Opening secondary proceedings
Priority of claims
Setting aside transactions
The EU Regulation on Insolvency Proceedings (1346/2000) sets out provisions on the coordination of measures in cross-border insolvency proceedings within the European Union. The regulation covers two types of insolvency proceeding: the main proceeding and the secondary proceeding. The courts of EU member states with jurisdiction to open the main proceedings are those of the member state in which the debtor has its main interests. The main proceeding is governed by the principle of universality and aims to encompass all the debtor's assets. However, local secondary proceedings are permitted, alongside the main proceeding, in the member states in which the debtor has establishments. The effects of secondary proceedings are limited mainly to the assets located in that state.
The law of the member state in which insolvency proceedings are commenced (ie, the lex concursus) is applicable. The lex concursus principle defines the applicable law in both the main proceeding and the secondary proceedings, and sets out all the terms of those proceedings unless otherwise provided in the regulation. The opening of a secondary proceeding changes the lex concursus with regard to the assets which are within the scope of territorial secondary proceedings. The change in applicable legislation increases uncertainty regarding the creditor's position in the proceeding, which may be one of the reasons why secondary proceedings are exceptional.
This update introduces the key issues relating to the provisions in applicable Finnish legislation which regulate the priority of claims and the setting aside of transactions, which should be considered when a request for the opening of a secondary proceeding in Finland seems appropriate.
Opening secondary proceedings
The right to request the opening of a secondary proceeding is exercisable by the liquidator in the main proceeding, as well as the creditors, authorities and other persons empowered to request the opening of insolvency proceedings under the law of the member state in which the opening of secondary proceedings is requested.
In practice, the liquidator in the main proceeding may consider requesting the opening of a secondary proceeding where:
- a significant number of minor creditors are located in a member state that is not the location of the main proceeding and the opening of a secondary proceeding will allow the creditors to lodge their claim in the local secondary proceedings; or
- the legal relationships of the debtor are complex and it is more cost effective or practical to manage the estate locally through a secondary proceeding.
A creditor may benefit from the opening of a secondary proceeding in Finland, for example, if the Finnish regulations that govern the proceeding are more favourable to the creditor than the national regulations governing the main proceeding. However, the result that may be gained from such a change in the lex concursus is limited, as the effects of a Finnish secondary proceeding would be restricted to the assets of the debtor that are situated in Finland.
In Finland, the priority of claims in bankruptcy is regulated by the Act on the Priority of Claims (1578/1992). This legislation provides for the following priority of claims:
- secured claims;
- claims arising during reorganisation proceedings;
- floating charges (50% of the value of property subject to the floating charge – the rest of the claim is non-preferential and unsecured); and
- unsecured claims in proportion to the amount of the debt.
Creditors that hold collateral have special priority over other creditors in respect of distributions from the debtor's assets. A special priority arises in relation to a loan secured by the use of real estate, a registered vessel or aircraft or a motor vehicle mortgage. A creditor holding such collateral has the right to receive its payment, paid out of the value of the pledge, before other creditors. A holder of a lien on moveable property is also entitled to receive payment from the object to which such right relates before other creditors. Interest accrued after the bankruptcy proceedings have been initiated and certain payments based on public law with penal character are paid only if the other creditors have received a distribution up to the full amount of their lodged claims.
If the priority of claims regulated by Finnish legislation provides a creditor with a better chance of increased disbursements than would be the case according to the lex concursus of the main proceeding, requesting the commencement of a secondary proceeding in Finland may be advantageous. The Finnish regulations do not prioritise claims by the tax authorities or the debtor's employees.
Setting aside transactions
The Act on Recovery to a Bankruptcy Estate (758/1991) regulates the setting aside of transactions. As part of recovery, fundamentally lawful transactions entered into by the debtor before the bankruptcy proceeding may be set aside and recovered.
The grounds for recovery can be classed as subjective or objective. In order for subjective grounds for recovery to exist, the debtor must have behaved improperly towards creditors and the other party to the transaction must have acted in bad faith. This ground is available for all types of transaction. Subjective grounds apply to transactions during the recovery period which is, depending on the circumstances, up to five years before the relevant date.
Objective grounds for recovery are a means of setting aside transactions which are, typically, inappropriate and detrimental to creditors. It is therefore unnecessary to establish intent to defraud. Objective grounds apply to certain transactions, such as the liquidation of debt and the lodging of security during the recovery period (which is normally the three months before the relevant date).
According to the regulation, the lex concursus principle applies in a secondary proceeding to the rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all creditors. Therefore, opening a secondary proceeding in Finland could enable recovery of a transaction, which may not be recovered under the legislation governing the main proceeding. This may be the case in particular if the lex concursus of the main proceeding allows no recovery of a transaction on objective grounds.
However, the insolvency regulation also creates a defence against the applicability of the lex concursus. Lex concursus shall not apply where the person who benefited from an act that is detrimental to all the creditors proves that:
- the act is subject to the law of a member state other than that of the state in which the secondary proceedings have been commenced; and
- that law allows no means of challenging that act in the relevant case.
The regulation provides that the liquidator in a secondary proceeding may bring any action to set aside a transaction which is in the interests of the creditors. If a secondary proceeding is initiated in Finland, the effects of a secondary proceeding are restricted to the assets of the debtor that were situated within the territory of Finland when the proceeding was initiated. These temporal and territorial limitations of the scope of secondary proceedings opened in Finland may limit the recovery of transactions which have not reduced the debtor's assets located in Finland.
For further information on this topic please contact Juho Lenni-Taattola or Klaus Majamäki at Hammarström Puhakka Partners, Attorneys Ltd by telephone (+358 9 474 21), fax (+358 9 474 2222) or email ([email protected] or [email protected]).