The Supreme Court recently set a precedent (KKO 2015:103) regarding the liabilities of a bankruptcy estate in a case that concerned maintenance charges of a limited liability golf company. More specifically, the legal question subject to the precedent was whether the maintenance charge receivables of the golf company in connection with the golf company's shares (incurred after the beginning of bankruptcy proceedings) were liabilities of the bankruptcy estate (ie, were they considered administrative expenses, and as such, were they payable on becoming due and before the disbursements towards other creditors' claims in bankruptcy).
The debtor company held shares in a golf company at the time that the bankruptcy proceedings were commenced in 2009. Pursuant to a decision made at the golf company's general meeting, shareholders were to pay certain maintenance charges for 2011. The golf company claimed that the bankruptcy estate was liable for these charges because the bankruptcy estate had taken hold of the golf company's shares, paid the previous year's maintenance charges and attempted to resell the shares.
The bankruptcy estate in turn claimed that the maintenance charges were not the bankruptcy estate's liability. In other words, the charges were not to be seen as administrative expenses.
Accordingly, the questions before the court were as follows:
- Were the maintenance charges administrative expenses for which the bankruptcy estate was liable?
- If so, could the bankruptcy estate be discharged from its liability by abandoning the shares for the benefit of the golf company?
It was undisputed that the bankruptcy estate had not explicitly agreed to cover the charges or made any type of agreement with the golf company.
Pursuant to Chapter 16, Section 2(1) of the Bankruptcy Act, the bankruptcy estate's liability for a debt can be based on the following circumstances:
- if the debts arise from the bankruptcy proceedings (eg, the fees and expenses of the bankruptcy administrator);
- if the debts arise from a contract or commitment entered into by the estate; or
- if the estate is liable for the debts under the Bankruptcy Act or some other act.
Pursuant to Chapter 1, Section 5 of the Bankruptcy Act, in a continuous debt relationship the part of the debt arising from the period before the beginning of bankruptcy shall be deemed a claim in bankruptcy. Accordingly, as the golf company had not made a lodgment regarding the maintenance charge claims in question, the court stated that the maintenance charges could not be deemed a claim in bankruptcy.
The court found that the bankruptcy estate was not liable for the maintenance charges as administrative expenses.
First, the court considered that the maintenance charges did not constitute a debt for which the bankruptcy estate was liable under the Bankruptcy Act or any other provision of law. The maintenance charge was based on the general meeting's decision and such receivables are not subject to any provision of the Limited Liability Company Act or the Bankruptcy Act so as to be considered as administrative expenses under Chapter 16, Section 2(1) of the Bankruptcy Act.
Second, the court maintained that the bankruptcy estate had not entered into a contract or commitment with the golf company from which liability could arise. In this regard, the court stated that the actions taken by the bankruptcy administrator to fulfil its legal obligations to take control over and liquidate the assets of the bankruptcy debtor may not be deemed to constitute such a commitment by the estate so as to result in the estate's liability over maintenance fees. In this case, the bankruptcy administrator's actions (ie, taking hold of the golf company's shares, paying the previous year's maintenance charges and attempting to liquidate the shares) were seen to be an integral part of the bankruptcy administrator's duties and did not constitute a contract or commitment towards the golf company.
However, the ruling was not unanimous. The dissenting judge came to the opposite conclusion. In his opinion, he stated that the bankruptcy estate was liable for the maintenance charges connected to the shares of the golf company, as the shares were a part of the assets belonging to the estate, and as such, the expenses relating to the administration and management of the shares (including the maintenance charges) should be considered administrative expenses.
The concept of administrative expenses under the Bankruptcy Act may be deemed a legal exception to the main principle regarding creditor equality, according to which the debtor's assets should be used in payment of bankruptcy claims so that all creditors without a legal order of priority may receive disbursements towards their claims in bankruptcy with a proportional amount of each claim. Within this framework, administrative expenses may be deemed to constitute the best order of priority, surpassing that of a secured creditor.
It follows that such an exception should be applied with caution and in all cases be applied strictly according to the rules set out in the law. From this viewpoint, the recent decision seems to uphold the principle of creditor equality.
Further, the precedent may also be seen to support the legal objectives of bankruptcy proceedings in general. If the administrative expenses incurred exceed the value of assets belonging to the estate, the bankruptcy proceedings could either lapse due to insufficient funds or the bankruptcy estate could itself be declared bankrupt. In both instances the creditors of the bankruptcy debtor would not receive any disbursements. In cases where certain assets are found to be difficult to sell – as many golf shares are in Finland – the continuous liabilities of the estate regarding these assets would eventually drain the estate's funds otherwise distributed to all creditors as disbursements.
Besides the exclusion of the estate's liability as set out in the court's precedent, the other option to prevent continuous liability regarding the maintenance charges would be to allow the bankruptcy estate to abandon the shares. However, this secondary question remains unanswered, as the maintenance charges were considered not to constitute administrative expenses.
Finally, even though the precedent explicitly concerned the maintenance charges connected to golf shares, the court's interpretation could be applied to the maintenance charges connected to other types of shares as well (eg, those of a real estate corporation). On a more general level, the principles arising out of the precedent seem to tie the coverage of the administrative expenses more rigidly to the letter of law. This is good news for creditors in bankruptcy proceedings, as it protects the creditors' right to receive disbursements from assets belonging to a bankruptcy estate.
For further information on this topic please contact Juho Lenni-Taattola or Lasse Luoma at Hammarström Puhakka Partners, Attorneys Ltd by telephone (+358 9 474 21) or email ([email protected] or [email protected]). The Hammarström Puhakka Partners, Attorneys Ltd website can be accessed at www.hpplaw.fi.
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