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FINLAND: An Introduction to Banking & Finance

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Current topics in Finnish banking and finance 

Finland is a stable environment for business and financing. At the same time, the effects of different global events, such as the COVID-19 pandemic and Brexit, have a direct impact on Finland.

The COVID-19 situation in Finland has been better than in most other countries but it has caused a need for rapid action in relation to special legislation to be implemented, including in relation to the financing sector. In addition to various support schemes, a creditors’ right to file for a debtor’s bankruptcy was temporarily limited in 2020 by an amendment to the Finnish Bankruptcy Act (statute 120/2004, as amended). This temporary limitation came to an end on 31st January 2021. As of 1st February, pursuant to a second temporary measure, companies will be granted a longer period to negotiate their debts with their creditors than they would normally have after a payment demand with a bankruptcy threat. This temporary amendment to the Finnish Bankruptcy Act is valid until 30th September 2021. It has been predicted that the end of these temporary measures will cause a wave of bankruptcies and thereby also an increase in the risk of credit losses for lenders and financiers. Whether this transpires remains to be seen, although following the end of the first amendment limiting a creditor’s right to file for bankruptcy there has been an increasing trend in the number of bankruptcy applications.

In relation to Brexit, one of the topics discussed in the financing sector is the jurisdiction clause of cross-border financing documents and the recognition and enforcement of English court judgments. As of 1st January 2021, Brexit became effective and therefore e.g., the EU regulation regarding enforcement of judgments within the EU (Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012) is no longer applicable to enforcement of an English court judgment in Finland. Therefore, although the choice of English law as the governing law would be recognized, the recognition and enforcement of an English court judgment is not currently a straightforward matter. Until the situation is clarified, this needs to be taken into account by parties to financing arrangements when choosing the governing law and submitting to the jurisdiction of a certain court and when facing a possible dispute in relation to an arrangement executed prior to Brexit with submission to the courts of England.

As with other countries, sustainable finance is a hot topic in Finland. The country is committed to implementing the UN’s 2030 Agenda for Sustainable Development and the Finnish government has outlined a plan for Finland to be carbon-neutral by 2035 and, at the same time, the world’s first fossil-free welfare society. Demand for climate- and planet-friendly solutions and innovations is high and increasing. Consequently, significant financing and investments are needed to address different sustainability and other challenges. The Finnish financing sector is engaged in this development and sustainability indicators and ESG policies are being introduced and developed. Major Finnish banks have committed to the UN’s Principles for Responsible Banking and their strategy and practice will have to be aligned with sustainability goals and the Paris Climate Agreement. In practice, these aspects have already found their way into due diligence processes of financiers and an increasing number of green bonds and loans and, for example, margin grids are already based on carbon dioxide emission levels.

Some key legal issues in the Finnish market 

Financial assistance / Corporate benefit

As in many countries, Finland has rules regarding prohibition of financial assistance and requirement of corporate benefit. According to the Finnish Limited Liability Companies Act (statute 624/2006, as amended), a limited liability company shall not provide loans, assets or security for the purpose of a third party acquiring shares in the company or its parent company. Further, a transaction which in breach of the provisions of the Companies Act reduces the assets of a company or increases its liabilities without any corporate benefit or a sound business reason for the company, constitutes unlawful distribution of assets.

The concept of corporate benefit is always evaluated from the perspective of the company granting loans or security and the assessment is made on a case-by-case basis. Finnish company law does not recognise any group benefit. Pursuant to the general principles of the Companies Act, it is the management’s obligation to assess the existence of corporate benefit or a sound business reason for entering into any particular transaction. However, ultimately the determination is made by an insolvency administrator and/or the court. Standard Finnish market practice where the applicability of the financial assistance prohibition or the existence of a corporate benefit for the company is not clear or is open for interpretation, is to include generic limitation language in the finance documents applying to both guarantees and security. The limitation states that a guarantee and/or security will only be provided to the extent this does not violate the financial assistance or distribution of assets provisions of the Companies Act. There is, however, no Finnish case law on such limitation language, and therefore the significance a Finnish court would assign to such clause cannot be fully determined.

Floating charge 

In Finland, a common security in financing transactions is a floating charge (also called a business mortgage). A Finnish floating charge covers all movable assets of a company, including all fixed assets (e.g. machinery, equipment and trademarks), current assets (e.g. raw materials, consumables and finished products and goods) and liquid assets (e.g. cash at hand and receivables).

A new floating charge is created by entering into a pledge agreement regarding mortgage notes and delivering an application to the relevant authority for issuance of new mortgage notes with instruction to deliver such new mortgage notes directly to the secured party. If mortgage notes over the assets of a company already exist, a pledge is created by entering into a pledge agreement regarding these mortgage notes and delivering them to the secured party.

