During the first half of 2009 the number of corporate
bankruptcies in Finland increased by 38% to nearly 1800. The
number of statutory restructurings tripled to 289 compared to
the first half of 2008. The number of distressed companies that
are not formally insolvent is far higher. This means that the
number of voluntary corporate restructurings is likely to
increase significantly in the latter part of 2009 and
throughout 2010. Furthermore, the situation will create good
opportunities for distress investing in the Finnish
Finnish law is favourable in terms of facilitating private
workouts management liability can be controlled,
debt-equity swaps are relatively easy to carry out, divestments
and creditor control can be arranged contractually, and the
lender liability risk is not too high. In addition, expedited
corporate restructuring procedures provide interim freezes on
enforcement and enable negotiation of pre-packaged plans that
can be approved by a court.
Finnish restructuring environment
There is no established manner of carrying out corporate
restructurings outside the formal insolvency procedures. The
only way of binding hold-out creditors is through statutory
corporate restructuring. Private workouts can be achieved, but
a successful private workout requires in practice 80 to 90%
creditor approval if the parties wish to minimise court
The Finnish Restructuring of Enterprises Act (the
Restructuring Act) was implemented in the early nineties and
the latest amendments were made in 2007. Statutory
restructurings have traditionally focused on debt composition,
which is often inadequate for facilitating business recovery.
Furthermore, restructurings were often carried out bilaterally
between a bank and a borrower. There was often no need to
address multi-creditor restructurings or issues arising with
complex financial instruments and multi-layered debt.
During the last few years statutory restructurings have
become more advanced. This is partially based on stronger
presence of business recovery specialists, investment banks and
the development of restructuring law.
Finnish private workouts tend to mirror the priority
structure and rights of various parties in the statutory
restructuring and bankruptcy because hold-out creditors holding
a controlling interest in a particular debt-class can
effectively block approval of the reorganisation plan, and
because any large enough a creditor can file a bankruptcy
petition based on a payment default of the borrower.
The Finnish statutory restructuring is a
debtor-in-possession (Dip) procedure much like the US Chapter
11 procedure. Although the debtor retains the control of its
assets throughout the procedure, management actions are
substantially restricted in order to make sure that the assets
are not unduly depleted and that the restructuring plan can be
Commencement of a corporate restructuring triggers the
statutory freezes to make payments, grant security for a
reorganisation debt, carry out or continue debt collection
measures (for example, enforcement of security) and seek
The reorganisation plan is, in practice, prepared by the
estate administrator in consultation with the creditors and the
debtor. Although the substantive measures needed to effect the
rescue are not regulated, the administrator can only submit a
plan to the court that can realistically be expected to be
approved by the creditors.
The creditors vote on the restructuring plan within their
respective creditor groups. Generally, the plan must be
accepted by more than half of the creditors representing
majority of each group's claims. The terms of the restructuring
debts are replaced by the terms stated in the restructuring
plan. All secured debts are subject to the restructuring plan,
but the composition of debts cannot be applied to their capital
There are certain detailed rules for a court to 'cram down'
dissenting creditor groups even if the majority vote is not
reached. Furthermore, creditors that receive full payment as
well as last-ranking creditors that are not entitled to any
distribution under the plan are discarded in voting.
As only the debt restructuring part of the plan is
specifically enforceable against the debtor, the debtor's
restructuring obligations often need to be reinforced through
separate contractual commitments and legal measures. This can
be achieved by making creditor approval conditional on entering
into other corporate restructuring measures (for example,
divestments, debt-for-equity swaps, share issues and the
In cases where financing structures are not overly complex,
it may be feasible to opt for an expedited pre-negotiated deal
instead of a full-scale statutory restructuring. The
reorganisation plan can also be prepared prior to the
commencement of the reorganisation. The same applies for
solicitation of creditor approvals.
As of June 2007 it has become easier to carry out an
expedited reorganisation procedure. This requires that the
debtor, as well as creditors representing at least 80% of the
claims and any creditor representing at least 5% of all claims,
give their written approval for the process. In this case,
there is no need to hear various parties concerning the
reorganisation plan proposal, no process for disputing
restructuring claims, no division of the creditors into
creditor groups and no voting procedures.
Because the expedited procedure may save a considerable
amount of time, it also creates substantial pressure to prepare
the pre-packaged plan with diligence.
The debtor is entitled to incur indebtedness and grant
security interests in the ordinary course of business even
after the commencement of a corporate restructuring. Dip
financing is not generally considered to be within the ordinary
course of business, and any such new indebtedness and granting
of security interests requires the estate administrator's
consent. A court may on the estate administrator's application
permit new super-priority financing and order that such new
financing has same or better priority to the debtor's assets
than existing secured debt. However, the arrangement must not
considerably increase the risk of the secured creditors who
hold the existing security interest. It is often advisable, in
order to ensure the priority of new Dip financing, to submit to
the court consents from the creditors affected by the
Bond buy-backs and voluntary exchange offers
The negotiation position
In a case where the company has listed bonds or other debt
securities, it may be advisable either to buy back such bonds,
to the extent they are traded at a discount, or, in case the
company does not have the required liquidity to carry out a
buy-back, to make an exchange offer for such securities.
