Debtor’s Dishonesty, Damages and Forfeiture of the Proceeds of the Crimeof the Proceeds of the Crime

Here again, I must note that the analysis of the Finnish dishonesty by a debtor provision would not apply. The potential crimes would have been committed in Estonia and would thus be governed under Estonian law. I will not analyze the choice of law and jurisdiction in this work, as those questions are not of interest in the development of the veil piercing doctrine. It is thus only a theoretical interest in the relationships between different liability doctrines that are served through this examination. The analysis is thus operated under the (false) assumption that Finnish law would have governed Arctecho’s operations. While this would not have benefitted the lawyers in the actual case, this change allows for partially deducing whether piercing or more traditional liability approaches are appropriate in an all-Finnish case.

The examination only lends the facts of the corporate relationship, not the applicable laws. It is productive to lend the facts and impose a select alteration.

This allows us to use the familiar facts and explore possibilities based on them. The alternative would have been either to seek another case or to invent one. The two major piercing cases are KKO 2015:17 and KKO 2017:94, and both are under analysis. There is simply no piercing case concrete enough to replace KKO 2015:17.

Inventing one also seems worse than using an alternative law to the existing case. In an invented case, every fact would be made up, possibly leading to an arbitrary choice of facts and opening the work up to a critique of selecting the facts on an ideological basis or to favor an outcome of personal desire. The choice of law does not matter in a hypothetical analysis. Thus, the question answered here is what to note when making the choice between these doctrines in the future. It is most definitely not about how the actual situation described in KKO 2015:17 could have been resolved.

Debtor’s dishonesty, similar to unlawful distribution, requires transferring, giving away or destroying property, or alternatively, the baseless addition of liabilities. This action, then, needs to cause or worsen the insolvency of the debtor. Again, we have the same evidence on the transaction between the two corporations. Arctecho operated with funds it received from loans granted by Verkkokauppa, and Arctecho purchased the products mostly from Verkkokauppa. Should these transactions have been priced under market value, then these actions would constitute giving away

property without an acceptable reason. It was entirely possible and acceptable to operate Arctecho without the need to distribute assets and transfer the profits away as loan payments. If we could also determine that Arctecho was insolvent or became insolvent due to this, then the actions would constitute debtor’s dishonesty. We do not have any evidence of this. On the contrary, on the materials, the defendants argue that Arctecho was shut down in large part due to the cost risk created by Teosto’s claim. While this is not concrete proof of solvency, it certainly hints that the business was otherwise operational.

Yet one could argue that Arctecho should have been considered insolvent from the beginning. This would require an ius infinitum argument. Everyone must be aware of the content of the law, and ignorance is no excuse. Therefore, Arctecho and the management had to be aware of the remuneration duty, and by neglecting it, they added corporate liabilities without a basis. If these neglected liabilities are taken into account, it is arguable that Arctecho was insolvent at the time these remunerations were demanded at the latest. If we affirm that the management had to be aware of the remuneration duty, then the insolvency may have started even earlier. A third option for the beginning of the insolvency would be the date that the judgment on Teosto’s claim became final.

Determining between these dates becomes an effort to ascertain how obvious the remuneration duty was. Verkkokauppa and Arctecho did deny their remuneration duty in court and made a lot of effort to contest the duty. The most complicated legal issues were the correct forum and Verkkokauppa’s liability from piercing. Arctecho’s duty to pay remunerations was a much more simple issue, and arguably, it was simple enough that denying it was clearly without a basis in law. Should Arctecho and its representatives have known that contesting the duty was moot? The duty to pay remunerations is based on EU regulation, which requires the member states to ensure that the artists receive the remunerations. The EU Court’s case law had an earlier decision deeming it impossible that a seller does not pay remunerations to any member state.⁴⁸¹ It arguably could not have been obvious to Arctecho that an arrangement where no one pays the remunerations is impossible. The question was argued in the EUC and was only resolved after the Arctecho arrangement was dissolved. At the time, the legal issue was unclear. The argumentation that the purchasers were the importers of the products was also obviously contra legem. This interpretation would have invoked an exception to the remuneration duty. Denying the remuneration duty was plausible at that time.

Instead of providing some route toward satisfaction of the creditors, debtor’s dishonesty seems to only take the existing approach of unlawful distribution and adds

481 EUC 16.6.2011, C-462/09 (Opus) at 10,12 and 38–40. Additionally, KKO 2016:65 established the management’s duty to be aware of the core legal issues of the company even when a division of duties exists.

another requirement to the mix. Establishing debtor’s dishonesty in this case would require proving the same aspects as unlawful distribution and then one would still need to prove that the corporation was insolvent during the distribution or became insolvent due to it. The heightened burden of proof in the criminal procedure creates yet another disadvantage to this approach. As an advantage though, the prosecutor would be on the case, and the cost risk of trial would be lower.

