What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?
The Bankruptcy Act (120/2004) governs bankruptcy proceedings, which are aimed at liquidating the assets of an insolvent company to satisfy its creditors and winding up the company.
The Company Administration Act (47/1993) governs company administration proceedings, which are aimed at rehabilitating a company that is insolvent but deemed ultimately viable through a restructuring of its debts and business operations.
On an international spectrum, is your jurisdiction more creditor or debtor friendly?
Finland is creditor friendly in bankruptcy, but debtor friendly as regards company administration.
Do any special regimes apply to corporate insolvencies in specific sectors (eg, insurance, pension funds)?
Yes. Specific regimes apply to the winding up and rehabilitation of credit institutions, insurers (including pension insurers) and clearing houses. Special provisions apply to the winding up and rehabilitation of investment undertakings.
Are any reforms to the legal framework envisaged?
A major issue in the company administration framework has been the use of extensive debt haircuts as the primary tool for debt reorganisation. This has generally put unsecured creditors in an inferior position compared to shareholders. The Ministry of Justice is preparing a proposal to amend the Company Administration Act by introducing new and more flexible means of restructuring, such as debt-to-equity conversion. The proposal, which is still in the early stages, is expected to take company administration proceedings in a more creditor friendly direction.
Director and parent company liability
Under what circumstances can a director or parent company be held liable for a company’s insolvency?
A member of the board of directors and the managing director of a Finnish limited company may be held liable for damage caused by a wilful or negligent breach of the general fiduciary duties under the Companies Act, a specific provision of the Companies Act or the company’s articles of association. A shareholder (parent company) may be held liable for damage caused to the company, a shareholder or a third party by a wilful or negligent breach of the Companies Act or the company’s articles of association. In a distressed situation, such actions that diminish the assets or increase the liabilities of a company without a business rationale are particularly susceptible to trigger liability.
The liability may be civil liability for the loss or damage caused or, in certain cases, criminal liability. Liability requires causality between the negligent or wilful misconduct and the loss or damage caused. The burden of proof lies with the accused board member or managing director – that is, it is not for the claimant to show negligence, but rather for the accused person to show that he or she acted diligently.
The board of directors must continuously assess the company’s financial standing and the need to file for bankruptcy or administration proceedings in order to protect creditors. Trading should be discontinued where it would cause or worsen the company’s state of insolvency.
The board of directors also has certain obligations to act where shareholders’ equity is adversely affected.
What defences are available to a liable director or parent company?
The board member or managing director must show that he or she has acted diligently. Accordingly, corporate decision making should always be backed up by appropriate resolutions where the business rationale and the compliance of such decisions with the Companies Act are expressly assessed and stated in the minutes.
What due diligence should be conducted to limit liability?
This depends on the circumstances and the economic impact of the transactions. Where a contemplated transaction is estimated to have a major impact on the company, more extensive due diligence and a comparison of the options is usually required to show a sufficient level of diligence.
Position of creditors
Forms of security
What are the main forms of security over moveable and immoveable property and how are they given legal effect?
Floating charge The main form of security over the movable business assets of a company is a floating charge (sometimes called a business mortgage). A floating charge is created by issuing floating charge notes, registering them with the trade register and transferring them to the possession of the secured creditor. A floating charge covers movable assets that are not subject to a separate pledge or mortgage.
Fixed charge Aircraft, vessels and vehicles may be subject to a fixed charge, which is created by registering the charge in the relevant register and transferring the certificate of charge to the secured creditor.
The main form of security over immoveable property is a mortgage.
Ranking of creditors
How are creditors’ claims ranked in insolvency proceedings?
Creditors’ claims are ranked in the following order:
- Secured creditors – creditors whose claims are secured by specific asset security must be satisfied in full up to the value of the security asset in question (although enforcement costs are first deducted from the sales proceeds). Therefore, secured creditors have the highest priority.
- Fees and financing obtained during company administration proceedings – the administrator’s fees and claims that have arisen in the course of company administration proceedings enjoy special priority in bankruptcy proceedings under certain circumstances. The liquidator’s fees also enjoy special priority.
- Floating charge holders – floating charge holders are entitled to 50% of the net proceeds of the liquidated assets covered by floating charge (enforcement costs are first deducted from the sales proceeds). Floating charge holders that are not fully satisfied from such proceeds are treated as unsecured creditors for their remaining claim. The balance of liquidation proceeds is distributed among unsecured creditors.
