The Austrian debt finance market has faced several challenges over the past few years. Tougher financing conditions resulting from higher interest rates have pushed up borrowing costs and, consequently, constrained borrowing activity to fund capital investments.

On the supply side, banks have also become more cautious as lenders. Due to the general economic situation, risk assessment became stricter, and some key sectors were particularly challenged. However, despite overall reduced activity and financing opportunities, an increase in refinancing deals could be observed.

After a period where Austrian real estate was funded at low interest rates, climbing debt servicing costs – a consequence of a significant increase in interest rates and corrections of property valuations – have led to a significant number of major real estate companies that were left with high debt burdens or even defaulted. Although interest rates are currently decreasing, real estate financings have not yet regained momentum.

Following international market trends, ESG is becoming increasingly important. In particular, sustainability-linked loans – ie, loans linked to specific sustainability goals – are placing Austria in line with global trends towards sustainability-oriented financial instruments.

Debt finance transactions in Austria are mostly driven by international and national credit institutions. While Austrian banks are typically active in connection with – often family-owned – small to medium-sized companies, international financing syndicates consisting of major international credit institutions are active in high-volume financings.

Commercial lending generally requires a banking licence in Austria. For non-banks (such as debt funds), it is only permissible to participate in the lending business if the activity is exempted from the requirement to hold a banking licence. Exemptions exist, for example, in relation to (i) the acquisition of loan portfolios by special securitisation purpose entities and (ii) the use of bonds. However, due to the strict regulatory requirements, a case-by-case assessment is of the essence (see 9.2 Regulatory Considerations for further information).

Crowdfunding, which plays a role in real estate financing, has recently been regulated in statutory law and – if and to the extent that such financing does not exceed certain thresholds – provides for exceptions from the banking licence as well as the capital markets prospectus requirements.

Uncertainties have been caused by the Russian invasion of Ukraine, particularly due to a significant rise in energy prices. Higher costs due to rising energy prices in connection with higher borrowing costs led to a decrease in financing transactions. Furthermore, extraordinary government support measures in response to the COVID-19 pandemic have led to an increase in corporate credit default rates following the repayment of such measures. Also, the escalating conflict in the Middle East has caused market players to be more cautious.

The structure of debt finance transactions typically follows the needs of the parties involved and has to be in line with the strict banking licence requirements in Austria (see 9.2 Regulatory Considerations).

Senior loans (bilaterally or via a financing syndicate) play a key role in the Austrian market and are generally used for various finance transactions. They differ in line with international practice (eg, multi-tranche senior facilities providing for diverging maturity). Senior loans are often combined with other financing products, such as mezzanine loans (which notably play a role in connection with real estate financing) or hybrid products. Mezzanine loans are commonly provided in the form of unsecured or subordinated loans (Nachrangdarlehen), in most cases offered with a high interest rate compared to senior loans.

Bridge loans are utilised for different scenarios. Traditional bridge loans are temporary loans with an initial maturity of one year or less for the purposes of bridging a potential gap, including bridge-to-bond and bridge-to-equity scenarios. In addition, bridge loans play an important role in financial and pre-insolvency restructurings.

Bond issuances are regularly used for acquisition financings and LBO transactions, allowing the participation of specialised debt funds that do not have an Austrian banking licence or a banking licence to be passported from another EU member state.

Bonded loans (Schuldscheindarlehen) are commonly used by Austrian corporate borrowers. These transactions are typically governed by German law (complemented by Austrian law requirements) and in line with German market standards.

Besides real estate financing and securitisations, asset-based financing is not very common in Austria. The real estate boom, driven by low interest rates up until 2022, led to a significant increase in asset-based financing. However, increasing interest rates recently led to a drastic decrease in asset-based financings.

Furthermore, the financing of renewable energy assets (particularly solar and wind power) is playing an increasingly significant role in the market.

The structure and instruments of debt finance transactions typically follow the needs of the transaction (see 2.1. Debt Finance Transactions). This also includes workarounds when lenders are not fulfilling the banking licence requirements (see 9.2 Regulatory Considerations); hence, direct or syndicated lending – which would be the primary choice in connection with licensed credit institutions – is not an option.

The documentation used for debt finance transactions in Austria varies depending on the type of financing and the parties involved.

The recommended forms provided by the Loan Market Association (LMA) are typically used for documenting finance transactions involving international lending syndicates or, in certain cases, for high-volume national finance transactions. Such transaction documents are usually governed by English law; however, following Brexit, German law – which always played a significant role – is increasing in importance.

