Finland: Special Features Of The Finnish Business Mortgage

Many jurisdictions, including Finland, recognise the taking of security not only over individual assets but also over the business assets (as a class of assets) of a security provider. In Finland, the latter form of security is called ‘yrityskiinnitys’, in English ‘business mortgage’ or ‘enterprise mortgage’ (the term business mortgage is used in this article). The term ‘floating charge’ is also used to describe a Finnish business mortgage. Yet while this term has the advantage of being widely used in many jurisdictions to describe a security that is, in many respects, similar to the Finnish business mortgage, it also has the disadvantage of suggesting that the legal implications are the same, or at least essentially similar to, those of, for example, a floating charge in English law. The truth is, however, that while the legal implications (aside from perfection requirements) of taking security over individual assets are fairly similar in many jurisdictions, the implications of taking security over business assets on a ‘floating’ basis vary significantly from jurisdiction to jurisdiction. For example, a Finnish business mortgage has many features that are unique to the Finnish legal system, compared to similar forms of security used in many other jurisdictions. Some of these features are discussed in more detail below.

The security position of the holder of a Finnish business mortgage is rather weak, as is discussed below. To begin with, it ranks second to any security lawfully created over individual assets. Further, it only materialises in the form of a preferred right in relation to the proceeds of the business assets of the security provider when these are sold, for example, in a judicial sale, not in the form of a right to take control of, and sell, those assets. Finally, this preferred right is limited in a number of ways. First of all, essentially, all assets that are capable of being separately mortgaged fall outside the scope of a business mortgage. The same applies to receivables and securities, to the extent that they are separately pledged. Second Second, in insolvency proceedings, only half of the proceeds of a disposal of assets, falling within the scope of the business mortgage, is allocated to, and shared with, priority by the holders of pledged business mortgage notes, the balance being shared by all creditors pro rata in relation to each creditor’s claim.

A business mortgage is regulated by the Act on Business Mortgage (1984/634, the Act) and created by the issuing of a business mortgage note, or notes, which are registered in the Business Mortgage Register of the Finnish National Board of Patents and Registration. The actual security interest is then created by the pledging of those notes and perfected by their delivery into the possession of the creditor. The registered capital of the notes, in each case together with accrued interest at the rate set out in the notes, as well as the amount expressed to be reserved therein for reimbursement of enforcement costs, constitutes the maximum amount that can be received by their holder with the priority of a business mortgage. Consequently, the notes do not constitute any indication of the actual debt, if any, secured by the business mortgage.

A business mortgage will cover, in principle, all business assets of the debtor company, with the exception of immovable property and certain other assets that are capable of being subject to a specific mortgage, such as aircrafts and vessels. Certain motor vehicles, such as trucks, buses and certain motor-driven equipment will, although they can be subject to a specific mortgage, be covered by the business mortgage and cannot be charged separately if they have not been so charged prior to the registration of the business mortgage. The same applies to, for example, intellectual property which cannot be separately pledged once a business mortgage is in place.

The Act includes a general prohibition on the pledging of assets covered by a business mortgage but leaves open, for example, the question whether assets covered by the prohibition can be pledged separately after the registration of a business mortgage, but prior to pledging the business mortgage notes to a creditor as security. There is no relevant case law addressing this issue but in legal literature, the prevailing view seems to be that in order to be valid towards the business mortgage holder, a separate pledge has to be created prior to the registration of a business mortgage, in practice on the day preceding the registration of the business mortgage. A pledge undertaken in violation of this prohibition will be valid as between the pledgor and the pledgee, but will be ineffective in relation to the holder of a registered business mortgage.

It is important to note that securities and receivables can be pledged separately, regardless of an earlier registration of a business mortgage. This may weaken the security value of the business mortgage, as a pledge of movable property will rank ahead of a business mortgage, for example, in bankruptcy or other insolvency proceedings of the debtor company. However, as long as securities or receivables have not been pledged separately, they are covered by a business mortgage.

A creditor holding business mortgage note(s) has to file a claim in the bankruptcy proceedings of the debtor and specifically request priority under the Act, ie the right to payment after (i) other secured creditors and creditors who are entitled to retention or set-off rights; and (ii) expenses incurred in the insolvency proceedings. The maximum security value, conferred by a registered and duly pledged business mortgage note, is the aggregate principal amount of the note together with a maximum of three years’ interest and the amount reserved in the note for collection costs. In a bankruptcy situation, the true security value of the business mortgage is, however, as discussed, reduced by the fact that in insolvency proceedings, holders of business mortgage notes enjoy preferred right to payment only out of 50 per cent of the proceeds of the company’s assets that fall within the scope of the business mortgage.

If the enforcement of a business mortgage is sought outside of insolvency proceedings, the above mentioned 50 per cent rule does not apply and the business mortgage holders will enjoy priority to payment out of the proceeds of all assets covered by the mortgage. Such separate proceedings are, however, uncommon in practice. In reality, the inability of a debtor to service a debt secured by a business mortgage generally quickly leads to insolvency proceedings.

As shown above, the Finnish business mortgage has many similarities with the English law floating charge and similar systems in other jurisdictions but there are also significant differences. It is important that these differences are duly acknowledged when the taking of security over the assets of a Finnish legal entity is being considered.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.