Lending and taking security in Finland: overview
A Q&A guide to finance in Finland. The Q&A gives a high level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security, negative pledge clauses, guarantees, and loan agreements. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and trust concepts; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.
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This article is part of the global guide to finance. For a full list of contents visit www.practicallaw.com/finance-guide.
Overview of the lending market
The Finnish corporate lending market has remained stable and is largely dominated by the domestic OP Financial Group (that is, one of the largest financial companies in Finland) together with its Nordic rivals, Nordea, Danske, Handelsbanken and SEB.
Requirements for secured lending have continued to tighten. The most common financing problem of companies has been to find sufficient securities for loans, leading to an increasing demand for unsecured lending. However, bank lending has remained the main source of financing for Finnish companies, including both large corporations and SMEs. Although the interest rates and margins have remained at a record low, the low investment levels in Finland have also kept the demand for new corporate loans low. However, the sources of financing are gradually diversifying and an increasing number of companies have raised funds through corporate bonds or commercial papers (that is an unsecured zero-coupon promissory note with a fixed maturity of not more than 12 months).
There has been an increase in factoring that is a financial transaction and a type of debt financing in which a business sells its accounts receivable to a third party at a discount), in particular among small enterprises looking for alternative funding and quick sources of cash. In addition, the emergence of a variety of new consumer loans, including pay-day loan providers, has also affected the corporate lending market, which services the funding needs of these loan providers. Forms of security over assets
Real estate in Finland includes the:
Land and water areas that are registered as real property units in the Land Register (kiinteistörekisteri).
Components (ainesosa) of a property, such as buildings, soil and trees that belong to the real estate.
Accessories (tarpeisto) of a property (such as equipment and tools) that are permanently located on the property and serve the property's intended purpose.
Common forms of security
Security over real estate can only be created by means of a mortgage (kiinnitys). Both title to real estate and certain transferrable leasehold rights of real estate can be mortgaged.
The holder of the title or, as applicable, of the leasehold right to the real estate can apply for the mortgage. In addition, the mortgagee can, with the written consent of the mortgagor, apply for the mortgage.
To establish a security interest in real property, the following is required:
Registering the mortgage over the real property in the Land Register. The Land Registry will issue mortgage notes (panttikirja), to represent the mortgage.
A pledge of the mortgage notes in favour of the mortgagee.
Transfer of the mortgage notes to the mortgagee.
The security interest is perfect when both the mortgage is registered with the Land Register and the mortgage notes are pledged and transferred to the mortgagee.
The same mortgage notes can, once the pledge has been released by the (first) mortgagee, be reused as security and repledged to a new mortgagee.
Tangible movable property
Tangible movable property
Tangible movable property in Finland includes any tangible property other than real property, for example:
Aircraft and ships.
Gold and jewellery.
Common forms of security
Securities over tangible movable property can be created either by means of a pledge (pantti) or a floating charge (yrityskiinnitys). However, aircraft, ships and vessels in excess of 15 meters and trucks, busses, tractors and similar large vehicles cannot be pledged but may be subject to a specific mortgage.
The common forms of security in Finland are listed below.
Pledge. This is the standard form of security over tangible moveable property. Due to the formalities (see below, Formalities) involved in creating, executing and perfecting a pledge, tangible movable property is seldom used as security in commercial banking transactions.
Floating charge. The floating charge provides security over all movable assets of a debtor's business, excluding property that has been specifically pledged or is capable of being mortgaged. The debtor can dispose of its movable assets in the ordinary course of business. New assets acquired by the debtor will automatically be included in the floating charge. Except for securities and receivables, assets covered by a floating charge can generally not be pledged.
A floating charge does not provide as strong a protection as a pledge or mortgage. In the event of bankruptcy, a floating chargee is only entitled to 50% of the realised value of the charged assets, while the remaining 50% is available for distribution to the unsecured creditors.
Mortgage. Security over aircraft, ships, vessels in excess of 15 meters as well as trucks, busses, tractors and similar large vehicles can only be created by means of a specific mortgage.
