Legal Alert – New Interpretation of Law Improves Contractors’ Probability of Success in Restructuring Proceedings

As of 8 June 2018, the interpretation of the Finnish Act on the Contractor’s Obligations and Liability when Work is Contracted Out (“Act on Contractor’s Obligations”) (Tilaajavastuulaki) has changed in terms of the restructuring proceedings carried out by a contractor. Under this new interpretation, if a contractor initiates restructuring proceedings and the contractor has restructuring debt towards the tax authority or an employment pension insurer, it is no longer considered an indication on contractor’s possible failure to fulfil statutory obligations under the Act.

Contractor’s obligations in relation to the payment injunction during restructuring proceedings

Pursuant to the Act, contractors shall ensure that their contractors discharge all their statutory obligations, i.e. have for example paid the applicable taxes and other statutory contributions. Contractors must acquire this confirmation before signing an agreement with the contractor.

The contractors’ obligations can be fulfilled by obtaining a report (in Finnish: Luotettava Kumppani -raportti) from a Finnish private service provider called Suomen Tilaajavastuu Oy. If the report shows that a contractor has not fulfilled its statutory obligations, contractors may face a negligence fee if they conclude an agreement with such contractor. If the report shows that all obligations have been fulfilled, an agreement can be concluded without a risk of being fined.

According to the earlier rule of interpretation of Suomen Tilaajavastuu Oy and the supervising authorities, the status of the report of a company that has unpaid obligations and is under restructuring, was “to be clarified”, unless these restructuring debts were paid or a payment plan, i.e. restructuring programme, was approved by the court. The status “to be clarified” indicates that the contractor’s obligations might not have been fulfilled and that contractors should obtain a clarification on this before concluding an agreement with the said contractor. In practice, most contractors do not conclude agreements with contractors or even petition for clarification with the status “to be clarified”. The contractors usually have other alternative contractors to choose from and consider the process of obtaining additional information as burdensome and the information obtained as unreliable. Contractors have also refused to pay their debts to companies with this notification in their report.

The above-mentioned interpretation has caused practical problems for companies undergoing formal restructuring proceedings. Under the Finnish Restructuring of Enterprises Act, the debtor company may not repay its restructuring debts once the restructuring proceedings have commenced. Restructuring debt means all debts that have arisen before the filing of the restructuring application, including statutory payments, such as taxes. This means that a contractor under restructuring is legally not allowed to pay any of its taxes or employee pension insurance payments that have arisen before the filing of its restructuring application, and can therefore not fulfil its statutory obligations defined in the Act on Contractor’s Obligations.

The changed rule of interpretation and its impact

In practice, the interpretation together with the payment injunction of restructuring debts have meant that contractors have refrained from concluding agreements with contractors that are undergoing restructuring. Therefore, these contractors have faced significant difficulties in obtaining new orders and have made it even harder to rectify the already dire financial situation. The difficulty of obtaining new orders has meant that the chances of implementing a successful restructuring programme have clearly been decreased, which in its turn has meant that the whole purpose of the Restructuring of Enterprises Act, i.e. rehabilitation of distressed companies’ viable business has been compromised.

As of 8 June 2018, Suomen Tilaajavastuu Oy has for the above-mentioned reasons, changed this rule of interpretation after discussions with the relevant authorities such as Regional State Administrative Agency and Bankruptcy Ombudsman and the tax authority and two biggest employment pension insurance companies. Currently, the payment injunction of the Restructuring of Enterprises Act is considered as a valid payment plan, and therefore, unpaid restructuring debt does not prevent the contractor from getting a report showing that its statutory obligations have been fulfilled. However, the report still contains a note on the restructuring proceedings of the contractor and that the restructuring programme has not been certified by the court.

This change of interpretation is considered a significant improvement from the perspective of successful restructuring of companies that are obliged to fulfil the requirements of the Act on Contractor’s Obligations. Attorney Robert Peldán, as the appointed restructuring administrator of NELIÖX Oy, initiated these discussions between the parties and was actively engaged in finding a solution for the problem that is hampering the successful restructuring of otherwise viable companies.

Borenius’ lawyers are available to assist in addressing any questions you may have regarding this legal alert. Please feel free to contact any of the Borenius attorneys listed in this alert or those with whom you usually work.