such as shares, bank accounts and receivables, the enforcement is primarily governed by terms of the respective security agreement and other relevant finance documents. Finnish law security agreements commonly provide that the pledgee (often the security agent acting on behalf of pledgees) is authorised to enforce the security in any manner it deems appropriate, including by selling, transferring or otherwise disposing of the pledged property, be it through public auction or privately, which would also include arranging a limited auction (ie, an auction where the pledgee seeks bids from pre-selected potential buyers).

The enforcement of a floating charge will, for practical purposes, take place in a bankruptcy scenario where the bankruptcy trustee realises the assets covered by the floating charge and distributes the net enforcement proceeds to the beneficiary of the floating charge (with 50% going to unsecured creditors).

Enforcement of security in insolvency proceedings is subject to specific rules. For example, the filing for company restructuring usually triggers a moratorium.

Pursuant to the Rome I Regulation, a contract shall be governed by the law chosen by the parties. Accordingly, the choice of a foreign law as the governing law of the contract is a valid choice of law between the parties and will be recognised by the courts of Finland. However, a Finnish court may not apply foreign law of a state if it is against the ordre public.

However, the Rome I Regulation does not regulate the effects of transactions in relation to third parties (ie, ultra partes), and there is no harmonisation on this. Therefore, interpretation may vary from jurisdiction to jurisdiction, and there is no binding legal framework for resolving conflicts – this may particularly impact on security over receivables where the creditor and debtor of the receivables are not located in the same jurisdiction.

Further, submission to a foreign jurisdiction is also generally recognised in Finland, though enforcement of foreign judgments may be limited, as discussed in 6.3 Foreign Court Judgments.

The enforceability of a judgment by a foreign court or of an arbitral award depends on where the judgement or arbitral award is issued. In each case, the enforcement of foreign judgments or arbitral awards in Finland is subject to the provisions of the applicable regulation, convention or treaty (such as the Brussels I Regulation, the Lugano Convention, the Hague Convention and the New York Convention). If no regulation, convention or treaty applies, enforcement may require a re-examination of merits and/or judgment of:

• a Finnish court;
• a court of another EU member state under the Brussels I Regulation; or
• a court of a country signatory to an enforcement treaty with Finland or the EU, as applicable.

The commencement of insolvency proceedings may delay or prevent enforcement. For example, the filing for company restructuring usually triggers a moratorium, as outlined in 7. Bankruptcy and Insolvency.

The costs and speed of the process largely depend on the security asset in question and on whether enforcement is part of insolvency proceedings.

Since under the relevant security agreement the pledgee is usually free to choose the means of enforcement regarding security over specific movable property (such as shares, bank accounts and receivables), the timeframe for the completion of the enforcement proceedings and the distribution of the enforcement proceeds primarily depends on the practicalities, such as how swiftly the security assets can be sold and/or instructions given.

However, in the case of a floating charge, given that the pledgor may plead its case in the court proceedings and appeal the court’s decision, this may serve to materially postpone the enforcement proceedings. Further, enforcement measures regarding a floating charge typically result in formal insolvency proceedings.

The costs associated with pre-insolvency enforcement typically consist of the fees for the advisers, valuers, etc, and, with regard to certain security assets, of the court’s and the bailiff’s fees.

In bankruptcy, the bankruptcy estate has priority to receive payment of certain expenses from the proceeds of the realisation of security assets. The bankruptcy trustee is also entitled to a reasonable fee, considering the nature and amount of work required.

The primary practical considerations regarding enforcement are of a commercial nature – ie, as follows.

• What is the best enforcement point in the structure?
• How quickly can a buyer be found and assets sold?
• Can the business be disposed of as a going concern?
• Can all assets be sold at the same time?
• How likely is the borrower to file for formal insolvency proceedings, which may be destructive for value and/or result in a moratorium for enforcement, etc?

As a slight limitation deriving from Finnish law, the pledgee may not just simply appropriate the security assets – ie, have the title to the assets automatically transferred to the pledgee upon default. However, even though appropriation as such is prohibited, Finnish law does not prohibit the pledgee from effectively assuming ownership of the security assets (essentially by selling the security assets to itself) or selling the security assets to an entity set up by the pledgee – valuation issues will, however, need to be addressed.