High-volume transactions involving domestic lending syndicates and lower-volume domestic transactions are often based on a reduced form, or “LMA-light” documentation, which is typically governed by Austrian law.

Small finance transactions are typically documented based on Austrian law-governed marked standard local documentation or the in-house documentation used by the banks involved, which in most cases is rather short.

Security

Security interests in connection with Austrian assets are generally governed by Austrian law and typically follow the documentation language of the loan agreement. For certain securities that have to be filed with the relevant register (eg, mortgages), a bilingual agreement or German translation is required (see 5.1. Guarantees and Security Packages).

Language

The documentation language varies depending on the parties involved. Cross-border transactions are primarily documented in English. For mere domestic transactions, German is typically used but lenders sometimes wish to use English documentation to increase flexibility in connection with the syndication options.

Governing Law

The choice of a foreign law as applicable contract law is generally permissible. This also applies if such contract shall be enforced in Austria. In view of market practice, besides Austrian law, English and German law are most commonly chosen as applicable law for loan agreements.

Legal Opinions

In line with international market practice, enforceability opinions are typically provided by lenders’ counsel, whereas borrowers’ counsel issues capacity opinions.

Besides the strict Austrian banking licence requirements, no special Austrian particularities need to be considered with respect to various types of investors.

Financing structures must always be compliant with the Austrian banking licence requirements; hence, in connection with non-licensed lenders, a case-by-case assessment of such structures is essential (see 9.2 Regulatory Considerations).

In relation to Austrian law-specific terms, particularly Austrian stamp duty risk mitigation measures (see 9.1 Tax Considerations), Austrian capital maintenance rules (Kapitalerhaltungsvorschriften) (see 5.2 Key Considerations for Security and Guarantees) and several aspects of Austrian law-governed security (see 5.1 Guarantees and Security Packages) have to be considered.

Austrian Law-Specific Considerations

In general, two primary categories of security interest exist under Austrian law: personal security rights (Personalsicherheiten) and in rem security rights (Sachsicherheiten). Personal security rights relevant to financing transactions include, in particular, (i) guarantees (Garantien) (ii) sureties (Bürgschaften), (iii) assumption of debt (Schuldbeitritt) and (iv) comfort letters (Patronatserklärungen).

The most relevant forms of in rem security rights in this context are (i) pledges of movable assets or rights, (ii) mortgages (Hypotheken), (iii) transfer of title for security purposes (Sicherungsübereignung), (iv) assignment for security purposes (Sicherungszession) and (v) retention of title (Eigentumsvorbehalt).

The concept of a general security interest in all assets of a security provider does not exist in Austria. In addition, important security rights (including pledges, mortgages and sureties) are strictly accessory (akzessorisch), meaning such rights are dependent on the validity of the underlying secured obligations. Hence, the beneficiary of the collateral must always have an independent claim over the secured obligations. If accessory collateral becomes separated from the underlying secured obligations, such collateral ceases to be valid security.

In addition to existing credit claims, secured obligations may also secure future credit claims as long as such claims are sufficiently determined or determinable. Generally, existing and future assets may serve as collateral as long as the asset can be individually specified or is specifiable. However, the in rem security interest will only be validly established upon the acquisition of such asset by the security provider.

Restrictions arise in connection with Austrian capital maintenance rules, which may prohibit the provision of “side-stream” or “upstream” collateral by group companies (see 5.2 Key Considerations for Security and Guarantees).

Common Types of Security

Security packages depend on the type of financing at hand and the actual needs of the specific transaction, and hence are established on a case-by-case basis. However, lenders generally expect to receive collateral over the shares in the borrower and/or the main group entities as well as asset collateral from all relevant group entities over, in particular, their accounts and receivables. Further security over intellectual property (IP), inventory, assets in general (eg, machinery), real estate or the granting of personal security rights may also be expected depending on the financing at hand.

Bank accounts

Security over cash deposits in bank accounts may be established by way of a pledge (Pfandrecht) or as a financial collateral arrangement (Finanzsicherheit) under the Austrian Financial Collateral Act (Finanzsicherheitengesetz), which implements the Financial Collateral Directive. Regarding form requirements, no legalisation, registration or translation is required. Perfection is achieved by either (i) notification to the account bank – whereas an acknowledgement of the notification is not legally required but needed for the waiver of statutory bank liens – or (ii) entry in the commercial/accounting books (Buchvermerk) in every list of outstanding receivables – ie, the debtor accounts (Debitorenkonten) and the open accounts (Offene-Posten-Liste) of the security provider.