If a crime has caused damage, then that damage can be claimed in full. If the damages are not claimed, then the prosecutor needs to demand forfeiture of the proceeds of the crime. Could Teosto claim the full amount of the neglected remunerations as damage? The amount of unpaid debt no doubt is the damage the creditor suffers. If the transactions caused the insolvency of Arctecho, then a causal relation between the damaging act exists, and the full unpaid amount could be claimed. The transactions caused insolvency and then insolvency caused damage to creditors, as the company could no longer operate and receive cash flow to pay creditors, although a contrary argument could be presented about limiting the liability to transferred amounts when the debtor’s cash flow was uncertain.⁴⁸² If the company was legitimately nearing insolvency and thus unlikely to ever be able to pay the credit, then the criminal transactions might not be in causal relation to the total unpaid debts that could be claimed in bankruptcy. Instead, the damage would only be the amount these transactions caused, e.g., the transactions that had no benefit for the business or those that deviated from the market value to the detriment of the debtor.

Although dishonesty by a debtor could, in theory, apply to a situation with these facts, it does have several key complications. First, will the prosecutor take the case?

Second, there is a heightened burden of proof in a criminal case. Third, the amount of damage is contestable. Fourth, debtor’s dishonesty is reliant on transactions or the increase of liabilities, the same as unlawful distribution. If these are overcome however, the criminal procedure does have its benefits. Firstly, the police will conduct an investigation and do the relevant fact-finding. Second, if the damage was caused by a crime, economic losses are claimable without having to prove especially weighty reasons.

2.5. Asset Recovery

Asset recovery is a doctrine that is meant to prevent the debtor from making transactions that damage the creditors or that favor one creditor over the others.

The Act on the Recovery of Assets to Bankruptcy Estates sets the rules of asset recovery. Asset recovery enables the reversal of transactions made by the debtor

482 Cf. Kukkonen 2016a at 729.

during a set period before bankruptcy or another insolvency proceeding. From this short description, we find three key limitations to its application: the time period limitation, requirement of an insolvency proceeding and transaction orientation.

Similar to the previously discussed doctrines, asset recovery is applicable solely to transactions.

Depending on the type of transaction, a different section of the Act on the Recovery of Assets applies. In KKO 2015:17, the intercorporate relations were forged contractually. The contracts were loans and sales of product. The Asset Recovery Act Section 10 would allow reversing any payment on a loan made three months before bankruptcy if the payment was made with an unusual method before the expiration date or if it was disproportionally large compared to the debtor’s assets. There are no indicators in the material about any of these elements. Section 5 of the act allows the reversal of any legal action that has favored one creditor over others, has transferred assets away from the debtor to the detriment of the creditors, or has added liabilities to the detriment of the creditors. The application of Section 5 requires the debtor to have been insolvent during the time the legal action was made. This raises the same problem as discussed before in the context of dishonesty by a debtor. When should Arctecho have been considered insolvent—from the start, from the claim for remunerations or from the finality of the remuneration judgment? This assessment of insolvency would bring a lot of uncertainty to the asset recovery claim. If the contested claim for remunerations is taken into account as a debt of Arctecho, then insolvency was no doubt present, but the question of when it needed to be taken into account remains open to interpretation.

In addition, the other party in the transaction needs to have been aware of the insolvency. This is not an issue since Paragraph 2 of Section 5 allows for assuming this knowledge when the other party is considered a close party to the debtor.

Section 3 of the act determines who can be considered a close party. The relevant part of Section 3 is the second paragraph, stating that any enterprise, corporation, foundation or other society is considered a close party to the debtor if they are fundamentally united in interests or if one holds substantial influence over the other.

Their businesses were entangled, and Verkkokauppa shared the financial interests of Arctecho through sales and loans. Verkkokauppa and S were both shareholders of Arctecho, and S, in turn, owned Verkkokauppa. S held board memberships in both corporations. Arctecho and Verkkokauppa were no doubt close parties through either factor.

The close party status allows different, more creditor-friendly treatments and enables reversing transactions made more than five years before the insolvency proceeding application was submitted. Other than that, it allows utilizing the assumption of gratuitous transaction in Section 8. Any transfer of assets from the debtor to the close party that was made without counter value or the value the debtor receives is disproportionately small compared to the given assets and is assumed a

gift. Gifts, in turn, are reversible by Section 6 of the act. This returns us to the same analysis as the unlawful distribution and dishonesty by the debtor if the contractual relations between Verkkokauppa and Arctecho were made at market value. If they were not, we have yet another doctrine capable of remedying those undervalued transfers of assets.

Still, it is important to note, that Arctecho never went bankrupt. Teosto would have faced the same hardships with asset recovery as it would have with a liability in damages claim based on Company Act 22:1. I will not repeat the analysis here and refer the reader to section IV.2.3. of this work. Additionally, the bankruptcy proceedings and asset recovery would have been conducted according to Estonian law.

3. KKO 2017:94 and Appellate Court of Turku 26.10.2016 no. 1070

3.1. General Notes on the Method of Analysis of These Two Cases The cases KKO 2017:94 and Appellate Court of Turku 26.10.2016 no. 1070 (THO 1070) were about the same corporate arrangement. In the KKO 2017:94 case, the piercing claim was made by the pay security and on the THO case by a group of employees. The defendants were the same two companies in both cases, and the same facts were present in both. One person owned the shares of a corporation practicing logistics business, and that same person was the chairperson of the corporation’s board of directors. Initially, the business was practiced through one corporation, which employed several persons as truck drivers. The business consisted mainly of delivery contracts with Itella/Posti Oy. The shareholder decided to make a risk limitation arrangement. He founded another corporation, owned solely by him, and he occupied the chairperson position on its board. The new corporation was a staff rental business (staff corporation). All the existing truck drivers’ employee contracts were transferred to the new corporation. All the assets and delivery contracts were left in the old corporation (asset corporation). Both operated from the same address.

