I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY

In Finland restructuring and insolvency activity has been decreasing for many years. The Finnish economy is expected to finally recover after almost a decade of downturn. During 2016 the increase of total production was 1.4 per cent. In 2017 the GDP is expected to grow by 1.2 per cent and the growth is broader based than last year.2 The increase is mainly owing to the increasing confidence of the consumers as well as good indications in the rate of employment, both causing growth in private consumption. Private investments have also been increasing. However, it is to be noted that the industry production has grown only in a very moderate way. The economy is, nevertheless, expected to grow slightly in the coming years. The Finnish economic situation mirrors the global situation. There are concerns that politicians will not be able to implement labour law reforms. The rise of protectionism is also a growing concern.

The liquidity of companies seems to be adequate. There are sufficient funding possibilities in the markets, reflecting the companies' financial situation. On the other hand, the decreasing amount of bankruptcies can partly be explained by the assumption that many small companies do not go through the whole liquidation process as initiated bankruptcy proceedings will collapse because there are no funds to cover the costs of the proceedings and usually the debtors are not willing to participate by paying the costs.

Global events such as the worldwide economic crisis still influence the financial markets. From the Finnish perspective the main effect seems to be the relatively cheap price of funding. It has caused consumers to view the economic situation in a more optimistic way and to support the economic growth. In addition, the construction sector is growing, as there are many large-scale building initiatives ongoing. Furthermore, the level of the oil price and the value of the Russian rouble keep exports to Russia at a more moderate level than previously.

During 2016 there were 2,845 finalised bankruptcy proceedings, which is 10.2 per cent less than in 2015.3 In addition, the amount of bankruptcies has decreased by 29.6 per cent between January 2017 and April 2017.4 One of the main initiators in the bankruptcy proceedings, the Finnish tax administration, filed 55.6 per cent fewer bankruptcy applications between January 2017 and August 2017 than in the corresponding period in 2016.5

The majority of the bankruptcy proceedings have lapsed due to the lack of required funds to finance the proceedings. This indicates that the majority of the bankrupt companies are small.

In 2016 there were 6.8 per cent fewer finalised restructuring proceedings than in 2015.6 However, between January 2017 and April 2017 there were 118 applications for restructuring, which is 14.6 per cent more than in the corresponding period in 2016. In addition, 98 of these applications were approved. During 2016 the majority of restructuring proceedings ended with a court-approved restructuring programme. However, restructuring proceedings are very often discontinued as the applicant goes bankrupt.

II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK

Finnish legislation recognises two alternative overall insolvency proceedings for companies: bankruptcy and restructuring.7 Bankruptcy aims to divide the remaining assets of an insolvent company between its creditors. Restructuring aims to arrange the debts and to rehabilitate the viable business of the company in order to keep the business running.

i Bankruptcy proceedings

Bankruptcy proceedings are regulated in the Finnish Bankruptcy Act8 and begin with a district court's order upon an application. The application may be filed by the debtor or by a creditor. In practice, a majority of bankruptcy proceedings commence by a petition of Finnish insurance companies or tax authorities.

The main prerequisite for a bankruptcy is that the company is insolvent, (i.e., other than temporarily unable to repay its debts as they fall due). When the debtor itself petitions for a bankruptcy, its own announcement of insolvency is generally sufficient. If the bankruptcy has been petitioned by a creditor, the district court must investigate the claimed insolvency in more detail. If the debtor contests the petition, the matter will be handled in the court as a non-contentious civil case.

Unless the debtor proves otherwise, the district court generally deems it insolvent if: (1) the debtor has discontinued its payments; (2) it has been determined in enforcement proceedings that the debtor cannot repay the claim in full; or (3) the debtor has not repaid the clear and due claim of the creditor within a week of the receipt of a reminder. In practice debtors are deemed insolvent relatively easily. A debtor may not be declared bankrupt on the petition of a creditor if the creditor holds adequate collateral. Bankruptcy may be ordered reversed on the joint petition of the debtor and the creditor who filed the bankruptcy petition or, if the debtor has been declared bankrupt on his or her own petition, on the petition of the debtor. The application for reversal must be filed within eight days of the order of bankruptcy. There must be a valid reason for the reversal. Said valid reason is, in practice, usually that the receivables of the creditor who filed the bankruptcy petition have been paid.