Further, when enforcing security, the secured creditor has a duty to take into account – in a way appropriate in the circumstances – the interests of the pledgor and those of other potential interested parties, such as any second lien pledgees or floating charge holders. In practice, this means (for example) that the secured lender may not sell the secured assets for a price lower than fair market value in the then-current circumstances. This duty of care is generally deemed to apply irrespective of the terms of the security agreement.

Typically, no claims or other obligations become the responsibility of the secured lenders. However, the situation may be different if the secured lender takes possession of the relevant assets itself (in particular, real estate).

If a company is insolvent or if there is a risk of it becoming insolvent, two primary insolvency regimes are available under Finnish law.

The first, bankruptcy (konkurssi), is primarily designed to liquidate and distribute the assets of a debtor to its creditors and to wind up the debtor company.

The second, company restructuring (yrityssaneeraus), is split into early company restructuring (varhainen saneerausmenettely) and regular company restructuring (perusmuotoinen saneerausmenettely).

Regular company restructuring aims to evaluate whether the business has a reasonable possibility of and sufficient resources for carrying on, and, if so, to rehabilitate the company’s viable business, ensure its continued viability and make arrangements with creditors (eg, debt haircuts, extension of payment schedules). The objective of early company restructuring, meanwhile, is to prevent potential insolvency.

Bankruptcy Proceedings

In bankruptcy proceedings, the process begins with a filing of a bankruptcy petition by the company itself or a creditor. If the bankruptcy order is granted by the court, the court will appoint one or more external trustees (in Finland, practising lawyers serve in this role) to assume the control and management of the company in bankruptcy. In this case, the trustee manages the bankrupt company (the bankruptcy estate) during the bankruptcy proceedings.

The court-appointed bankruptcy trustee will seize and liquidate all of the bankruptcy estate’s assets in a manner most favourable for the bankruptcy estate. The actual method of sale is decided by the bankruptcy trustee (who runs the day-to-day management of the bankruptcy estate) or is put to a vote at the meeting of creditors (who make certain major decisions by vote as set out in the Finnish Bankruptcy Act).

A pledgee holding security over a movable asset (eg, shares, bank accounts or receivables), may generally enforce the security independently notwithstanding the bankruptcy proceedings, after notifying the bankruptcy trustee. The trustee may prohibit the independent enforcement if:

• the bankruptcy trustee decides to redeem the pledged asset from the pledgee at a price equal to the principal plus accrued interest of the pledgee’s secured claim; or
• the trustee requests the court to impose a temporary moratorium of up to two months for the purpose of determining any lack of clarity in the secured creditor’s claim or protecting the interests of the bankruptcy estate.

A floating charge cannot be enforced separately from the bankruptcy.

Company Restructuring

In company restructuring, an order on the basis of a petition for company restructuring is filed by the company itself or a creditor. Company restructuring proceedings can be initiated even without the support of the debtor company if necessary to protect a material interest of the applicant creditor. If the company restructuring order is granted by the court, the court will appoint one or more external administrators (in Finland, practising lawyers serve in this role) to assume the control and oversight of the company in restructuring; unlike in bankruptcy, the board of directors of the company stays in place, but with limited powers.

The filing for regular company restructuring proceedings usually triggers a moratorium on enforcement against the debtor. The moratorium generally prohibits:

• the enforcement of security;
• the repayment and enforcement of debts that have fallen due before the commencement of the restructuring proceedings; and
• the seizure of assets.

The moratorium is in force until the company restructuring programme has been confirmed by the court (or the proceedings are terminated early, for example due to a lack of funds). Debts arising after the filing for restructuring proceedings must be paid as they fall due. The restructuring proceedings leading to the commencement of the actual restructuring programme generally take several months, with the duration depending on the complexity of the debtor company.

After the restructuring programme is approved by the court, and for the duration of the programme, the enforcement of security is only possible pursuant to the terms of the court-approved programme, which commonly entails that enforcement will not be possible in practice during the duration of the programme.

