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03 August 2012
Under the Bankruptcy Act (120/2004), the bankruptcy estate must liquidate the assets of the estate in the manner most advantageous to the estate. This is an essential principle of insolvency law.
The bankruptcy administrator will usually carry out the liquidation – this is one of its main duties. However, the power to make decisions regarding the liquidation rests with the creditors. A successful liquidation requires cooperation between the administrator and the creditors.
The Bankruptcy Act includes detailed provisions on the liquidation of collateral belonging to the estate. In accordance with these provisions, secured creditors have a special position and rights in the bankruptcy proceedings, whereby the bankruptcy estate's right to sell the collateral is restricted. The secured creditor has the right to sell the collateral regardless of the bankruptcy proceedings. The bankruptcy estate may sell the collateral only with the secured creditor's consent or, in the case of disagreement regarding the liquidation, if a court grants its permission.
In bankruptcy proceedings, a secured creditor may exercise its right of liquidation of the collateral and collect its claim out of the sale price, insofar as not otherwise provided in the Bankruptcy Act. However, it must first give notice of the claim to the administrator. Also, the interests of the bankruptcy estate should be considered in the liquidation of the collateral.
The right to sell the collateral plays a relevant part, as without such right the value of the collateral would not be as high as intended. If the collateral is a piece of a real estate, a mortgageable vehicle, an aircraft or a vessel, the secured creditor has the right to apply for its liquidation in accordance with the Enforcement Act (705/2007). If the collateral is a movable object, the secured creditor has the right to liquidate it directly through a private sale.
If the creditor has taken measures for the liquidation of the collateral in violation of the obligation to give notice of the claim, the court may – at the request of the bankruptcy estate – enjoin or stay the measures or order other measures necessary to safeguard the estate's interests. In addition, the estate may prohibit the creditor, for two months at most, from taking or continuing measures for the liquidation of the collateral. The prohibition takes effect once the estate has verifiably served it on the creditor.
The bankruptcy estate's right to sell the collateral is restricted as in some cases the liquidation might harm the interests of the secured creditor. The bankruptcy estate may sell the collateral belonging to the estate only if the secured creditor consents or if the court grants permission in the following circumstances:
In addition, the bankruptcy estate may request that the collateral be sold in accordance with the Enforcement Act. However, in the absence of the secured creditor's consent, the request may be filed no sooner than three years after the beginning of the bankruptcy proceedings. The request should be accompanied by evidence that the secured creditor has been notified of the sale no later than three months before the filing of the request and that the creditor has filed no request for the prohibition of the sale for the two months thereafter.
As described above, the bankruptcy estate has the right to sell the collateral belonging to the estate only with the secured creditor's consent. If there is more than one secured creditor, the administrator must obtain consent from all of them, including those with a secondary security right. The consent can be given in any form. However, as evidence may be needed in the future, it is recommended that the administrator demands written consent.
The administrator's duty is to find the most profitable way to sell the collateral from the viewpoint of the bankruptcy estate. The liquidation can be carried out, for example, as:
Although the collateral can be liquidated without the secured creditor's consent, this will not endanger the validity of the collateral or the other rights secured by the assets. If the bankruptcy estate sells the collateral and the claim secured by the collateral is not repaid, the collateral will remain bound unless the secured creditor agrees otherwise. The rule also applies to other rights secured by assets.
The rules described above derive from the essential principles of Finnish property law. Transferring ownership will have no effect on legally valid liens or pledges. The bankruptcy estate is responsible for retaining all effective rights, including those which will not necessarily be effective in accordance with the principle of protection of the third party.
For further information on this topic please contact Matias Leskinen at Hammarström Puhakka Partners, Attorneys Ltd by telephone (+358 9 474 21), fax (+358 9 474 2222) or email (firstname.lastname@example.org).
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