Inventory

Security over inventory is generally avoided in cases where other valuable collateral can be provided as its creation and perfection may be challenging in practice. Security over inventory may be taken by way of pledge or security transfer over the assets. Regarding form requirements, no legalisation, registration or translation is required. Since the delivery of inventory to the secured party is usually not practicable or feasible, alternative methods – such as the appointment of a custodian, restricting the pledgor’s access to the inventory or the affixing of labels showing the security right of the secured party over the inventory – are implemented to fulfil perfection requirements. Such methods are often connected with practical difficulties and may be easily compromised by the conduct of the parties. Hence, security over inventory does not provide a robust security interest in most cases and is avoided if possible.

IP rights

Security over IP rights may be taken by way of pledge, security transfer or – in case of software – by way of escrow agreement (Softwarehinterlegungsvertrag). Regarding form requirements, legalisation, registration with the relevant register and translation may be required, depending on the IP right. Perfection depends on the IP right at hand. In case of registered IP rights – such as patents or trademarks – entry into the relevant register is required and/or market practice.

Moveable assets

Security over movable assets is taken by way of a pledge or a security transfer of the assets. Creation and perfection may be difficult in practice. Regarding form requirements, no legalisation, registration or translation is required. Perfection is generally achieved by delivery of the pledged asset to the pledgee or their custodian. In certain cases, other methods are also available, in particular attaching labels to the asset.

Quasi-security

The most common types of quasi-security in Austria are guarantees, sureties, comfort letters, set-off and netting arrangements, restrictions on pay out to the insured (Vinkulierung) and assumption of debt. Regarding form requirements, no legalisation, registration or translation is required. However, some form of quasi security must be established in writing (schriftlich).

Real estate

Security over real estate is generally established by a mortgage (Hypothek), of which two types exist. A fixed-amount mortgage (Festbetragshypothek) secures a specific loan receivable, while a maximum-amount mortgage (Höchstbetragshypothek) secures several receivables resulting from an ongoing business relationship with the borrower up to a maximum amount. Due to the substantial ad valorem registration fees in the amount of 1.2% of the registered amount, borrowers generally try to avoid such collateral. Regarding form requirements, legalisation, registration of the mortgage with the Austrian land register (Grundbuch) and translation into German are required. The registration also serves as the perfection step.

Receivables

Security over receivables is established by a pledge, a security assignment or – in case of credit claims – a financial collateral arrangement. Common security packages include trade-, insurance- and intra-group receivables. Restriction of the pay-out to the insured is also an option for receivables under insurance policies. Regarding form requirements, no legalisation, registration or translation is required. Perfection is achieved by either (i) notification to the third-party debtors – although acknowledgement of the notification is not legally required – or (ii) entry in every list of outstanding receivables in the commercial/accounting books – ie, the debtor accounts and the open accounts of the security provider.

Shares

Security over shares is taken by way of a pledge . However, transfer restrictions (vinkulierte Geschäftsanteile) may complicate or even prohibit the creation of such security. Perfection for the pledge depends on the legal form of the company to be pledged. Share pledges regarding shares in an Austrian limited liability company (Gesellschaft mit beschränkter Haftung) require a different modus than pledges of bearer shares (Inhaberaktien) or of registered shares (Namensaktien) in joint stock companies (Aktiengesellschaft). Regarding form requirements, voting proxies and transfer of power of attorney must be legalised (particularly regarding Austrian limited liability companies – GmbH); however, no registration or translation is required. Perfection in relation to shares in Austrian limited liability companies and partnership interests is achieved by either (i) notification to the pledged company – although acknowledgement of the notification is not legally required – or (ii) entry in the commercial/accounting books of the security provider.

Agent and Security Trustee: Parallel Debt

The concepts of agent and security trustee are regularly used in Austrian financing transactions.

In view of the accessory nature of many securities (see 5.1 Guarantee and Security Packages), appropriate contractual arrangements (eg, via a joint creditorship or parallel debt) are typically found in the main finance documents to ensure that the appointed security trustee is also the creditor of all secured obligations.

There are no provisions under Austrian law or court decisions in connection with international market practice to create an independent claim of the security agent (parallel debt). However, it is a commonly held view that parallel debt structures governed by non-Austrian law should be recognised in Austria. Such structures are regularly used in particular in case of international financing syndicates (where the loan documentation is typically governed by non-Austrian law). On the other hand, it is uncertain whether Austrian law-governed parallel debt may be validly established. While there is legal writing supporting such position, it has not yet been tested in courts.

