Vol 1 (2004) - Issue 6

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A First Decade of Corporate Restructuring in Finland

General statutory framework and history

Insolvency proceedings in Finland can be divided into two categories, according to whether the objective of the proceedings is liquidation or restructuring. The former category includes bankruptcy proceedings, as regulated by the new Finnish Bankruptcy Act of 2004. The latter category, on the other hand, includes the adjustment of debts of an individual, as enacted in the Finnish Act on the Adjustment of the Debts of a Private Individual of 1993, (the ‘Adjustment Act’), as well as corporate restructuring, as regulated by the Restructuring of Companies Act of 1993 (the ‘RCA’).

In the international context it should be noted that the Council regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings (the ‘Insolvency Regulation’) is applicable law in Finland.

Finnish bankruptcy proceedings are purely a matter of the liquidation of the subject of the proceedings and the fast realization of any assets, in order to satisfy creditors’ claims. Finnish bankruptcy regulations do not provide for any form of intermittent takeover of the subject of the proceedings, e.g. by a trustee, for the purpose of keeping a company viable until further measures, or in order to facilitate a possible sale of the business operations as a whole. At the commencement of bankruptcy proceedings, the debtor forfeits control of all leviable property, which, after the precise time of adjudication on the bankruptcy, is considered to belong to the creditors through the bankrupt’s estate.

The reorganization of an entity, on the other hand, as regulated by the RCA, means that the debtor retains the right to control the normal day-to-day activities of the company during the restructuring period, although an administrator has to give his consent to certain significant business decisions, such as taking out a new loan. The reorganization of a corporation is in many ways similar to the adjustment procedure for the debts of an individual, since the goal is to save the subject of the proceedings from bankruptcy.
The RCA was enacted in 1993, at a time when Finland was in the midst of the worst economic depression the country had faced since the end of the war in 1945. The pure liquidatory character of the bankruptcy regulation then in force soon proved insufficient to deal with the new economic conditions, which were forcing many companies, large and small alike, into bankruptcy. It was soon realized that many companies that in theory seemed to have prospects went bankrupt simply because of a momentous but drastic change for the worse in their own private finances. It was perceived that these companies did not ‘deserve’ to go bankrupt and be liquidated, but the legislation then in force had no instrument to offer for dealing with these kinds of situations.
The RCA, which was enacted as a result of this situation, is still in force, largely unchanged. Now, approximately ten years after the Act entered into force significant experience and practice has accumulated in and around the restructuring of companies. The RCA, which was enacted quickly at a time of need, has surprisingly met with only a little criticism and few demands for change. There has, as with any new regulations, been a need for smaller technical amendments to the Act, but the nature of the RCA is still the same as in 1993, and at present no concrete reforms have been proposed. One of the major criticisms that has been raised is that too many companies which could be written off as having ‘no hope’ are undergoing restructuring. These cases often naturally end up in bankruptcy sooner or later, something which is very much contrary to the idea of restructuring proceedings in the first place.

Brief overview of the RCA

The main purpose of the RCA, as mentioned before, is to provide a company that is in financial difficulties, but has the potential for survival with protection from its creditors in order to avoid bankruptcy. When restructuring proceedings are initiated, the court appoints one or more administrators. A company under restructuring retains the right to control its normal day-to-day operations during the restructuring period. However, consent from the administrator is required for important business decisions.
As a general rule, the initiation of restructuring does not affect the debtor’s contractual relationships except for those regarding debts and collateral.