Real Estate Collaterals and Debtor's Bankruptcy in Finland

[fa icon="calendar"] February 12, 2018 by Kari Peltola

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Immovable property (e.g. real estates) constitutes in Finnish bankruptcy proceedings often financially substantial element of the assets of a debtor company and the financial capacity of the debtor company is usually secured with a real estate collateral to protect the rights of the creditor.

Traditionally the position of a pledgee in Finnish bankruptcy proceedings is strong and robust with only minor influence on the rights of a pledgee in the event of a debtor’s bankruptcy.

The rights and the sales procedure options of the creditors protected by a collateral varies however remarkably based on the nature of the property and the type of the collateral which should be taken into consideration when setting up the collateral.  

Limited right to liquidate real estate collateral

A creditor protected by a real estate collateral should recognize that the liquidation of the real estate collateral requires in Finnish bankruptcy proceedings contribution of the competent Finnish authorities and the creditor has no exclusive competence to decide the type of the sale procedure.

The contribution of the competent authorities means in this context i.e. sale based on the provisions of the Finnish Enforcement Code and a legal ground for the enforcement regulated in the Enforcement Code (e.g. a court judgement). The outcome of a transaction by using these strict regulatory proceedings can lead from the pledgee’s perspective to an undesired result due to the lengthy period and the possible financially poor result of the sale procedure.

Bankruptcy estates as sellers of real estate collaterals

The restrictions in Finnish law regarding the pledgee’s right to liquidate a real estate collateral means in praxis that in insolvency cases the bankruptcy estates act as the seller of the real estates. The bankruptcy estates have the right to close a transaction more swiftly and with usual business terms and conditions which usually benefits the pledgees.

From the pledgee’s perspective the sale procedure through bankruptcy estate means however lower profit since the bankruptcy estate is entitled to compensation for the necessary costs of the management and sale of collateral, including the fee of the estate administrator for the sale.

Use of contractual rights prior to bankruptcy

Could a pledgee (creditor) and a pledger (debtor) use their contractual rights before a debtor company (pledger) is declared as insolvent (by a Court of Law) to improve the rights of the pledgee and to avoid the situations described above?

Firstly, Finnish legal environment and case-law discourses negatively the combination of bankruptcies and contractual clauses and restricts the contracting parties’ opportunity to agree of their rights and obligations in connection with the insolvency of the debtor company. These agreements or clauses are usually interpreted as non-binding towards the bankruptcy estate and the other creditors.

However, an ordinary credit agreement, drawn up prior to bankruptcy, including a clause of real estate collateral which authorizes the pledgee to liquidate the collateral actively and independently, on behalf of the pledger, is one option to consider. 

The pledgee should use and enforce this contractual right before the bankruptcy of the debtor company since the existing regulation limits the rights of the pledgee to liquidate the real estate collateral freely during the debtor’s bankruptcy proceedings and such an agreement can be interpreted as invalid in the event of the debtor’s bankruptcy.

As a rule, which aids remembering: “Never try to establish through contract clauses rights or obligations only for the possible future bankruptcy estate of the debtor company or for the other bankruptcy creditors.”  

Tägit: insolvency

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