At the beginning of a bankruptcy, a district court appoints an estate administrator. The estate administrator is usually an attorney-at-law that the creditors have suggested. When bankruptcy proceedings begin the debtor loses its authority over the company's assets and the assets are transferred to the possession of the estate and are governed by an estate administrator. The creditors who have a claim in bankruptcy proceedings exercise their authority over the bankruptcy estate in the creditor's meeting. The main rule is that the creditors must lodge their claims before a certain lodgement date in order to become creditors of the bankruptcy process.

A claim in bankruptcy proceedings means a debt is owed by the debtor and based on a commitment or other legal basis that has arisen before the beginning of bankruptcy. The debts that have arisen after the beginning of bankruptcy are not claims in the bankruptcy proceedings and the bankruptcy estate is obliged to pay them when they fall due. This means that a bankruptcy estate can also be declared bankrupt.

The purpose of a bankruptcy is to divide between the creditors as high a level of disbursement as possible. Secured debts have the primary right to disbursements. A bankruptcy ends either with the certification of the disbursement list and the payment of disbursements or with the collapse of proceedings. In practice many small companies do not go through the whole liquidation process as the proceedings collapse because there are no funds to cover the costs of the proceedings. Usually the debtors are not willing to participate in funding the bankruptcy process. In some cases, the bankruptcy may continue as a public receivership, in which the costs of bankruptcy proceedings are paid from state funds in so far as the funds of the bankruptcy estate are insufficient to cover the costs of bankruptcy proceedings. Commencing the public receivership requires in practice adequate public interest to conduct the estate administration. This means a need to clarify the estate, for example, in order to be able to file a request for criminal investigation to police officials. The public receivership can also be commenced if the funds are not sufficient to cover the costs of the bankruptcy proceedings or if there are other significant reasons.

The estate administrator is obliged, within two months from the beginning of bankruptcy, to draft an estate inventory and a debtor description (the trustee's clarification and observations of the debtor's business and inter alia reasons that led to insolvency, as well as observations made by the trustee). As from 1 March 2013 the estate administrator is obliged to present the debtor description to the prosecutor, the debtor, the main creditors and, at request, also to other creditors and the pretrial investigation authority, namely, the police. Also as from 1 March 2013 the estate administrator is - with certain limitations - obliged to draft a request for investigation for police authorities if the estate administrator has any reason to suspect that the debtor has committed a crime.

ii Restructuring proceedings

Restructuring proceedings are regulated in the Finnish Restructuring of Enterprises Act.9 Restructuring proceedings include debt arrangements that are made in order to rehabilitate a distressed and insolvent company's viable business and to ensure its continued viability.

Restructuring proceedings require that the company is insolvent or at least faces imminent insolvency, but should commence before the cash flow forces the company or its creditors to reconsider bankruptcy. Restructuring proceedings are fairly expensive and time consuming as it normally takes about a year before a possible restructuring programme is approved and the proceedings end. If the company's assets are not sufficient to cover the costs of the proceeding, the proceeding cannot be started. During the proceedings the company normally faces difficulties with suppliers etc., owing to entries in the official records stating that the company is undergoing restructuring proceedings. These entries are indicators of insolvency and they tend to lead to suppliers etc. requiring payment up front, which can be harsh on an insolvent company.

Restructuring proceedings cannot be started if the debtor is insolvent and it is probable that the restructuring programme will not remedy the insolvency or prevent its recurrence other than for a short period, nor can they be started if it is probable that the debtor will not be able to repay debts arising after the commencement of the proceedings. In addition, any debtor's offences or other criminal actions by the company or anyone acting on its behalf, or material defects in the company's books, will also form a barrier for restructuring proceedings.

The application for restructuring proceedings may be filed by the debtor, creditor, several creditors together or a probable creditor. Restructuring proceedings begin with a district court's order upon an application, which normally is filed by the debtor company itself. When the restructuring proceedings begin, the court appoints an administrator. A court-appointed administrator, most often an attorney-at-law, will help the company to find different ways of rehabilitating the business.

The administrator shall prepare a report of the debtor's assets, liabilities and other undertakings and regarding the circumstances that affect the financial position of the debtor and its expected development. The purpose of the report is to enable the creditors to assess the possibilities for an enforceable restructuring programme. The administrator monitors and supervises the debtor's activities that are subject to the proceedings and sees to an audit of the debtor's activities.

