AUSTRIA: An Introduction to Banking & Finance

Austria: Market overview and introduction of a new legal framework for preventive restructuring proceedings

Austria, as much as any other country in Europe, has been hit hard by the COVID-19 outbreak at the end of the first quarter of 2020. Rising infection numbers resulted in three extensive lockdowns, which greatly affected the economy and caused a sharp downturn of market activity. Support measures taken by the government, the central bank and supervisory authorities have focused on maintaining companies’ liquidity by keeping up the supply of bank credit. This however, will not last for much longer and corporate indebtedness is expected to rise in the longer run. In anticipation of the upcoming wave of insolvencies, the Austrian government is preparing a new legal framework for preventive restructuring proceedings explained in more detail in this overview.

On the basis of Directive (EU) 2019/1023 on restructuring and insolvency, the Austrian Ministry of Justice has prepared and submitted to Parliament a draft of an Austrian Act on the Restructuring of Companies (Restrukturierungsordnung) which is currently subject to legislative process. The new law aims to protect intrinsically healthy companies that have run into financial difficulties. Such companies will have the possibility of restructuring at an early stage of economic problems while continuing the company’s business to avoid unnecessary insolvencies and ultimately liquidation proceedings.

In accordance with the underlying directive, the new law shall be adopted and published by 17 July 2021 the latest. Considering that Austria's economy has been severely shaken by the current COVID-19 pandemic, timing could not be more appropriate.

Retrospective on corporate insolvencies in Austria

According to official figures, 3,155 companies became insolvent in 2020. A total of 5,059 corporate insolvencies, which was 38% more in comparison to the previous year, were recorded in 2019. However, the positive first impression of the statistics is deceptive. These figures are the result of temporary protective measures that have been implemented against the backdrop of the severe effects of the COVID-19 crisis to the Austrian economy. In order to avoid mass insolvencies of stumbling, crisis-ridden companies combined with exploding unemployment rates, the legal obligation of debtors to file for insolvency in cases of over-indebtedness has been suspended.

It is to be expected that many companies will not be able to avoid insolvency or even company break-up after the expiry of the suspension period without additional measures. The new restructuring framework could be a ray of hope here, at least for some companies.

The new restructuring procedure at a glance 

Restructuring proceedings are judicial proceedings initiated at the request of the debtor, who may be a natural person or a legal entity. Some debtors, such as credit institutions or other financial institutions, are however exempt from the right to restructure.

Key prerequisites 

The initiation of restructuring proceedings will be permitted under the following conditions:

• A certain likelihood of the relevant debtor’s insolvency must be given. Such likelihood is to be assumed if the existence of the company would be endangered without restructuring. As relevant key figures, the law specifies an equity ratio of less than 8% and a notional debt repayment period of more than 15 years.
• Neither insolvency proceedings nor restructuring proceedings may have been initiated against the respective debtor in the past seven years.
• Based on the documents submitted by the debtor with its application, it must be plausible that the company will be able to continue as a going concern if the restructuring plan is accepted.
• The debtor or its representative must not have been convicted of fraudulent accounting according to section 163a of the Austrian Criminal Code within the last three years unless the debtor certifies that appropriate steps have been taken to remedy the problems that led to the conviction so that creditors now have the relevant information that is required to make a decision during the restructuring negotiations.
• The inability of the debtor to pay its debts (Zahlungsunfähigkeit) must not yet have occurred.

There is no specific obligation on the part of the debtor to apply for restructuring proceedings. Instead, the law emphasises the general obligation to take adequate steps to prevent a probable insolvency. Such steps are not conclusively defined and can also include the use of professional advisors.

Core element: restructuring plan 

The main focus of each restructuring process lies on the restructuring plan which shall be submitted by the debtor together with its restructuring application or optionally later within a certain time limit set by the competent court.

Amongst others, the restructuring plan will name the proposed restructuring measures which may include any change in the composition, conditions or structure of the debtor’s assets and liabilities or any other part of the capital structure of the debtor's business. As an example, the sale of assets or business units, or even the sale of the entire company could be a possible restructuring measure. Other possible measures would be the reduction of claims or the amendment of contracts.

The debtor determines which of its creditors are to be included in the restructuring process. It is not required that all creditors or claims are covered. Claims of employees are always excluded from the restructuring proceedings. Unlike in Austrian insolvency proceedings, the debtor must classify the affected creditors into the following categories, except in the case of small and medium sized enterprises: creditors with secured claims, creditors with unsecured claims, bondholders, creditors in need of protection (in particular creditors with claims of less than 10,000 euros) and creditors of subordinated claims.

Decision on the restructuring plan 

The fate of a restructuring plan lies in the hands of the creditors on the one side and the court on the other side.

In a first step, the creditors vote on the restructuring plan. Unanimity of the vote is not required. The majority is calculated for each class of creditors both by heads and by the amount of the claims concerned.

The restructuring plan is adopted if

• a majority of the creditors present at the vote in each of the individual creditor classes votes in favour of the adoption; and
• the aggregate amount of the claims of the creditors of a class voting in favour is at least 75% of the aggregate amount of the claims of the affected creditors of that class present at the vote.

If the restructuring plan is accepted by the creditors, it must be confirmed by the court in a second step in order to become binding for the affected creditors.

