AUSTRIA: An Introduction to Restructuring/Insolvency

Latest Developments 

After the number of insolvency proceedings decreased massively during the COVID-19 pandemic, insolvencies returned to the pre-crisis level in 2022 with around 5,000 insolvency proceedings. This upward trend persisted into 2023, with approximately 5,400 insolvency proceedings. Particularly impacted were the real estate and development sectors, which were severely affected by the high base rate, inflation, and rising material and construction costs.

In this context, calls for a modern restructuring and insolvency law capable of addressing these adverse economic trends are growing. The reform efforts by the European legislature, particularly its proposal for a directive aimed at harmonising certain aspects of insolvency law, especially for pre-pack procedures, are seen as a welcome step in this direction.

Requirement for Restructuring and Insolvency Under Austrian law

In Austria, when early signs of a financial crisis emerge, particularly an indication of “likelihood of insolvency”, a debtor has to take restructuring measures. Failure to act by the company’s legal representatives in the face of such signs can lead to potential civil and criminal charges. A “likelihood of insolvency” is defined in the Austrian Restructuring Act as (i) imminent insolvency or (ii) when the equity ratio falls below eight percent and the notional debt repayment period exceeds 15 years. In such scenarios, the following informal and formal restructuring procedures are available in Austria for business entities:

• Out-of-court restructuring: The aim of this type of restructuring 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 “fresh money” (new loans or private equity), an M&A process (accompanied by a restructuring trust) or a (partial) liquidation concept (for assets not necessary for operations or real estate). Out-of-court restructuring requires the consent of all affected creditors.
• Restructuring proceedings under the Restructuring Act: These proceedings aim at a 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). For voting on the restructuring plan, the creditors are grouped into classes. Adoption of the restructuring plan generally requires that a majority of the affected creditors present in each class approve the plan and that the sum of the claims of the consenting creditors in each class amounts to at least 75% of the total sum of the claims. The restructuring plan is binding once it has been confirmed by the court. Restructuring measures can thus be implemented by majority decision.
• 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. However, in practice, the Business Reorganisation Act is considered a “dead law” since entities do not make use of it. If a debtor is insolvent, the legal representatives are obliged to file for insolvency without undue delay, and generally – if serious restructuring efforts are made – 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 an entity is insolvent 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 it lacks the necessary financial resources to pay all due claims and will not be able to procure the necessary funds in the foreseeable future (within a three-month timeframe).

A debtor is over-indebted if the following criteria are met: 

• the debtor’s liabilities exceed its assets at liquidation values; and
• a positive going-concern prognosis is not feasible.

In Austria, in the event of insolvency the following types of insolvency proceedings are available for business entities:

• 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. Under Section 141 of the Austrian Insolvency Act, in reorganisation proceedings without debtor in possession, the debtor has to pay the creditors a quota of 20%. Under Section 169, in reorganisation proceedings with debtor in possession, the debtor has to pay a quote of 30%. In both cases, the quota is payable within two years. Apart from the different quotas, 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.
• 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.

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.

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.

Estate claims 

Ranking 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.

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.

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 (Equity Substitution Act).

Tailor-Made Restructuring 

In summary, effectively addressing an impending or existing crisis requires adequate restructuring measures. As set out above, there are a large number of different restructuring alternatives available to debtors in financial distress. Therefore, it is crucial to identify and implement a tailor-made solution specifically suited to the unique needs and circumstances of the respective company.