Pledge. To create, execute and perfect a pledge of tangible movable property all of the following must be complied with:
The pledge agreement must be executed and delivered.
The possession of the movable property must be transferred to the pledgee or its representative or, if the property is in the possession of a third party, a notice to the third party.
A second-ranking pledge of tangible movable property is perfected by notice to the first-ranking pledgee.
Floating charge. To create, execute and perfect a floating charge, all of the following must be complied with:
The chargor must issue floating charge notes.
The floating charge must be applied for and registered (with the floating charge notes) in the Floating Charge Register (yrityskiinnitysrekisteri).
The floating charge notes must be pledged in favour of the chargee.
The floating charge notes must be delivered to the chargee or its representative.
An application for a floating charge can be filed either by the chargor or by the chargee (with the chargor's written consent). The same floating charge notes can be re-pledged to another chargee once the pledge to the (first) chargee has been released.
Mortgage. The Finnish Transport Safety Agency (Trafi) maintains specific registers for vessel mortgages, aircraft mortgages or vehicle mortgages, which can be created and perfected in the same manner as a real estate mortgage (see Question 2, Formalities) or a floating charge.
The most common types of financial instruments in Finland are:
Equity securities (in certificated and in dematerialised book-entry form and shares of private companies that are not certificated).
Common forms of security
Security over financial instruments is created by a pledge. Securities that are not subject to a specific pledge can be secured by a floating charge (see Question 3).
A pledge is created by the execution and delivery of a pledge agreement. The perfection method for the pledge depends on the type of financial instrument:
A pledge of certified securities is perfected by physical transfer of the certificates to the pledgee or its representative.
A pledge of uncertified shares of private companies is perfected by a notice to the company, which then must record the pledge in the company's share register.
A pledge of book-entry securities is perfected by registration of the pledge against the book-entry account in which the securities are held.
A pledge of receivables (derivatives) is perfected by notice to the debtor (that is, the counterparty of the derivate transaction).
For formalities relating to the creation of a floating charge, see Question 3, Formalities.
Claims and receivables
Claims and receivables
The most common types of claims and receivables are:
Credit card receivables.
Other debts or rights under contracts.
Common forms of security
Security over claims and receivables are created by a pledge. Claims and receivables that are not subject to a specific pledge can be secured by a floating charge (see Question 3).
A pledge of claims and receivables is created by the execution and delivery of a pledge agreement. It is perfected by notice to the debtor, instructing him to make payments to the pledgee.
Common forms of security
Security over cash deposits (including bank account funds) are created by a pledge. Cash deposits that are not subject to a specific pledge are secured by a floating charge (see Question 3).
A pledge over cash deposits is created by the execution and delivery of a pledge agreement. It is perfected by notice to the pledgor's bank, blocking the pledgor's right to make withdrawals. In addition, it is market practice to request the pledgor's bank to provide written confirmation that it will not, without the consent of the pledgee, exercise its right of set-off against the funds in the bank account.
The most common types of IP over which security is granted are:
Common forms of security
Security over IP rights can be created by a pledge or a floating charge.
A pledge over IP is created and perfected by registering it in the relevant register maintained by the Board for Patents and Registrations. To register the pledge, a written pledge agreement or undertaking is also required.
For the formalities of a floating charge, see Question 3, Formalities.
According to the ''earnings principle'' (ansaintaperiaate), future receivables for which the counter performance has not yet been made (that is, when the receivable has not yet been ''earned'') cannot be pledged with binding effect on third parties. However, a duly perfected pledge agreement can be binding on the parties and become enforceable and effective in relation to third parties once the receivables are ''earned''.
Once their title has been passed to the debtor, future assets can be subject to a floating charge registered against the debtor's assets. Future assets can also be pledged if the assets can be identified in the pledge agreement. However, the pledge will have no effect on third parties until the title to the pledged assets has been passed to the pledgor and the pledge has been duly perfected.