To ensure that the mandatory requirements of the accessory collateral are met under Austrian law, it is common market practice to either provide that (i) all secured parties are pledgees (or direct beneficiaries) under the security agreements or (ii) that a “security agent” is appointed, whereby it is agreed among all lenders – with the consent of the borrower (or the obligors) – that the security agent is the joint and several creditor (Gesamtgläubiger) of all secured claims. In such structures, it is further agreed among all creditors that only the security agent shall have the right to enforce the collateral and will thereafter distribute the proceeds from the enforcement among all lenders pro rata to their portion of the secured obligations.

Concerning non-accessory forms of collateral (eg, guarantees), their validity does not depend on them being directly connected with the secured obligation. However, since loan documentation typically includes accessory and non-accessory collateral, it is market practice to provide for joint and several creditorships if the lenders desire to execute their rights arising from the collateral through an appointed security agent.

Restrictions on Upstream Security

Austrian capital maintenance rules

While the granting of downstream security is not restricted under Austrian law, the granting of upstream/side-stream financings, guarantees (including the assumption of joint and several liability) or other security interests is subject to limitations.

Pursuant to mandatory Austrian capital maintenance rules – in particular Section 82 of the Austrian Act on Limited Liability Companies (GmbH-Gesetz – GmbHG) and Sections 52 and 65 et seq of the Austrian Stock Corporation Act (Aktiengesetz) – companies organised in the form of (i) Austrian limited liability companies, (ii) the recently established Austrian flexible company (FlexCo - Flexible Kapitalgesellschaft), (iii) Austrian joint stock companies and (iv) certain Austrian partnerships, where the only unlimited partner is a limited liability company or joint stock company, are prohibited from disbursing their assets to their shareholders in circumstances other than as (i) a distribution of profits (to the extent and as long as available for distribution under Austrian law), (ii) by a reduction of share capital or (iii) as liquidation surplus on liquidation of that corporation.

The granting of upstream/side-stream financings, guarantees (including the assumption of joint and several liability) or other security interests is considered disbursement and thus is invalid and unenforceable unless (i) such transaction would have been entered into under identical terms and conditions with an unrelated third party (third-party test – Dritt- oder Fremdvergleich) and/or (ii) is commercially justified (betrieblich gerechtfertigt).

Whether the granting of up-or side-stream security is commercially justified has to be assessed on a case-by-case basis considering all particularities of the transaction.

Voidness might also affect third-party lenders, and the company may claim repayment/restitution. Further, the management of the company might become personally liable to the company.

To reduce the risk of a violation of the Austrian capital maintenance rules, it is standard market practice in Austria to use contractual provisions with a view to limit the obligations of that Austrian company under guarantees or to secure liabilities to an amount that is in compliance with Austrian capital maintenance rules (so-called limitation language). Lenders should be aware that the effect of such limitations could be that the guaranteed or secured amounts are reduced to zero. As no case law is available to confirm, it is uncertain whether such limitation language would be valid and enforceable under Austrian law and achieve the desired effect of legally preserving the guarantees and security interests to the extent possible. There is a risk that the security interests could be deemed null and void in their entirety.

Financial assistance

Austrian companies are in principle prohibited from financing or providing assistance in the financing of the acquisition of their own shares. The strict Austrian capital maintenance rules apply. Furthermore, the Stock Corporations Act explicitly states in Section 66a that a targeted company is prohibited from financing or providing assistance in the financing of the acquisition of its own shares or the shares of a parent company.

Requirement for Guarantee Fees

In Austria, there is no legal requirement for a guarantee fee. However, the parties typically agree on the payment of a guarantee fee to the guarantor.

Syndicated financings in Austria typically include intercreditor agreements. Following international market practice, intercreditor agreements typically regulate the ranking relationship between creditor groups in the distribution of payments and enforcement proceeds from joint collateral.

Furthermore, provisions providing for the sharing of security are typically found in intercreditor agreements. Attention has to be paid as to whether the security constitutes an accessory security interest that is dependent on the underlying secured obligation. Accordingly, a separate parallel debt structure or joint and several creditorship for the benefit of the security agent is established in the intercreditor agreement. See 5.2 Key Considerations for Security and Guarantees.

Intercreditor agreements are usually governed by the law governing the underlying finance documents. The binding effect of the intercreditor agreement in the case of insolvency proceedings is a fundamental issue and has not yet been tested in the Austrian courts.

In general, Austrian law recognises both contractual and legal subordination. Whether subordination instruments are used depends on the nature of the transaction.

Mezzanine financings (commonly utilised in real estate transactions) often involve contractual subordination. This can be structured either through lending to a holding company, which subsequently on-lends to the operating entity (structural subordination), or through explicit contractual agreements that establish ranking between creditors (contractual subordination). Another example of contractual subordination is in connection with shareholder loans, where banks typically require subordination agreements to ensure priority of their claims over the shareholder’s claims. While contractual subordination is binding between the parties involved, it does not automatically affect third parties, such as insolvency administrators, unless it is legally enforceable.

