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01 November 2013
The course of events leading to a debtor's bankruptcy is as varied as it is case specific. In many cases, there is little reason to doubt the sincerity of the debtor or its management, as bankruptcy by itself rarely has any benefits for the debtor. Nevertheless, the acts and omissions in the business of the debtor are often the direct cause of the insolvency and its negative financial implications. It follows that from the economic perspective – as well as that of the creditors – it is crucial that these acts and omissions are scrutinised and if needs be any offences are reported.
The recent provision (March 1 2013) in Chapter 14, Section 5(4) of the Bankruptcy Act (120/2004, as amended) regulates the duty of the bankruptcy administrator to report offences committed by the bankruptcy debtor. This update addresses the new regime relating to the reporting of debtors' offences and gives an overview of its practical implications in Finnish bankruptcy practice.
Pursuant to Chapter 14, Section 5(4), if there is a reason to suspect that the bankruptcy debtor has committed an offence against the creditors, an accounting offence or another business offence, and if such an offence may have more than a minor effect on the claims in bankruptcy or the scrutiny of a bankruptcy estate, the bankruptcy administrator must report the suspected offence to the police if deemed necessary.
The provision sets out an active and independent duty to the bankruptcy administrator to react to if there is a reason to suspect an offence by the debtor. The administrator may hear creditors on the matter, but it is not required. Neither is the administrator bound to creditors' statements – on other hand, a creditor may always report an offence on its own.
The role of the administrator has increased further due to a concurrent amendment in Chapter 9, Section 2 of the act. According to Section 2, the debtor description drafted by the administrator is not sent automatically to the prosecutor in connection with bankruptcy proceedings commenced after March 1 2013. It follows that the prosecutor cannot initiate a criminal investigation on its own initiative on the basis of the information received from the debtor description addressing the bankruptcy debtor's business and containing observations on the main reasons of the bankruptcy and how debtor's accounts have been kept, as well as on the use of the debtor's assets.
However, the language of the provision regarding the administrator's duty to report includes a caveat – the administrator must file to report if deemed necessary. In practical terms, this means that filing the report is always subject to the consideration of the administrator. In accordance with the act, the administrator must assess the effect of the suspected offence on two different accounts in order to determine whether a report must be made to the police.
On first account, the administrator must assess whether the suspected offence affects the claims in bankruptcy.
If the suspected offence violates the financial rights of the creditors and the quantity of the assets concerned is not negligible, the administrator is obligated to report the offence under the Bankruptcy Act. However, when assessing the quantity of the criminal liability, the administrator should consider the amount of overall damage caused by the suspected offence instead of potential recoverability of the assets or the implications that the suspected offence may have on the disbursements of individual creditors. As such, the administrator's penal assessment diverges from the civil considerations of the recovery cases.
Moreover, if the suspected offence concerns an individual creditor only, the filing of a report is generally not for the administrator. Instead, if the administrator observes that such an offence may have been committed by the debtor, the administrator should inform the affected creditor and let that creditor decide whether to choose to file a report on its own behalf. It follows that tax offences, for example, are not for the administrator to report but rather for the tax authorities.
In its recommendation relating to the administrator's duty to report suspected offences, the Bankruptcy Ombudsman has stressed overall assessment, in which the administrator weighs the probability of a punishable offence against the gravity of the criminal liability. If it is unclear whether the essential elements of an offence are at hand, the administrator should not file the report unless the overall damage caused is substantial. In any case, the administrator should always take the specific circumstances into account. For example, if the suspected offence is deemed systematic, the threshold for filing should be lower.
The other account to be considered by the administrator is the impact that the suspected offence has on the scrutiny of the bankruptcy estate (ie, identifying and locating debtor's assets and drafting of the estate inventory).
