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Remedies Besides Simple Liquidation

Other than on insolvency, the parties’ freedom of agreement is also the main rule when it comes to remedies alternative to simple liquidation. For example, if a secured creditor and debtor consider it appropriate that upon default the secured creditor may take possession and start using the means of transport, or start collecting income generated by it, they can so agree.[1]

As regards remedies that involve vesting ownership of a means of transport in a secured creditor, Section 37 of the Contracts Act may cause complications. It provides as follows: “A term under which property pledged as security for an obligation is forfeited if the obligation is not discharged shall be void.”

This so-called lex commissoria prohibition does not mean that a forfeiture term is never possible. In legal literature, Section 37 is often understood as meaning that a secured creditor is only entitled to receive the amount of their secured claim out of the value of the encumbered asset, whereas any surplus belongs to the owner of the asset. Accordingly, vesting ownership in a secured creditor by a forfeiture term is considered possible if that vesting is made conditional on the value surplus, if any, being returned to the owner.[2] It has even been suggested that Section 37 may not apply to situations in which forfeiture has been agreed on at some point after the security arrangement is initiated and credit extended. In such situations, in casu, so the argument goes, the creditor’s bargaining power may have weakened to the extent that the security-provider debtor no longer needs the special protection that Section 37 is meant to provide.[3] Furthermore, because Section 37 only concerns conditional forfeitures, it does not prevent the debtor from transferring ownership to the creditor, say, in exchange so that the creditor releases the debtor from the payment obligation.[4]

  • [1] Cf. Wassgren 2004, 566. He states that allowing a chargee to grant a lease over a mortgagedaircraft in a default situation is “currently unknown under Finnish law”. However, he probablydoes not mean that this cannot be agreed on by the parties in a non-insolvency context.
  • [2] Tepora, Kaisto and Hakkola 2009, 305-306.
  • [3] Tepora 2008, 23-24. He presents this argument in discussion of security transfer of ownership(sale and lease-back with a security purpose).
  • [4] Tepora, Kaisto and Hakkola 2009, 306.
 
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