Unlike the company's bank creditors, the debtor may not know
the identity of its bond creditors or their objectives (for
example, are they control investors or institutional investors
looking for a secure investment?). The negotiating position of
bond creditors in restucturings, debt buy-backs and exchange
offers can be summarised as follows.
First, a creditor's right to receive a full payment of
capital and interest on its receivable cannot be cancelled or
reduced in any other manner than in bankruptcy or in statutory
restructuring in which appropriate creditor majorities approve
the reorganisation plan.
Second, without specific contractual provisions, creditors
have no right to convert the debt into an equity interest or
require owners to give up their ownership in the company.
Creditors' control is based on loan covenants and negotiating
power upon debtor's failure to make the agreed capital and
Third, a creditor who in a voluntary arrangement is proposed
to be treated in a less favourable manner than what would be
the case in a formal insolvency process is likely to object to
the proposed voluntary arrangement.
Fourth, the rule of absolute priority sets boundaries for
all arrangements. It is a part of mandatory legislation and
covers also ownership interests, which are always the last in
Amendment of bonds terms
The terms of Finnish listed bonds vary from one case to
another. Usually any amendments require two-thirds majority in
a creditors' meeting. The same applies, for example, to
covenant waivers. The meeting is usually convened by the debtor
alone or together with creditors representing at least 10% of
the bond capital. The quorum requirement for a first meeting is
usually 50% of the bond capital and 10% for the second meeting
(if the threshold cannot be reached in the first meeting). As
is the case in a number of other jurisdictions, the following
amendments cannot be made without all creditors giving their
(i) reduction of the debt capital or interest;
(ii) extending the maturity of the bond; and
(iii) changes to the quorum and voting thresholds.
Buy-back and pre-payment
Generally, debt buy-backs and exchange offers can be carried
out unless such measures have been restricted in the terms of
On the other hand, a bond has to be repaid in accordance
with its terms. Therefore, a mandatory redemption or
pre-payment of a bond is not possible without specific
contractual provisions in the terms of the bond.
Tender offers and exchange offers
Unlike with share tender offers, the success of a bond
tender offer is not as dependent on the premium offered for
such securities. A bond creditor is entitled to a full
repayment. Therefore, a consideration which is below the
combined capital and discounted interest amounts accruing to
the bonds is often not accepted.
The likelihood of success of a voluntary bond exchange offer
is in practice increased if the position of the non-accepting
bond creditors deteriorates as a result of the implementation
of the offer. The position of the remaining bondholders can be
changed in two ways:
(i) The seniority of the new bonds may be better than the
ones subject to the exchange offer (through new security or
subordination of the old bonds by amending its terms).
(ii) The terms of the existing bonds can be otherwise be
made less advantageous for the hold-out creditors.
The majority threshold for implementing these changes in
Finnish listed bonds is usually two-thirds. However, there is
little case law concerning duties owed by the debtor and the
majority creditors to the minority creditors.
Bondholders in private workouts
As the structure of private workouts is often influenced by
the voting thresholds in a statutory restructuring, it may be
easier to amend the bond terms in a private workout by using a
court-approved pre-packaged plan. In such a situation, the
voting threshold is 50% of the capital of the creditor class.
It should be noted that in the expedited corporate
restructuring procedure the thresholds are much higher.
Unlike in exchange offers in which a reduction of the
capital or interest payments of the bond or extending its
maturity requires unanimous bondholder consent, such changes
can be implemented as a part of the reorganisation plan with a
majority approval by each creditor class. Therefore, in
practice all debt compositions involving bondholders need to be
carried out through a court-approved restructuring plan.
Alternatively, the bondholders may be crammed down by the
court even if they do not support the reorganisation plan.
However, such cram-down is unlikely to be approved by a court
if the reduction of the debt is excessive and the
reorganisation plan does not affect the shareholder structure
or require adequate participation in the restructuring by the
shareholders as well. In effect, this means that a distress
investor holding a control position (51%) of the creditor group
often has considerable leverage in negotiation a debt-equity
swap in the restructuring.
The structure of a private workout depends fundamentally on
the details of each particular company and situation. In a
private workout, the parties must respect the priority order
that would apply under the general insolvency laws. Otherwise,
a creditor that has a lower priority in a contractual
arrangement than in a formal procedure can effectively block
the procedure. Furthermore, unlike in solvent restructurings,
in private workouts, the question is primarily about to what
extent each creditor participates in the sharing of financial
losses and only as a secondary matter about who gets the
benefits of a successful restructuring.
The following structure sets out in general terms the
various phases that a Finnish private workout might consist
- Entering into a standstill agreement (which may also be a
common understanding instead of a binding agreement): banks,
other creditors and the debtor agree that debts will not be
accelerated during the standstill period, and no debt
enforcement measures will be taken.
- The auditors or investment bankers prepare a feasibility
study concerning the recovery prospects with the assistance
of the management.