- Ordinary unsecured creditors – ordinary unsecured creditors rank pari passu and pro rata. Secured creditors whose security is not sufficient to satisfy their entire claim are treated as unsecured creditors for their remaining claim.
- Subordinated creditors – subordinated creditors, such as creditors whose claims are contractually subordinated and subordinated bondholders, have the lowest priority.
Can this ranking be amended in any way?
Intercreditor agreements are commonly used as a means of agreeing on the waterfall among creditors.
What is the status of foreign creditors in filing claims?
Foreign creditors are treated the same as domestic creditors. It may be advisable for foreign creditors to retain Finnish counsel for the submission of claims and other stages of the insolvency proceedings, since proceedings are conducted in Finnish.
Are any special remedies available to unsecured creditors?
Generally, no. However, sector specific remedies such as relief through the deposit guarantee fund or the investor protection fund may be available in the insolvency of certain regulated entities.
By what legal means can creditors recover unpaid debts (other than through insolvency proceedings)?
These can be recovered through private debt collection or foreclosure (enforcement) through public enforcement authorities. A creditor can take debt collection measures independently or engage a professional debt collection company. The permitted costs and timetables of debt collection measures are regulated in the Debt Collection Act. Foreclosure through public enforcement authorities requires first obtaining an enforceable judgment on the debt.
Is trade credit insurance commonly purchased in your jurisdiction?
What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?
Bankruptcy proceedings are used to liquidate an insolvent company. They may be initiated voluntarily (by the debtor) or compulsorily (by a creditor). The proceedings are based on largely mandatory provisions of law, and there is little flexibility to deviate from such provisions even where the proceedings were initiated voluntarily.
Winding up under the Companies Act (624/2006) is the other available form of liquidation proceedings. However, winding up is only possible if the company is able to satisfy its liabilities to its stakeholders. Therefore, winding up is generally not available to an insolvent company.
How are liquidation procedures formally approved?
By an order of the district court pursuant to a petition by the debtor or a creditor.
What effects do liquidation procedures have on existing contracts?
Bankruptcy does not have immediate direct impact on the continuity of contractual relationships. However, the bankruptcy estate will replace the debtor as the contractual counterparty.
In practice, a bankruptcy will often result in a termination trigger event under a contract or breach of contract. However, the bankruptcy liquidator has the right to force the continuation of agreements under certain circumstances.
What is the typical timeframe for completion of liquidation procedures?
The timeframe for the completion of bankruptcy proceedings and the distribution of net proceeds depends mostly on practical issues, such as how quickly the assets of the bankrupt company may be liquidated. Proceedings can be expected to take years, especially if the bankruptcy estate becomes involved in lawsuits.
Role of liquidator
How is the liquidator appointed and what is the extent of his or her powers and responsibilities?
The bankruptcy trustee as liquidator in a bankruptcy is appointed by the relevant district court. The court may hear the creditors and the debtor in connection with such appointment.
The trustee manages the bankrupt company (the ‘bankruptcy estate’) during the proceedings. The trustee will:
- take possession, review and maintain the assets of the bankruptcy estate;
- undertake any measures necessary to collect the receivables of the bankruptcy estate and secure the rights and terminate any redundant contracts of the bankruptcy estate;
- review any possibilities for voidability/clawback;
- issue public summons to the creditors and prepare the list of creditors;
- sell the assets of the bankruptcy estate;
- satisfy the claims of the creditors as provided by law; and
- manage the proceedings pursuant to the Bankruptcy Act (120/2004).
The liquidator may choose to continue the company’s business operations during the bankruptcy proceedings, where this is beneficial to the creditors.
What is the extent of the court’s involvement in liquidation procedures?
The court’s main tasks are to:
- agree the commencement of the bankruptcy proceedings and the appointment of a trustee;
- confirm the distribution of assets on the basis of the trustee’s proposal; and
- rule on any disputes that arise in connection with the bankruptcy proceedings.
What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?
The creditors exercise oversight of the trustee’s activities at creditors’ meetings, where the trustee acts as chairman. The trustee calls the first meeting of creditors within two months after completing the inventory of assets and liabilities (and in any event within six months from the commencement of bankruptcy). The trustee must also call a meeting of creditors whenever necessary to address issues regarding the management of the bankruptcy estate. A final creditors’ meeting at the conclusion of the bankruptcy proceedings must also be held. The creditors may appoint a creditors’ committee that supervises and assists the trustee. The creditors’ committee is generally mandatory in large bankruptcies.
