Legal Alerts/12 Dec 2022
Important Decision by the Supreme Court – Damages to be Paid for Terminating Subtenancy Agreement in Restructuring Proceedings Treated as a Restructuring Debt
In its recent decision, the Supreme Court rejected an appeal lodged by a debtor’s previous subtenant and stated that the claim for damages based on the premature termination of a subtenancy in connection with the termination of the tenancy agreement between the debtor and its landlord is to be treated as a restructuring debt.
The decision is an important precedent, and it is also in line with the previous decisions by Helsinki District Court, Helsinki Court of Appeal, and the supervisor, Senior Partner Jyrki Tähtinen from Borenius, who also acted as the administrator in this restructuring case in question, issued in relation to the treatment of damages for terminating subtenancy agreements in connection with restructuring proceedings.
Helsinki District Court approved the debtor’s restructuring programme on 9 February 2021. In its decision the District Court stated that the damages payable to the former subtenant, based on the termination of the debtor’s lease agreement pursuant to Section 27 of the Finnish Restructuring Act, are considered a restructuring debt instead of a debt that has arisen after the filing of the application pursuant to Section 32 of the Restructuring Act.
The subtenant appealed against the decision stating that the claim for damages was based on a breach of contract taken place during the restructuring proceedings. Helsinki Court of Appeal rejected the complaint.
The Supreme Court’s decision
The Supreme Court had to discuss whether the basis of the subtenant’s claim for damages had arisen before the filing of the application and, consequently, whether the debt must be considered as a restructuring debt or a debt that has arisen after the filing of the application, which should be paid when it falls due. If the debt had arisen after the filing of the application, the Supreme Court also had to take a stand on whether the claim would still be considered a restructuring debt pursuant to Section 27 subsections 1 and 4 of the Finnish Restructuring Act.
Under the Supreme Court's decision, the subtenant's claim for damages from the debtor is a restructuring debt pursuant to Section 27 subsection 1 and 4 of the Finnish Restructuring Act. In its decision, the Supreme Court considered the regulation applicable to the relationship between the landlord and the tenant and highlighted that the purpose of the restructuring proceedings as well as the requirement of equality among creditors supported the opinion.
Furthermore, the Supreme Court noted that the special provision of Section 27 of the Finnish Restructuring Act sets aside the principle of full compensation and confirmed that the compensation in restructuring for the premature termination of a lease agreement must be a reasonable compensation. The Supreme Court also noted that the requirements of the restructuring proceedings and the objective of the Restructuring Act to enable the rehabilitation of a distressed debtor's viable business outweigh any interest that the debtor's contracting party may have in continuing to enjoy the benefits of the contractual relation.
Implications of the decision
The Supreme Court’s decision can be considered important as it discusses a topic relevant in several restructuring proceedings where Section 27 of the Finnish Restructuring Act is applied. Furthermore, this is also the first decision made by the Supreme Court on the subtenant’s position in a restructuring proceeding.
The decision also highlights the objective of the Restructuring Act supporting the rehabilitation of the viable business of a distressed debtor in the interpretation and application of Section 27 of the Finnish Restructuring Act and reaffirms that reasonable compensation referred to in the section does not mean full compensation.
The Borenius lawyers named below are more than happy to answer any legal questions you may have regarding this decision. Please do not hesitate to contact us for more information.