The administrator is obliged to file the report if the debtor's offence has substantially impeded the scrutiny of the bankruptcy estate. For example, if the administrator is unable to determine the assets of the bankruptcy estate due to lacking or misleading accounts, the administrator should consider filing a report on accounting crime under Chapter 30, Section 6 of the Criminal Code of Finland (39/1889, as amended). Further, the Bankruptcy Ombudsman recommends that the administrator files a report on the suspected offence if the debtor's bankruptcy has been declared under ostensible management that has taken the control of the debtor specifically for the purposes of the bankruptcy – typically just before the bankruptcy proceedings – as this is likely to impede the scrutiny of the estate.
The Bankruptcy Act does not explicitly list the applicable penal provisions establishing the offences subject to the administrator's duty to report. However, the language of the act sets out certain types of offence in this regard:
Offences committed against creditors
The typical offences committed against creditors include the following penal provisions under Chapter 39 of the Criminal Code:
A typical case of dishonesty is at hand when a debtor gives away its assets without an acceptable reason, or otherwise transfers the assets beyond the reach of the creditors and thus causes the debtor's insolvency or essentially worsens it.
A debtor may be guilty of favouring a creditor if the debtor repays a debt before its maturity, gives collateral that had not been agreed on or uses an unusual means of payment to meet a liability. Further requirements are that the debtor has intended to favour an individual creditor over other circumstances where the debtor has known it cannot meet all of its liabilities.
These two offences relate to the claims in bankruptcy, and as such are directly in the interests of the creditors. These offences may include transactions that are also subject to the civil recovery proceedings. However, the criminal responsibility and civil liability under recovery proceedings are not conditional to each other. A transaction may be recovered irrespective of whether the suspected offence is at hand.
Debtor's fraud is different in that it typically affects the scrutiny of the bankruptcy estate instead of claims in bankruptcy. Debtor's fraud may be at hand if the debtor has concealed information from the administrator or has given misleading information in a circumstance that is significant from the viewpoint of the estate inventory.
If a debtor with a legal duty to keep accounts impedes obtaining a true and sufficient picture of the debtor's financial result of the business violates the statutory accounting requirements and enters false or misleading data into the accounts, or destroys, conceals or damages account documentation, the debtor may be found guilty of an accounting offence.
As the debtor's accounts have a crucial role in drafting the estate inventory, the accounting office relates typically to the scrutiny of the bankruptcy estate. The Bankruptcy Ombudsman recommends that where the accounts have been destroyed or neglected completely, the administrator should always report an accounting offence. The same applies if the debtor refuses to deliver the accounts to the administrator.
Other business offences
Despite the title, which is the same as that of Chapter 30 of the Criminal Code, other business offences include:
In a bankruptcy context, the typical application of Chapter 23, Section 1 of the Limited Liability Companies Act involves a violation of the creditors' protection by unlawful distribution the debtor's assets. Pursuant to Chapter 13, Section 1(3), transactions in contravention of the provisions of Chapter 13 of the act that reduce the assets of the company or increase its liabilities without a sound business reason constitute unlawful distribution of assets. As such, this penal provision relates chiefly to the effects on the claims in bankruptcy.
Pursuant to the Bankruptcy Act, the bankruptcy administrator must report the suspected offence to the police if deemed necessary in circumstances where there is a reason to suspect that the bankruptcy debtor has committed an offence.
The filing of a report on a debtor's suspected offence is always based on the consideration of the administrator, whereby the administrator assesses the effect that the suspected offence has on claims in bankruptcy (ie, damage caused to the creditors in general), and on the scrutiny of the bankruptcy estate (ie, identification and localising of debtor's assets and drafting of the estate inventory).
The scope of applicable offences includes:
The typical offences that involve the financial interest of the creditors (ie, the offences that affect the claims in bankruptcy) include:
For further information on this topic please contact Juho Lenni-Taattola or Lasse Luoma at Hammarström Puhakka Partners, Attorneys Ltd by telephone (+358 9 474 21), fax (+358 9 474 2222) or email (firstname.lastname@example.org or email@example.com).
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