During bankruptcy proceedings, the general rule is that creditors cannot commence legal action against the insolvent company for repayment of debts incurred before the commencement of the bankruptcy proceedings. Accordingly, creditors are free to commence legal action to recover the payment of debts incurred by the bankruptcy estate. Further, creditors that have security over specific assets may enforce such security, subject to certain restrictions. The liquidator has the power to stay such enforcement temporarily in order to examine the validity of the creditor’s claim or to protect the interests of the bankruptcy estate.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in liquidation procedures?
Directors and shareholders are obliged to assist the trustee at the trustee’s request. Assistance is usually required in particular in the preparation of a list of assets and liabilities of the debtor company.
What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?
In order to qualify for bankruptcy proceedings, the debtor must be insolvent. The debtor may be considered as insolvent on the basis of:
- its own declaration unless there is a reason to doubt the correctness of such declaration; or
- an externally visible indicator.
Generally, such indicators are that:
- the debtor has ceased payments;
- foreclosure proceedings have been pending against the debtor for the last six months and it has become evident that the debtor is unable to satisfy the relevant claim; or
- the debtor has received a payment notice coupled with a threat to initiate bankruptcy proceedings if the claim is not satisfied and the debtor has not satisfied the claim.
Where the proceedings are initiated by a creditor, its claim must be based on an enforceable court judgment or otherwise be indisputably clear.
What are the primary formal restructuring procedures available in your jurisdiction and what are the key features and requirements of each?
Company administration proceedings are the primary formal restructuring proceedings. Company administration proceedings are used to rehabilitate a company that is insolvent but considered ultimately viable. They may be initiated voluntarily (by the debtor) or compulsorily (by a creditor or group of creditors), provided that certain criteria regarding the creditor’s claim, the debtor and the debtor’s financial condition are met.
The proceedings are based on largely mandatory provisions of law, and there is little flexibility to deviate from such provisions even where the proceedings were initiated voluntarily. A general moratorium protects the debtor company against enforcement during the proceedings. After confirmation of a restructuring programme, creditors may receive payments only in accordance with the repayment schedule set out in the programme. Debt haircuts and extension of repayment schedules are generally the main tools of restructuring, and it is common for haircuts of unsecured debts to be in the region of 60% or more. Secured debts may only be subject to a haircut to the extent the debt exceeds the value of the security.
How are restructuring plans formally approved?
By an order of the district court pursuant to a petition by the debtor or a creditor or group of creditors.
What effects do restructuring procedures have on existing contracts?
Company administration has no direct impact on the continuity of contracts. However, lease and financing contracts may be terminated by the administrator, as well as any contract providing for an unusual obligation (ie, outside the ordinary course of trading) that has not yet been fulfilled by the company in administration. The termination of employment contracts with a relatively short notice period is also possible where such termination is based on business reasons.
What is the typical timeframe for completion of restructuring procedures?
The timeframe for completing company administration proceedings depends on the size and complexity of the debtor’s business. Generally, the preparation of a programme proposal may take some weeks for a smaller company and several months for a larger company.
The typical duration of a restructuring programme is between five and seven years.
What is the extent of the court’s involvement in restructuring procedures?
The court’s main tasks are to:
- agree the commencement of company administration proceedings and appoint an administrator;
- rule on any disputes that arise in connection with the company administration proceedings; and
- confirm (or reject) the restructuring programme.
What is the extent of creditors’ involvement in restructuring procedures and what actions are they prohibited from taking against the company in the course of the proceedings?
Creditors will not typically be involved in the day-to-day operations of the company. The administrator liaises with creditors during the preparation of the restructuring programme in order to ensure that its proposal will gain the requisite support from the creditors.
The court may accept the restructuring programme (with some exceptions) with the approval of:
- all known creditors; or
- the majority of each class of creditors (in general, secured and unsecured creditors and floating charge holders form different classes of creditor).
The commencement of administration proceedings usually triggers a moratorium, providing the company with protection from its creditors, both secured and unsecured. The moratorium applies only to claims that have fallen due before the commencement of the administration proceedings. The moratorium is in force until the restructuring programme is either approved or rejected. A bankruptcy petition by a creditor made during administration proceedings may be stayed until the administration proceedings are terminated.
