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AUSTRIA: An Introduction to Restructuring/Insolvency

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Thought Leadership: Restructuring/Insolvency 

1. Requirement for insolvency under Austrian law

Under the Austrian Insolvency Act, a debtor is deemed insolvent if the debtor is illiquid or over-indebted. According to Austrian case law and commentary, a debtor is illiquid if the debtor lacks the means of payment in order to pay all claims due and will not be able to obtain the necessary means to do so in the foreseeable future. A debtor is over-indebted if the following criteria are met:

• the debtor’s liabilities exceed their assets, and
• a positive going-concern prognosis is not feasible.

If a debtor is illiquid or over-indebted, the legal representatives are obliged to file for insolvency without undue delay, and generally no later than 60 days after having determined that the debtor is insolvent. If the debtor’s insolvency is caused by a natural disaster like an epidemic or pandemic such as the coronavirus, the 60-day period is doubled to 120 days. In the course of the COVID-19 crisis, the obligation to file for insolvency due to over-indebtedness was temporarily suspended until 30 June 2021, if a valid going-concern prognosis could not be set up due to the uncertain market situation caused by COVID-19 and the over-indebtedness occurred in the period of 1 March 2020 to 30 June 2021.

Besides the temporary suspension of the obligation to file for insolvency due to over-indebtedness, bridge loans which were taken out in the period between 1 March 2020 and 30 June 2021 to pre-finance the salaries of employees on short-time work, as well as their immediate repayment upon receipt of the short-time working assistance, cannot be challenged pursuant to Section 31 of the Austrian Insolvency Act, if the loan was not secured by the borrower's assets and the lender was not aware of the borrower's illiquidity when the loan was granted. Further, the maximum payment period upon conclusion of a reorganisation plan was recently extended from 2 years to 3 years; this applies to reorganisation plans filed by 31 December 2021 at the latest.

If the entity is illiquid or over-indebted and the legal representatives fail to file for insolvency in time, the legal representatives expose themselves to possible civil and criminal charges for impairment of creditors’ interests.

In Austria, the following three types of insolvency procedures are available for business entities:

• reorganisation proceedings with debtor in possession: The main focus of these proceedings lies in the continuation of the debtor’s business or parts thereof. The debtor retains, generally and subject to certain restrictions, control over the estate’s assets and is only monitored by a court-appointed insolvency administrator;
• reorganisation proceedings without debtor in possession: The main focus of these proceedings is also the continuation of the debtor’s business, but the insolvency administrator takes control; and

• liquidation (bankruptcy) proceedings: the court-appointed insolvency administrator takes control of the task of selling the estate's assets at a maximum value, with the proceeds being paid out to the creditors.

2. Rank of Claims 

In all three types of insolvency proceedings under the Austrian Insolvency Act claims are classified and ranked in the following order of priority:

1. Secured Creditors

The first rank is taken by secured creditors, who either have claims of separation to receive assets and/or claims of separation to receive the proceeds of enforcement after sale.

2. Estate Claims

Ranked behind secured creditors are estate claims (Masseforderungen), which are claims that arise after the opening of insolvency proceedings and include the costs of the insolvency proceedings; the expenses of the management and administration of the estate; and claims for labour, services and goods furnished to the estate post-filing. Preferential creditors of estate claims share in such claims on a pro rata basis.

3. Insolvency Claims

The third rank is taken by insolvency claims (Insolvenzforderungen), which are claims of unsecured creditors and have to be filed with the competent court within a time period after the opening of insolvency proceedings as fixed by the court. Those insolvency creditors who filed a claim that was acknowledged by the insolvency administrator also share in such claims on a pro rata basis.

4. Subordinate Claims

In general, subordinate creditors only participate in the insolvency proceedings if a surplus for distribution is generated. Subordinate claims may arise from contractual provisions or from statutory provisions.

3. Reform 

On 17 July 2021, the Restructuring and Insolvency Directive Implementation Act (Restrukturierungs- und Insolvenz-Richtlinie-Umsetzungsgesetz) came into force. The law contains regulations, among others, with respect to the access to the restructuring process with the restructuring plan as the core of the process, which contains haircuts for creditor claims, the involvement of a restructuring representative, a stay of execution and contestation in case of failure of the restructuring plan.

In principle, the new Restructuring Act is to be applicable to all entrepreneurs, which also includes sole proprietors. However, certain companies in the financial sector, such as credit institutions pursuant to Section 1 para 1 of the Austrian Banking Act, as well as public bodies and natural persons who are not entrepreneurs, are expressly excluded.

The restructuring proceeding is intended to be available to companies in the event of a "probable insolvency". It must be initiated at the request of the debtor and is intended to enable the debtor to avert insolvency and ensure the viability of its company.

The restructuring proceedings are proceedings with self-administration. The debtor in the restructuring proceedings must in principle retain full or at least partial control over its assets and the day-to-day operation of its business. However, the court may make certain legal acts subject to the approval of a so-called restructuring officer or assign them to a restructuring officer.

At the debtor's request, the court may order a stay of execution proceedings for a period of up to three months (extendable to a maximum of six months) to support negotiations on a restructuring plan. During this stay of execution proceedings, the debtor's obligation to apply for the opening of insolvency proceedings due to over-indebtedness is suspended. On the other hand, no decision is to be taken on a creditor's application for commencement of insolvency proceedings during the period of the restructuring proceedings.