Security over Collateral. FINLAND Roschier, Attorneys Ltd.

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1 Security over Collateral FINLAND Roschier, Attorneys Ltd. CONTACT INFORMATION Gunnar Westerlund Tatu Simula Roschier, Attorneys Ltd. Keskuskatu 7 A, FI Helsinki, Finland +358 (0) Gunnar.Westerlund@roschier.com / Tatu.Simula@roschier.com 1. Can assets be charged, liened and/or encumbered in your jurisdiction? Please insert any exemptions, if any. Most types of assets may be used as security under Finnish law. For an asset to be usable as security, it is generally required that the asset (a) can be individually identified and (b) has monetary value and (c) is freely transferable. Furthermore, the creation of any security interest requires the existence of a valid underlying obligation. Since the perfection of a security interest generally requires an act of publicity, there are types of assets which may not be used as collateral individually due to the absence of a method for such an act. Furthermore, the use of certain social benefits as collateral is prohibited by law on social grounds. Other examples of assets which may not be pledged individually are buildings and constructions together with appurtenances and fixtures to the same and other merged assets, business names and an author s copyright. Note, however, that e.g. buildings and constructions may be used as security by pledging the underlying real estate, and are also covered by a floating charge. 2. In your jurisdiction, under what circumstances may security arrangements be subjected to choice of law and/or choice of forum clauses (does it matter, whether the security itself is located abroad and/or governed by foreign law [e.g. a pledged claim])? What is the market practice in your jurisdiction? Is there a treaty on this in your jurisdiction, whether bilateral or multi-lateral? Are there any requirements for enforcement in your jurisdiction?

2 Choice of law and choice of forum clauses are typically allowed under Finnish law and are binding inter partes. However, certain provisions of Finnish Law, mainly relating to the protection of the debtor/pledgor, may not be contracted out of by a choice of law clause. Even when a pledge agreement is governed by foreign law, a Finnish court will hold that the relationship between the pledgee and third parties is governed by Finnish law if the object used as security is located in Finland. This main rule may not be contracted out of by choice of law clauses. If the relevant asset is located in Finland, it is therefore recommended that the security interest is perfected in such a way as to comply with both the relevant foreign law and Finnish law. If the object is moved to Finland after a valid security interest has been created under the law of the previous location, then according to general doctrine the security interest remains valid subject to two limitations. First, it is uncertain whether a security interest that should under Finnish law be perfected by the delivery of the object into the physical possession of the pledgee will be considered validly perfected after the transfer to Finland if the object is not handed over (even if duly perfected under the laws of the previous location). Secondly, if the object is originally intended to be transferred to Finland, the security interest should be perfected in accordance with Finnish law. Enforcement of security governed by foreign law may be problematic, at least to the extent that the security interest under foreign law has a wider scope than the Finnish equivalent. As an example, the Finnish Supreme Court ruled that a German law retention of title provision was not enforceable in bankruptcy to the extent that it covered objects that had been merged with other objects (under Finnish law merging an object generally renders any security interests over the merged object ineffective in relation to third parties). It is established market practice that when the asset to be used as security is located in Finland, the pledge agreement is made under Finnish law, even if the underlying obligation (e.g. loan agreement) is not. Finland is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ( The New York Convention ) and the Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters ( The Lugano Convention ). Furthermore, Council Regulation (EC) No 44/2001 ( The Brussels I Regulation ) applies in Finland. 3. In your jurisdiction, are floating charges or security over the overall assets of an entity accepted, and if so in what terms? Finnish law recognises a floating charge 1 over the business assets of an enterprise. The floating charge is regulated by the Act on Enterprise Mortgage (Finnish: yrityskiinnityslaki) and is available to companies, other legal entities and entrepreneurs registered in the Finnish Trade Register. The floating charge covers only movable assets. This means that e.g. real estate, buildings thereon and their fixtures and appurtenances such as machinery and equipment are not covered. Other assets not 1 The Finnish term may be translated as floating charge, enterprise mortgage or business mortgage. In this presentation the terms are used interchangeably.