The administrator's main task is to prepare a draft-restructuring programme together with the debtor and with the assistance of the creditors. The debtor and the creditors are also allowed to submit their own competing programmes to the court. It is common for the debtor to submit a competing programme but very rare for the creditors to do so. There are no regulations or case law on how a creditor-based programme should be dealt with together with the administrator's programme. The restructuring programme shall specify the measures and arrangements designed to improve the debtor's activities and the measures and arrangements that affect the status of the debtor and the creditors, as well as the reasons for the same. The programme should contain provisions on the debtor's activities, whether they are to be continued or altered, the measures and arrangements relating to the assets of the debtor, such as allowing the debtor to retain assets, the liquidation or transfer of assets, the manner of liquidation or transfer, and the resulting or expected revenue from the same, arrangements regarding restructuring debts and the duty to make supplementary payments, arrangements regarding the personnel and remunerations to the debtor or an entity or person close to it for their services, and the financing and monitoring of the programme.

The restructuring programme must be approved by a majority of the creditors of the company. Therefore, if there is a justifiable reason to believe that the necessary conditions for the preparation or approval of a restructuring programme for the debtor do not exist, the application should not be approved in the first place or the proceedings should be interrupted.

One significant difference between restructuring and bankruptcy proceedings is that the commencement of restructuring has no effect on the debtor's authority to dispose of its property and to decide on its activities. Some activities, such as taking on a new debt or the transfer of business require the consent of the court-appointed administrator.

The commencement of restructuring proceedings has no effect on the existing undertakings of the debtor, but the commencement of proceedings interrupts the accrual of overdue interest on restructuring debts. An interdiction of repayment of restructuring debts follows from the commencement of the proceedings. The restructuring debts can only be paid based on an approved restructuring programme or with the administrator's approval (e.g., small debts). After the commencement of the proceedings, no measures can be directed at the debtor in order to collect on a restructuring debt. This provides the debtor time to find ways to rehabilitate the business.

Debt arrangements cover only restructuring debts that have arisen before the filing of the restructuring application, and all debts arisen after the filing must be paid when falling due. Restructuring proceedings cannot be used to prevent a creditor from collecting his or her claim or otherwise to violate the rights of a creditor. There must, hence, be a genuine aim to rehabilitate the company.

The restructuring programme should contain and specify, for example, the measures and arrangements that are meant to improve the debtor's business, the measures and arrangements that affect the status of the debtor and the creditors, as well as the reasons for the same. The programme must also contain a payment programme, which includes a schedule of payments of the restructuring debts. The payment programme includes information about the percentage to be cut from the debts. The average cutting percentage ought to be around 40 to 60 per cent. There are no provisions on how long the programme can be but the majority of programmes are between five to 10 years, only a small minority lasts less than two years or more than 10 years.10

When a restructuring programme has been approved by the district court, all entries are removed and the company can perform its business with only the restrictions that are mentioned in the programme. The programme itself is enforceable, so should the debtor not pay its restructuring debts in accordance with the programme or otherwise act as required in the programme, a creditor can file for bankruptcy.

iii Duties of directors of companies in financial difficulties

The Finnish Limited Companies Act11 includes provisions covering the directors' liabilities in financial difficulties. Many of the provisions originate from the need to inform the shareholders and debtors as well as official authorities of the difficulties. The main principles according to the Finnish Limited Companies Act are that the management of the company shall act with due care and promote the interests of the company. The requirement to act with due care is connected to the liability issues: the board members, CEO as well as the member or members of the administrative board are always liable for the damages for the loss that they, in violation of the duty of care, or by violation of other provisions of the said Act or the articles of association of the company, have deliberately or negligently caused to the company while in office.

The requirement to act with due care can be interpreted widely and thus it can be applied to various situations. The definition of due care shall be interpreted by comparing the actual actions taken to actions expected from a diligent person in an equivalent position. The concept of due care and the liability of the management has been specified through case law. It is typical that the liability issues are observed thoroughly in bankruptcy situations as it is in the interest of the bankruptcy estate as well as the creditors. The liability is mainly collective covering the board as a whole and can take place simply on the basis of participation in a specific board meeting. It is also typical that the liability of the CEO is wider than the board members owing to the CEO typically being better informed and having a greater ability to act when needed.

When insolvency is forthcoming or a possible scenario, the equity of the company often turns negative. This triggers the duty to register the loss of share capital. The same applies to publicly listed companies, in which case the obligation to make a register notification is triggered when the equity of the company is less than half of the share capital. The board is responsible for making the register notification. Neglecting the register notification is a violation of the Finnish Limited Companies Act and may lead to personal liability of board members.

