Reformed Restructuring of Enterprises Act to simplify restructuring proceedings and prevent abuse
The Restructuring of Enterprises Act has been under reform during this Government’s term in office. The reform that entered into force this summer implemented the EU Directive on Restructuring and Insolvency into national law. The amendments currently being discussed concern developments on a national level. Their goal is to simplify restructuring proceedings and prevent abusing the system. The government proposal was submitted to Parliament on 3 November 2022, and the proposed Acts are intended to enter into force in the spring of 2023.
Reforms aim at streamlining restructuring proceedings
The reforms of the Restructuring of Enterprises Act aim in particular at strengthening the operating conditions of SMEs, streamlining and simplifying restructuring proceedings, promoting businesses’ possibility for restructuring proceedings early enough, and preventing abuses relating to restructuring proceedings. In addition, the new Act facilitates accessing accelerated restructuring proceedings and terminating certain contracts to which the debtor is party.
Administrator’s preliminary estimate to replace financial report on debtor
The government proposal includes replacing the financial report on debtor with a preliminary estimate carried out by an administrator. In the preliminary estimate, a court-appointed administrator establishes the debtor’s assets, liabilities and other commitments as well as the circumstances affecting the debtor’s financial situation and its expected development.
In addition, within a month of the commencement of restructuring proceedings, the administrator must also provide the committee of creditors, the debtor, the major creditors and, upon requests, the other creditors with
- an account of any new or exceptional material circumstances that have surfaced after the filing of the application;
- an account of the debtor’s financial situation;
- an account of the reasons for the financial difficulties;
- an estimate on the viability of the business and the rehabilitation measures; and
- an account of the circumstances relevant for the continuation of the proceedings.
The current report on debtor has been criticised especially for not really being able to add to the information on the debtor that is already included in the application. As the applications for restructuring proceedings must be drafted carefully, it is easy to agree with the proposed report reform. The reform simplifies considerably the administrator’s duties at the beginning of the restructuring proceedings, allowing the administrator to focus on drafting a restructuring programme and rehabilitating the business.
Terminating certain contracts to be allowed in restructuring proceedings
A debtor may terminate certain contracts it has entered into before the commencement of restructuring proceedings if such termination is necessary for the execution of the restructuring. This concerns contracts under which the debtor is committed to a non-monetary obligation and which the debtor has not fulfilled when the restructuring commences. The contracts may be terminated upon approval of the restructuring programme irrespective of their term or notice period. As an example of such contracts, the government proposal mentions long-term contracts where the debtor’s obligation to render services remains similar for a long period of time. A potential compensation for premature termination would be restructuring debt – contingent restructuring debt, to be more precise – until the restructuring programme is approved and the termination enters into force. In addition, terms and conditions relying on restructuring proceedings would be prohibited. The legal state would therefore correspond with bankruptcy.
The proposed change reflects the European framework. In many countries, termination during restructuring proceedings is more flexible than in Finland. However, the proposed legislation still carries major uncertainties. With the extended right of termination, evaluating the amount of reasonable compensation payable to the contracting partner will become more frequent. In this respect, the government proposal refers to the section on lease or credit-lease agreements. As evaluating the reasonableness of compensation has been problematic for these agreement types, it is clear that the legal state surrounding the evaluation of reasonable compensation will remain unclear for a long time. Disputes concerning the amount of compensation also lend themselves to lengthening the restructuring proceedings. Moreover, it is clear that the proposed change impairs the position of certain contracting partners of debtors in restructuring proceedings.
Longer period for bringing actions for recovery
The government proposal also suggests extending the period during which actions for recovery must be brought from six months to a year. Both the administrator and the debtor must bring actions within a year of the commencement of the restructuring proceedings. This would align the periods for bringing an action of restructurings and bankruptcies. The amended Act would also lay down more precise rules on how the assets recovered with the administrator’s action should be retained and used. The provisions on the use of assets should be included in the restructuring programme.
Extending the period for bringing an action can be criticised as it does not promote streamlining restructuring proceedings. However, it is worth remembering that actions can be brought earlier as well, and the administrator must still actively look into grounds for actions as soon as the proceedings commence. This point of departure has also been noted in the government proposal.
The government proposal also includes further amendments to the Act. As means to prevent abusing the system by filing unjustified restructuring applications, it is proposed that the processing of bankruptcy petitions is continued even if a restructuring application is filed simultaneously. However, the bankruptcy petition cannot be resolved before there is a decision on the commencement of the restructuring proceedings. If the restructuring application is denied or the proceedings are otherwise ordered to be terminated, the bankruptcy petition must be resolved.
This also applies in situations where a restructuring application has been initiated but a petition for the bankruptcy of the debtor is filed before resolving the matter. If the restructuring application and the bankruptcy petition have been filed at the same time and the restructuring proceedings are commenced, the bankruptcy petition lapses after the restructuring programme is approved.
The qualifications of administrators are also specified. In Finland, it has been deemed necessary to appoint an administrator also for early restructurings, and it is easy to agree with this approach.
The government proposal also includes a new section in the Act on declaring claims or additional demands after the due date set by the court. The new section aims to clarify the current legal state by unifying practices, as restructuring regulation would then align with the practice of retroactive lodgement of claims in bankruptcies.
The summary approval of restructuring programmes is also supported. In summary approval, the ordinary proceedings of the programme are disregarded and the programme is approved faster. Pursuant to the proposal, summary approval requires approval of the creditors whose claims total at least 70% of the overall total claims of the creditors (instead of the current 80%) as well as of each creditor whose claim is at least 10% of the overall total claims of the creditors (instead of the current 5%). It is difficult to estimate in advance what the practical effect of these changes in summary approval will be. Other procedural provisions are also fine-tuned to make the process more streamlined going forward.
Reforming the Act to continue
The European Commission is preparing a new directive on insolvency proceedings, expected to be adopted in early December. The directive will provide for recovery, the duties of directors in the event of insolvency and the rights of creditors in the event of a bankruptcy.