3 covered by the floating charge are assets whose pledging is specifically regulated. These include vessels above a certain size and aircraft (see items 4 (a) and 4 (n) below). Although the pledging of vehicles is regulated by specific legislation (see item 4 (o) below), vehicles are covered by a floating charge 2. The scope of a floating charge may be further limited by specifying in the registration application that the charge is limited geographically or to a specific business of the company. Finnish law considers buildings, machinery and equipment to be movable property when these are not fixtures or appurtenances of a freehold real estate or registerable leasehold. Thus e.g. buildings on leased real estate are covered by the floating charge unless the land lease is capable of being registered. Other types of assets covered by the charge include intellectual property rights, raw materials and inventories, receivables and financial assets (with the exception of tax refunds). In liquidation, claims secured by specific pledges over property as well as certain payables incurred during a corporate reorganisation procedure (regulated by the Act on the Reorganisation of Companies Finnish: yrityssaneerauslaki) have priority over registered floating charges. The priority of claims secured by floating charges is further limited to 50% of the net proceeds from the realisation of assets covered by the floating charge. The priority among claims secured by different floating charges is determined according to the time of registration of the charges. The Act on Enterprise Mortgage forbids, in general, the separate pledging of assets that are covered by an existing floating charge, and such security interests are not effective in relation to claims secured by a floating charge. However, paper-based and book-entry securities, as well as receivables, may be pledged freely. Assets covered by a floating charge may be disposed of in the ordinary course of business. If all or a majority of the assets are disposed of at once, the creditor may, within six months of becoming aware of the disposal, demand payment from the assets so disposed of. In practice the floating charge is most commonly used to supplement other forms of security, such as charges on real estate, pledges of shares and assignments of receivables. If all assets of the company may be pledged separately, such as e.g. in the case of holding companies, a floating charge is generally not used. A floating charge is created by registering the charge in the Trade Register. The floating charge is registered as security for the payment of a specific floating charge promissory note (or notes) with a specified principal amount, interest rate and enforcement costs. These establish the maximum amount that can be effectively secured by the charge and are not an indication of the actual value of the assets. This promissory note does not evidence an actual debt between the debtor and any creditors. The actual debt relationship is generally evidenced by a loan (or other) agreement made between the parties. The security interest is created by the pledging of the floating charge notes and perfected by handing over the notes to the creditor. When the floating charge is registered, the registration authority may be instructed to deliver the notes directly to the 2 A vehicle may simultaneously be covered by a vehicle mortgage and a floating charge. While the Act on Floating Charge prohibits the subsequent pledging of assets covered by the floating charge, the registration of a floating charge does not nullify existing vehicle mortgages. The floating charge covers any value of the vehicle in excess of the value of the vehicle mortgage.

4 creditor, in which case the security interest is considered perfected immediately upon registration. The registration fee is EUR 135. The debtor company may register floating charge notes at its discretion. The notes can be pledged immediately or retained unpledged (in reserve). Once a pledged floating charge note is released, it may be repledged as security for new debt without loss of priority. Upon application by the holder of a floating charge note, the identity of the holder is recorded in the Trade Register. The purpose of this registration is to ensure that the holder is informed of any enforcement against the assets covered by the floating charge. Failure to participate in such enforcement may result in the creditor losing the security interest, and therefore registration is recommended. 4. In relation to the following types of assets, please explain in your jurisdiction the types of security that can be created or granted, if the security requires any type of registration or perfection requirements, an estimate of cost (including applicable taxes and any other duties/ costs) and timing for granting such security, and any special considerations regarding the asset type: (a) Aircraft; Aircraft registered in the Finnish aircraft register may be charged as security as stipulated in the Act on Charges on Aircraft (Finnish: laki kiinnityksestä ilma-aluksiin). The security interest is created by the pledging of one or more promissory notes, each secured by a registered charge on the aircraft, and is perfected by the delivery of the promissory note(s) into the physical possession of the pledgee. The process is similar to the granting of security over a vessel (please see item (n) below). In liquidation a receivable secured by a charge on an aircraft is given priority up to the value of the asset. The Finnish Civil Aviation Authority estimates the processing time for the registration of a new charge to be approximately two weeks. The cost of registering the charge is EUR 100. (b) Bank Accounts; Bank accounts may be used as collateral. This is achieved by the execution of a pledge agreement between the pledgor and the pledgee(s). The pledge is perfected by the delivery of a notice to the account bank prohibiting the pledgor from making withdrawals from or otherwise using the account. The perfected pledge creates a first priority security interest over the bank account and all funds in the account. For the sake of clarity it is recommended that the pledge is specifically extended to cover any interest on the deposited funds. It is also customary to ask the account bank to give a separate undertaking not to exercise set-off against the funds on the account. To allow the daily operations of the pledgor, the pledgor is often allowed to use the bank account until an event of default has occurred. It is important to note, however, that until perfection, the pledge will not be effective in relation to third party creditors of the borrower. Should the borrower enter bankruptcy proceedings shortly after the