Future funds in bank accounts or in a book-entry securities account will, once credited to the account, become subject to the pledge registered over the account.
Security over fungible assets (such as stocks, inventory and accounts receivables) can be created by a floating charge. In addition, a pledge of fungible assets is possible under certain circumstances (for example, if the assets can be identified and separated from the pledgor's other funds).
Contractual rights cannot be pledged, except to the extent that they constitute receivables.
Release of security over assets
The terms and conditions for the release of a security are generally agreed in the relevant security agreement. The relevant provisions usually provide for the secured assets (in the possession of the pledgee, mortgagee or chargee) to be returned to the debtor when the security is released.
A pledge over book-entry securities is released by removing its registration from the book-entry account. A pledge over receivables or bank accounts is released by a new notice to the underlying debtor or bank. A pledge over IP is released by removing its registration from the relevant register.
Special purpose vehicles (SPVs) in secured lending
It is uncommon to take security over the shares of SPV holding assets instead of the debtor's assets. However, in transactions that use special bidding SPVs (in particular, M&A and real estate transactions) security is taken over the shares of the SPVs, in addition to the assets of the target.
Financial assistance rules (see Question 13) restrict the use of the assets of the target for the purposes of servicing or securing the loan.
Sale and leaseback
Sale and leaseback structures (that is, a contractual arrangement where the relevant assets are sold to an investor and then leased back to the seller) are used, in particular in connection with:
Real estate financing.
Movable property, such as machinery and aircraft.
However, under the Finnish Land Code, the parties cannot validly agree on the seller having a call option or repurchase right, which should be taken into account when structuring a real estate sale and leaseback transaction.
There is a risk of recharacterisation in sale and leaseback structures as a secured (or unsecured) loan exists and the buyer's title to the property may not in all circumstances be recognised and protected against the seller's creditors if the assets remain in the seller's possession.
Factoring (that is, when accounts receivables are sold to a factoring company, who assumes responsibility for the collections, either on a recourse or non-recourse basis) is usually used to finance working capital. In order for the transfer to be duly perfected, the transfer of each receivable must be notified to the relevant debtors and the debtors must be instructed to make payments directly to the factoring company.
The factoring company bears the risks associated with the quality of the receivables and creditworthiness of the underlying debtors. The risk associated with the quality of the receivables is that the underlying debtors continue to be entitled to raise against the factoring company any counterclaims and set-off claims that they have against the transferor, including claims for defects or delays in the goods or services delivered.
Hire purchases are frequently used, in particular in the financing of vehicles. A hire purchase is used in the sale of goods, where payment is made in instalments and both:
One or more instalments mature after the goods have been handed over to the buyer.
The seller has retained either the ownership of the goods until the price is paid or a right to take the goods back if the buyer fails to pay the price.
Hire purchases are subject to specific laws regulating the form of contracts and the terms for repossession by the seller. In addition, Finnish insolvency laws regulate hire purchases specifically.
The statutory impediments to enforcement and repossession (such as statutory payment holidays or force majeure events) can in some instances cause substantial delay to both processes. In addition, the repossession process is highly regulated and includes a valuation risk. If the parties fail to agree on a statement of accounts, the enforcement authority will value the repossessed goods and impose a statement of accounts on the parties. In the statement of accounts, the value of the repossessed goods is credited in favour of the debtor and, correspondingly, the total outstanding amount of the receivable (calculated according to detailed regulations) and the repossession costs are credited in favour of the lender. If the total amount credited in favour of the debtor exceeds the total amount credited in favour of the lender, the lender can only proceed with the repossession if the difference is first paid to the debtor. Where the total amount credited in favour of the debtor is less than the total amount credited in favour of the lender, the lender can, in addition to the repossession of the goods, only claim for the difference. This difference constitutes an unsecured claim against the debtor.
