Finland – Has the Time for Restructuring Support Agreements Come?

In Finland, restructuring has often been used as a last resort by owners seeking to shield themselves when the till has run dry, funds have been exhausted, and creditors are poised to petition the company into bankruptcy (referred to in the US as "free fall Chapter 11 bankruptcies"). This typically means that preparation for restructuring has been inadequate and there have been no discussions with creditors to attempt to negotiate a restructuring plan before filing the application (see our commentary in the recent debt-to-equity legal alert, where we discuss key updates regarding amendments to the Finnish Restructuring of Enterprises Act and predicted that the need for voluntary negotiations and better preparation beforehand would increase, as owners could now lose their holdings in corporate restructuring).

In the US, in Chapter 11 proceedings, and now in the UK, Part 26A proceedings, the uncertainty regarding in-court restructuring processes has often been mitigated through pre-negotiations and Restructuring Support Agreements (US) or Plan Support Agreements/Lock-Up Agreements (UK) (collectively, "RSAs"). For instance, in the Virgin Atlantic restructuring, the company entered into support agreements with a large number of plan creditors and other key stakeholders who undertook to support the recapitalisation and to vote in favour of the restructuring plan.

In the following sections, we will discuss what RSAs are, what is agreed and between whom, and what are the recognised advantages and disadvantages. Finally, we will offer our view on how RSAs might fit within Finnish Restructuring of Enterprises Act proceedings and how they might prove useful in the future.

The basic problem with out-of-court workout negotiations is the ability of one or small minority of creditors to oppose a meaningful restructuring plan in order to “blackmail” for full payment (holdout creditors). Modern in-court restructuring laws also often provide for certain benefits to the debtor including moratorium, ability to opt-out from loss-making agreements, cram-down of the holdout creditors and debtor-in-possession financing that are not available on voluntary workouts. RSAs build a bridge between the out and in-court processes by allowing for negotiation out of the public eye without negative going concern effects, securing necessary majorities for plan approval and then filing with restructuring law benefits.

The RSAs have their origins in the US but were introduced to UK insolvency rules in 2016 and have recently become commonplace after the introduction of Part 26A restructuring plans in the UK. RSAs are agreements made pre- or post-bankruptcy petition between certain creditors (usually the biggest creditors or creditor group majorities) that agree to support the upcoming restructuring plan with certain pre-agreed-to terms and usually also the debtor company. This type of pre-planning helps to ensure that Chapter 11 plan (or Part 26A in UK) will be successful. They make it less likely for the company having to file for a liquidation bankruptcy as it can already count on having enough creditors being supportive of the restructuring plan and thus will face less negotiation issues after the plan is filed.

RSAs key element is for an agreement to support the contemplated plan. Creditors can agree not to intervene with the plan confirmation and not to transfer or assign claims that are subject of the RSAs. RSAs can include entire classes of creditors or just a few key constituents, and the agreement may be solely among creditor constituencies or may include the debtor as a party.

As a part of a US pre-filing RSAs there will usually be a term sheet that describes the contemplated restructuring, as well as milestones for various in-court and out-of-court events. In-court milestones can relate to for example, to the filing of a petition, plan, or sale motion or confirmation of a plan and out-of-court milestones may relate to dates for debt exchanges, votes, and solicitations.

Due to the nature of the Part 26A being based on scheme of arrangements the UK RSAs are about an agreement to pursue and implement the plan negotiated with sufficient creditor majorities in all or at least with the in-the-money creditor groups allowing for cram-down of out-of-the money groups. RSAs require participating creditors to vote for the plan and support any ancillary steps (e.g. new financing or liability releases). If used in scheme of arrangements a standstill is included into the RSA as schemes do not provide for a moratorium. As in the US RSAs are seen in the UK as practical tool to achieve consensual restructurings.

In both countries the plans can offer some fees or incentives for the creditors that adhere to the RSA. The UK the courts have focused on such inducements being transparent, fair and equitable.

In the US RSAs usually include a fiduciary out provision which allows the debtor's board to abandon the agreement if their fiduciary duties require them to pursue a superior alternative proposal or if the debtor exercising its business judgement, determines that remaining in the agreement would no longer be in the best interests of the estate for e.g. if the debtor were to receive what it might perceive as superior restructuring offer after entering into the RSA. A material adverse change (regarding the debtor) out is also quite common.

As noted above well negotiated and drafted RSAs combine the best part of private and public re-structuring regimes. Key benefit of RSAs is their ability to incorporate the basic terms of the plan quickly and efficiently. Since RSAs can be negotiated pre-filing, post-filing or both they allow a debtor to bargain “in the shadow” of liquidation or cram-down. RSAs create strong incentives for parties to build consensus and come to an agreement that may not be present otherwise in the out-of-court context.