5 perfection of the pledge, the same may further be subject to recovery to the bankruptcy estate. Aside from legal expenses incurred, there are no material costs associated with creating the security interest. (c) Animals, Crops (in ground and severed) and Timber; In principle, these types of assets may be used as collateral by pledging identifiable objects and perfecting the pledge by handing over physical possession of the assets (Finnish: käteispanttaus). This applies to animals as well as crops and timber that are severed i.e. harvested. However, the requirement of handing over the asset generally makes the use of these objects as specific collateral impractical, and typically a floating charge is used instead. In practice sufficient individualisation and separation of harvested crops and timber may also be difficult to achieve, in which case a specific pledge will not be possible. Crops and timber in ground may not be pledged separately and are considered parts of the real estate on which they are located. Their value is reflected in the proceeds realised when the real estate is sold. It must be noted that while a fixed term logging right on real estate may be registered, this right is not separately mortgageable. The method for perfecting a security interest in severed assets is handing over physical possession, while crops and timber in ground constitute part of, and are pledged together with, the real estate (see item (j) below). (d) Equipment; Equipment may be pledged as general movable property. As these pledges are perfected by physical delivery of the relevant assets into the exclusive possession of the pledgee(s) or a third party acting on behalf of the pledgee(s), pledging equipment this way is often not practical. Equipment may also be used as collateral by creating a floating charge or by pledging the freehold real estate or registered leasehold on which the equipment is located, if the equipment is sufficiently attached to the real estate to be construed as a fixture or appurtenance of that freehold or leasehold. To avoid confusion, sufficiently identifiable equipment may be registered in the real estate register as either belonging or not belonging to a freehold or a registered leasehold. Retention of title and hire purchase may be used, but only to secure the payment of the purchase price for the relevant asset. Mandatory law regulates the terms of hire purchase transactions (The Act on Hire Purchases, Finnish: laki osamaksukaupasta), limiting e.g. the enforcement rights of the creditor. Further, the Consumer Protection Act (Finnish: kuluttajansuojalaki) applies if the purchaser is a consumer. These restrictions are not discussed in detail here. Further conditions for effective retention of title include that the object is intended to remain severable and is not intended for resale. Thus, while retention of title creates an effective security interest up to the value of the asset, it is not widely usable.

6 The existence of retention of title on a building or qualifying equipment may be registerable in the land register to protect the seller s security interest against any third party creditors. (e) Intellectual Property; Finnish law recognises the use of patents, utility models (Finnish: hyödyllisyysmalli), registered designs (Finnish: mallioikeus), trademarks, layout designs of integrated circuits and plant breeder s rights (Finnish: kasvinjalostajanoikeus) as security. Security interests in each type of asset are perfected by registration. While all types of intellectual property rights may be pledged in a single agreement, separate applications for registration are recommended. The registration fee is EUR 40 per item. If several security interests have been created over the same intellectual property right, their relative priority is determined based on the date of registration. When intellectual property is used as collateral for a specific obligation, the pledge expires when the obligation is fulfilled. As noted above, the existence of a floating charge prevents the registration of security interests on the same entrepreneur s intellectual property. The use of a separate mortgage note, although in theory possible, is not common in the case of intellectual property rights. The security interest is typically registered to secure a specific obligation, in which case repledging requires a new registration. (f) Inventory; For practical reasons it is seldom possible to pledge inventory using the general method for pledging movable property, as this would require transfer of physical possession. In practice, a floating charge is normally used to create security over inventory. (g) Leases; The pledging of leasehold property will be covered under the heading real estate (see item (j) below). Lease income may be used as collateral the same way as other receivables (see item (k) below, including the discussion on unearned receivables). The lessees should be instructed to make payments to a specific lease account, which is pledged to the creditors. (h) Mineral Interests, including Hydrocarbons; Under Finnish law, the process for the commencement of mining operations has three stages, (i) reservation of the right to claim (Finnish: varaus), (ii) the mining claim (Finnish: valtaus) and (iii) mining concessions (Finnish: kaivospiiri). Mining rights and mining claims may be used as security, while the reservation of the right to claim may not. The security interest is perfected by registering the pledge in a register maintained by the Ministry of Trade and Industry. The registration fee is EUR 60. For the registration, the original certificates (Mining Books) must be submitted to the registration authority, after which they are delivered to the pledgee or security agent.

