Every Coin Has Two Sides – Ministry of Justice Proposes Relief for Debtors?

The Finnish Ministry of Justice has stated that it aims to issue a relief to the rules that allow creditors to force debtors to bankruptcy that do not pay an overdue debt within 7 days from notice. The Ministry sites this as being a relief to debtors fighting the COVID-19 crisis and notes that insolvency should be longer lasting to qualify as a cause for bankruptcy. All well intended, but will this give the intended result or will it in fact create more problems?

Unlike some other countries, Finland does not have a hard and fast rule on when boards should discontinue trading in the face of insolvency. It can be argued that Finnish law is not all that dissimilar to the wrongful trading rules applied in the UK that forbid the board to continue trading if there is no reasonable prospect of the company avoiding a court driven insolvency process and force the boards to take actions with a view to minimising losses to the company’s creditors. In Finland, the board should have negotiations in good faith on a sale of assets or discussions with creditors and/or investors about a haircut and/or new debt or equity. The board can become liable if it continues to trade under false presumptions and creditors become worse off than they would have been if the company had timely filed for bankruptcy or reorganization.

The other side of the coin? If the Ministry fails to also relax the rules that apply to board liability for insolvent trading, we could see well-intending board members allowing insolvent companies to trade off the back of the relief from creditor-originated bankruptcy filings proposed by the Ministry and becoming personally liable as a result. In Spain, the government is suspending the time period when the debtor needs to file for insolvency and the courts will not hear creditor originated bankruptcy filings for two months. In which jurisdiction would you like to be a board member just now?

The writer has over 30 years of experience in advising boards facing liquidity problems and insolvency.

This blog post was first published on DIF’s website.