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Criteria for enforcement
What are the common enforcement triggers for loans, guarantees and security documents?
The enforcement triggers may be freely determined by the parties. The most typical triggers would be non-payment, commencement of insolvency proceedings and material breach of contract in line with international practice.
Process for enforcement
What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?
Loans and guarantees may be accelerated or enforced with a simple demand to the borrower or guarantor in accordance with the relevant agreement. As regards security, the procedures vary depending on the type of security, as well as on whether the grantor of the security interest is in insolvency proceedings.
Pledges over movable property The enforcement of a pledge over specific movable property (eg, shares in Finnish limited liability companies, bank accounts, IP rights and receivables) is primarily regulated by the Commercial Code. However, the code is not mandatory and it is common practice to deviate from or exclude entirely the code’s applicability in a Finnish law pledge agreement.
Where the code has been excluded, the enforcement of a pledge over movable property is primarily governed by terms of the respective pledge agreement and other relevant finance documents. Finnish law pledge agreements commonly provide that the pledgee (often the security agent acting on behalf of pledgees) is authorised to enforce the pledge 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).
If bankruptcy proceedings (which are similar to US Chapter 7 proceedings) have been initiated against the pledgor, pursuant to the Bankruptcy Act the pledgee may enforce a pledge during the bankruptcy proceedings of the pledgor by means of an independent sale of the pledged assets. However, the pledgee must notify the bankruptcy liquidator of the intended enforcement at least two weeks before enforcement. Once the bankruptcy liquidator has received the pledgee’s notice of the upcoming enforcement, the bankruptcy liquidator may prohibit the pledgee from enforcing the pledge for up to two months for the reason of either determining the pledgee’s rights to enforce or protecting the interests of the bankruptcy estate. Once this period has lapsed, the timeframe for the completion of the enforcement proceedings and the distribution of the enforcement proceeds depends mostly on the practicalities, such as on how swiftly pledged assets may be realised. The bankruptcy liquidator may also settle the pledgee’s secured claim and thereby release the pledged property from the pledge.
If administration proceedings (which are similar to US Chapter 11 proceedings) have been initiated against the pledgor under the Administration Act, the pledgee can no longer enforce the pledge independently (nor accelerate the underlying loans against the pledgor) and any enforcement procedures already initiated (but not completed) will be discontinued.
Floating charges Under Finnish law, a floating charge may be enforced only after the beneficiary has obtained a court decision in which the debtor’s payment liability under the secured debt is established. After this judgment is obtained and the pledgee can engage public enforcement authorities that will sell the collateral assets, and the net proceeds will be used to satisfy the beneficiary of the floating charge. Instead, the beneficiary cannot take the enforcement measures privately.
Since the enforcement of a floating charge requires a court decision establishing the debtor’s payment liability, the debtor may plea its case in the court proceedings and also appeal the court’s decision. This may serve to materially suspend the enforcement proceedings. In practice, such collection measures of a floating charge (which are public) typically mean that the borrower company loses its creditworthiness altogether and will seek bankruptcy or administration. For typical practical purposes, this entails that the enforcement of a floating charge will eventually take place in a bankruptcy or administration environment, even though enforcement measures would have been commenced outside insolvency proceedings.
When bankruptcy proceedings have been initiated against the debtor, a floating charge can no longer be enforced separately from the bankruptcy proceedings. Further, enforcement proceedings which have not been completed by the time bankruptcy proceedings are initiated will be discontinued. In order for the beneficiary of the floating charge to exercise its rights, it must notify the liquidator of the existence of the secured claim and floating charge.
In a bankruptcy scenario, the bankruptcy liquidator will sell the assets covered by the floating charge and the liquidator will then distribute the net proceeds. However, only 50% of the net proceeds of the assets covered by the floating charge – which remain after debts to creditors with a better priority position than the holders of the floating charge (in particular debts secured by pledges on specific assets) have been satisfied – will be applied to satisfy the floating charge holders, while the balance (50%) will be applied to satisfy the unsecured creditors. Holders of floating charges stand pari passu with (other) unsecured creditors for satisfaction of their excess claims from the balance of the proceeds.
In administration proceedings, the same principles as with movable property apply.
Real estate mortgages Under Finnish law, a real estate mortgage may be enforced only by public means and in order to enforce a mortgage, the mortgagee must obtain a court decision in which the mortgagor’s payment liability under the secured debt is established. After the judgment is obtained, the mortgagee can approach the public enforcement authorities, which will then sell the real estate and the net proceeds will be used to satisfy the mortgagee’s secured claim. Any excess proceeds will be transferred by the public enforcement authorities to the mortgagor.
In case of the mortgagor’s bankruptcy, the court decision to initiate bankruptcy proceedings is sufficient for the mortgagee to enforce a mortgage and no separate court decision on the debt is required. The mortgagee may enforce a mortgage during bankruptcy proceedings independently of the bankruptcy proceedings, but the mortgagee cannot sell the underlying real property privately. The real estate must be sold with the assistance of public enforcement authorities.
Alternatively, with the mortgagee’s consent, the underlying real property can be sold by the bankruptcy liquidator on behalf of the mortgagee. The bankruptcy liquidator may then sell the real property independently without the assistance of public enforcement authorities.
In administration proceedings, the same principles as with movable property apply.
Ranking in insolvency
In what order do creditors rank in case of the insolvency of a borrower?
In the event of the borrower’s insolvency, creditors rank in the following order:
- Bankruptcy costs (eg, the liquidator’s fees and legal expenses), commitments and undertakings of the bankruptcy estate (eg, agreements entered into by the bankruptcy estate) and debts for which the bankruptcy estate is responsible by law (eg, use by the bankruptcy estate of leased premises and employees’ salaries after the commencement of bankruptcy) are to be satisfied directly by the bankruptcy estate as they fall due and thus enjoy top priority.
- Secured creditors with pledges or mortgages, claims secured by a pledge or mortgage or right of retention up to the amount of the proceeds of the collateral assets – if the proceeds of the collateral assets are insufficient to provide full repayment of the creditor’s secured claim, the outstanding balance of the secured claim is taken into account as an ordinary, unsecured receivable ranking pari passu with other ordinary, unsecured claims. Set-off also enjoys a high priority.
- Secured creditors with floating charges up to 50% of the net proceeds of relevant assets – if 50% of the net proceeds of the collateral assets are insufficient to provide full repayment of the creditor’s secured claim, the balance of the secured claim is taken into account as an ordinary, unsecured claim ranking pari passu with other ordinary, unsecured claims.
- Ordinary, unsecured creditors (eg, all ordinary, unsecured creditors rank pari passu and pro rata, including tax claims and employees’ unpaid salaries).
- Subordinated creditors (eg, subordinated loans and any interest or default interest accruing after the commencement of bankruptcy, where such interest is not secured).
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