7 Unclaimed mineral deposits may be used as security by mortgaging the real estate on which they are located. The scope of the Finnish Mining Act is specifically limited and does not include hydrocarbons. Thus these deposits may not be used as security separately. Due to the absence of oil or natural gas deposits in Finland, this limitation has few practical implications. (i) Promissory Notes and Chattel Paper; Under Finnish law, promissory notes may either be negotiable (Finnish: juokseva velkakirja) or ordinary (Finnish: tavallinen velkakirja). Both types may be used as security, but the method for perfecting the security interest is different. Ordinary promissory notes specify to whom the payment is to be made, and these notes are treated as evidence of an existing debt rather than as securities. The use of receivables as security is discussed below in item (k). A security interest over a negotiable promissory note is perfected by handing over physical possession of the note to the pledgee. Also a notice to the underlying debtor is necessary if the pledge is to include interest payments. Chattel paper security (understood to mean a transferable promissory note secured by movable property) is not recognised by Finnish law. (j) Real Estate; Real estate is a common and well established type of collateral in Finland. The security interest is created by the pledging of registered real estate mortgage notes and is perfected by the delivery of these into the exclusive physical possession of the pledgee. A real property charge may be registered on (i) a registered unit of freehold property, (ii) a fixed share of a unit, (iii) a parcel of land, (iv) transferable leaseholds (as explained below) and (v) certain usufructs. Leaseholds and other rights of use are mortgageable if they (i) are registered, (ii) have a fixed term, (iii) may be transferred without consulting the lessor and if (iv) the holder of the right of use (lessee) has or is entitled to erect buildings on the property. The scope of a real estate mortgage depends on the existence of leaseholds or other special rights that encumber the property. If such encumbrances do not exist, the mortgage covers the land, any buildings and constructions on the land and any machinery, equipment and other assets constituting fixtures and appurtenances of the property. If a leasehold does exist, buildings and constructions, together with related fixtures and appurtenances, owned by the lessee are considered to belong to the leasehold rather than the land. Thus the economic and security value of a registered leasehold is often greater than the value of the underlying property. The creation of the security interest takes place in two stages. First, the owner of the real estate (or the lessee of a registered leasehold) requests the District Court of the district in which the real estate is located to register mortgage(s) on the property. As evidence of this mortgage the District Court issues real estate mortgage notes (Finnish:

8 panttikirja) to the owner in the number and amount stipulated in the application. These real estate mortgage notes alone do not evidence actual debt. The security interest is created by the owner pledging the real estate mortgage notes as security for a debt, generally evidenced by a loan (or other) agreement, and perfected by the delivery of the mortgage notes into the exclusive physical possession of the pledgee. In the application for new real estate mortgage notes, the District Court is typically instructed to send the registered mortgage notes directly to the pledgee, in which case the pledge is considered perfected immediately upon registration of the mortgage. The dualistic structure described above, with separation of the registration of the mortgage and the pledging of the mortgage notes, has certain distinct advantages. First, the owner of the property or leasehold may register the mortgage notes in advance, and secondly the mortgage is effective until annulment and the mortgage notes may thus be released and repledged without loss of priority. The amount of a mortgage note establishes the maximum amount of debt that can be effectively secured by the pledging of that note and is not an indication of the actual value of the asset. Unlike e.g. a floating charge promissory note, real estate mortgage notes do not contain provisions on interest or collection expenses. The priority among mortgage notes registered against the same property or leasehold is determined on the basis of the date of application, and notes applied for on the same date have equal priority, unless otherwise stipulated in the application. The priority of the notes may be changed upon application by the owner. However this requires the consent of each holder of notes that would receive a lower priority. (k) Receivables (credit rights under contracts or invoices); Receivables and interest thereon may be pledged as security. The security interest is perfected by notice to the debtor, whose consent is not required unless so stipulated in the agreement between the debtor and the pledgor. In the case of existing debt, a single notification is sufficient, while in the case of future receivables (such as lease income) a separate notification should be made separately for each receivable once this has been earned (normally the notification is attached to or included in each relevant invoice). There is some uncertainty as to the treatment of unearned receivables if the underlying debtor is subject to execution proceedings or insolvency proceedings. The general view is that the security interest is not effective against third party creditors if the receivable has not yet been earned when execution or insolvency proceedings are initiated. It should be further noted that in order for the perfection to be effective, i.e. in order to ensure the effectiveness of the security interest against third party creditors, the underlying debtor should be instructed to make payment only to a bank account that is also pledged to the same pledgee. (l) Rights under Contracts (excluding Receivables); To be usable as security, an object must be identifiable, separately transferable and have monetary value. Contractual rights with these characteristics could, in theory, be used as collateral. However, other contractual rights than receivables are normally not separately transferable and are thus seldom used as security. Also contingent

