Finland
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).
Are there any restrictions on giving and taking guarantees and security?
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.
What are common types of guarantees and security?
Common forms of guarantees
Guarantees may be given for one’s own debt or for someone else’s. In both cases the guarantees may be either performance guarantees or payment guarantees. Performance guarantees guarantee the performance of the underlying obligations of the debtor. Such guarantees are typically given by a parent company for the performance obligations of its subsidiary. Payment guarantees on the other hand cover the payment obligations of the debtor rather than any contractual performance obligation. The specific terms and conditions applicable to guarantees are determined on a case by case basis.
Common forms of security
The most common forms of securities granted by a company of its assets are:
- a mortgage over real estate;
- a pledge over assets which are identifiable and can be controlled by the creditors (such as equipment and vehicles);
- a floating charge over the fluctuating assets of the company (Yrityskiinnitys); and
- a pledge of receivables (such as rental income) and bank accounts.
Are there any other notable risks or issues around giving and taking guarantees and security?
Giving or taking guarantees
The most notable risks are related to guarantees given by natural persons.
If a guarantee is given by a Finnish limited liability company for liabilities of a third party then the guarantee is subject to the condition that sufficient corporate benefit, as such concept is applicable under the Limited Liability Companies Act, is given to the guarantor or pledgor, and the requirement set out in Section 13:2 of the Companies Act that no distribution of funds should lead to insolvency will apply. The existence of corporate benefit and the fulfilment of the requirement in Section 13:2 are ultimately questions of fact. Should the above referenced requirements not be fulfilled, any guarantee or other security provided for obligations owed by other parties, may be limited and funds or proceeds received may have to be returned to the guarantor.
Giving or taking security
A pledge is only valid and binding if it meets certain prerequisites (for more information, see Giving and taking guarantees and security – restrictions). Of these prerequisites, particular consideration should be had to perfection measures, as if these are not undertaken in accordance with the applicable law, the pledge might not be binding to third parties and it is also more likely to be subject to proceedings to have the pledge set aside. The perfection measures differ depending on the nature of the pledged assets (for example, with real estate mortgages the pledge has to be notified to the register at the Finnish land registry and with shares the pledge has to be written in the share and shareholder’s register and relevant share certificates must be given to the beneficiary).
In addition, we would recommend that pledge and guarantee agreements are made in written form signed by both parties. While this is not a mandatory requirement under Finnish law it is recommended for good order.
In addition, any security or guarantee may be subject to measures to have such guarantee or security set-aside under the Recovery Act.
Hans Sundblad
Partner
DLA Piper Finland Attorneys Ltd
[email protected]
T +358 9 4176 0421
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