Retention of title
Retention of title refers to a condition of sale under which the seller retains the ownership of the goods until the purchase price has been paid in full. If the purchase price is paid in instalments, the regulations on hire purchases must be observed in order for the retention of title to be considered valid. In addition, the seller cannot effectively invoke the title if the sold goods have been fixed to another price of property in a permanent manner or resold by the buyer.
The risks associated with the retention of title include the risk of damage or loss.
A right to set-off of claims is widely used in lieu of security, in particular, by the financial industry. Set-off can be based on an agreement or requested unilaterally by a party. Unilateral set-off can be imposed on the counterparty where the relevant claims are one of the following:
Of the same kind.
Oppose to one another.
Due and payable.
The primary risks relating to set-off include the risk of claw-back in connection with insolvency proceedings, in particular if the parties agree on set-off in circumstances where the statutory prerequisites for set-off are not met (see Question 23).
The following types of guarantees are commonly used as security in Finland:
Surety (omavelkainen takaus) (that is, when the guarantor assumes responsibility for the debt).
Secondary guarantee (toissijainen takaus) (that is, when the creditor has not been able to collect payments from the debtor to settle the debt in full or the debtor has been declared bankrupt, making the guarantor liable for the debt).
Deficiency guarantee (täytetakaus) (that is, when the guarantor's obligation is limited to the extent that the debt cannot be recovered from the security of the principal debt).
Demand guarantee that imposes an obligation on the guarantor to pay on demand. Demand guarantees are typically governed by English law and, for Finnish law purposes, recognised as valid and enforceable contractual undertakings.
A guarantee is typically documented either in a unilateral declaration by the guarantor or in an agreement between the guarantor and the beneficiary. A guarantee can also be included in a credit agreement.
Risk areas for lenders
Financial assistance is governed by the Finnish Companies Act (osakeyhtiölaki, 2006/624), which prohibits a limited liability company (osakeyhtiö) from granting a loan, security or guarantee for the purpose of another entity acquiring shares in it or its parent company.
Generally, the purpose of a limited liability company is to make profit to its shareholders, unless otherwise provided in its articles of association. Any transaction that reduces the assets of the company or increases its liabilities without a due corporate benefit may be considered unlawful.
In particular, corporate benefit must be considered when a company grants security for or guarantees the debt of another company in the same group. Typically, where a parent grants a security for or guarantees the debts of its subsidiary, corporate benefit issues rarely arise. However, corporate benefit issues are more likely to be established in connection with:
Guarantees by a subsidiary for the benefit of its parent company.
Cross-stream security or guarantees to benefit a sister company.
Loans to directors
The Finnish Companies Act does not specifically address loans to or guarantees in favour of directors. However, these loans and guarantees must be at arms' length and in the interest of the company.
An unreasonably high interest rate on a loan is considered usury, if it is clearly disproportionate to the lender's performance, taking into account the (Finnish Criminal Code (rikoslaki, 1889/39)):
Amount of the credit, credit term and other terms of the credit agreement.
Credit risks associated with the credit granted.
Cost of activities relating to due conduct and responsible lending.
Costs incurred in the financing of the credit.
Overhead expenses of the credit operations.
Finnish law does not set any interest rate caps for commercial lending.
A security can be voided if either:
It was not agreed when the loan was raised or the debt was incurred.
It was not perfected when granted.
Structuring the priority of debts
Contractual subordination is common practice in Finland and generally considered to be effective and enforceable between the parties. Contractual subordination can be achieved by means of inter-creditor agreements or subordination clauses. The Finnish Companies Act regulates capital loans, which are special types of subordinated loans that count as equity in the solvency test of a limited liability company. For a loan to qualify as a capital loan:
It must be contractually subordinated to all other debts except for other capital loans.
It must not be secured by the company or any of its subsidiaries.
The principal of the loan may be repayable and interest payments allowed, only to the extent that the company's total amount of equity exceeds its accrued losses.
Structural subordination is also possible and common in Finland, and can be achieved by, for example, lending at different levels of a group structure.