9 receivables, such as the right to receive a price adjustment or the right to receive compensation on the basis of contractual liability, can be pledged. The security interest is perfected by notification to the underlying obligor. As to the timing of perfection, please see item (k) above. Pledging of the position of pledgee is, at least in theory, also possible. (m) Shares (in book-entry and certificate form and other securities); Shares that are not entered into the book-entry securities system are generally treated similarly to promissory notes, which were discussed above in item (i). There are, however, numerous additional considerations. If share certificates have been issued in respect of the shares, the security interest is perfected by handing over the certificates to the pledgee. To facilitate enforcement, the shares are usually endorsed in blank by the pledgor. Even though the security interest over the shares is perfected by handing over, a notice to the company is recommended if the intention is for the security interest to cover also dividends payable on the shares. The company is obliged to register any pledges it is aware of in the share register, even though this registration is not required for the perfection of the security interest. If no share certificates have been issued, the security interest is perfected by notification to the issuer. The pledge is registered in the share register. This situation is somewhat uncommon, as lenders typically require that share certificates are issued and handed over to ensure that there is no uncertainty as to the validity of the pledge or existence of competing pledges. Furthermore, the handing over of certificates ensures that the original lender immediately becomes aware of any secondary security interest created over the shares, as such security is perfected by notice to the holder of the share certificates. Due to the specific nature of the asset, share pledge agreements typically include stipulations on (i) the use of shareholder rights and (ii) the scope of the security over e.g. dividends and new shares issued by the company. When a default ceases to be continuing, any dividend paid on the shares to the pledgee may either be assigned to the pledgor (in which case they are released from the pledge) or retained by the pledgee. Similarly, the pledgor may be allowed to exercise shareholder rights when a default is not continuing. Book-entry securities are used as collateral by the pledging of the relevant book-entry account. The security interest is perfected by notice to the relevant book-entry registrar, who records the pledge. The pledge covers all securities recorded on the account and each account may be pledged only to a single pledgee. Furthermore, pledging of the position of pledgee is specifically forbidden. A security interest may be created over specific shares by using a separate book-entry account, on which only the shares to be used as collateral are recorded. By a similar arrangement also parts of a portfolio can be pledged to different pledgees. The pledgor may not dispose of any of the shares recorded on the pledged account without the consent of the pledgee. This includes also shares that are recorded on the account after the registration of the pledge. It is, however, possible to use a pledged

10 book-entry account and a pledged bank account to create an arrangement (a so-called portfolio pledge ) allowing the pledgor to dispose of shares on the account, provided that any proceeds are deposited on the pledged bank account and may only be used to purchase shares that are recorded on the pledged book-entry account. (n) Vessels; Vessels may, depending on the size of the vessel, be used as security either as general movable property or by registering a charge on the vessel. The latter allows the pledgor to remain in possession of the vessel. However, a charge may only be registered on vessels that have been entered into the vessel register maintained by the Finnish Maritime Administration. Other vessels may only be pledged as movable property. Vessels may (and must) be registered if they (i) are in commercial use and (ii) are more than 15 meters long. Commercial vessels between 10 and 15 meters long may be registered by application. Vessels under construction may be registered by application if upon completion the vessel would be subject to mandatory or voluntary registration. Vessels that are capable of being charged may not be pledged as movable property. Note that while smaller vessels may be registered in other registers, these registers have no security function. The process for using vessels as collateral is similar to that of mortgage over real estate, with the pledging of a specific promissory note secured by a registered charge on the vessel. A joint charge on multiple vessels is possible if all vessels are owned by the same owner, while a charge over partial ownership is not possible. The charge covers inter alia the vessel, its equipment and cargo. While the security gives its holder priority over unsecured creditors, it is secondary to certain statutory security interests such as maritime liens. The mortgage will lapse unless novated within ten years of its registration. (o) Vehicles; Certain types of registered vehicles may be used as security as stipulated in the Act on Vehicle Charges (Finnish: autokiinnityslaki). The types of vehicles that may be charged include trucks and busses, truck trailers, special vehicles, tractors and motorized work machines. Most notably vans and ordinary passenger cars may not be charged, and may thus only be used as collateral in the form of a pledge over general movable property. Conversely, vehicles that may be charged cannot be pledged as movable property. The creation of the security interest is done in two stages. The owner of the vehicle sends an application to the registration authority requesting the registration of a charge securing a separate collateral note. The actual debt is generally evidenced by a loan (or other) agreement. The security interest is created by the pledging of the collateral note and perfected by handing over the collateral note to the pledgee. The registration authority is the Finnish Vehicle Administration and the registration fee is EUR 135. Each vehicle must be charged individually. Multiple charges may be registered on each vehicle. The mortgage will lapse unless novated within ten years of its registration. The collateral note may, once released by the previous pledgee, be repledged without loss of priority.

