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Insolvency means that a debtor is other than temporarily unable to pay his debts when they fall due. In such cases insolvency proceedings mean an enforcement proceeding which applies simultaneously to all of the debtor’s debts.
There are three different types of insolvency proceedings in Finland: bankruptcy, reorganisation of an undertaking and adjustment of the debts of a private individual. The replies concerning bankruptcy are based on the provisions of the Bankruptcy Act (120/2004) which entered into force on 1 September 2004. The Act on the Reorganisation of Undertakings (47/1993) and the Act on the Adjustment of the Debts of a Private Individual (57/1993) entered into force on 8 February 1993.
Bankruptcy is a liquidation procedure aimed at realising a debtor’s assets and distributing the proceeds to the creditors. Reorganisation of undertakings and adjustment of the debts of private individuals are rehabilitation procedures to restore financial soundness and allow debtors to overcome their financial difficulties.
The debtor may also reach an agreement with his creditors on payment of his debts and other arrangements outside official insolvency proceedings. There are no legal provisions governing arrangements which have a voluntary basis.
The general requirement for opening all three types of insolvency proceedings is that the debtor is insolvent.
Bankruptcy is of general application so both natural and legal persons may be declared bankrupt. Either the debtor or the creditor can apply for a declaration of bankruptcy.
The general requirement for a declaration of bankruptcy is the insolvency of the debtor. The bankruptcy laws set out several possible sets of circumstances to make it easier to establish whether someone is insolvent; a debtor is considered to be insolvent if his circumstances are among those given, unless there is any indication to the contrary.
Possible circumstances of insolvency:
where the debtor states that he is insolvent and there are no special grounds on which to reject his statement;
where the debtor has defaulted on his payments;
where, in recovery proceedings during the six-month period prior to the submission of an application for bankruptcy, it has become apparent that it will not be possible to collect sufficient funds from the debtor to discharge the debt in full; or
where the debtor, who is or who has been required by law during the year immediately preceding the submission of the application for bankruptcy to keep accounts for his business, does not pay an established outstanding amount due within one week of receiving a creditor’s demand for payment. The creditor must make his application for bankruptcy within three months of the expiry of the time-period stated for payment of the debt in his demand for payment.
Where the creditor makes the application for a declaration of bankruptcy the amount claimed by the creditor must be based on a judgment or other enforceable grounds or must otherwise be evident. The amount claimed does not have to be overdue. There are restrictions on applications for bankruptcy based on small claims.
The court ensures that a notice about the commencement of bankruptcy proceedings is published promptly in the Official Journal. The notice may also be published in any daily newspaper. It is the duty of the receiver to inform creditors of the commencement of bankruptcy proceedings. An entry on the commencement of bankruptcy proceedings is also made in, among others, the Register of Bankruptcy and Reorganization Proceedings, the Trade Register, the Register of Land Ownership and Mortgages, the Shipping Register, the Shipping Maintenance Register, the Aircraft Register, the Business Mortgage Register, the Vehicle Register and the Securities Register.
An undertaking carrying on any kind of business can be the subject of reorganisation proceedings, as can a private trader. Certain undertakings, however, such as credit and insurance institutions subject to special regulation and control, are outside the scope of reorganisation of undertakings proceedings. Either the debtor or the creditor may apply for reorganisation proceedings. Most applications are made by debtors.
Proceedings to reorganise an undertaking may commence where the debtor is unable to meet a payment and there is no obstacle in law to the commencement of the proceeding. An obstacle may consist in insolvency which cannot be resolved by a reorganisation programme or a situation where the debtor’s assets are insufficient to cover the costs incurred as a result of the proceeding. Reorganisation proceedings can also commence where the debtor is in danger of insolvency. In such cases the creditor may have the proceeding opened only in special circumstances. Additionally, the reorganisation proceeding may be opened where the debtor and two creditors make a joint application to that end. In such cases the joint claims of the creditors must represent at least one-fifth of the debtor’s known debts.
The court publishes a notice of a decision to open reorganisation proceedings in the Official Journal. It is the duty of the liquidator to give notice of the commencement of the proceeding to creditors. An entry on the commencement of bankruptcy proceedings is also made in, among others, the Register of Bankruptcy and Reorganization Proceedings, the Trade Register, the Register of Land Ownership and Mortgages and the Securities Register.
Only a natural person can apply to have debts adjusted. The debt adjustment proceeding can also adjust debts linked to a business which has ceased trading.