- The banks and major creditors form a creditor committee
and nominate a person or persons to administer the
- The creditors enter into loss-sharing agreements.
- The parties prepare a restructuring plan concerning the
company and the group.
- The restructuring plan is approved in an expedited
statutory restructuring as a pre-packaged restructuring
- The banks grant new secured financing in accordance with
- A part of the existing debt is converted into equity to
restore the solvency of the company or the group.
- The parties start implementing the restructuring
It should be noted that certain transactions which have no
commercial rationale for the debtor company may be void under
company legislation. Private workouts have generally a genuine
commercial motive and, therefore, a financially justifiable
structure will most likely not be caught by any ultra
Liability issues may be pronounced in distressed companies.
The members of the management are liable for damages caused to
the company by deliberate or negligent violation of their duty
of care. In addition, the management may be liable for damages
caused to the company or a third party by breach of the
explicit provisions of the Finnish Companies Act or the
company's articles of association. Importantly, in these cases
and in affiliated party transactions, the burden of proof is
reversed. However, if the decisions of the management are based
on careful evaluation of the alternatives and diligent review
of the particular situation, the management will not generally
be found liable.
Management's decisions may not cause undue benefit to a
shareholder or another person at the expense of the company or
another shareholder. This issue is encountered in a number of
private workouts. Importantly, liability for damages is likely
to arise if the company enters into credit transactions while
its ability to make the repayments can be seriously doubted or
when there is no commercial rationale to continue the
financing. Failure to take action or continuance of trading
when the grounds of insolvency are apparent, increase the
monetary liability of the management.
In practice, in order to mitigate the above risks, it is
recommended to engage specialists to carry out a feasibility
study or a restructuring analysis prior to making actual
decisions on the restructuring. Another way is to sign an
indemnity with the management so that they are able to take the
restructuring decisions with controlled liability.
Risks with avoidance of transactions
In private workouts, the transactions that are most likely
to be challenged, should the debtor become insolvent are:
premature payments made, for example, to trade creditors, bond
repurchases, sales of assets to entities affiliated with the
creditors or shareholders, and granting of new security. On a
general level, Finnish law on voidable transactions is more
extensive than, for example, the corresponding English law.
The preference rule and gift-like transactions
A transaction may be avoided under the general preference
rule if it inappropriately prefers a creditor, results in
transfer of property outside the reach of the creditors, or
increases debts at the other creditors' expense. The rule may
not be invoked unless the debtor was insolvent at the time of
the transaction or became insolvent due to the transaction.
However, a duly structured reorganisation plan or a workout
arrangement that respects the statutory priorities of the
creditors and treats similar creditors equally is unlikely to
be caught by this provision.
The rule may apply also if the transaction is based on
pressure exerted by a creditor. This means that, for example,
the integrity of the restructuring valuation will be of the
utmost importance. It should, among other things, be ensured
that there is no financially more advantageous way of divesting
a part of the business (bids have been solicited from other
potential purchasers) and that the divestment produces a better
overall result than a hypothetical insolvency sale would do.
These measures often provide protection against avoidance of
gift-like transactions as well.
Avoidance of certain payments
A payment that is premature, excessive or made with uncommon
consideration may be avoided in the debtor's insolvency.
"Uncommon consideration" in effect refers to something else
than money, unless such payment has been agreed on when making
the initial agreement. A payment is usually deemed considerable
if it exceeds 15% of the assets of the insolvency estate.
Payments that are made in the ordinary course of business or
based on long-term practice are generally not voidable. It is
considered that 'payment' of indebtedness by conversion of debt
into equity cannot be voidable as it does not deplete the
company's assets it merely dilutes the existing share
Granting of security interests may be set aside if the
perfection of the security has not taken place without undue
delay after the parties had agreed on the security, or if the
parties had not agreed on security when the debt was incurred.
This risk is usually avoided in restructurings if granting of
security is a precondition for the new financing.
Juha-Pekka Mutanen is a partner of the firm and heads the
firms finance and capital markets practice. He
advises banks, insurance companies, financial
institutions, investment banks as well as private equity
and venture capital houses in various finance and capital
market transactions including restructuring issues. He
also advises corporations in a range of financial law
issues, including general corporate finance, acquisition
finance and structured transactions such as
securitisation and project finance. He has written and
spoken widely on various financial and corporate law
topics. Mutanen has degrees from the University of Turku,
Åbo Akademi University and the University of
Dittmar & Indrenius
Pohjoisesplanadi 25 A
Tel: +358 9 6817 0112
Mika J Lehtimäki is a senior attorney and a member
of Dittmar & Indrenius' finance and capital markets
practice. His work focuses on corporate finance and
capital market transactions, structured finance,
corporate recovery procedures and M&A. He is also
experienced in cross-border transactions and has written
about financial law in Finland and in the UK.
Lehtimäki has a degree from the University of
Helsinki and two post-graduate degrees from the
University of Oxford.
Mika J Lehtimäki
Dittmar & Indrenius
Pohjoisesplanadi 25 A
Tel: +358 9 6817 0152