Finland

Author: | Published: 10 Oct 2001
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The key considerations in achieving a bankruptcy-remote structure in securitization under Finnish law relate, notably, to the making of a notification to debtors in order to complete a transfer of receivables by the originator to the special purpose vehicle (SPV), a measure partly intertwined with the well-known concept of true sale.

PERFECTION OF TRANSFER OF RECEIVABLES

As a rule, receivables are transferable under Finnish law without the consent of the debtor, unless otherwise expressly agreed. Inter partes, the transfer becomes legally binding upon conclusion of a transfer agreement between the transferor and the transferee, identifying the receivables to be transferred.

All credits offered to consumers, typically, bank loans (including residential loans), credit card receivables and sales receivables generally constitute an ordinary loan agreement.

A transfer of an ordinary loan agreement must be notified to the debtor, in order to take legal effect in relation to the debtor and the creditors and subsequent assignees of the transferor.

Usually, any security, such as a pledge, mortgage or a guarantee standing as security for a securitized receivable, is transferable together with the receivable. Perfection of the transfer of the security generally requires, in addition to the notification to the debtor of the transfer of the loan, the transfer of the physical possession of the objects standing as security (for instance, share certificates or mortgage deeds).

SIGNIFICANCE OF NOTIFICATION

The notification to the debtors is a central element in safeguarding a bankruptcy-remote structure. Due notification entails various benefits, inter alia, protection against the transferor's (originator's) creditors, protection against claims of set-off by the debtors and a senior priority ranking against eventual subsequent assignees of the relevant receivables.

Until a notification has been duly dispatched, the following limitations and risk factors apply:

  • the debtor may validly discharge its obligations under the transferred loan by means of payment to the originator (transferor);
  • the debtor may set-off any claims it has towards the originator (transferor) against the relevant loan;
  • the rights of the transferee will not override the rights of subsequent assignees or pledgees;
  • the transfer is not effective as against third party creditors of the originator (transferor).

REQUIREMENT OF TRUE SALE

The concept of true sale relates to the effectiveness of the transfer vis-à-vis the originator's (transferor's) creditors.

Should the transfer of a receivable fail to qualify as a true sale, the consideration paid by the transferee would in most cases be considered to constitute a loan granted by the transferee to the transferor. In such case, title to the receivables transferred would, notwithstanding the transfer, be considered to belong to the transferor.

No express statutory provisions and legal precedents exist on the criteria for recharacterization or on the concept of true sale in connection with securitization. It must be independently established in each situation whether or not the retained share of rights or obligations is sufficiently significant so as to call for recharacterization of the transfer, particularly where the originator retains a right or an obligation regarding the transferred assets. On the basis of opinions expressed in legal doctrine, it is generally believed that a risk for recharacterization may, in particular, exist where the transferor has agreed to assume and bear the credit risk for the transferred receivables, or where the transferor is entitled or obligated to repurchase and regain the transferred receivables.

On 16 January 1996, the Finnish Financial Supervisory Authority (FSA) issued a Guideline on Asset Transfer and Securitization the "Securitization Guideline", applicable to credit institutions only. The Securitization Guideline may prove helpful in untangling the plethora of risk factors involved in the case of credit institutions as originators, notably in the domain of capital adequacy requirements. According to the Securitization Guideline, a credit institution is required to submit, in advance, for the FSA's review a draft for the relevant asset transfer agreement.

RECOVERY OF ASSETS

A transfer may be subject to recovery under Finnish insolvency laws. This is understood to be the case notably where notification of the transfer of the receivables is made to the debtors only substantially after the transfer. A payment may be reversed if made no earlier than three months (or, in case of payments to an associated company, two years) before the filing of a petition for bankruptcy, where the payment exploits unusual means of payment, or constitutes a premature or considerable payment in view of the bankrupt's assets.

In addition, any transactions or actions may be reversed, subject to the conditions enumerated in the law, if they, in an inappropriate manner, favour a particular creditor before others, involve the removal of debtor's assets beyond the reach of creditors or the increase of the debtors' debts to the detriment of its creditors. A payment may be reversed on these grounds if made no earlier than five years before the filing for a petition for bankruptcy (there is no time limit in case of associated companies).

FUTURE FLOW SECURITIZATION

The transfer of future receivables, ie receivables not existing at the time of the transfer, in order to monetize future cash flows is prima facie not deemed enforceable under Finnish law. However, this prima facie lack of enforceability is generally considered capable of remedy through the steps required for transfer, subsequent to the emergence of the relevant receivable. Accordingly, the transfer of future receivables not existing at the moment of the transfer appears to be enforceable, provided that a notification to the relevant debtors of the transfer has been made at the time of emergence of the receivable, for instance upon grant of a loan.

CONCLUSIONS

The making of a notification to the debtor plays a key role in achieving a bankruptcy-remote structure, entailing protection against the originators' creditors and against claims of set-off by the debtors, as well as priority ranking against other assignees of the relevant receivables. The importance of a due and timely notification is further accentuated in the event of future flow securitization.


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