RSAs tend to reduce costs and length of the insolvency process thereby minimising disruption to customers, suppliers and employees. They also reduce negative news caused by an extended moratorium and signal relatively quick return to the market.   

In the UK two potential issues have been raised i) creditors being paid upfront fee for the RSAs in order to provide some comfort for the company about the likely outcome of the plan meeting, possibly resulting in separate voting classes for the ones receiving fees and those that are not and ii) the provision of timely, adequate and appropriate information to creditors.

The widespread use of RSAs can result in mismatched and inconsistent information provision to creditors. Creditors might end up binding themselves to RSAs at different times, when different information was available. RSAs can create imbalances, as most of the negotiation participants tend to be well-funded stakeholders such as large financial institutions. This comes as an expense to trade creditors, as they most likely cannot participate in RSA’s negotiations nor dissent to the envisioned plan once it has the support of these well-funded stakeholders. However, it is important to note this issue does not exist in use of RSA’s alone but is an economic reality of larger creditors possessing more leverage. The amount of the upfront fee can additionally impact the way a creditor will vote.

While a US RSA can provide that debtor will seek to reject a contract or lease, or that an impaired creditor class will be created, these provisions are subject to the requirements of the Bankruptcy Code and court oversight. A RSA does not allow a debtor to address its potential litigation liability. Creditors need to keep this in mind or otherwise they will risk giving consent to an agreement that ultimately will not grant them what they expected.

The US Bankruptcy Code has several protection mechanisms for dissenting creditors to ensure that RSAs bestow benefits on all parties without creditors being placed at the mercy of inside groups.

The Bankruptcy Code's plan confirmation requirements provide several key protections for dissenting creditors, including:

Additionally, whilst it is often the case that trade and other smaller creditors are not impaired in prearranged cases, if such creditors are impaired, they have the right to vote to reject the plan.

These protections collectively ensure that, albeit large creditors may negotiate RSAs before bankruptcy, dissenting and smaller creditors maintain meaningful rights to protect their interests through voting requirements, recovery guarantees, and judicial oversight of the confirmation process. It has been noted that RSAs bring more advantages to the table than potential drawbacks.

In the UK the plan has to receive requisite support of at least one creditor group in the money (would receive a payment or has a genuine economic interest) and none of the dissenting creditor groups can be worse off than in the relevant alternative. Furthermore, the courts have absolute discretion to refuse a plan that is not just and equitable. Part 26A case law has been evolving from giving the out-of-the money creditors no say to pointing out that the benefits of the restructuring (restructuring surplus) has to be divided fairly and that the out-of-the money creditors may need to be given a piece. There is also a revised Practice Statement for Parts 26 and 26A of the Companies Act 2006 aimed at ensuring that all creditors and the courts receive information in timely manner to allow them to make informed decisions.

We have explained above how, in the leading restructuring jurisdictions, the US and the UK, RSAs build a bridge between the out-of-court and in-court processes by allowing for negotiation out of the public eye without negative going concern effects, securing necessary majorities for plan approval and then filing with restructuring law benefits. We believe that the same now applies for Finland after the recent legislative changes introducing debt-to-equity conversions and absolute priority rule (the latter subject to various carve-outs as explained in our previous alert). The benefits from using RSAs would be largely the same in Finland. Reducing the duration of a public restructuring procedure would help companies to preserve their going concern value more effectively. This could minimise the adverse impact of disadvantageous payment conditions and mitigate the risks associated with customers and suppliers on turnover and cash flow. RSAs negotiations would improve the opportunity (at least) for the larger creditors to engage more actively in restructuring processes. Furthermore, the prospects for companies to obtain debtor-in-possession (DIP) financing could be enhanced, as there would be greater clarity regarding the likelihood of a successful restructuring. Finally, RSAs could significantly increase the opportunities to utilise the FSA’s accelerated restructuring procedure (subject to approval of 70% of the debt reduced to 60% if payment plan does not exceed 1 year, and each creditor with 10% of the debt).

In Finland, as in the UK and US, parties excluded from negotiations or opposing RSAs have a number of protections provided by law. These protections include i.a. equal treatment of creditors and the right to receive information required by law (the administrator’s reports). No plan can be approved that does not give a dissenting creditor a better outcome than bankruptcy and the Supreme Court has furthermore specifically ruled that the “haircut” cannot favour the debtor over the creditors any more than necessary. Finally, a restructuring administrator is not bound by the RSA and would have to independently evaluate the merits of a plan proposed by the RSA.

It is arguable that the FSA does not necessarily enable any payments to those who sign the RSA although such payments have been common in out-of-court bond restructurings. At best, such payments could be cost-based.

We will continue to monitor with great interest how the restructuring regime will develop in Finland during 2026 and onwards and how RSAs may form an important building block for successful restructuring processes.

If you have any questions concerning this Legal Alert, please contact the undersigned.