In general, the enforcement of security is not possible during the moratorium. After the administration programme has been approved, the claims of the secured creditors are satisfied in accordance with the repayment schedule set out in the programme and no enforcement is permitted as long as the company complies with the terms of the programme.
Under what conditions may dissenting creditors be crammed down?
The restructuring programme is confirmed on the basis of a majority vote in each class of creditors. Accordingly, the programme can be confirmed even if minority creditors vote against it. 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 that took part in the voting within such class of creditors (creditors with large receivables are typically kept in classes separate from creditors with small receivables and secured creditors and floating charge holders form classes of their own); and
- creditors representing more than 50% of the aggregate monetary value of the claims represented in the voting of such class of creditors.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in restructuring procedures?
In company administration, the directors and shareholders will continue to act in their usual roles, but any major or out-of-the-ordinary course transactions require the administrator’s consent.
Are informal work-outs available for distressed companies in your jurisdiction? If so, what are the advantages and disadvantages in comparison to formal proceedings?
Voluntary restructurings are typically used in Finland in cases where the debtor company has an appropriate creditor/shareholder structure. An agreement on a voluntary restructuring is typically made between the creditors, the debtor and shareholders of the debtor. The debtor company generally retains title to the assets. Typically, the debts are only partially satisfied and, in return, the equity holders agree to invest additional equity into the debtor company. Conversion of debt into equity is also often applied. The advantages of voluntary restructuring are speed and privacy. The disadvantage is that the arrangements are purely contract based and may not be held up in relation to third parties in the event of insolvency of a party (eg, debt haircuts may be subject to clawback if the relevant lender becomes insolvent).
What are the eligibility criteria for initiating restructuring procedures? Are any entities explicitly barred from initiating such procedures?
Administration proceedings may be initiated if the company is unable to pay its debts as they fall due or there is an immediate threat of the company being unable to pay its debts and this inability is not temporary. Proceedings may also be initiated if a group of creditors representing at least 20% of the company’s known debts file the petition together with the debtor company. If the petition is filed by a creditor or creditors alone, the proceedings may be initiated only if necessary to protect a material economic interest of such creditor.
Company administration proceedings may not be initiated if:
- the company is insolvent and it is unlikely that the administration will be successful in resolving the company’s financial problems other than temporarily;
- it is likely that the company’s assets will not be sufficient to cover the costs of the administration proceedings and no third-party investor has undertaken to bear such costs; or
- there are sufficient grounds to believe that the main reason for the petition is to prevent a creditor from enforcing its claim.
Further, unless there are any particular reasons to the contrary, administration proceedings may not be initiated if the company or its representative is suspected or found guilty of certain criminal offences or subject to a prohibition to conduct business.
Setting aside transactions
What rules and procedures govern the setting aside of an insolvent company’s transactions? Who can challenge eligible transactions?
Finnish law has a general clawback provision for transactions without business rationale made before insolvency. In addition, there are various grounds for clawback in specific situations. The applicable time period depends on the grounds for clawback and the transaction counterparty’s relationship to the debtor.
Generally, transactions made within a period of five years preceding insolvency proceedings may be subject to clawback where:
- the transaction (individually or together with other transactions) favoured a creditor to the detriment of the other creditors, decreased the debtor’s assets or increased the debtor’s debts;
- the debtor was already insolvent at the time of the transaction or became insolvent as a result thereof; and
- the transaction or arrangement can be deemed as improper or inappropriate.
Clawback further requires that the counterparty of the debtor knew, or ought to have known, of the debtor’s insolvent state and the improper nature of the transaction.
Further, by way of example, the repayment of a debt may be clawed back if the payment was made by unusual means or prematurely, or was substantial in size compared to the debtor’s assets. A security right may be clawed back if the security was not agreed when the secured debt arose, or the security was not perfected without undue delay after the secured debt had arisen.
Operating during insolvency
Under what circumstances can a company continue to conduct business during an insolvency procedure?
In bankruptcy, the trustee may choose to continue to conduct the bankrupt company’s business during bankruptcy if the trustee deems that this would yield a better outcome for the creditors than liquidation.
In company administration, the company may generally continue to conduct day-to-day business but will require the administrator’s prior approval for any major or out of ordinary course transactions, such as the raising of further financing or sale of assets.