In cases where a restructuring plan has not been accepted by all classes of creditors, the court may exceptionally confirm it at the debtor's request. Such cross-class cram-down is however only permissible if certain requirements set out by the law are met.

Position of the debtor in the course of restructuring procedures

In general, the debtor remains in control of its assets and of the day-to-day operation of its business. The aim of maintaining this freedom is to increase the attractiveness of restructuring procedures from the debtor's perspective and to keep the costs of the proceedings low.

However, certain legal acts can be made subject to the court's permission. Acting without such permission will render the legal act void if the third party knew or should have known of such restriction.

Furthermore, the law provides that in certain cases an independent practitioner (Restrukturierungsbeauftragter) in the field of restructuring must be appointed by the court to assist the debtor and the creditors in negotiating and drafting the restructuring plan. The debtor or a majority of creditors may apply for such an appointment. Depending on the debtor’s situation, the court may define the scope of the practitioner's duties. The practitioner may, for example, be responsible for merely assisting the debtor, but may also be given partial control over the debtor's assets and transactions.

Stay of individual enforcement actions 

In order to facilitate the preparation of the restructuring plan and ultimately enable its adoption, the court shall, at the debtor's request, order the stay of individual enforcement actions for a period of up to three months. In exceptional cases, this period may be extended to up to six months. This stay shall enable the debtor to continue its operations and preserve the value of its assets during the preparation of the restructuring plan.

As a rule, the court shall limit the imposed stay to certain creditors and creditor classes. Only in exceptional cases, provided that the restructuring procedure has been publicly announced, a general stay may be granted.

During the stay the right to realise movable and immovable assets out of court shall also be suspended. However, the legislative materials point out that the realisation of pledged financial assets or the collection of assigned claims will remain possible.

While Directive (EU) 2019/1023 also contains the possibility of providing for the suspension of proceedings or the deferral of claims, the Austrian legislature has not made use of such option.

Insolvency bar 

The stay of individual enforcement actions is accompanied by an insolvency bar. While such stay is lasting, the obligation of the debtor to file for insolvency due to over-indebtedness is suspended. Similarly, the court shall not accept a petition for insolvency filed by a creditor on the grounds of the debtor’s over-indebtedness.

If a creditor applies for the debtor’s insolvency based on inability to pay, insolvency proceedings shall not be opened if such proceedings would be contrary to the general interest of the creditors.

The insolvency bar enables the debtor to make payments during the restructuring proceedings that are consistent with the diligence of a prudent business manager, which allows the company to continue as a going concern.

Special provisions exist for new or interim financings which are made in the course of a restructuring. Such facilities are protected from being challenged during subsequent insolvency proceedings.

Effects on contractual relationships 

Creditors who are subject to a stay of individual enforcement actions only have limited possibilities to terminate contracts with the debtor.

If the debtor fails to pay a claim that occurred prior to the commencement of the stay of individual enforcement and if such a claim results from a contract that is essential for the continuation of the debtor's business, the creditor shall not be permitted to refuse performance, accelerate the maturity of the contract, terminate it or otherwise modify it to the detriment of the debtor solely for the reason of non-payment.

In this context, the new law also imposes a restriction on contractual autonomy. Provisions in a contract are unenforceable if they grant the creditor the right to refuse performance, to claim for early repayment or to terminate or amend the contract to the detriment of the debtor for the sole reason that the initiation of restructuring proceedings or a stay of individual enforcement actions has been applied for or imposed. Furthermore, such clause may not refer to the sole reason that the economic situation of the debtor deteriorates to such an extent that the initiation of restructuring proceedings is possible.

However, the above restrictions do not apply to claims for the disbursement of loans. The debtor may therefore be prevented from being able to draw down an open credit line.

Similar restrictions already exist under Austrian insolvency law. The new provisions in connection with restructuring procedures will lead to an even stricter regulation of contractual autonomy.

Special procedural provisions 

In principle, the new law refers to the procedural provisions of the Austrian Insolvency Act. On this basis, the jurisdiction of the court for restructuring proceedings also coincides with that for insolvency proceedings.

Unlike the Austrian insolvency procedure, the restructuring procedure will generally not be public. This confidentiality can be an incentive for entrepreneurs to seek restructuring proceedings. However, a notable disadvantage of such non-public proceedings is that they are not recognised in other EU member states under the Regulation (EU) 2015/848 on insolvency proceedings. In addition, a general stay of individual enforcement actions is only possible if the restructuring proceedings have been made public. With this in mind, a debtor may apply for the public announcement of the restructuring procedure.

Finally, the law provides for a special simplified restructuring procedure for cases in which only financial creditors are affected. The term "financial creditor" is understood broadly and encompasses all creditors who have claims of a financing nature. This could include private lenders or suppliers with particularly long payment terms.

An outlook 

Since the use of the new restructuring framework will not be mandatory for companies that face economic difficulties, it is not yet foreseeable whether and to what extent the new possibilities will be used in practice. However, an early opportunity for restructuring offers an improved chance to take preventive steps in time to successfully avert insolvency. Such measures could therefore play an important role in preventing the increase of non-performing loans, supporting the recovery of struggling companies and finally, securing jobs.