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30 November 2018
The value and operation of floating charges as securities for creditors in restructurings have been the subject of several Supreme Court rulings. However, the question remains as to the value that the receivable of a floating charge creditor must have in order to be considered a secured debt in a restructuring and therefore spared from the restructuring measures that apply to unsecured debts – in particular, the cut on debt capital.
Notwithstanding the statutory 50% leakage rate applied in both restructuring and bankruptcy proceedings, the law remains relatively silent on the valuation aspects of applying floating charges as securities. For example, to what extent are the assets under a floating charge considered to be a sufficient security and thus a secured restructuring debt for the creditor? Here, the tendency arising from legal praxis has been towards the assets' liquidation value and away from valuation on a going-concern basis.
In January 2015 two Supreme Court precedents indicated that assets subject to floating charges should be valued at their feasible liquidation value (for further details please see "Security value of floating charge in restructuring – recent precedents"). However, under these precedents, the valuation terms were somewhat ambiguous and certain liquidation costs remained undetermined.
In late 2017 the Supreme Court issued another precedent (KKO 2017:63) that further defined the valuation based on liquidation value. In addition to the direct costs of realising secured assets, a proportional share of the general costs of bankruptcy proceedings should also be deducted from the value of the security. Given that in most cases a debtor's assets will not be liquidated under restructuring proceedings, the specific amounts of these deductions should be based on a hypothetical liquidation alternative (typically liquidation through bankruptcy). On a practical level, the deducted amounts will be based on an empirical understanding of the average liquidation costs.
The ruling's main argument concerned the equal treatment of creditors in both restructuring and bankruptcy proceedings. If the perceived share of the costs of an alternative liquidation scenario are not deducted from the value of the security in a restructuring, a floating charge creditor would be in a better position than a creditor in a bankruptcy.
The Supreme Court's 2015 and 2017 precedents indicate that under Finnish law, the position of a creditor should not differ depending on which insolvency proceeding is at hand. At the same time, the prevailing legal praxis dictates that administrators of restructuring proceedings should be able to allocate the overall costs of a hypothetical bankruptcy alternative on a sound basis. A legitimate valuation should be well structured and carefully performed. Further, the grounds for the valuation should be clearly explained, while deductions and the grounds thereof should be discussed early on (ie, at the planning stage). Otherwise, the administrator's restructuring programme may be subject to time-consuming and expensive disputes which could jeopardise the restructuring's efficiency and benefits.
All things considered, the outcome of the Supreme Court's latest precedent is reasonable. By confirming that the valuation of assets subject to a floating charge should be derived from the estimated liquidation value, the decision may not directly favour floating charge creditors; however, it clearly improves the predictability of floating charges as securities in restructuring proceedings. The legal clarifications on this issue will help creditors to estimate the amount of secured debt established by a floating charge in advance and, as such, the potential outcomes of the restructuring as an alternative to other remedies available thereto.
For further information on this topic please contact Lasse Luoma at HPP Attorneys Ltd by telephone (+358 9 474 21) or email (firstname.lastname@example.org). The HPP Attorneys Ltd website can be accessed at www.hpp.fi.
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