Stakeholder and court involvement
To what extent are relevant stakeholders (eg, creditors, directors, shareholders) and the courts involved in any business conducted during an insolvency procedure?
In bankruptcy, the trustee takes over the business and the directors and shareholders step aside. The creditors provide their input to the trustee through regularly held creditors’ meetings or through the creditors’ committee, if one is appointed. The court’s role is limited to:
- commencing the proceedings and appointing the trustee;
- processing disputes that arise in connection with the proceedings; and
- ultimately, confirming the distribution of assets among the creditors.
In company administration, the directors and shareholders will continue to act in their usual roles, but any major or out-of-ordinary course transactions require the administrator’s consent. The administrator liaises with the creditors during the preparation of the restructuring programme in order to ensure that the programme proposal is set to gain the requisite support from the creditors. The creditors will not typically be involved in the day-to-day operations. The court’s role is limited to:
- commencing the proceedings and appointing the administrator;
- processing disputes that arise in connection with the proceedings; and
- ultimately, confirming (or rejecting) the restructuring programme.
Can an insolvent company obtain further credit or take out additional secured loans during an insolvency procedure?
Effect of insolvency on employees
How does a company’s insolvency affect employees and the company’s legal obligations to employees?
In bankruptcy, employment agreements continue unless terminated. Usually the trustee terminates all employment agreements at the commencement of proceedings. The notice period is 14 days irrespective of the terms of employment. Employees’ wages do not enjoy a special priority in bankruptcy. However, pay security out of public funds is available for employees in the insolvency of an employer. The trustee has a duty to ensure that the employees receive pay security for lost wages.
In company administration, arrangements relating to employees must be addressed in the administration programme proposal. This usually means that employment agreements are terminated or amended. Termination must be based on business reasons. The notice period is two months irrespective of the terms of employment. Generally, wages may be paid during company administration proceedings notwithstanding a general moratorium on payments. Salaries may be subject to a haircut.
Pension contributions are withheld from wages and paid to employment insurance companies or funds, which are ring fenced from the assets of the employers, and as such, unaffected by the insolvency of an employer.
Recognition of foreign proceedings
Under what circumstances will the courts in your jurisdiction recognise the validity of foreign insolvency proceedings?
Finnish courts will recognise the validity of foreign insolvency proceedings when such proceedings fall within the scope of applicable EU regulations or international treaties.
The EU Recast Insolvency Regulation (2015/848) entered into force on 26 June 2015, applying to insolvency proceedings from 26 June 2017. The regulation is directly applicable law in Finland and governs the validity of insolvency proceedings within the European Union, excluding Denmark.
According to the Nordic Bankruptcy Convention of 7 November 1933 (as amended) between Finland, Sweden, Denmark, Iceland and Norway, a bankruptcy declared in one Nordic country is recognised in the other Nordic countries as automatically applying to the bankrupt company’s assets in those countries. However, in insolvency proceedings between Finland and Sweden, the EU Recast Insolvency Regulation has replaced the convention.
Winding up foreign companies
What is the extent of the courts’ powers to order the winding up of foreign companies doing business in your jurisdiction?
Generally, Finnish courts have jurisdiction to open insolvency proceedings that aim at the liquidation and winding up of a foreign company where such foreign company’s centre of main interests is located in Finland. Further, Finnish courts generally have jurisdiction where the EU Recast Insolvency Regulation does not apply and the debtor has substantial assets in Finland (certain exceptions apply in respect of Icelandic, Norwegian and Danish debtors).
Centre of main interests
How is the centre of main interests determined in your jurisdiction?
Pursuant to the EU Recast Insolvency Regulation, the debtor’s centre of main interests will be presumed to be at the registered office. However, the presumption may be overridden if the central administration is located in another EU member state and a comprehensive objective assessment of all the relevant factors establishes that the company’s actual centre of management and supervision and the management of its interests is located in that other EU member state. The registered office presumption will not apply if the registered office was moved during the three months before the opening of proceedings.
What is the general approach of the courts in your jurisdiction to cooperating with foreign courts in managing cross-border insolvencies?
Finnish courts have long traditions of cooperation with other Nordic courts in managing cross-border insolvencies. Due to the similarity of the Nordic insolvency laws, cooperation is generally smooth and straightforward. Cooperation within the European Union is largely regulated at EU level. Cooperation with third-country courts depends on the particular situation at hand, and can be difficult due to the differences in domestic insolvency laws.