The shareholder and a witness in court elaborated on the purposes behind the arrangement thusly: The main motive was to simplify the corporation’s operations since the primary client sometimes required the service of drivers without the trucks. The arrangement was also meant to isolate the risk of diminished demand for the company services. In that case, the arrangement would allow renting staff services to others. They expressly denied any financial troubles as a motive behind the arrangement. According to them, the pricing of staff rental contracts between the two companies allowed the staff corporation to pay all the wages and other legally mandated fees as well as taxes. In a report conducted by the bankruptcy estate, the

shareholder listed the primary purpose behind founding the staff corporation as a means of outsourcing the employee contracts into a separate corporation to allow the asset corporation to better compete in the logistics market.

Following some disputes with the employees and the logistics workers’ union AKT, Itella eventually terminated the delivery contracts. These contracts constituted around 90% of the business. Unable to replace the lost business, the asset corporation seized renting the staff services from the staff corporation. The staff corporation ended up in bankruptcy soon after because the asset corporation was its only client.

The management claimed that other contacts were sought, albeit unsuccessfully. The bankruptcy estate serviced an investigation into the debtor’s finances, which revealed that the corporation had operated at a loss every year. The losses were between 48 000 euros and 120 000 euros annually. It had also neglected to pay value-added tax and employee fees, totaling 140 000 euros.

In KKO 2017:94, the authority responsible for pay security (ELY) paid the unpaid wages of the employees of the now-bankrupt staff corporation. It demanded the asset corporation to refund the unpaid wages of employees based on piercing the corporate veil. Piercing in a pay security context derives support from the Pay Security Act Section 17 and the legislative works behind that section. Thus, it seems that piercing is more easily accepted in pay security cases.⁴⁸³ Veil piercing in general, however, can adopt interpretation and support from these pay security piercing cases.⁴⁸⁴ Since veil piercing in pay security is founded in the section and pay security as a creditor is unable to even invoke the other doctrines discussed here, the discussion from here on out focuses on the employee creditors’ position.

In the THO 1070 case, the employees claimed some unpaid wages. Although they did demand piercing, they won the case on other grounds in the appellate court.⁴⁸⁵ The employees thought the intercorporate relation was so commingled that the asset corporation should also be responsible for the unpaid wages. The employment contracts were unilaterally transferred, the entire benefit of the employees’ work befell the asset corporation and the corporations’ operations clearly were operated in unison, neglecting the individual corporate benefit. The district court pierced the veil on these grounds.

The discussion from here on out is from the viewpoint of the employee creditors in the case. In theory, they could be replaced by any bankruptcy creditor. The aim is thus to look at the possibilities the bankruptcy creditors have toward holding additional parties liable, namely, which doctrines would allow holding the beneficiary of the described corporate arrangement liable. This includes the doctrines that return assets to the bankruptcy estate, as well as those that benefit one creditor directly.

483 See Kärki 2018a.

484 As done in both KKO 2015:17 and KKO 2018:20.

485 Although not in any of the doctrines discussed here.

3.2. Liability for Damages

Any person causing damage to another is liable to compensate that damage. The requirements for compensation are an act or omission, damage, negligent behavior and causality between the damage and the act. In the materials of the case, no elements appear that would allow for utilizing the tort doctrine. Even if there were some, applying tort liability would be difficult for the same reasons described earlier when discussing KKO 2015:17.

It is also hard to isolate which act the damage is based on. Again, was it some concrete decision during the operation of the company or was it the founding of the intercorporate arrangement itself? From among the corporate operations, we could point to the contractual relationship between the two corporations and claim the damaging act to be the undervaluation of those. At that point, one should use the unlawful distribution clause and follow it up with the management liability claim according to Company Act 22:1.

We could alternatively choose the formation of the arrangement as the damaging act. The damage is simple enough to determine, as is the causality. Clearly founding a limited liability company limits the liability should some risk be realized.

The problem is that founding a corporation to limit liability is exactly how the corporation is meant to be used. Establishing negligence or deliberate behavior is redundant; one can found a corporation only deliberately. The situation comes down to assessing whether especially weighty reasons exist to compensate economic loss. There is no need to repeat what was previously said on the subject in IV.2.2.

Finding the especially weighty reasons would be extremely difficult. Applying tort law in the situation would have required concessions to the causality requirement or would establish causality from the founding of a corporation. In either choice, some justification needs to be provided for disregarding the formal actor.

In this case, a key deviation from KKO 2015:17 is present. Liability in damages places liability on the one causing the damage, e.g., the one performing the damaging

In this case, a key deviation from KKO 2015:17 is present. Liability in damages places liability on the one causing the damage, e.g., the one performing the damaging