During the moratorium, the court may, however, permit a secured creditor to enforce its security interest, if:

• the security asset is clearly not necessary for the restructuring programme to succeed; or
• the debtor has failed to pay interest on the secured debt, compensate any depreciation of the respective security asset due to its use during the moratorium, or maintain proper insurance on the security asset in question.

The moratorium does not restrict the payment of accrued interest on secured debt if the interest is paid on the original terms of the loan and falls due during the restructuring proceedings.

Although the secured creditors are subject to the moratorium on most enforcement actions, the Finnish Restructuring Act provides them with special protection in respect of their claims and rights as secured creditors during the proceedings. However, a creditor is considered a secured creditor only to the extent that, at the time at which the reorganisation proceedings are commenced, the value of the security asset is sufficient to cover the debt so secured. As such, any amount of the debt in excess of this is considered unsecured and can be subject to the same haircuts as other unsecured debt.

In the early proceedings, a general moratorium is imposed, unless it is likely that a moratorium will not be necessary. However, a general moratorium shall not be imposed if the debtor so requests. If a general moratorium is imposed, it is in force for three months, and can be extended to a maximum of 12 months. Also, the court may, on application, impose a temporary moratorium before the actual proceedings are initiated.

Upon the expiry of the maximum period, the early restructuring proceedings should be completed; however, if that is not the case, it is possible to commence regular proceedings or, if the company is insolvent, to apply for bankruptcy.

The Act on the Ranking of Claims determines the order in which debts are settled. As a main rule, creditors with similar priority have an equal right to a disbursement from the funds of the bankruptcy estate in proportion to the amount of their claims, unless otherwise provided by law.

However, the following creditors have precedence over unsecured creditors to receive disbursement for their claims, in this order.

• Secured creditors (excluding floating charge holders) and holders of rights of retention have priority for the proceeds relating to the relevant security asset.
• Creditors of the administrative expenses of the bankruptcy estate, and creditors with claims on the basis of contracts that the bankruptcy estate (rather than the debtor) has entered into, as well as any liabilities for which the bankruptcy estate is responsible by operation of law.
• If the company has undergone company restructuring proceedings prior to the bankruptcy:
1. fees and expenses of the restructuring administrator and the supervisor of the restructuring programme, with penalty interest accrued until the time of payment of the fees and expenses; and
2. after satisfaction of payments mentioned in (a), creditors of a debt that has arisen between the commencement and discontinuation of restructuring proceedings, with penalty interest accrued until the time of payment of the debt.
• Creditors with claims that are secured by a floating charge will receive (prior to other unsecured claims) a disbursement of 50% of the net proceeds of the assets (after the claims of creditors with a better priority position have been satisfied). 

There are no material statutory security interests or priming liens under Finnish law. For example, tax, employee and pension claims do not enjoy any super-priority but instead rank pari passu with normal, unsecured debt. In practice, the bankruptcy trustees’ fees and costs have a super-priority.

The timeframe for the completion of the bankruptcy proceedings and the distribution of the net proceeds depends mostly on the practicalities, such as how quickly the assets of the bankrupt estate can be realised. Generally, this may take years, especially if the bankruptcy estate becomes involved in lawsuits.

The usual duration of a restructuring programme is five to seven years. However, the early company restructuring proceedings should be completed within 12 months, though may be followed by the commencement of regular company restructuring proceedings or, if the company is insolvent, bankruptcy proceedings.

Through a company restructuring, creditors are typically able to recover a larger portion of their debts compared to what would be possible in bankruptcy.

Finnish law does not provide for formal procedures for preventative financial restructuring of a company, apart from the regulations for a preventative reorganisation of debt set out in the Restructuring Act.

However, a debtor and creditor may voluntarily agree on arrangements, such as payment plans, in order to avoid insolvency proceedings under the general principle of freedom of contract. A voluntary contractual payment arrangement between a creditor and a distressed debtor often results in a faster and more inexpensive process than a bankruptcy or regulated restructuring process. Nonetheless, there is an inherent risk in such voluntary arrangements, as they may be rendered moot by the mandatory provisions of applicable insolvency laws if they fail. Additionally, there is an increased risk of claw-back in such arrangements.