The Finnish legislation does not include any obligation for a company to start insolvency proceedings. The company may continue loss-making business. However it is noted that if the equity has turned negative, the rules of the Criminal code of Finland12 of and the rules of the Act on Recovery to a Bankruptcy Estate13 shall apply. The board can also be seen to have caused the company damage if they did not apply for insolvency proceedings in time. The criminal aspect includes acts aiming to favour a creditor and dishonesty by a debtor. The main duties the directors of a distressed company have relate to the obligation to provide accurate information to all parties. This means that the board needs to be duly informed by the CEO and all the contracting parties will need to be aware of the financial situation of the company in order to be able to evaluate the risks involved. The board should take extra measures in order to confirm that the decisions are properly documented.

iv Clawback actions

In Finland clawback actions are regulated in the Act on Recovery to a Bankruptcy Estate, and the Act is applicable to both bankruptcy and restructuring proceedings.14 Transactions made by the debtor prior to applying restructuring or bankruptcy proceedings may be subject to clawback if the transactions are harmful for the creditors.

The main and most commonly applied provisions are the general recovery provision (Section 5) and provision regarding the recovery of payment of a debt (Section 10). They are typically invoked together, but there are also cases that are based only on the general recovery provision.

According to Section 10, a payment of a debt carried out later than three months prior to applying the insolvency proceeding may be subject to clawback if the payment has been performed with unusual payment instruments or prematurely or with an amount that is considerable in relation to the assets of the debtor. An amount corresponding to around 10 per cent of the net assets of the estate is considered to be considerable. If the payment has been made to a person closely associated to the debtor, the time limit for clawback is two years. Clawback may be performed even if the transaction itself is valid and the creditor has acted in good faith.

The general recovery provision in Section 5 covers all kinds of transactions up to five years prior to applying of the insolvency proceedings. However, Section 5 is applicable only to inappropriate transactions that are made in order to evade the legal consequences of bankruptcy or restructuring. The prerequisite for applying this recovery provision is that the creditor has acted in bad faith.

In addition to the aforementioned clawback provisions, the Finnish Act on Recovery to a Bankruptcy Estate includes several specific provisions regarding for example, clawback of gifts, unreasonable benefits and collateral.

The clawback provisions are not applicable to customary transactions. Therefore, a transaction may not be recovered if it is, considering the specific circumstances of the case, an usual payment related to the ordinary business. In order to be subject to clawback, the transaction must be in deviation from previous practices and related to the future insolvency of the company.

A clawback claim may be made by a creditor or an administrator. A valid transaction made by the debtor is recovered, and the assets transferred in the transaction are returned to the bankrupt's estate or, in restructuring proceedings, to the company. However, in restructuring proceeding if the claim for clawback is carried on solely by a creditor (without the support of the administrator), the assets are transferred directly to the creditor. If the transferred assets do not exist anymore, the creditor must compensate the value of the assets.

Clawback claims are common especially in bankruptcies in Finland. As the clawback regulations may be used to recover actions that without the insolvency proceedings would be considered valid, clawback claims are presented in almost every bankruptcy proceeding that does not lapse. The threshold in the presentation of evidence is considered to be fairly low.

iii Significant transactions AND key developments

There have been no fundamental alterations to the insolvency legislation or legal praxis. One of the current hot topics is the bankruptcy estate's liability for the waste caused by the bankrupt company as well as the environmental views regarding the role of, for example, the bankruptcy estate. The below sections concerning future developments include our views of the possible forthcoming reforms.

During the last years there have been problems regarding cost-effectiveness in the retail trade sector. The increasing global trend of online shopping is likely to be one major reason. As a result, we have seen some large-scale bankruptcies and restructuring proceedings in this field. The latest bankruptcy case was a company named Anttila, which was declared bankrupt in July 2016. At the time of bankruptcy the company had a chain of 28 department stores and during 2014 the company employed approximately 1,500 persons. It is argued that the company's lack of both cost efficiency and specialisation together with the pressure caused by internet trade were the major reasons for the bankruptcy.

One of the latest major financial distresses in the retail trade sector was the restructuring of a chain of retail shops named Hong Kong Oy. The entity consisted of 25 warehouses. In January 2017 restructuring proceedings of Hong Kong Oy commenced. The same happened to a major retail chain named Seppälä Oy, which was granted restructuring proceedings in April 2017. At the time of the major financial difficulties the company had 78 stores, and according to the restructuring decision the company's problems were caused mainly by too wide structure causing costs the business could not cover. The company intends to reduce the amount of stores to 39. Both Hong Kong Oy and Seppälä Oy sought restructuring proceedings only after their creditors had filed a petition for the bankruptcy.