Furthermore, second-ranking security can be granted for most Austrian law-governed security interests. However, due to the high registration fees, which amount to 1.2% of secured debt, borrowers typically seek to avoid second-ranking mortgages.

A key example of legal subordination is the subordination of shareholder loans under the Austrian Equity Substitution Act (Eigenkapitalersatz-Gesetz – EKEG), pursuant to which shareholder loans granted during a financial crisis may be reclassified as equity rather than debt. See 8.2 Main Insolvency Law Considerations.

Legal subordination also plays a role in Austrian insolvency proceedings, where secured creditors, such as those holding pledges or mortgages (Absonderungsgläubiger), are given priority over unsecured creditors in relation to their security interest.

General Principles of Enforcement

The process for enforcement of contractual security rights varies significantly depending on the type of security interest to be enforced on the one hand and the underlying contractual arrangements on the other.

Generally, a secured party may enforce security upon:

• the non-payment of any of the secured obligations when due (Pfandreife), regardless of whether this is at stated maturity or following acceleration (Fälligstellung);
• the issuance of an enforcement notice by the secured party; and
• the expiration of the notice period, which is seven calendar days for entrepreneurs and one month for consumers, following the receipt of the enforcement notice.

In certain cases, the notice period does not apply if unfeasible and may be waived by agreement, in particular in connection with financial collateral agreements (Finanzsicherheiten).

Enforcement Process

Personal security rights

Regarding personal security rights (eg, guarantees, sureties), there are no specific enforcement procedures, and the enforcement process is generally subject to the agreed terms and conditions set out in the underlying contractual arrangement. The secured party can require payment from the security grantor directly or enforce such security in court.

In rem security rights

In rem security rights are enforced – based on statutory law – by court proceedings, or out of court by way of public auction or private sale, which needs to be contractually agreed upon except for pledges over moveable and tangible assets. Other methods/procedures are permitted for financial collateral within the scope of the Austrian law implementation of the Financial Collateral Directive.

In relation to the most relevant types of in rem security rights, the following statutory rules and market practices are applicable. Share pledges are typically enforced out of court by way of public auction or private sale. This procedure requires a prior notification to the pledgor and valuation by a valuation expert (typically provided by an auditing firm). In case of a private sale, the collateral can be sold to any buyer by the pledgee provided that the sale price amounts to at least the value assessed by the valuation expert (the pledgor is usually granted the right to suggest a buyer) In case of a public auction, the collateral is sold to the highest bidder (the pledgor or its affiliates are usually granted the right to participate in the public auction). However, the enforcement of share pledges is challenging in practice.

In connection with pledges over receivables and bank accounts, the pledgee is typically granted the right to directly claim the payment from the third-party debtor or the transfer of the account balances from the account bank in case an enforcement event occurs. Also, a prior notification to the pledgor is required.

Mortgages are typically enforced – based on statutory law – by court proceedings. Nonetheless, out-of-court enforcement by way of public auction and private sale are possible too and require a valuation by a valuation expert.

Restrictions

Due to mandatory debtor protection provisions under Austrian law, certain agreements in connection with the enforcement of security interests are void. This includes, inter alia, the agreement that the secured party may keep the assets in case of enforcement or must not transfer any excess of enforcement proceeds to the security provider. Furthermore, the agreement of a predetermined fixed realisation price and realisation at the sole discretion of the secured party are prohibited.

Insolvency

For enforcement after the opening of insolvency proceedings, see 8.2 Main Insolvency Law Considerations.

Recognition and enforcement of foreign judgments in Austria are generally regulated in:

• the Austrian Code of Civil Procedure (Zivilprozessordnung);
• the Austrian Enforcement Act (Exekutionsordnung); and
• the directly applicable Regulation (EU) No 1215/2012 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (the “Brussels I Regulation”).

In addition, Austria is party to several bilateral and multilateral treaties governing the recognition and enforcement of foreign judgments, including most importantly:

• the Lugano Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (2007);
• the Hague Convention on choice of court agreements (2005); and
• the bilateral treaty with the United Kingdom providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters (1961).

Court Judgments From EU Member States

The enforcement of judgments rendered in another EU member state is governed by the Brussels I Regulation, and such judgments are generally recognised and enforced in Austria without any additional procedures or examination of the merits of the case. Limited exceptions may apply in case such recognition or enforcement would violate the Austrian ordre public (ie, general principles of law).

