In its ruling of 7 July 2015, the Helsinki Court of Appeal adopted a new interpretation of the requirement of corporate benefit when a subsidiary grants security for the debts of its parent company. This interpretation is wider than the prevailing market view and may imply enhanced possibilities for lenders to obtain collateral from the borrower’s group companies.
Do subsidiaries still need to receive loan proceeds?
It is common ground that a subsidiary may grant security for the obligations of its parent only if the subsidiary derives from the transaction such direct or indirect benefit which justifies putting its assets at risk. According to precedent, security granted by a subsidiary for the obligations of its parent has been held invalid due to lack of corporate benefit in situations where the parent is in financial difficulties and it is evident already at the time of the granting of the security that the security will likely be lost (KKO 2006:96). In other circumstances, it has remained unclear what constitutes sufficient corporate benefit. In connection with loan arrangements, it has in practice often been considered that security granted by a subsidiary for the borrowing obligations of its parent is effective only up to the amount which corresponds to the loan proceeds actually channelled to the subsidiary (e.g. as intra-group loans).
“The Court of Appeal adopted an interpretation that was clearly more creditor-friendly than the prevailing market view.“
Need to secure maintenance charges
The Court of Appeal adopted an interpretation that was clearly more creditor-friendly than the prevailing market view. The mortgage was granted in a situation where GT’s business partners had already filed for GT’s bankruptcy due to GT’s failure to make the payments set out in the settlement agreement. In assessing corporate benefit, the Court found that the MREC was dependent on maintenance charges from GT and that the mortgage was necessary to remove the threat of GT’s bankruptcy and to secure the continued payment of maintenance charges to the MREC. The Court therefore held that the requirement of corporate benefit was met and the mortgage was valid.
The Court’s findings concerning the MREC’s interest to secure the inflow of maintenance charges could well have been different. Every MREC is dependent on maintenance charges from its shareholders. It is questionable whether financial difficulties of a shareholder can be regarded as a circumstance with which the MREC should be concerned and which would justify using other than distributable assets to support the shareholder. The Court’s ruling would seem to lead to the problematic outcome that an MREC can always guarantee the debts of its shareholder if the shareholder is in serious financial difficulties.
“If this were to be the law, it would present a completely new landscape for corporate security arrangements.“
New collateral landscape
The real reason behind the creditor-friendly ruling was presumably that no other creditors of the MREC were harmed by the enforcement. The ruling therefore appears to say that very little or no corporate benefit is required for upstream security as long as at the time of the granting of the security there were no creditors who were likely to be harmed by such security. If this were to be the law, it would present a completely new landscape for corporate security arrangements. The ruling has, however, been appealed to the Supreme Court and it remains to be seen whether the creditor-friendly approach of the lower courts will prevail.