The Finnish Bankruptcy Act is not suitable for solving problems arising from groups’ bankruptcies

Groups’ bankruptcies have increased in recent years in Finland, and several companies that have declared bankruptcy share a common owner. Despite these developments, there are still many open and unsolved issues in Finnish legislation concerning groups’ bankruptcies.

In its legal praxis concerning bankruptcies, the Finnish Supreme Court has not attributed significance to a group’s structure. In particular, the Supreme Court has not considered the group relationship to be of relevance in the event of insolvency. Instead, it has assessed the transactions of companies that, on basis of their ownership, are members of the same group to be transactions between independent companies.

Under the current Bankruptcy Act (120/2004), in a situation where a group or any of its member companies faces bankruptcy, each constituent member company must be declared bankrupt in its own bankruptcy proceedings. An estate administrator is appointed separately to each of the companies, although the same person can administer several estates. In the event of bankruptcy, the legal significance of the group structure is lost. In practice, however, the bankruptcy of one member company is apt to cause the bankruptcy of other member companies. Respectively, a company might avoid bankruptcy through the financial support of the other group member companies.

However, the effect of the group relationship in the event of bankruptcy raises a number of questions that remain unanswered in the light of the current Bankruptcy Act. It is not clear whether the group relationship affects the insolvency determination i.e. can a company refer to the assets of another group member company in order to avoid being deemed insolvent. In practice the financial status of a group member company cannot be established only by evaluating the assets and the debts of that company. There are also open questions concerning the disqualification of the administrator in bankruptcy issues, and on the other hand, the potential benefits of the situation where the administrator’s tasks for several closely related companies can be consolidated and performed by a single person. At the time of adjudication of bankruptcy, it is often difficult for a court to evaluate the possible future conflicts of interest of a vast entirety, as required in the Bankruptcy Act. Furthermore, it is not clear how the group relationship is taken into consideration for the purposes of the Act on the Recovery of Assets to a Bankruptcy Estate (758/1991).

In a critical situation, the transactions inside the group that are per se justified—such as group contributions, set-off and loans—are easily considered as transactions at an undervalue for the purposes of section 6 of the Recovery of Assets to a Bankruptcy Estate Act. For instance, in the precedent Finnish Supreme Court 2004:69, the release of credit insurances between two group member companies was assessed based on the abovementioned section. The Supreme Court concluded that the return of the property to the bankruptcy estate was justified in the given circumstances.

The duties of the administrator of an estate representing debtors include scrutinising the extent of the estate, as well as the possibilities of reverse transactions and the recovery of estate assets. In the event of a group bankruptcy, this often signifies time-consuming proceedings between former group member companies as provided for in the Recovery of the Assets to a Bankruptcy Estate Act.

Nor has the legal literature shed light on the abovementioned problems. Risto Koulu, research director and professor of procedural law at the University of Helsinki, has published in 2013 the first Finnish comprehensive research focusing on the problem of groups’ bankruptcies. Koulu’s research provides excellent assistance to resolving the issues arising from group bankruptcies, in addition to the experience of an estate administrator. Based on these experiences, the best result in group bankruptcy proceedings is achieved through the carefully considered joint administration by the estate administrators, the exchange of information and consultation.