Inter-creditor arrangements are commonly used in Finland and provide useful means for lending banks to ensure priority, both in terms of the:
Ranking of claims in the event of insolvency.
Time and order of payment of interest and repayment of capital outside of insolvency proceedings, in relation to shareholder loans or inter-company loans and other lower ranking junior financiers.
The typical parties to the inter-creditor arrangements are lending banks, shareholder creditors and inter-company creditors.
Debt trading and transfer mechanisms
Debt that is governed by Finnish law can be transferred and traded. A collateral or guarantee securing the debt is usually transferred together with the debt, unless prohibited in the security agreement.
To perfect the transfer of the debt, the debtor must be notified of the transfer. The transfer of security may also need to be independently perfected, for example by:
Transferring the mortgage notes, certified securities, floating charge notes or secured assets to the possession of the new lender.
Delivering a new notice to an account bank or the debtor of the underlying security.
Updating registration entries for book-entry securities or IP rights.
Agent and trust concepts
An agent concept is recognised under Finnish law and a security agent, who represents the secured parties, is frequently used in syndicated loans. As an agent, the security agent can act as an authorised representative of the secured parties and also enforce the security on behalf of the secured parties.
Finnish law does not have the concept of a trust. While a trust created under the laws of another country is generally recognised in Finland, Finnish law will govern the way in which security can be taken and enforced with respect to assets in Finland. The practical implications of this include that a security trustee would not be able to effectively take or enforce security in its own name and right but would act as a representative or agent of the secured parties.
Enforcement of security interests and borrower insolvency
A lender can enforce its loan, guarantee or security interest once the secured debt has become due and payable. To enforce an unsecured loan by means of seizure of the assets of the debtor or to enforce a mortgage, the lender must both:
Obtain an enforceable judgment or an arbitration award.
File for the enforcement with the enforcement authority that will execute the seizure of the borrower's assets.
Methods of enforcement
Security interests over real estate are usually enforced in a public auction by execution authorities.
Typically, the pledge agreement for movable property, financial instruments or receivables grants the pledgee wide discretion as to the means of realising the assets. For example, realisation can take place through private sale by the pledgee or a collection of receivables without any need to first obtain a court judgement or arbitration award.
A floating charge is enforceable only on the winding-up of the company in connection with the realisation of all assets of the debtor.
Rescue, reorganisation and insolvency
Voluntary contract-based reorganisation arrangements are fairly common among Finnish corporate lenders and borrowers.
The statutory reorganisation proceedings (yrityssaneeraus) of Finnish companies are governed by the Company Reorganisation Act (laki yrityksen saneerauksesta 1993/47, as amended). The commencement of company reorganisation proceedings triggers a moratorium, providing the company with general protection from its creditors, both secured and unsecured. The moratorium is in force until the court confirms a reorganisation programme for the debtor company. The acceleration of loans and the enforcement of security during this period are generally prohibited.
A reorganisation programme, which is prepared by the court-appointed administrator after consultation of the creditors, includes the arrangements considered necessary or desirable to rehabilitate the company and provides for amendments to the debts and the repayment obligations of the debtor company (including haircuts). However, the principal amount of any secured loan cannot be reduced below the value of the security and maturity cannot be extended unreasonably. The reorganisation programme can also include other measures, such as:
Changes to the business operations.
Production procedures of the debtor company.
Divestment or redundancy plans.
A reorganisation programme remains in force for a defined time period. The business activities of the company continue as usual, except for the limitations deriving from the programme and some restrictions on the debtor's capacity to control its assets. The reorganisation programme generally ends when all liabilities have been satisfied and other actions have been completed in accordance with the programme.
The commencement of bankruptcy proceedings (konkurssi) prevents the creditors from independently enforcing loans, guarantees or security. As an exception, a pledgee can usually independently realise the pledge after having given due notice in writing to the insolvency estate no later than on the filing day (valvontapäivä). The pledgor must also inform the liquidator of the contemplated type, time and place of the realisation. The bankruptcy estate can prohibit the realisation for a maximum period of two months or, with the bankruptcy court's consent, take over the realisation.
