The Helsinki Court of Appeal issued a judgment regarding the recovery of assets to the bankruptcy estate on 26 October 2022. The Court of Appeal concurred with the judgement of the District Court and stated that the payments subject to recovery must be considered customary in the light of the circumstances, and as a result, they were not reversed back to the bankruptcy estate. The decision is still subject to appeal to the Supreme Court.
The main question in the matter was to consider whether the assets in question had been mixed with the company’s own assets in a way that they could be reversed to the bankruptcy estate in accordance with Section 10 of the Act on the Recovery of Assets to Bankruptcy Estates (“Recovery Act”). If the answer was yes, the subsequent question was to consider whether the payments made during the intervening period could be considered customary.
Company B Ltd had authorised Company A Ltd to act as its representative and to sell admission tickets to the public on its behalf. Company A Ltd and Company B Ltd had concluded a ticket sales agency agreement pursuant to which Company A Ltd should have kept the assets they collected from the sale of the tickets separate from their own money. However, the income received from the ticket sales had been credited to their own main bank account and the funds had thus become mixed with Company A Ltd’s assets.
Company A Ltd was declared bankrupt on 22 August 2018. Company A Ltd’s bankruptcy estate filed a lawsuit against Company B Ltd in order to recover the assets back to the bankruptcy estate in accordance with Section 10 of the Recovery Act. Company A Ltd had discharged its debt totalling EUR 87.538 to Company B Ltd during the period from 12 March 2018 to 22 August 2018. The payment transactions had been made significantly late (177–298 days after the due date) and they were made during the so-called critical period. This means that the payments were made later than three months before the cut-off date, which, pursuant to Section 2 of the Recovery Act, was the filing date of the restructuring application, i.e. in this case 11 June 2018.
The bankruptcy estate of Company A Ltd considered that the payments were not customary and therefore the assets would be recoverable. Company B Ltd, on the other hand, was of the opinion that the assets that were required to be returned were not Company A Ltd’s property – and thus the property of the bankruptcy estate – but rather the property of a third party (transit items). Therefore, in Company B Ltd’s view, the case did not concern the payment of a debt that could be reversed. Furthermore, Company B Ltd considered that the accounts had been, in any case, customary and the settlement procedure had continued in the same way for a longer time.
Asset commingling assessment
Pursuant to Section 10 of the Recovery Act, payment of a debt later than three months prior to the due date can be recovered if the debt has been paid by unusual payment instruments or prematurely or with an amount that is significant in relation to the assets of the estate. The payment shall not, however, be recovered if it is considered customary given the circumstances. It is stated in the government bill which concerns the Finnish Bankruptcy Act that if the assets of the debtor and a third party are mixed, they have lost their individuality and, therefore, they are generally not distinguishable. The Court of Appeal considered that the funds had been mixed and thus cannot be separated. Therefore, there would be grounds to apply Section 10 of the Recovery Act and the funds should form part of the assets of the bankruptcy estate.
Assessment of customary nature of payments
It is undisputed in this matter that the amounts paid by Company A Ltd must be considered to be considerable in view of the estate’s assets. The payments made by Company A Ltd were due in 2017, so it is clear that they were long overdue, which indicates that the payments were not customary. On the other hand, the Court of Appeal assessed that the following issues indicated that the payments were customary: i) the payment practice between the companies and the fact that the funds collected from the ticket sales have been invoiced continuously in the short term, ii) the payments made to Company B Ltd had not been out of proportion in relation to the new invoicing accumulated during the same period, i.e. altogether EUR 134.000 and iii) the debt to Company B Ltd had increased by EUR 23.000 during the same period of time. Lastly, the debt collection measures that Company B Ltd had used, including the sending of reminders by email and finally terminating the agreement, but not threatening Company A Ltd with bankruptcy, did not indicate that that the payments would not have been customary. These circumstances altogether support the conclusion that the payments had to be considered customary and there were no grounds for an opposite conclusion, regardless of the fact that the payments had been overdue for a long time.
Based on the Helsinki Court of Appeal’s judgement, when assessing whether the payments are customary, attention should be paid e.g. to the business relationship and the payment and debt collection practice between the companies as well as to the question how the amount of debt has evolved during the period when the payments have been made. In addition, it is also important to consider whether the payments are overdue and how large are the payments in comparison to the assets of the bankruptcy estate.