Court Judgments of Non-EU Member States

Contrary to the enforcement of domestic judgments, the enforcement of foreign judgments requires a declaration of recognition and enforceability of such foreign judgment. If a foreign judgment is rendered by courts in EU member states or Lugano Convention member states, no separate recognition proceedings are required.

Judgments rendered by courts in other jurisdictions will only be recognised and declared enforceable if they are enforceable in the jurisdiction where the judgment was rendered and if (i) a bilateral treaty between Austria and such other jurisdiction or (ii) a regulation ensures formal reciprocity, meaning that Austrian judgments must not be treated differently than judgments of such other jurisdiction. If the treaties do not provide rules on recognition requirements, it is furthermore required (i) that the defendant in the enforcement proceedings had the opportunity to participate in the original proceedings before the foreign court, (ii) that the court in the other jurisdictions had international jurisdiction if applying Austrian rules on jurisdiction and (iii) that the relevant judgment is final in the sense that it may no longer be challenged before the courts and/or authorities of the foreign state.

Enforcement may nonetheless be denied if it would violate the Austrian ordre public (ie, general principles of law) or is targeting claims that may not be enforced or are not permissible under Austrian law.

Arbitral Awards

Furthermore, Austria has ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Therefore, foreign arbitral awards may be generally enforced in Austria.

In Austria, insolvency proceedings and pre-insolvency proceedings exist. Insolvency proceedings can be opened or conducted as bankruptcy proceedings (Konkursverfahren) or restructuring proceedings (Sanierungsverfahren), the latter with or without self-administration (mit oder ohne Eigenverwaltung). In the case of restructuring proceedings, certain minimum quotas need to be paid to unsecured creditors within two years (30% in case of self-administration, otherwise 20% of the nominal amount of the claims).

Pre-insolvency proceedings comprise the restructuring proceedings pursuant to the Restructuring Regulation (Restrukturierungsordnung – ReO) and the reorganisation proceedings pursuant to the Business Reorganisation Act (Unternehmensreorganisationsgesetz – URG).

The logic behind the implementation of the URG was that the earlier reorganisation measures are started, the more likely they would turn out successful. However, apart from its liability provisions, the URG is of little practical importance.

The ReO came into force following the implementation of the Restructuring and Insolvency Directive and gives debtors who operate a business and are experiencing financial difficulties (where the focus is on “likely insolvent”) access to flexible, preventive restructuring procedures. Such restructuring procedures are in principle non-public (no publication in the official insolvency database unless the debtor so requests), with court involvement and self-administration. However, the debtor’s self-administration rights can be limited if the court appoints a restructuring expert. Further, at the debtor’s request, enforcement can be blocked (Vollstreckungssperre), which has the effect of largely preventing the opening of insolvency proceedings and the termination of contracts.

A prerequisite for the opening of reorganisation proceedings – which cannot be applied for by creditors – is that the debtor is “likely insolvent” but not already illiquid. A debtor is in particular “likely insolvent” in case the equity ratio is less than 8%, and the fictional debt redemption period is longer than 15 years. Over-indebted debtors may apply for reorganisation proceedings if they submit a positive going-concern prognosis.

An advantage of restructuring proceedings is that the implementation of restructuring measures via a restructuring plan does not require the consent of all creditors, but (only) the consent of a qualified majority of creditors (simple majority in numbers and majority of 75% in value) in each creditor class. Under certain circumstances, the court may even confirm the restructuring plan, even if the qualified majority is not reached in every class (cross-class cram-down), to remove the disruptive potential of hold-out creditors outside of insolvency proceedings.

Some companies are adept at counteracting the negative effects of an ongoing crisis early on, allowing them to maintain their operational activities with minimal adjustments. For those facing deficits that cannot be immediately addressed, early out-of-court-restructuring is imperative. At the outset, identifying the main stakeholders (shareholders, banks, credit insurers, important suppliers and customers) and initiating negotiations among them is essential. The company and the important stakeholders can collaboratively agree on a package of measures tailored to lead the company out of the crisis effectively. Such a tailor-made restructuring solution is often best achieved through out-of-court restructuring. Out-of-court restructuring efforts, commonly triggered by the company’s financing banks, are in many cases a useful method and follow an informal procedure developed and established on the market over the years.

General Aspects and Lenders’ Rights

Upon the opening of insolvency proceedings, the debtor is no longer entitled to dispose of its assets. Obligations of the debtor that are not due are accelerated and assumed to be due following the opening of insolvency proceedings.