Some smaller publicly listed companies (Talvivaara Mining Company Plc, Trainers' House Oyj, Componenta Corporation) have entered into restructuring proceedings during the last few years. The reason for these companies' insolvency differ. Talvivaara Mining Company Plc was a holding company whose daughter company entered into restructuring proceedings at the same time but entered into bankruptcy proceedings after a short time. Restructuring of a holding company with no business of its own and no valid holding business forced the company to undertake in the restructuring programme to bring new business to the company within a specific period. Talvivaara Mining Company Plc had the exceptionally low payment of 1 per cent approved by the court. Componenta Corporation has also acted as a holding company. One binding factor for the above-mentioned companies is conversion of receivables as a means of restructuring during the proceedings. The companies have either during the proceedings issued a convertible loan, the noteholders of which have the right to convert their receivables into shares or issued new shares to their restructuring creditors. There are no regulations on how such a conversion of receivables should be enforced but it has been accepted by the courts. There is now a working group to discuss whether a forced conversion could be added in the restructuring proceedings.

At the same time as Componenta Corporation filed an application for restructuring in Finland, one daughter company in Finland and several daughter companies in Sweden filed for restructuring and one daughter company filed for bankruptcy in the Netherlands. This is the most international Finnish insolvency case in the past few years.

iv RECENT AND Future developments

The Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (the New Insolvency Regulation) has entered into force on 26 June 2017. The obligation to establish an insolvency register set in the New Insolvency Regulation will be in force as of 26 June 2018. The New Insolvency Regulation replaced the previous Regulation (EC) No. 1346/2000.

The New Insolvency Regulation is directly applicable in Finland as well as in other member states of the EU (excluding Denmark), that is, it is in force without also being implement into national legislation. Finland is, however, currently preparing several amendments to the national insolvency Acts. The first amendments based on the New Insolvency Regulation came into force on 26 June 2018 and the rest of the suggested amendments are expected to enter into force during 2018.

The central matters in the New Insolvency Regulation are to regulate: (1) which member state is competent to commence insolvency proceedings; (2) which Member State's jurisdiction is applicable; and (3) how the decisions of other Member States are recognised and implemented. In addition, the Regulation includes new provisions regarding insolvency registers and insolvency proceedings of groups of companies.

As a result of the national implementation measures, the current Finnish insolvency registers will be expanded and made available to the public via internet and the notice procedures in insolvency proceedings will change. The amendments include also several practical matters (e.g., in future filing of claims in insolvency proceedings may also be carried out in English).

Another EU-based regulation that may later lead to amending the national insolvency Acts is the Proposal for a Directive of the European Parliament and of the Council on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU (COM (2016) 723 final). This could have an impact inter alia on pre-pack proceedings, which are currently not regulated in Finnish legislation.

In addition to the aforementioned amendments based on EU law, the Finnish government has established a working group to examine the possibility of regulating the liability for environmental damages in the Act on Bankruptcy and to simplify the provisions of the said Act. The working group is currently preparing its suggestions and is expected to submit them in Autumn 2017.

1 Martina Kronström and Matti Nousiainen are counsels and Anna Silventoinen is an associate at Uoti, Sotamaa & Co Attorneys-at-law.

2 Ministry of Finance, Economical Review Spring 2017, Publication 17a/2017.

3 Statistics Finland, published 7 June 2017.

4 Statistics Finland, published 17 May 2017.

5 Statistics Finland, publication 17 May 2017.

6 Statistic Finland, publication 7 June 2017.

7 There are two other insolvency methods, the adjustment of the debts of a private individual and the general enforcement, but they are not presented here in more detail.

8 Finnish Bankruptcy Act 20 February 2014/120. The Act came into force on 1 September 2014.

9 Finnish Restructuring of Enterprises Act 25 January 1993/ 47, came into force on 8 February 1993.

10 The Office of Bankruptcy Ombudsman 24 January 2017.

11 The Finnish Limited Companies Act 21 July 2006, came into force 1 September 2006.

12 Criminal Code 19 December 1889/39.

13 Act on Recovery to a Bankruptcy Estate 26 April 1991/ 758, came into force 1 January 1992.

14 Act on Recovery to a Bankruptcy Estate 26 April 1991/ 758, came into force 1 January 1992.