11 (p) Business as an ongoing concern. As Finnish law generally requires that the pledged object be clearly identifiable, business as an ongoing concern may only be used as security by creating a floating charge. The floating charge is discussed above in section Please explain briefly for each type of assets the procedure for enforcement (judicial and extra-judicial). Is it possible to enforce security governed by another jurisdiction? If yes, what is the procedure? The enforcement procedures vary somewhat depending on the type of security. While judicial procedures are more common, extra-judicial procedures are available in respect of certain types of collateral. Furthermore, the enforcement procedure may be different if the pledgor is simultaneously undergoing insolvency proceedings. The most common method for enforcement is the liquidation of the collateral by auction or other sale. While the current Enforcement Act (Finnish: ulosottolaki) will be replaced by the Execution Code (Finnish: ulosottokaari) as of 1 January 2008, a number of material changes have already been incorporated into the Enforcement Act in recent years. It must also be noted that enforcement action by third party creditors may affect the pledged property. The district bailiff may foreclose on property that is pledged as security, but the secured claim retains its priority in any resulting realization proceedings. Furthermore, the bailiff should refrain from such foreclosure if it is clear that after discharging the secured claim(s), no excess value would be available to third party creditors. Movable Property The Commercial Code (Finnish: kauppakaari) stipulates a default method for the enforcement of a pledge of movable property. However, the parties may as a rule contract out of most parts of the process. This is also commonly done. Thus, the method by which the asset is liquidated is typically at the pledgee s discretion, and enforcement allowed immediately upon a default by the debtor. However, the Commercial Code requires that the pledgee must act diligently and with due consideration given also to the debtor s justified interests when liquidating the asset, which in practice means that the asset may not be sold at clearly less than its market value. Regardless of the method of liquidation, any proceeds in excess of the creditor s receivable shall be returned to the pledgor (see also section 10 below). The beneficiary of a pledge of movable property may also elect to initiate court proceedings to obtain a judgment establishing its claim and ordering the obligation to be fulfilled. This procedure may for instance become relevant if it is clear that the value of the pledged property is not sufficient to fully discharge the obligation, as the creditor will need a judgment in order to initiate (judicial) enforcement also against other assets of the debtor. Mortgages

12 The enforcement of mortgages created by registration (e.g. real estate mortgages and mortgages over vessels, aircraft and vehicles) always requires a judgment (or arbitral award), and the enforcement is carried out by a district bailiff 3. The creditor may apply for enforcement against all assets of the debtor or request that the enforcement is targeted specifically at the mortgaged asset. In either case, if the mortgaged asset is to be liquidated, the liquidation is carried out by the district bailiff in a public auction or other sale. The technicalities related to the settlement of all security interests on the asset, the auction process, and the fixing of a minimum selling price are not discussed here. The need for expedient enforcement of security is recognised by the Code of Judicial Procedure (Finnish: oikeudenkäymiskaari), which allows for a summary procedure for undisputed claims. The procedure also allows the District Court to immediately declare a mortgaged asset foreclosed. After receiving a judgment ordering the obligation to be fulfilled, the creditor may apply for the enforcement of the judgment, which typically means selling the asset by auction or other sale. This is carried out by the district bailiff, who also has discretion to decide on which assets to foreclose. A business mortgage may be enforced only through the public enforcement procedure set forth in the Finnish Enforcement Act or in connection with bankruptcy proceedings. In practice the latter is vastly more common, and thus enforcement outside of bankruptcy will be covered summarily. After receiving a court judgment, the creditor will submit an enforcement application to the district bailiff. The bailiff has authority to decide on which assets to foreclose, and to decide how the assets will be liquidated. Note that although in bankruptcy a floating charge receives priority only up to 50% of the value of the covered assets, such limitations do not apply to individual enforcement. Enforcement of security when the debtor is bankrupt In bankruptcy secured creditors enjoy distinct advantages. Creditors whose claims are secured by a pledge are separatists, which means that the bankruptcy administration is generally prohibited from interfering with the enforcement of the security (in practice the liquidation of the asset). The creditor must nonetheless inform the bankruptcy administration of the claim, the security, and any enforcement actions (prior to enforcement). To evaluate the validity of the security interest and to secure the bankruptcy estate s rights, the estate may order the enforcement to be stopped for a period no longer than two months. To maximise the proceeds to all creditors, the bankruptcy administration may, under certain circumstances, interrupt any enforcement by a pledgee and liquidate the collateral. The District Court may allow the bankruptcy estate to liquidate the property if the estate has received an offer to buy the property at a price higher than that likely to be received in a public auction. The pledgee may oppose this by showing that a higher price is likely to be achieved by other means of liquidation. The bankruptcy estate may 3 While typically an asset is declared foreclosed by the district bailiff, a court judgment may declare immediate foreclosure on a mortgaged real estate. In this event, the pledgee must nonetheless apply to the bailiff for the sale of the real estate, and the sale is carried out as usual. Upon foreclosure, the debtor/owner may no longer dispose of the asset.