The opening of insolvency proceedings does not automatically terminate existing contracts. With respect to contracts that are not mutually fulfilled on or before the date insolvency proceedings are opened, the insolvency administrator can choose whether to fulfil or withdraw from such contract. If the administrator chooses to terminate the contract, the other party may file a claim for damages resulting from such termination as a creditor in the insolvency proceedings; however, such party will only receive the insolvency quota. Special rules for leases and employment contracts apply.

Contractual agreements that grant one party the right to terminate the agreement in the event of insolvency of the other party are void.

During insolvency proceedings, creditors in general may not initiate or continue enforcement or other legal actions against the debtor. Exceptions exist in relation to proceedings (i) not affecting the debtor, (ii) relating to creditors with a right to segregation (Absonderungsrecht), (iii) relating to claims disputed by the insolvency administrator, and (iv) resulting from transactions concluded after the opening of insolvency proceedings (Masseforderungen).

A validly perfected security interest is generally not affected by the opening of insolvency proceedings, and the creditor has a right to segregation. However, assets of an insolvent debtor essential for the continuation of the debtor’s business cannot be enforced for six months from the opening of insolvency proceedings. Beyond that, default interest (Verzugszinsen) accruing during a period of six months from the opening of insolvency proceedings will not be effectively secured by the pledge.

Enforcement steps depend on whether the collateral assets are in the possession of the secured party, the insolvency administrator or the insolvent debtor. If the secured party is already in possession of the collateral assets, the enforcement procedure remains as set out under 7.1 Process for Enforcement of Security. If the collateral assets are in possession of the insolvency administrator, enforcement is effected by the insolvency administrator, either via in court or via out-of-court enforcement depending on the asset.

Any surplus funds following the complete satisfaction of the right of segregation creditor will be allocated to the insolvency estate (and distributed pro rata among all remaining insolvency creditors). Reciprocally, if the proceeds fall short of fully meeting the right of segregation with respect to the creditor’s claims, such creditor is categorised as an (ordinary) insolvency creditor concerning the remaining unpaid quota of its claims and subsequently participating in the general insolvency pro rata.

Claw-Back Risks

The Insolvency Code (Insolvenzordnung) enables the insolvency administrator to avoid certain transactions that possibly decreased the assets of the debtor prior to the opening of insolvency proceedings. In this respect, transactions that were entered into by the debtor and a third party within certain suspect periods prior to the opening of insolvency proceedings, which may discriminate against other creditors, might be contested by the insolvency administrator.

The general requirements for avoidance under the insolvency code are:

• the challenged legal action or transaction must have caused the other creditors to have experienced direct or indirect discrimination (Gläubigerbenachteiligung);
• the avoidance must result in an increase of the insolvency estate (Befriedigungstauglichkeit); and
• the avoidance claim must be filed by the insolvency administrator within one year after the opening of the insolvency proceedings – however, an extension of three months may be agreed between the insolvency administrator and the relevant counterparty.

The most relevant grounds for avoidance are linked to the actual insolvency of the debtor, as follows:

• avoidance due to preferential treatment (Anfechtung wegen Begünstigung); and
• avoidance due to knowledge of insolvency (Anfechtung wegen Kenntnis der Zahlungsunfähigkeit).

Further, but in relation to financing transactions, avoidance grounds that are usually less critical include:

• avoidance due to intentional discrimination (Anfechtung wegen Benachteiligungsabsicht);
• avoidance due to the squandering of assets (Anfechtung wegen Vermögensverschleuderung); and
• avoidance of dispositions with no considerations or analogous transactions (Anfechtung unentgeltlicher Verfügungen und ihnen gleichgestellter Verfügungen).

Equitable Subordination

Under the Austrian Equity Substitution Act, a loan granted by (i) a direct or indirect major shareholder or (ii) a person who is granted extensive rights of control over the borrower during a crisis (Krise) of a borrower is considered as substituting equity. Therefore, the borrower must not repay such loan to the lender as long as the crisis persists.

A borrower is considered to be in a crisis if any of the following apply:

• illiquidity within the meaning of Section 66 of the Austrian Insolvency Act;
• over-indebtedness (Überschuldung) within the meaning of Section 67 of the Austrian Insolvency Act; or
• thin capitalisation (an equity ratio of less than 8% and a fictional debt redemption period longer than 15 years), unless no reorganisation of the debtor is required under the Austrian Reorganisation Act.

However, the extending of loans that were initially granted before a crisis was imminent is not considered as equity in order to help maintain the liquidity of a struggling company to a certain extent. Nonetheless, a case-by-case assessment is advisable.

