Every coin has two sides – Ministry of Justice proposes relief for debtor?

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. MoJ 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 does this give the intended result or are in fact more problems created?

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 UK wrongful trading rules 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 we are used to saying that the board should have good faith negotiations 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 had the company timely filed for bankruptcy or reorganization (“yrityssaneeraus” in Finnish).

The other side of the coin? If the MoJ fails to relax also the rules that apply to board liability for insolvent trading we could see well intending board members allowing insolvent companies to trade on the back off the MoJ proposed relief from creditor originated bankruptcy filings and becoming personally liable. In UK the government is proposing a 3-month relief to the wrongful trading rules. 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 30 years of experience in advising boards facing liquidity problems and insolvency.

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