13 also repay the debtor s obligation in full, in which case the creditor s security interest is cancelled. These rights of the bankruptcy estate do not typically jeopardize the value of the security interest. If the creditor s claim is not fully covered by the value of the pledged asset, the remainder is treated as unsecured debt. If the debtor is bankrupt, creditors whose claims are secured by a floating charge must allow the bankruptcy administration to carry out all measures related to the liquidation of the assets. The benefit of a floating charge is realised through the application towards payment of claims secured by registered floating charges of 50% of the net proceeds received in the liquidation of the relevant assets. Any part of the secured claims not so paid is treated as unsecured debt and in such capacity competes on equal terms with other unsecured claims for e.g. the balance of the proceeds. Security governed by a different jurisdiction Both loan agreements and security agreements entered into under foreign law are, in principle, enforceable. As signatory to the conventions listed above in section 2, Finland recognises the enforceability of foreign judgments and arbitral awards rendered in a large number of treaty jurisdictions. These may thus be used as grounds for judicial enforcement. As a judgment may be enforced against all assets of the debtor, any pledged property may be foreclosed. Assets pledged with first priority to the creditor seeking enforcement are typically favourable targets for foreclosure, and the district bailiff may be instructed to choose these assets for foreclosure (although the bailiff retains ultimate discretion). 6. Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? The use of a security agent is possible and in practice common. However, the security documents must be adapted to the Finnish legal environment to avoid complications. First, Finnish law does not recognise the concept of trustee and Finnish courts may have difficulties in determining the role of the security trustee if the term is used. In practice, the term trustee should be avoided, although in most situations a reference to a security trustee would most likely be construed by a Finnish court as a reference to the same acting as agent for and on behalf of the creditors. As the existence of an underlying debt is a condition for the creation of a security interest, and as thus security created for the benefit of a security agent that is not also a creditor may not be enforceable, it is important that security is expressed to be granted to the creditors and that references to the security agent are to the same acting in such capacity and not in its own name. It should also be noted that the debtor/pledgor cannot act as security agent. To overcome the complications discussed above, the role of the security agent should be clearly defined in the documentation. It should also be clearly stipulated that the security interest is created for the benefit of the lenders, while the security agent acts as their representative or attorney. 7. In bankruptcy or insolvency scenarios, what are the suspect periods, is clawback possible, and what other types of rights (tax debts, employees, etc.) have preference over security granted?

14 In bankruptcy and corporate restructuring clawback or recovery (Finnish: takaisinsaanti) is possible, and must be considered when taking security. Clawback is regulated in the Act on Recovery to a Bankruptcy Estate (Finnish: takaisinsaantilaki). Clawback is possible on general grounds and on specific grounds. Only the main points are discussed here, while specific information on e.g. the burden of proof is mostly omitted. Suspect periods range from three months to five years (with the exception discussed below), and are significantly longer for related-party transactions. Clawback on general grounds is possible if the legal act in question, alone or in connection with other acts, (i) unjustly favors a creditor at the expense of other creditors, (ii) causes assets to become unavailable to creditors or (iii) harms the creditors by increasing debt. Furthermore, it is required that the debtor was insolvent at the time or that the act contributed to the debtor becoming insolvent on a later date, and that the other party to the transaction was aware, or should have been aware, of this. There is no defined suspect period for a related-party transaction, and the limit on the availability of clawback is in practice determined by the requirement of causality between the transaction and insolvency. There are several situations where clawback on specific grounds is possible. This presentation is limited to the ones most relevant in this context, i.e. repayment of debt, receipt of monies by execution, set-off and granting of security. Payment of debt less than three months prior to bankruptcy may be recovered if the payment was made (i) with unusual means of payment, (ii) before it was due, or (iii) with a majority of the debtor s assets. Furthermore, the repayment as a whole must be considered unusual. The suspect period for a payment to a related party is two years, and clawback is possible unless the debtor can show that it was not insolvent at the time and did not become insolvent due to the payment. Monies received by judicial execution may be recovered into the bankruptcy estate when the execution took place less than three months prior to bankruptcy. If the payment was received by a related party, the suspect period is two years and clawback is possible unless the debtor can show that it was not insolvent at the time and did not become insolvent due to the payment. Set-off is treated similarly to payment, unless the set-off would have been allowed in bankruptcy. Set-off is typically possible in bankruptcy, and thus clawback is uncommon. Security granted in favour of a creditor may be subject to clawback, unless such security was agreed on in the underlying loan (or other) agreement and the security interest was subsequently perfected without undue delay. If the security was granted for the benefit of a related party, the suspect period is two years and clawback is possible unless the debtor can show that it was not insolvent at the time and did not become insolvent due to the security. Priority in bankruptcy is regulated in the Act on Payment Order of Creditors (Finnish: laki velkojien maksunsaantijärjestyksestä). The general rule is equal treatment of unsecured creditors, subject to certain exceptions.