The opening of debt adjustment proceedings requires the debtor to be insolvent and unable reasonably to improve his solvency in order to be able to discharge his debts. Also of relevance are the reasons for insolvency (including illness, unemployment) , the total amount owed and the debtor’s ability to pay. A natural person carrying on a business may apply for readjustment of debts, subject to certain requirements. There must be no impediment in law to the debt adjustment proceedings (e.g. debt incurred through criminal activity or clearly negligent running up of debts).
Notice of the commencement of debt adjustment proceedings is given to the debtor and creditors. Notice is given by the court unless the court instructs the liquidator to do so. The court must also give notice of the commencement of debt adjustment proceedings to the distraint authorities both for the debtor’s place of residence and for the local authority where any real estate is situated.
A declaration of bankruptcy is a matter for a court to determine. The competent court is a general court of first instance (käräjäoikeus (District Court) ). A court also rules on the termination or other early closure of bankruptcy proceedings. The court appoints the receiver, confirms the distribution scheme and resolves disputes over claims. The rulings of the court may, with a few exceptions, be the subject of an appeal.
Creditors exercise supreme authority over an estate in bankruptcy. The most important decision-making body is the creditors’ meeting. Creditors’ votes are weighted according to the amount of their claims. An appeal against the creditors’ decisions may be lodged with a court.
The receiver has a central role in the administration of an estate in bankruptcy. Among other things, the job of the receiver is to represent the estate and see to its routine administration, draw up the estate inventory and a debtor report, receive papers lodging claims and draw up a proposed distribution scheme. The receiver also sees to the care and sale of assets belonging to the estate and distributes them. The person appointed as the receiver must meet the requirements for competence set out in law and be independent both of the debtor and the creditors.
The debtor is required to cooperate in the winding-up of the estate. The debtor must give the receiver information to enable the receiver to draw up the inventory and confirm it as being correct. The debtor has the right to receive information from the estate and to participate and express his views in creditors’ meetings in matters on which a decision is to be made.
The commencement of proceedings to reorganise an undertaking is a matter for a court to determine. A court also appoints a liquidator and where appropriate a committee of creditors. It also confirms the reorganisation programme. Matters concerning the reorganisation of an undertaking are dealt with by certain courts of first instance. The rulings of the court may, with a few exceptions, be the subject of an appeal.
The liquidator draws up a report on the debtors’ assets and debts and a proposal for a reorganisation programme. He also oversees the continued operation of the debtor undertaking. The person appointed as the liquidator must meet the requirements for competence set out in law and be independent both of the debtor and the creditors.
The creditors’ committee represents the creditors and assists the liquidator in its capacity as an advisory body. A committee is not appointed where, because of the low number of creditors, none is required.
The creditors are entitled to be heard at various stages of the proceeding. The proposed reorganisation programme drawn up by the liquidator is forwarded to the creditors for comment. In the event that not all the creditors agree to endorse the programme, a vote is taken on the final programme. The creditors are divided into groups for voting purposes and the programme may be endorsed with the approval of group majorities.
The debtor is required to provide information to the court and the liquidator and to help implement the reorganisation proceeding. The debtor is entitled to submit his own suggestions for the reorganisation programme.
The commencement of proceedings to adjust the debts of a private individual is a matter for a court to determine. Where necessary, the court appoints a liquidator. The court is also responsible for confirming the payment programme. The rulings of the court may, with a few exceptions, be the subject of an appeal.
The task of the liquidator is to draw up a proposed payment programme and to carry out other tasks assigned to him by the court. For example, the liquidator may be given the task of realising the debtor’s assets. The liquidator must meet the requirements for competence set out in law and be independent both of the debtor and the creditors.
If no liquidator is appointed the debtor draws up a proposed payment programme himself. The debtor is required to provide information to the court, the liquidator and the creditors, and to help ensure that the debt adjustment proceeding is carried out as provided for. The debtor receives assistance from the local authority finance and debt advisory service.
Creditors are given an opportunity to comment on the debtor’s application and proposed payment programme.
All the property of the debtor at the time of the commencement of bankruptcy proceedings and which the debtor receives prior to the closure of those proceedings belongs to the bankrupt estate. However, where the bankrupt is a natural person, property and unearned income received by him after the commencement of bankruptcy proceedings do not form part of the bankrupt estate.
At the opening of bankruptcy proceedings the debtor forfeits his authority over assets of his which form part of the bankrupt estate. That authority is transferred to the estate (the creditors).
