The Eastern Finland Court of Appeal recently ruled on a bankruptcy estate's liability for a mutual real estate company's maintenance charges.
The shares in the mutual real estate company owned by the debtor conferred on the debtor a right of possession of office premises which the debtor had used in its business. The debtor's business was not continued by the bankruptcy estate, but the estate took measures to realise the shares. The estate contested its obligation to pay the company any maintenance charges that the company's shareholders had been obliged to pay and that had been charged to cover the company's expenditures.
The court ruled that any maintenance charges incurred after the bankruptcy had been commenced could not be held as liabilities of the bankruptcy estate, but rather as receivables from the debtor in bankruptcy (ie, the actual shareholder). It applied the principles established in a Supreme Court precedent regarding the liabilities of a bankruptcy estate in a case concerning a limited liability golf company's maintenance charges (2015:103).
According to the Bankruptcy Act, bankruptcy estates are liable for debts:
- based on a contract or commitment entered into by the estate or arising from the bankruptcy proceedings; and
- for which the estate is liable under Bankruptcy Act or another act.
The obligation to pay maintenance charges to a mutual real estate company is primarily based on a title to the shares in the company and the criteria for the shareholder's obligation for the payment are provided in the company's articles of association.
The Eastern Finland Court of Appeal first stated that declaring a debtor bankrupt does not transfer the title to the debtor's assets to the bankruptcy estate. Therefore, a bankruptcy estate's liability for maintenance charges cannot be based on a debtor's title to shares. The court also stated that, in the present case, the company had not claimed that the bankruptcy estate had specifically entered into an agreement constituting liability for the maintenance charges.
Referring to a Bankruptcy Act government proposal, the court stated that debts arising from bankruptcy proceedings are expenses based on:
- legal procedures;
- bankruptcy administrators' fees; and
- other costs relating to an estate's management.
Costs relating to an estate's management may include those arising from drawing up a debtor's account. The court considered that maintenance charges are not costs that can be considered as debts arising from bankruptcy proceedings.
Referring to Supreme Court precedent (2015:103), the court stated that the debtor's assets belonged to the bankruptcy estate by law. Bankruptcy administrators must take control over a debtor's assets and liquidate them. Such control and management over the debtor's assets does not constitute a bankruptcy estate's commitment to the debtor's obligations. As the bankruptcy estate had not actively used rights conferred by the shares in a manner that could not be considered estate administration in accordance with its obligations provided for in the law, it could not be held liable for the maintenance charges claimed by the company.
This decision further defines the scope of bankruptcy estates' liabilities and is a logical continuation of Supreme Court precedent in this area. As payments of bankruptcy estates' administrative expenses are privileged compared with claims against a debtor, the definition of 'administrative expenses' should be interpreted cautiously.
The bankruptcy of a shareholder in a mutual real estate company may increase the other shareholders' liabilities as in practice, the solvent shareholders must compensate for the lack of cash flow to the mutual real estate company caused by the bankruptcy. However, the effects on the solvent shareholders are not final if the bankruptcy estate realises the shares. The new shareholder would be liable for the debtor's failure to pay the maintenance charges.
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