If the borrower, security provider or guarantor were to become insolvent, most typical risks for lenders are the value-destructive effects of insolvency and delays, including a moratorium on enforcement – this may trap a lender in an insolvency process that can last several years, with the final recoveries being paid only at the end of the proceedings.

A transaction, series of transactions, arrangement or any other act relating to the assets of the debtor can be challenged pursuant to the Act on Revocation of Transactions in Insolvency (the “Revocation Act”), if made during a critical period preceding insolvency or foreclosure proceedings, provided that the conditions described below are met. The critical period is calculated backwards from the filing for insolvency proceedings or enforcement of a claim by foreclosure.

General Grounds for Revocation

Transactions may be revoked pursuant to the Revocation Act where the arrangement can be deemed as improper or inappropriate from the point of view of the other creditors of the debtor, and where the counterparty of the debtor knew or ought to have known of the debtor being, or by virtue of the transaction becoming, unable to pay its debts when due. The critical period is five years preceding the insolvency/foreclosure filing. However, no time limit applies in dealings between related parties.

Revocation of Payments and Set-Off

In addition to the general grounds for revocation, the payment of a debt within a critical period of three months (two years between related parties) may be revoked where payment was made with unusual means or prematurely, or where the payment was large in relation to the assets of the debtor, unless such payment is considered ordinary in the circumstances.

Revocation of Security

In addition to the general grounds for revocation, the granting of security or collateral within a critical period of three months (two years between related parties) may be revoked where the security was not agreed upon when the underlying debt arose, or where the perfection measures were not taken without undue delay.

In addition to the above, other specific grounds for revocation exist – eg, regarding gifts. Further, certain general, fundamental principles of Finnish law may impact on the validity and enforceability of contractual arrangements.

Set-off in insolvency is recognised in Finland. A creditor who wishes to use its claim for set-off against a debt owed to the debtor must give a notice of the set-off to the bankruptcy trustee or administrator. Set-off in insolvency must meet the general criteria for set-off under Finnish law, with the exception of the requirement that the receivables in question have fallen due, which would be applicable outside insolvency. The bankruptcy trustee or administrator (as applicable) examines the grounds for the set-off, and may dispute the intended set-off if they deem that the creditor has no right to such set-off.

Finnish law does not provide for formal procedures for out-of-court restructuring. Instead, the parties may choose between a voluntary agreement between the debtor company, its creditors and shareholders (as applicable), early or regular restructuring, or a combination of voluntary and statutory restructuring.

Voluntary restructuring and debtor-initiated early restructuring are typically available when a company seeks to address its financial difficulties at an early stage, before becoming insolvent. Since the commencement of formal restructuring proceedings usually triggers a moratorium and involves an administrator, creditors generally have more room to manoeuvre outside formal proceedings.

From a structuring perspective, having the group structure (and suitable enforcement point) go through a jurisdiction with tried and tested out-of-court restructuring processes should be considered.

Bankruptcy Proceedings

In bankruptcy proceedings, the creditors exercise their powers at the meetings of creditors, with the bankruptcy trustee acting as chairperson. In large bankruptcies, the creditors appoint a creditors’ committee to supervise and assist the trustee. This provides a smoother process since the bankruptcy trustee is in control of the dissenting lenders.

The trustee must call a meeting of creditors whenever necessary to address questions regarding the management of the bankruptcy estate, and a final meeting at the conclusion of the bankruptcy proceedings.

Decisions at the meetings of creditors are made as majority decisions – ie, the opinion representing more than 50% of the votes of the creditors participating in the vote will prevail. The number of votes that each creditor holds is proportional to the size of the creditor’s claim – ie, one vote per euro (excluding subordinated creditors, if the expected liquidation proceeds are clearly insufficient to satisfy such creditors). A conflict of interest may prevent a creditor from participating in a particular decision.

Company Restructuring

In company restructuring, the administrator has an obligation to negotiate with (inter alia) the known creditors when preparing a proposal for the restructuring programme. Also, secured creditors who represent a minimum of 5% of all the secured claims may propose an alternative restructuring programme to the court. If a pledgee or, in particular, an entire group of creditors opposes restructuring, the restructuring programme can only be accepted by the court provided that certain specific requirements are satisfied.

