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01 February 2013
Overseas companies often use branch offices to expand into new markets due to their relative simplicity and cost efficiency. This is a common model used by many international companies, both big and small, in Finland. It follows that questions relating to the role of branch offices in potential insolvency situations - whether local or global - are significant issues for the creditors of such companies.
Pursuant to Section 2 of the Act on the Right to Conduct Industrial and Commercial Activity (27.9.1919/122 as amended), the term 'branch office' refers to a part of a foreign company or foundation that is engaged in continuous business on behalf of the foreign company or foundation through a fixed establishment in Finland.
Pursuant to Article 4(1) of the EU Insolvency Regulation (1346/2000), the law applicable to insolvency proceedings and its effects is the law of the member state in which such proceedings are opened. Further, as provided for in Article 4(2), the law of the member state in which proceedings are opened shall determine the conditions for the opening of those proceedings, their conduct and their closure. In particular, the law of the country in which proceedings are opened shall be used to determine the debtors against which proceedings may be brought on account of their capacity.
In the event of Finnish bankruptcy proceedings involving a branch office of a foreign company, the Bankruptcy Act (120/2004) regulates the opening of proceedings. According to Chapter 1, Section 3 of the act, a private individual, a corporation, a foundation and another legal person may be declared bankrupt. The rather restricted and general language used in the act does not provide clearly defined boundaries to the subjective scope of bankruptcy proceedings. In practice, the act encompasses almost every type of entity engaged in economic activity.
However, the preamble of the act states that a debtor's susceptibility to bankruptcy is based on its legal capacity and separate estate. 'Legal capacity' refers to a debtor's capacity to possess rights on its own account, to make independent commitments and to be a respondent in court proceedings. Under the Act on the Right to Conduct Industrial and Commercial Activity, only a nominated representative of a branch office is eligible to receive a summons on behalf of the foreign company.
It follows that in the absence of any explicit language in the Bankruptcy Act regarding a branch office of a foreign legal person, such a branch office may not be declared bankrupt - a branch office is not a legal person, but rather a part of another foreign legal person.
A recent ruling of the Helsinki Court of Appeal (HelHO:2012:6) confirmed that a branch office cannot be declared bankrupt in Finland. The court upheld a district court decision which stated that a branch office is not a legal person and therefore cannot be declared bankrupt in the absence of an explicit provision. Further, the district court stated that the susceptibility to to bankruptcy is an issue concerning the capacity to be a party in court proceedings and, as such, is within the jurisdiction of the court to consider ex officio.
Therefore, a creditor of a foreign company that has established a branch office in Finland cannot reserve its rights or limit its damages in an insolvency situation by means of a local bankruptcy application concerning the branch office itself, even if there are substantial assets situated in Finland. This could be problematic for the creditor, especially if a debtor's assets in Finland would make local bankruptcy a practical and attractive solution.
Pursuant to Article 3(2) of the EU Insolvency Regulation, Finnish courts have jurisdiction to open secondary insolvency proceedings against a debtor whose centre of main interests is situated in another member state, provided that such a debtor possesses an establishment in Finland. The law applicable to Finnish secondary proceedings and their effects is that of Finland (Article 4(1) of the EU Insolvency Regulation).
Therefore, it may be possible to open Finnish secondary insolvency proceedings under the Brankruptcy Act concerning a debtor whose main interests are situated in another member state and has a branch office in Finland. Similarly, under the act, a non-EU debtor may be declared bankrupt in Finland. However, in this case the prerequisite for opening proceedings is based on either a fixed establishment or sufficient distrainable assets situated in Finland at the time the proceedings are opened.
The effects of such proceedings (concerning either an EU or a non-EU debtor) will be limited to the distrainable assets of the debtor situated in Finland at the time of opening such proceedings. It follows that in some instances a swift opening of proceedings may be in the best interests of a creditor in order to mitigate the detrimental effect of cross-border transactions aimed at moving the debtor's assets beyond the reach of Finnish proceedings - potentially to a jurisdiction deemed more advantageous to the debtor.
Further, the EU regulation does not categorically prohibit secondary proceedings that precede the main proceedings. The secondary proceedings may be opened in Finland even though the debtor has not been declared bankrupt in the main proceedings situated in another member state in which the debtor is registered. A creditor may find potentially available territorial proceedings more practical due to, among other things, the limited scope of the proceedings and relative ease of lodgement in brankruptcy claims.
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 (email@example.com or firstname.lastname@example.org).
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