Finland
Under Finnish law, a security interest shall be validly and bindingly given and established, provided that the following four requirements have been met:
- a pledge agreement between the parties;
- competence to give the pledge (i.e. security);
- an underlying obligation which is to be secured by the security; and
- the applicable perfection measures having been taken.
From these requirements, we would especially highlight requirements the second and last (ie competence and perfection measures) as worthy of consideration. When these four requirements are met, the pledge constitutes a valid and binding obligation of the party giving the security.
The following points should also be considered.
Capacity
It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative. In some cases, it would also be advisable to request a copy of the decision of the board of directors (or an extract of it), in which it was decided to enter into the transaction in question. If it is not within the company’s capacity to enter into a security agreement, but such an agreement is entered into regardless, the agreement shall be binding unless the counterparty knew, or it ought to have known, that the signatories were acting against their capacity. It should also be noted, that Section 1 of Chapter 13 of the Companies Act states how a limited liability company may distribute it assets. According to this section, any distribution of assets which is contrary to the provisions of the Companies Act, constitutes unlawful distribution of assets. Under the Companies Act, distribution of assets includes all transactions which might affect the company's liquidity. Further, under the Companies Act, a company must always ensure that entering into any transaction is in the best interest of the company.
Insolvency
In insolvency proceedings any security given may be set-aside if the provisions of the Recovery Act are met. Under Section 14 of the Recovery Act, a security may be set-aside if:
- the security was given for an already existing debt obligation; or
- if the relevant perfection measures were not taken without undue delay.
It is further required under both the above-mentioned situations that the security was given within three months prior to the beginning of the insolvency proceedings (or within two years for connected parties). It should be noted that any security given (and the related agreements) may also be subject to proceedings under alternative provisions of the Recovery Act to those listed here.
Financial assistance
Under the Companies Act it is unlawful for a limited liability company, including both private and public companies to provide financial assistance for the purchase of its own (or its holding company's) shares. Financial assistance in this context would include giving a guarantee or security in connection with the share purchase.
Natural person
If security or a guarantee is given by a natural person, there are some specific mandatory requirements which need to be taken into consideration. For example, under applicable legislation, the natural person must be given sufficient information about the pledge or the guarantee by the beneficiary.
Are there any restrictions on lending and borrowing?
Lending
Lending is a regulated activity in relation to lending to consumers. The Consumer Protection Act regulates consumer credits and the Finnish Competition and Consumer Authority supervises lending to consumers.
Consumer loans are subject to a range of regulatory requirements. For example, there are particular restrictions around:
- how the loans are marketed;
- how to deal with borrowers who fall behind with their payments; and
- how payments may be claimed from the consumers.
Borrowing
Borrowing is generally not regulated in Finland. However, certain borrowers may benefit from specific protection provided to them under Finnish law (for example consumers).
What are common lending structures?
Lending in Finland can be structured in a number of different ways to include a variety of features depending on the commercial needs of the parties.
A loan can either be provided on a bilateral basis (a single lender providing the entire facility) or syndicated basis (multiple lenders each providing parts of the overall facility).
Syndicated facilities by their nature involve more parties (such as agents which fulfil certain roles for the finance parties), are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one of the syndicate taking the lead in coordinating and arranging the financing.
Loans will be structured to achieve specific objectives, e.g. term loans, working capital loans, equity bridge facilities, project facilities and letter of credit facilities.
Loan durations
The duration of a loan can also vary between:
- a term loan, provided for an agreed period of time but with a short availability period;
- a revolving loan, provided for an agreed period of time with an availability period that extends nearer to maturity of the loan and which may be redrawn if repaid;
- an overdraft, provided on a short-term basis to solve short-term cash flow issues; or
- a standby or a bridging loan, intended to be used in exceptional circumstances when other forms of finance are unavailable and often attracting a higher margin.
Loan security
A loan can either be secured, unsecured or guaranteed.
Loan commitment
A loan can be:
- committed, meaning that the lender is obliged to provide the loan if certain conditions are fulfilled; or
- uncommitted, meaning that the lender has discretion whether or not to provide the loan.
Loan repayment
A loan can be paid back in instalments of the same size consisting of a loan repayment portion and an interest portion. The size of the monthly instalment changes in line with changes in interest rates, but the loan period remains unchanged (annuity loan).
It can also be paid back in instalments of the same size consisting of a loan repayment portion and an interest portion. The size of the monthly instalment remains unchanged when interest rates change, nut the loan period changes (fixed instalment loan).
It can also be paid back in instalments consisting of a fixed loan repayment portion and an interest portion that changes as interest rates change. When interest rates change, the size of the monthly instalment changes, but the loan period remains unchanged (fixed period loan).
It can also be paid back in one instalment consisting of the whole loan amount at the end of the loan period, and during the loan period only interest payment shall be made.
What are the differences between lending to institutional / professional or other borrowers?
Lending to legal persons is subject to less regulatory oversight and so less burdensome from a compliance perspective. It is mainly a matter of contract law.
The Consumer Protection Act (especially Chapters 7 and 7a) regulates lending to consumers and the provisions in the Act are mandatory.
Do the laws recognize the principles of agency and trusts?
Trusts are generally not recognized in Finland however, under the quite recent Act on Detecting and Preventing Money Laundering and Terrorist Financing, trust, as they are defined in Article 3, Section 7 of the Directive (EU) 2015/849, are recognized as legal entities for the purposes of the said Act.
The principle of agency is recognized in Finland and in accordance with the Act on Agent of Bondholders,it is possible to appoint an agent to act on behalf of other parties and to hold rights and other assets for the lenders or secured parties.
Are there any other notable risks or issues around lending?
Generally
Loan agreements and other finance documents are subject to general contractual principles. Consumer clients must be taken into consideration because the regulations regarding consumers are mandatory.
Specific types of lending
For instance, providing mortgages to consumers is subject to mandatory regulations. The Mortgage Credit Directive, which is implemented in Finland through chapters 6, 7 and 7a of the Consumer Protection Act, imposes a number of requirements on lenders. These requirements include, amongst other things, the lender’s need to:
- conduct affordability tests before lending;
- provide standard information about the mortgage to enable borrowers to compare products; and
- ensure that staff are suitably trained.
Standard form documentation
Most Finnish syndicated finance transactions are governed by documentation based on recommended forms published by the Loan Market Association (LMA). These are often governed under English law, however. Bilateral finance transactions are more likely to be documented on bank standard form documentation prepared in-house and be governed by Finnish law.
Are there any other notable risks or issues around borrowing?
Borrowers should be aware of the potential implications of the EU’s Bank Recovery and Resolution Directive (BRRD), which outlines certain measures for dealing with failing financial institutions. It has been implemented in Finland through the Act on Resolution of Credit Institutions and Investment Firms (laki luottolaitosten ja sijoituspalveluyritysten kriisinratkaisusta) and the Act on the Financial Stability Authority (laki rahoitusvakausviranomaisesta).
The BRRD applies to financial institutions incorporated in the European Economic Area (EEA), but does not apply to EEA branches of non-EEA incorporated entities.
Article 55 of the BRRD gives authorities the power to ‘bail-in‘ obligations of failed EEA financial institutions and also postpone the enforcement of early termination rights against the affected institution. ‘Bail-in‘ describes a variety of write down and conversion powers, such as the power to convert certain liabilities into shares or cancel debt instruments. In the case of English or other EEA law contracts, such powers override what the contracts says. In the case of non-EEA law contracts, there are requirements to incorporate such provisions into the contract.
Hans Sundblad
Partner
DLA Piper Finland Attorneys Ltd
[email protected]
T +358 9 4176 0421
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