During the bankruptcy proceedings the debtor may, in certain circumstances, be subject to restrictions on his personal liberty (e.g. be forbidden to leave the country). The debtor’s competence to act is also restricted in certain respects. The debtor may not, for example, during bankruptcy proceedings found a company or be a company board-member. Those restrictions have significance chiefly when the debtor is a natural person.
Bankruptcy does not have the effect of discharging a debtor from his debts. The debtor remains liable for those debts which are not paid during the bankruptcy proceedings. Liability for debts is in practice of significance only when the debtor is a natural person, because bankruptcy generally results in the winding-up of a legal person. The debtor does, however, have the opportunity to be discharged from those debts which exceed his ability to pay under proceedings for adjusting the debts of a private individual.
The commencement of bankruptcy proceedings precludes separate enforcement of claims in bankruptcy such as distraint, with a few exceptions such as secured claims.
Pursuant to Council Regulation (EC) No 1346/2000 the liquidator may request that notice of the opening of insolvency proceedings be published in any other Member State (Article 21) and be registered in the registers kept in the other Member States (Article 22). Bankruptcy proceedings which have opened in other Member States are published in Finland in the Official Journal at the liquidator’s request. The Oikeusrekisterikeskus (Legal Register Centre - www.oikeus.fi/oikeusrekisterikeskus/) is responsible for publication.
In Finland, bankruptcy proceedings which have opened in other Member States are also registered at the liquidator’s request in the Register of Land Ownership and Mortgages, the Trade Register, the Business Mortgage Register, the Shipping Register, the Shipping Maintenance Register, the Aircraft Register, the Vehicle Register and the Securities Register. The entry is made by the registrar for the register concerned.
An application for an entry in the Register of Land Ownership and Mortgages is made to the District Court which has jurisdiction over the area in which the real estate is located (www.oikeus.fi/).
The registrar for the Trade Register and the Business Mortgage Register is the National Board of Patents and Registration (www.prh.fi/).
The registrar for the Shipping and Shipping Maintenance Registers is the Finnish Maritime Administration (www.fma.fi/palvelut/alusrekisteri/).
The registrar for the Aircraft Register is the Civil Aviation Administration (www.ilmailulaitos.fi/ilma_alusrekisteri/).
The registrar for the Vehicle Register is the Finnish Vehicle Administration (www.ake.fi/).
The registrar for the Securities Register is the Finnish Central Securities Depository Oy (www.apk.fi/).
Publication and registration are not required by law if the debtor’s place of business is in Finland.
A debtor in respect of whom reorganisation of undertaking proceedings are pending cannot be declared bankrupt. A court before which an application is pending can implement a temporary prohibition on payment, collection and enforcement even before the proceeding has opened.
A prohibition on payment, collection and enforcement is in force during proceedings to reorganise an undertaking. The prohibition covers all debts incurred prior to the opening of the proceeding, including secured debts.
During reorganisation proceedings the debtor does not forfeit his authority. The activity of the undertaking continues but under the liquidator’s supervision. The debtor must obtain the liquidator’s approval for certain activities.
During reorganisation proceedings the reorganisation programme is confirmed to the debtor; it may envisage various measures to restore the financial soundness of the debtor’s activities. This may involve adjustment of debts, which may have a bearing on the terms of the debts, including secured debts, which arose prior to the opening of the proceeding. The measures may also cover the transfer, operation, management, organisation, staff or capital of the undertaking. Where a debtor fulfils his payment obligations under the confirmed reorganisation programme, he is discharged from paying the amount of a debt which exceeds the amount confirmed in the programme.
A debtor in respect of whom an application for debt adjustment proceedings is pending cannot be declared bankrupt. A court can implement a temporary prohibition on payment, collection and enforcement even before the proceeding has opened.
A prohibition on payment, collection and enforcement is in force during proceedings to adjust a private individual’s debts. The prohibition covers all debts incurred prior to the opening of the proceeding, including secured debts.
A payment programme tailored to the debtor’s genuine ability to pay is confirmed to the debtor as part of the adjustment proceedings. The payment programme is of a specified duration, generally five years. The payment programme covers all debts incurred prior to the opening of the proceeding, including secured debts. Where a debtor fulfils the payment obligations confirmed in the payment programme, he is discharged from the rest of his debts.
In debt adjustment proceedings the non-essential assets of the debtor are realised. In certain circumstances the debtor may keep a dwelling owned by him.
