AUSTRIA: An Introduction to Restructuring/Insolvency
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1. Requirement for restructuring and insolvency under Austrian law
With the appearance of the first signs of a crisis, especially a “likelihood of insolvency”, the debtor has to take restructuring measures. If a company is confronted with these first signs and the legal representatives fail to take reasonable actions, the legal representatives expose themselves to possible civil and criminal charges. A “likelihood of insolvency” is defined in the Austrian Restructuring Act as (a) imminent insolvency or (b) when the equity ratio falls below 8% and the notional debt repayment period exceeds 15 years. In Austria, in such case the following informal and formal restructuring procedures are available for business entities:
(i) Out-of-court restructuring proceedings: The aim of this type of procedure is voluntary debt relief and the continuation of the debtor’s business, all in accordance with the provisions of private law based on a restructuring agreement (Restrukturierungsvereinbarung). In addition to debt relief, the restructuring agreement may contain other restructuring measures including the subordination of loans, injection of “new money” (new loans or private equity) and an M&A process. Out-of-court restructuring requires the consent of all affected creditors.
(ii) Restructuring proceedings under the Restructuring Act: These proceedings aim to discharge of debt through a restructuring plan (Restrukturierungsplan) and also at the continuation of the debtor’s business. Only the debtor can apply for this restructuring proceeding to avert insolvency and ensure the viability of its company (Sicherstellung der Bestandfähigkeit).
(iii) Statutory restructuring under the Business Reorganisation Act (Unternehmensreorganisationsgesetz): Besides the options provided by the Restructuring Act, entities that are not insolvent but that are having financial difficulties can apply for statutory restructuring of their business under the Business Reorganisation Act. In practice however the Business Reorganisation Act is “dead law” since entities do not make use of it.
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, the 60-day period is doubled to 120 days.
If the entity is illiquid or over-indebted and the management fails to file for insolvency in time, the legal representatives may be subject to civil and criminal charges, especially for impairment of creditors’ interests.
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:
(i) the debtor’s liabilities exceed its assets; and
(ii) a positive going-concern prognosis is not feasible.
In Austria, in the event of insolvency the following types of insolvency procedures are available for business entities:
(i) reorganisation proceedings with/without debtor in possession: The main focus of these proceedings lies in the discharge of debt with a reorganisation plan (Sanierungsplan) and in the continuation of the debtor’s business or parts thereof. The debtor has to pay the creditors according to Section 141 of the Austrian Insolvency Act a quota of 20% in reorganisation proceedings without debtor in possession and according to Section 169 of the Austrian Insolvency Act 30% in reorganisation proceedings with debtor in possession, in each case within two years. Apart from the different quota, the difference between these two forms of insolvency proceedings is whether the debtor retains, generally and subject to certain restrictions, control over the assets and is only monitored by a court-appointed insolvency administrator or whether an insolvency administrator takes control.
(ii) liquidation (bankruptcy) proceedings: In this type of proceedings a court-appointed insolvency administrator takes control of the task of selling the estate’s assets (of non-viable businesses) at a maximum value, with the proceeds being paid out to the creditors without any minimum quota.
2. Rank of Claims
In all types of insolvency proceedings under the Austrian Insolvency Act claims are classified and ranked in the order of priority outlined below.
2.1. 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.
2.2. 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.
2.3. 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.
2.4. 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. Latest Developments
The first half of 2021 saw the lowest number of bankruptcies in over 40 years. This means, compared with the first half of 2020, a reduction in the number of company insolvencies of around 45% to 1,059. Most of the legal and economic measures that were taken on the occasion of the coronavirus pandemic to mitigate its negative effects and led to this decrease in the insolvency rate have been out of force since the third quarter of 2021. This has triggered a trend reversal in the fourth quarter of 2021, namely an increase in the rate of company insolvencies compared to the same time period in the previous year; the number of insolvencies was higher than in the fourth quarter in 2019, the last year before the coronavirus pandemic with 40% of all company insolvencies in 2021 being opened in the last quarter. This trend reversal together with the increase in the insolvency rate could well result in a coming “wave of insolvencies”.