15 After secured creditors (other than creditors secured by a floating charge), the highest priority in bankruptcy is vested in creditors whose claims are directly recoverable from the assets of the bankruptcy estate. These are claims which have accrued after the commencement of the bankruptcy proceedings and by which the bankruptcy estate has expressly agreed to be bound. Debts that have been incurred by the debtor in company reorganisation proceedings preceding bankruptcy enjoy the same priority provided that the bankruptcy has commenced not later than three months after the reorganisation proceedings have ended. Debts secured by business mortgages enjoy priority over unsecured debt up to an aggregate maximum amount equal to 50% of the net proceeds from the liquidation of the relevant assets. If this is not sufficient to cover the entire debt secured, the remaining amount is treated as unsecured debt. It should be noted that wages of employees do not enjoy any special privilege in bankruptcy. However, the employees' position is to some extent secured by a specific regime of the Finnish State, under which employee wages are in bankruptcy covered by a state guarantee up to a certain amount. Furthermore, some claims are subordinated by law, but these exceptions are mostly irrelevant in a business context. 8. In your jurisdiction, can borrowers or guarantors subordinate their claims and if so in what terms? Under Finnish law subordination is possible. Subordination can be statutory, contractual or structural. Structural subordination is due to its nature not discussed here. Contractual subordination is commonly used e.g. in acquisition and real estate finance transactions in order to achieve subordination of shareholder and mezzanine debt to senior funding and shareholder debt to mezzanine debt. Normally the subordination is achieved by means of a separate subordination or intercreditor agreement, imposing various restrictions and contractual undertakings both on the debtor and on the subordinated creditors. Typically the subordination applies only as between, and can be waived and amended by, the parties to the agreement. Statutory subordination is regulated inter alia by the Finnish Companies Act and by the Act on Payment Order of Creditors. The Companies Act contains express provisions on the issuing by a limited liability company of a special kind of subordinated loans, so called capital loans. The Act on Payment Order of Creditors provides that subordinated bonds (essentially unsecured bonds issued by a debtor on terms providing for a ranking behind the issuer s other debt) rank ahead of other loans that according to their terms can be paid only after all other creditors of the debtor have received full payment but behind all other liabilities of the debtor. 9. What are the consequences of a transfer, assignment or novation of an underlying credit in your jurisdiction (is new security necessary, is the security automatically transferred, etc.) Under Finnish law there is no clear distinction between assignment and transfer, and the terms are used interchangeably in this presentation. Novation (taken to mean the discharge of an obligation and the creating of a new obligation on the same terms) entails significant risks in the Finnish legal environment. A Finnish court may hold that

16 security interests for the benefit of the new creditor are only valid if created and perfected after the novation. Such repledging may further affect the priority of the security interests. Transfer of the security is in most cases possible. If the loan agreement provides for transfer or assignment of the loan, the security agreements typically reflect this by stipulating that the security is given for the benefit of the initial lenders and their successors, assignees and transferees. Transfer of rights under the security agreement may be stipulated to occur immediately and automatically upon the assignment or transfer of the loan. Similarly, the security agreements typically stipulate that the security interest is effective until the secured obligations (as extended) are fully discharged. 10. Can you have on top of a security in your jurisdiction, another layer consisting of an assignment of the collateral concerned conditional upon default by the debtor? The Finnish Contracts Act (Finnish: laki varallisuusoikeudellisista oikeustoimista) expressly prohibits contractual terms by which pledged property is forfeited if the obligation is not discharged. However, it may be stipulated that the pledgee may enforce the pledge by taking ownership, subject to payment to the pledgor of any value of the pledged object in excess of the debt. Furthermore, after a default has occurred, the debtor and creditor may agree that the obligation is discharged by transfer of ownership of the pledged property to the creditor. If the value of the asset exceeds the outstanding obligation, such arrangements may be susceptible to clawback. 11. Are step-in rights lawful in your jurisdiction or does any action to take control require the creditors to go through a court process? Step-in rights (taken to mean the right of the creditor to replace the debtor as a party to agreements) are not recognised by Finnish law. The actions of the debtor are in practice controlled by undertakings in the loan agreement or other contractual arrangements.