Bankruptcy does not essentially affect the right of a secured creditor to realise his security. The estate in bankruptcy, however, has the right to prohibit the sale of secured assets (e.g. immovable property) for a prescribed time, where necessary to protect the interests of the bankrupt estate. Moreover, in certain circumstances the estate in bankruptcy has the right to sell secured assets with the permission of the court. The secured creditor must also notify the receiver of his secured claim. The purpose of this is to facilitate the winding-up of the estate. Moveable property of a debtor undertaking may be the subject of a business mortgage. A business mortgage gives rise to special preferential rights in respect of receipt of payments. Fifty per cent of the value of the mortgaged assets is paid in respect of the creditor’s claim. Final claims are non-preferential irrespective of any business mortgage which has been registered as secured against such assets.
Where a debtor has acquired assets on preservation of title terms, those terms are also binding, in certain circumstances, on the estate in bankruptcy. The estate is entitled to become party to an agreement instead of the debtor and thereby keep the assets under its administration.
The creditor has the right to set off the amount he is claiming from the debtor against his liabilities to the debtor at the opening of bankruptcy proceedings. The right of a credit institution to effect set-off is restricted where the debtor has an account at the credit institution which may be used for payment transactions. Otherwise the right to effect set-off is restricted chiefly on grounds intended to prevent it being abused.
The employees of a debtor undertaking are generally given notice upon commencement of bankruptcy proceedings. The receiver must establish the amounts owing to employees and the extent to which such amounts can be paid in the form of a pay guarantee.
An undertaking undergoing reorganisation continues to trade. The opening of reorganisation proceedings has no effect on commitments already entered into by the debtor, unless otherwise provided for in law.
In order to ensure the success of reorganisation proceedings, the reorganisation also has an effect on the status of secured creditors. The prohibition on payment, collection and enforcement also applies to secured creditors. The reorganisation programme may have effects, subject to certain restrictions, on the terms of secured debts as well.
A creditor does not (with certain exceptions) have the right to effect set-off in reorganisation proceedings.
Arrangements concerning staff may have to be implemented as a reorganisation measure.
Subject to certain restrictions, secured debts can also be adjusted as part of the debt adjustment proceeding. The prohibition on payment, collection and enforcement also applies to secured debts.
The Recovery to an Estate in Bankruptcy Act, which entered into force in 1992, deals with the setting aside of transactions. A transaction may be set aside in bankruptcy proceedings as well as in proceedings to reorganise an undertaking or adjust the debts of a private individual.
As part of recovery, an intrinsically lawful transaction performed by the debtor prior to the bankruptcy proceeding is set aside. Recovery is therefore different from civil law means by which a transaction may be regarded as void or declared invalid.
The grounds for recovery can be classed as being subjective or objective. For there to be subjective grounds for recovery the debtor must have behaved improperly towards creditors and the other party to the transaction must have acted in bad faith. This ground is available for all types of transaction.
Objective grounds for recovery can be a means of setting aside transactions which are, typically, inappropriate and detrimental to creditors. It is not therefore necessary for intent to defraud to be substantiated. Objective grounds apply to certain transactions, such as the liquidation of debt and the lodging of security during the recovery period which is normally the three months prior to the appointed date. For example in bankruptcy proceedings the appointed date is the date on which the application for bankruptcy was made to the court.
In bankruptcy proceedings a creditor whose claim on the debtor arose prior to the opening of bankruptcy proceedings (claim in bankruptcy) may receive a distribution. The creditor is required to lodge his claim. Lodgement is not, however, necessary where the receiver regards the claim in bankruptcy to be evident without it.
Claims must be lodged in writing. The statement lodging the claim must refer among other things to the amount and grounds of the claim, and the preferential status sought for the claim and the grounds on which that status is sought. The document which constitutes the basis of the creditor’s preferential claim must be identified in the statement if it is not forwarded to the receiver.
The creditor must forward the statement lodging his claim to the receiver on the lodgement date at the latest. The lodgement date is determined by the receiver, who also sees to the publication of the announcement concerning lodgement and notifies the creditors of lodgement. A creditor may lodge his claim even after the lodgement date, but in such cases must pay a late lodgement fee to the bankrupt estate.
The receiver examines the claims lodged and drafts a proposal as to how the assets of the bankrupt estate should be divided among the creditors (proposed distribution scheme). The court confirms the proposed distribution scheme. Uncontested lodged claims are regarded in bankruptcy proceedings as having been admitted.