A transaction can be voided where either the:
Transaction, alone or together with other transactions:
favours one creditor over the others;
transfers assets from the reach of creditors; or
unduly increases the debt owed to some creditors.
Debtor was insolvent at the time of the transaction or the transaction contributed to the insolvency within five years, and the other party to the transaction was, or should have been, aware of this.
In addition, payments made less than three months before the commencement of insolvency proceedings can be declared void if made in accordance with one of the following:
With unusual means.
Before the due date.
If the amount of the payment is considerable in comparison to the financial position of the borrower (unless considered the ordinary course of business in the circumstances).
A security granted or perfected less than three months before the commencement of insolvency proceedings can be declared void if either the:
Security interest was not agreed when the debt was incurred.
Security was not perfected without undue delay after the debt was incurred.
For close persons, the above time periods are extended.
In bankruptcy proceedings, creditors are paid in the following order:
Claims secured by a mortgage or a pledge.
Certain claims incurred in connection with restructuring proceedings.
Claims secured by a floating charge.
The priority rankings between several mortgages over the same assets and floating charges usually follow the time and order of registration of the mortgage or floating charge notes, which is set out in the relevant register entries.
If a security interest is not duly perfected, the security interest is not considered enforceable and the relevant creditors are treated as unsecured creditors.
Cross-border issues on loans
Taxes and fees on loans, guarantees and security interests
There are no documentary taxes in Finland. However:
The sale of Finnish shares is generally subject to a transfer tax at the rate of 1.6% of the purchase price (2% in the case of real estate and housing companies). Sales of listed shares are exempt from transfer tax and no transfer tax is imposed on sales between non-residents (except for real estate and housing companies).
Sale of real property is subject to a transfer tax at the rate of 4% of the purchase price.
In addition to the nominal purchase price, the transfer tax base also includes any debt or liabilities assumed by the purchaser, where the assumption of the debt or liabilities accrues to the benefit of the seller.
Only nominal registration fees apply.
Only nominal notaries' fees apply.
Description. Finlex is an online database of up-to-date legislative and other judicial information of Finland. Finlex is owned by Finland's Ministry of Justice. Most of the information is only available in Finnish and Swedish. There are approximately 600 full text translations of Finnish Acts (mostly in English). However, these may be out-of-date and should be used for guidance only. Case law is also available in English, but should be used for guidance only.
Tarja Wist, Partner
Waselius & Wist
Professional qualifications. Finland, LL.M, 1989; Admitted to the Finnish Bar, 1994
Areas of practice. Banking and finance; capital markets; mergers and acquisitions.
- Advising on the sale and leaseback and related financing arrangements of an Airbus A350-900 aircraft.
- Advising on the securitisation of auto loan hire purchase contracts by Santander Consumer Finance Oy.
- Advising on the financing of the acquisition of Musti ja Mirri Group Oy.
- Advising on the financing of the acquisition of Nets Holding A/S and its Finnish subsidiaries.
Languages. Finnish, Swedish, English, German
Professional associations/memberships. Finnish Bar Association: Securities and Finance Law Expert Group (former chair); International Bar Association (former member); Banking Law Committee (former co-chair); Legal Practice Division Council (current member)
- Banking Regulation – jurisdictional comparisons, the European Lawyer Reference Series.
- The Banking Regulation Review, Law Business Research.
- Security over Receivables, the International Bar Association and Oxford University Press.
- Global Financial Services Regulator, Oxford University Press.
Hannakaisa Andersson, Associate.
Waselius & Wist
Professional qualifications. Finland, LL.M, 2015
Areas of practice. Banking and finance; capital markets; corporate and commercial
Non-professional qualifications. Finland, MSc in Economics and Business Administration, 2014
Languages. Finnish, English, Chinese, German, Swedish
Professional associations/memberships. Association of Finnish Lawyers.