Mortgage notes evidencing a floating charge are bearer notes, hence transfer of a floating charge is executed by delivering the mortgage notes to the possession of the secured party. Although it is not mandatory, it is possible (and recommendable) to register the current holder of the mortgage notes to the Finnish Floating Charge Register. By registration, the secured party (pledgee) in practice ensures that it is contacted by the administrator in an insolvency situation and by the bailiff in case of enforcement of a floating charge granted to a third party. An original copy of the mortgage note needs to be presented in connection with enforcement of the floating charge.

In an insolvency scenario, floating charges entitle to priority over 50% of the enforcement proceeds of the relevant assets. The priority is limited to the nominal amount of the mortgage notes plus interest and enforcement costs as determined in the mortgage note.

Some assets (such as shares and receivables) can be separately pledged in spite of the existence of a floating charge. If a separate pledge has been created over an asset, such asset is not covered by the floating charge. In addition, separate mortgages may be created over certain asset classes (e.g. large vehicles and aircraft) under Finnish law. These assets are not covered by a floating charge even if such assets have not been separately mortgaged.

Pledge of receivables and bank accounts

A pledge over receivables and a pledge over bank accounts are both an essential part of a Finnish security package, particularly in project finance. In Finland, both may be created by entering into a pledge agreement between the pledgor as the creditor of the relevant receivable or the holder of the bank account and the pledgee as the creditor against the pledgor. In order to create protection against third parties, perfection of a pledge should be effected by notifying the debtor/the bank of the pledge and instructing the debtor/the bank not to make any payments to the pledgor.

In practice, it is at times agreed that although a pledge agreement is executed, the pledgor is free to collect the receivables or to use the pledged bank account until default occurs. In such cases, perfection measures are incomplete until default and instructions to the debtor/the bank that no payments can be made to the pledgor and therefore subject to claw-back risk. This is relatively common practice but also something that needs to be consciously considered when entering into financing arrangements which are, at least partially, secured by a pledge over receivables and bank accounts.

Guarantee as for one’s own debt 

When a guarantee is required for payment obligations, in the Finnish market it is common to require and give such guarantee as a guarantee as for one's own debt. This form of guarantee is covered by the Finnish Act on Guarantees and Third-Party Pledges (statute 361/1999, as amended). Under such guarantee, a guarantor is liable for the principal debt in the same manner as for its own debt (as the name suggests). The creditor is entitled to demand payment from the guarantor immediately after the principal debt (in full or in part) has fallen due and payable. Contrary to an on-demand guarantee, a guarantee as for one’s own debt is related to the underlying debt obligation and subject to the same defences.

When entering into a guarantee as for one’s own debt, it is essential to identify the guarantee as a guarantee as for one’s own debt in the guarantee documentation. If nothing has been indicated in the relevant agreement, a guarantee is taken to create a secondary guarantee which does not place the creditor in as strong a position as a guarantee as for one’s own debt would. References to the applicable (and excluded) sections of the Finnish Act on Guarantees and Third-Party Pledges are commonly included.

Mankala energy companies 

A specific concept in the field of electricity production in Finland is the so-called ‘Mankala principle’, which is based on a Finnish Supreme Administrative Court ruling from the 1960s. It establishes that a limited liability company, instead of paying dividends, may produce affordable energy for its shareholders as set out in its articles of association. The shareholders have the obligation to bear the operating costs in proportion to their shareholding in the company and have the corresponding right to a proportion of the electricity produced. The purpose of a Mankala company is to produce electricity for its shareholders at the lowest possible cost, whether as an independent energy producer or as an energy procurement company. The shareholders may, in turn, use the electricity for their own purposes or sell it onwards. The purpose of a Mankala company is not to make profit; the lower procurement costs constitute the benefit received by the shareholders.

The Mankala principle must be followed carefully. If it is not, tax may become payable, which is likely to be an expensive course of action for the company and its shareholders. However, it is possible to allocate the rights to energy (and the corresponding duty to bear the operating costs) produced from various sources or by different methods to a certain group of shareholders by structuring the company’s shareholding into different classes of shares. In addition, the provisions regarding cost division in the articles of association usually either stipulate that the shareholders bear the variable costs in proportion to the electricity received by them and the fixed costs in proportion to their respective shareholdings or that the shareholders bear the annual operating costs in proportion to their respective shareholdings only, irrespective of the amount of electricity received. In energy financing the impact of Mankala structures should be carefully considered.