The court may accept the restructuring programme (with some exceptions):

• with the approval of all known restructuring creditors; or
• with the approval of each class of creditors (in general, secured and unsecured creditors and beneficiaries of floating charges form different classes of creditors), with such approvals to be obtained in the manner as set out in the Restructuring Act.

On a general level, a class of creditors is deemed to have approved the restructuring programme if the programme is supported by:

• more than 50% of the creditors in number that took part in the voting within such class of creditors (creditors with large receivables are typically kept in separate classes from creditors with small receivables); and
• creditors representing more than 50% of the aggregate monetary value of the claims represented in the voting of such class of creditors.

However – and while in practice this should be very unlikely – where secured creditors and floating charge creditors oppose the restructuring, the court may still accept the restructuring programme even if each class of creditor did not approve it, so long as at least one creditor group voted in favour of the programme (as per the above) and the claims of all creditors who voted in favour of the restructuring programme account for at least one fifth of all eligible claims (provided that there are no impediments to the acceptance of the programme).

The decisions by the court in relation to the restructuring proceedings or restructuring programme can be appealed by any party with a vested interest in the matter, as provided by the general procedural rules of Finnish law.

The normal course of the restructuring process can be deviated from under certain conditions specified by law, when the parties involved aim to start the restructuring process or to confirm the restructuring programme more quickly than usual.

The so-called expedited restructuring process (nopeutettu saneerausmenettely) is a type of combined voluntary and statutory restructuring, where a draft programme prepared outside the process is submitted for court approval. This entails that all the acceleration methods available under the Restructuring Act can be utilised at the district court stage, significantly shortening the duration of this phase.

The expedited restructuring process is generally only useful in situations where the company is – despite its financial difficulties – still able to agree on debt arrangements and business restructuring measures with its major creditors. In practice, expedited restructuring processes are carried out quite infrequently.

Most private credit transactions are not made public by their parties, so only very limited case studies can be cited. However, the authors have seen a clear trend of major, typically London-based private credit providers entering the Finnish market to provide financing, in particular for acquisitions by private equity. The provided acquisition facilities have been coupled with bank-provided super-senior revolving credit facilities, and commonly include delayed draw, pre-agreed incremental facilities or accordion features, especially when the borrower is contemplating bolt-on acquisition.

As an interesting non-acquisition finance case, a London-based private credit fund specialising in asset-backed lending transactions provided a senior secured financing of up to EUR200 million to a Finnish financial services company, to enable it to lend to Finnish small and medium-sized enterprises (SMEs) in turn. The structure was quite different from a typical acquisition financing.

Additionally, a number of private credit firms, as well as one of the largest private equity and venture capital firms in Finland, have become increasingly active in providing credit to SMEs in Finland. These companies are bridging the gap for businesses that traditionally struggled with bank financing.

Private credit often offers more flexibility compared to traditional banks. In many recent transactions, companies have opted for private credit solutions, as they allow for more customised terms that fit better with their specific needs (eg, tailored repayment schedules, more lenient covenants, or bespoke risk-sharing arrangements), which have outweighed the typically slightly higher margin. Private credit is also generally able to move faster than traditional banks, making tight deal schedules much more realistic.

In addition, recent transactions also illustrate how private credit fills the gap for SMEs that may struggle to secure funding from traditional banks. Therefore, private credit may be better suited for SMEs, particularly in markets where traditional lending criteria is tight, or when companies require more specialised debt solutions to increase growth or cover short-term liquidity needs.

Private credit providers have also proven to be sensible and commercially oriented partners in distress (and potential distress) scenarios, and not as different from traditional banks as some feared.

Borrowers, in particular, can look to private credit deals with a view towards getting more tailor-made financing, with greater flexibility compared to traditional lending. Meanwhile, lenders (in particular, first-time lenders in the Finnish market) can draw comfort from the fact that most structures have been tried and tested before in traditional bank financings.

Non-Finnish lenders will feel right at home in finding that the Finnish market uses LMA template-based facility and intercreditor agreements, and that many borrowers are willing to accept English law as the governing law of the main finance documents.