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27 February 2015
According to the Restructuring of Enterprises Act (47/1993, as amended), the principal of a secured debt cannot be affected by debt arrangements established during restructuring proceedings. The principal of a secured debt must be paid in full, regardless of any debt arrangements. In restructuring proceedings, a creditor's claim is regarded as a secured debt only in relation to that part of the net value of the security which, at the commencement of the proceedings, would have been enough to cover the amount of the creditor's claim. The net value of the assets that are subject to a floating charge thereby determines which part of a creditor's claim secured by a floating charge will be considered as a secured debt and what the security value of the floating charge is.
The valuation of assets that are subject to a floating charge has been unpredictable and open to various interpretations. Traditionally, the value was derived from the estimated liquidation value in the debtor's hypothetical liquidation. However, for over a decade, the going-concern value of the assets has been accepted in many restructuring proceedings, on the premise of deriving the value of the underlying assets of the charge. On January 12 2015 the Supreme Court issued two precedent rulings on how the value of assets that are subject to a floating charge should be determined in restructuring proceedings. Pursuant to the rulings, the assets were to be valued at their liquidation value.
A floating charge can be created as a form of security over the movable assets of a company – including, as set out in the Act on Company Floating Charges (634/1984, as amended), the following:
According to the Restructuring Act, in restructuring proceedings a debt is considered to be a secured debt only in relation to the part of the debt that the creditor holds against third parties, an effective real security interest to property that belongs to or is in the possession of the debtor. In addition, for the debt to be secured, the value of the security at the commencement of proceedings must have been sufficient to cover the amount of the creditor's claim after the deduction of liquidation costs and claims with a higher priority (net value). The principal of a secured debt must be paid in full, regardless of any debt arrangements set in the restructuring proceedings.
The Act on the Ranking of Claims (1578/1992, as amended) provides that if a debtor is filed into bankruptcy, a creditor's claim secured by a floating charge has priority over other receivables up to 50% of the value of the assets that are subject to the floating charge. The remaining part of the creditor's claim will constitute a right to disbursement, similar to other receivables (non-secured claims). According to established practice, a claim secured by a floating charge shall be treated similarly in restructuring proceedings. Thus, if the net value of the assets that are subject to a floating charge is X and the claim of the creditor holding the floating charge is X/2 or less, the principal of the creditor's claim shall be paid in full. Accordingly, if the net value of the assets that are subject to a floating charge is X and the claim of the creditor holding the floating charge is X/2+N, the creditor will be paid X/2 and the payments based on N will be made in accordance with the debt arrangements applicable to non-secured restructuring debts.
The net value of the assets that are subject to a floating charge determines the debt amount secured by the floating charge and the security value of the charge.
One of the criteria specified in the Restructuring Act for a secured debt is that the value of the security at the commencement of the proceedings must have been enough to cover the amount of the creditor's claim after the deduction of liquidation costs and claims with a higher priority (net value). This criterion is open to interpretation as to how the value of the assets that are subject to a floating charge should be determined. Although the act's wording could be interpreted to mean that the basis for the valuation should be the estimated liquidation value in the debtor's hypothetical liquidation (deducted by liquidation costs), creditors holding a floating charge have in many cases insisted that the premise for valuation should be the going-concern value.
The going-concern value is generally understood as the company's value, assuming that it is carrying on its business as a going concern. In restructuring practice, the concept of the going-concern value has been used to justify an asset valuation and security value that is significantly higher than the estimated liquidation value for the same assets in the debtor's hypothetical liquidation (liquidation value).
The liquidation value of the assets that are subject to a floating charge is generally the realistic best possible liquidation result. If it is assumed that the debtor's assets could be liquidated as an operating business, this may be considered when the liquidation value is determined.
Going-concern value and liquidation value have both been accepted in restructuring practice and by district courts and courts of appeal. The views on valuation presented in judicial literature have varied between going-concern value and liquidation value.
On January 12 2015 the Supreme Court issued two precedent rulings (KKO:2015:2 and KKO:2015:3). In the first case (KKO:2015:2) the district court and the court of appeal had accepted the administrator's proposal, according to which the value of the assets that were subject to a floating charge had a going-concern value equal to their book value. In the second case (KKO:2015:3) the district court and the court of appeal had accepted the administrator's proposal, according to which the value of the assets that were subject to a floating charge had a going-concern value of 70% of their book value. The Supreme Court ruled that the valuation was incorrect in both cases. It stated that the value of the assets could be the going-concern value only if this was equivalent to the feasible liquidation result. The basis for the valuation should be the liquidation considered as most likely in the circumstances and resulting in the best possible outcome. The likeliest alternative for restructuring proceedings, and thereby the likeliest liquidation method, is generally bankruptcy.
The net value of assets that are subject to a floating charge may be very significant for the creditor holding a floating charge (and for other creditors), as it essentially affects the creditors' rights to payments against the capital balance of their claims. The higher the security value of the floating charge, the greater the portion of the total payments under the restructuring programme that will be paid to the creditor holding the charge (at the expense of non-secured creditors). The claim of a creditor holding a floating charge will be considered as a non-secured restructuring debt (pre-filing debt) in relation to the part that the claim exceeds the net value of the assets that are subject to a floating charge; such part of the claim shall be subject to debt arrangements similar to other non-secured restructuring debts. Thereby, it may be anticipated that the Supreme Court rulings will have an impact on the stance of financial institutions towards floating charges and their valuation in Finland's financial market.
For further information on this topic please contact Klaus Majamäki 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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