Chambers Europe 2019
Practice Overview - Restructuring / Insolvency
Contributed by Fellner Wratzfeld & Partners
In 2018, the number of insolvent companies in Austria amounted to 4,980, which was at the lowest level in 20 years. At first glance, these figures might draw a positive picture of Austria, however it needs to be noted that companies' debts increased to EUR2,071 million, a considerable rise of 11.2% compared to 2017, and the number of affected employees increased by approximately 16.6%. Such substantial increase of liabilities and employees affected by insolvency proceedings was caused by a few major insolvency cases, such as the insolvency of various companies of the steel construction group Waagner BIRO, of the airline NIKI Luftfahrt GmbH and of the commodity wholesaler MFC Corporate Services GmbH.
In the NIKI case, the Austrian courts for the first time had to deal in detail with questions of the centre of main interest (COMI) in order to assess whether main insolvency proceedings are to be opened in Austria. After the opening of an insolvency proceeding in Germany, the Austrian court ruled – due to the application of a creditor to open insolvency proceedings in Austria – that NIKI’s COMI is in Austria and thus it is eligible for the opening of such proceedings in Austria. The main arguments for the court for an Austrian COMI were that the main operations of NIKI were carried out from Austria, Vienna was the seat of the management and main administration, that NIKI was subject to Austrian taxation and that NIKI has an Austrian operation licence and slot-licence, which it arguably would have lost if its COMI was in Germany.
In 2018, the number of insolvency cases of private individuals considerably increased to 10,054 and thus was at the highest level since 1995. The reason for this increase was a substantial reform of the Austrian Insolvency Act (Insolvenzordnung) which was announced at the beginning of 2017 and due to which individuals withheld applications for insolvency until the amendment entered into force in November 2017. The respective amendment of the Austrian Insolvency Act made a significant change to the debt relief of private insolvency debtors: provided all statutory prerequisites are met, a private debtor may now achieve debt relief within a time-period of three years (before the amendment entered into force the time-period was seven years). Moreover, the new law abolished the minimum insolvency quota of 10%.
At EU level, it is expected that a directive of the European Parliament on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU will be passed by the end of March 2019. This directive stipulates amongst others a pre-insolvency restructuring framework (based on Chapter 11 and the UK Scheme of Arrangements) for companies and a debt relief for honest entrepreneurs in a maximum of three years without minimum quota. The implementation of the directive is expected by mid 2021 or 2022.
The legal framework for insolvencies of business entities (as well as individuals) in Austria is codified in the Insolvency Act. Within this legal framework, three different types of proceedings are provided:
(i) reorganisation proceedings with debtor in possession (the debtor basically retains, subject to certain restrictions control, over the estate’s assets).
(ii) reorganisation proceedings without debtor in possession (a court-appointed insolvency administrator takes control).
(iii) liquidation (bankruptcy) proceedings (the court-appointed insolvency administrator takes control with the task of selling the estate's assets at a maximum value, with the proceeds being paid out to the creditors).
The main focus of reorganisation proceedings lies in the continuation of the debtor's business or parts thereof. In order for the provisions of reorganisation proceedings to be applicable, it has to be the debtor who files for the opening of these proceedings. In addition, the debtor must provide a restructuring plan (Sanierungsplan) to the court with financial records of the past three years that shows the debtor’s ability to pay to the unsecured creditors 20% within a period of two years. If the debtor can prove that a payment of 30% within a period of two years is feasible, the debtor may additionally apply for debtor in possession. The restructuring plan must further provide for full payment of all estate claims (Masseforderungen) and evidence of the debtor’s ability to fund the estate claims for a period of 90 days following the filing for the opening of restructuring proceedings.
In general, the approval of a suggested restructuring plan is subject to a “double majority requirement” of the creditors in the restructuring plan hearing, which is set by the court and made public by way of a formal edict of the court. In case the creditors approve a restructuring plan, the insolvency court, as a second step, has to further confirm the restructuring plan as well.
Once the restructuring plan is approved, confirmed and legally binding, the debtor is relieved of the obligation to pay to the creditors the amount exceeding the quota as outlined in the reorganisation plan, which also includes the limitation on the creditors to set off their claims against this quota in case general requirements are met. These effects of the legally binding restructuring plan also apply to those creditors who did not vote for the restructuring plan or did not participate at all. However, any rights of secured creditors that either have claims of separation to receive assets (Aussonderungsanspruch) and/or claims of separation to receive the proceeds of enforcement after sale (Absonderungsanspruch) must not be affected by the restructuring plan.
If a debtor defaults on the payment of the quota as provided for in the restructuring plan, the respective creditor’s claim comes into effect again, but only proportional to the unpaid quota.
As opposed to the restructuring proceedings with or without debtor in possession under the Insolvency Act, liquidation proceedings aim at realising the assets of the estate and distributing the proceeds among the creditors. Restructuring proceedings that fail lead to a transformation of the proceedings into liquidation proceedings.
A debtor (or in the case the debtor is an entity its legal representatives) is obliged to file for insolvency proceedings with the relevant court without undue delay once its financial condition meets the statutory criteria for insolvency, but in any case no longer than 60 days after having determined that the debtor is insolvent (if the debtor is over-indebted or illiquid). In case the entity is illiquid or materially over-indebted and the legal representatives fail to file for insolvency without undue delay or no later than within the 60 days’ time period, the legal representatives can be exposed to civil and criminal liability, mainly for impairment of creditors’ claims. Apart from the legal representatives, any creditor is entitled to file for the opening of insolvency proceedings in the form of liquidation proceedings, provided such creditor has a claim (irrespective of its maturity date) against the debtor.In case the statutory criteria for insolvency (over-indebtedness or illiquidity) are not yet met, a debtor also may file for the opening or reorganisation proceedings under the Business Reorganisation Act. However, these proceedings are not relevant in practice as the consent of all creditors is required.