Creditors receive a payment from the debtor’s funds in accordance with the Arrangements for Payment of Creditors Act. There are not many preferential claims. Where they do exist, they are chiefly secured claims, claims which have arisen in connection with the reorganisation of an undertaking and maintenance allowances. Otherwise the debtor’s assets are divided proportionately in accordance with the amount of the claims.
Reorganisation of an undertaking covers all debts arising prior to the opening of the proceeding. The liquidator’s job is to establish the debtor’s creditors and debts. The creditors have the opportunity to correct information relating to a claim by an appointed date. Creditors receive a payment in accordance with the reorganisation programme confirmed by the court.
Confirmation of the reorganisation programme means, with some exceptions, the extinction of reorganisation debts which were unknown for purposes of the reorganisation.
Debt adjustment covers all debts arising prior to the opening of the proceeding. The debtor must make known all his debts. There is no requirement to lodge a claim. The debtor or liquidator draws up a proposed payment programme. Creditors are offered the opportunity to comment on the proposed payment programme. The debtor makes payments to the creditors in accordance with a payment programme which has been confirmed by a court.
In bankruptcy proceedings assets belonging to the bankrupt estate are realised in the way that is most advantageous to the estate such that proceeds from sales are as high as possible. The method of sale is not provided for; instead it is to be determined by the creditors of the estate. There are special provisions relating to secured assets (see point 5.1). Where the bankrupt estate has been wound up and the assets belonging to it realised, the proceeds are distributed promptly among the creditors in accordance with the distribution scheme confirmed by the court.
The receiver draws up a final account when the bankrupt estate has been wound up and the assets belonging to it have been realised. Bankruptcy proceedings are regarded as closed when the creditors have approved the final account.
Bankruptcy proceedings may also be closed by a decision of a court to terminate proceedings where the assets of the bankrupt estate are insufficient to cover the costs of the bankruptcy proceeding or where the proceeding is otherwise inappropriate. Bankruptcy proceedings cannot, however, be terminated, where the bankruptcy proceeding is conducted as a publicly- administered winding-up. A court may, acting on a proposal by the bankruptcy lawyer, rule that a bankruptcy proceeding is to be conducted as a publicly-administered winding-up. Reasons for a publicly-administered winding-up may be related to the debtor or the paucity of estate assets. The costs of the publicly-administered winding-up are paid from State funds insofar as the assets of the bankrupt estate are insufficient to meet them.
Bankruptcy proceedings may also be closed by ‘compulsory composition’ whereby the debtor and the creditors reach agreement as to the payment of debts.
Bankruptcy proceedings may also be closed for a valid reason within eight days of the commencement of the proceeding.
As a result of bankruptcy, a debtor’s competence to act is restricted (see point 4.1) until such time as the debtor has validated the inventory of his estate, for a maximum period of four months from the opening of the bankruptcy proceeding. After that period the debtor may, for example, begin another business.
Malpractice which may be linked to activity resulting in bankruptcy proceedings against the debtor may constitute an offence (for example accounting offences, fraudulent activity). The debtor or his representative may also be guilty of an offence during the bankruptcy proceeding (e.g. deception on the part of the debtor). It is also possible for the debtor or his representative to be made the subject of an order banning them from carrying on a business activity. The requirement for such a ban is that the person concerned has essentially failed to fulfil the statutory obligations on running a business or has engaged in a criminal practice in his business activity which cannot be regarded as minor. The ban on business activity is of a specified duration (three to seven years) and is entered in the public register. A person who is subject to a prohibition on business activity may not, among other things carry on, either on his own account or through an agent, business activity for which accounts must be kept, and neither may he found or be in charge of a company.
The reorganisation programme is in force until the obligations set out in it have been fulfilled. The reorganisation programme may be terminated by a court decision where the debtor fails to comply with the programme and that failure is not insignificant. The reorganisation programme is also terminated where the debtor is declared bankrupt before the programme has been completed. A court may also terminate the debt arrangements in respect of a particular creditor as contained in the programme where, for example, the debtor has essentially failed to fulfil his payment obligations in respect of that creditor.
A debtor is discharged from the latter part of his debts when the obligations set out in the payment programme have been fulfilled. The payment programme may, however be terminated by a court decision where the debtor essentially fails to comply with the programme for no acceptable reason or the debtor fails to comply with his obligation to cooperate. The programme is also terminated if the debtor is declared bankrupt or dies during the payment programme. Termination of the programme results in the restoration of the creditors’ original terms.
Last update: 22-05-2006