Stamp Duty

Pursuant to the Austrian Stamp Duty Act (Gebührengesetz), Austrian stamp duty is imposed in connection with certain legal transactions when written documentation evidencing the transaction is drawn up and an Austrian nexus exists.

Special care must be taken in connection with the Austrian tax authorities’ understanding of “written documentation”, which is extensive and comprises not only paper contracts but also contracts concluded by electronic signatures.

While loan and credit agreements are not subject to stamp duty, certain transactions typically entered into in connection with financing transactions are subject to stamp duty (eg, assignment of receivables, mortgages, sureties). With respect to surety agreements and mortgages, stamp duty in the amount of 1% of the secured interest applies. Likewise, for assignments, stamp duty in the amount of 0.8% of the secured interest generally applies.

Stamp duty may also be triggered by references to any finance document that contains stampable transactions or refers to stampable transactions in another written document (substitute documentation – Ersatzbeurkundung). Any such legal transaction then becomes the content of the written document for stamp duty purposes. Hence, a mere reference in any form (eg, letter, paper, email, fax) is sufficient to trigger stamp duty in Austria.

Consequently, attention has to be paid to whether a finance document containing or documenting (by reference) a stamp duty-sensitive transaction is executed within or brought to Austria, or to any other action that establishes an Austrian nexus, since this may trigger Austrian stamp duty. An Austrian nexus exists if finance documents are signed or handed over in Austria, or if a document is signed outside of Austria (documentation abroad – Auslandsbeurkundung) and has a personal or factual domestic reference. A personal domestic reference means that all contracting parties have their domicile/management/place of business in Austria, while a factual domestic reference means that the legal transaction concerns a domestic object or has a domestic place of performance.

Risk mitigation strategies

Legally permissible strategies to avoid triggering stamp duty or to reduce such risk include:

• avoiding an Austrian nexus by utilising documentation abroad;
• limiting the secured obligations to obligations and liabilities under the facility agreement (as opposed to all finance documents), since the Austrian Stamp Duty Act provides for an important exemption in this respect;
• avoiding written agreements to be signed by the parties; and
• having one party provide an offer that will be accepted by the other party, orally or on the basis of factual behaviour.

Stamp duty fine

Austrian tax authorities may impose a fine of up to 100% of the amount of the stamp duty, if stamp duty accrues but is not duly paid.

Withholding Tax/Qualifying Lender Concepts

In general, neither the repayment of principal nor the payment of interest under loan transactions to Austrian or foreign lenders is subject to Austrian withholding tax. Such payments must be considered for the purposes of the income tax of the lender. Different rules, inter alia, apply for interest payments on bank deposits – or other non-securitised receivables against banks – and interest payments on publicly offered debt instruments (bonds), for which the Austrian withholding tax rate is 27.5%, subject to a reduction to 23% for interest paid to corporations.

Furthermore, no withholding tax applies to interest payments made to:

• foreign resident corporate taxpayers (without a permanent establishment in Austria to which the income is attributable);
• foreign resident individual taxpayers (without a permanent establishment in Austria) if an automatic exchange of information mechanism is in place between Austria and the jurisdiction of residence of the taxpayer, and if they provide a qualifying tax residence certificate; or
• Austrian corporate taxpayers who provide a qualifying declaration of exemption (Befreiungserklärung).

Several double taxation treaties concluded with Austria provide for (i) further exemptions form withholding tax or (ii) withholding tax to be considered either as deductible or capable of being refunded, or both. If withholding tax has been withheld, the taxpayer must file a refund application to obtain either a full or partial refund (if only a reduction under a tax treaty is available). Capital gains realised on an alienation of loans or bonds would only be subject to withholding taxation in Austria if an Austrian custodian or paying agent is involved in such alienation, and exemptions exist.

Thin Capitalisation Rules

Austria does not have a statutory thin capitalisation rule. The Austrian tax authorities, in general, accept a debt/equity ratio of up to 4:1 (even higher in certain holding contexts).

The Austrian Banking Act (Bankwesengesetz – BWG) contains a list of banking activities that require a banking licence if they are carried out on a commercial basis in Austria. Lending activities – defined as the conclusion of loan agreements and the granting of loans – are qualified as such banking activities and, if performed commercially in Austria, require (i) an Austrian banking licence or (ii) a passported banking licence granted by another EU member state.

In the context of banking activities, “commercial” generally means any sustainable activity to generate income, although not necessarily profit. Considering the strict interpretation of the Austrian Financial Market Authority (Finanzmarktaufsichtsbehörde – FMA), already granting a single loan may qualify as commercial activity and, hence, require a banking licence.

Whether lending business is regarded as being carried out in Austria must be determined on a case-by-case basis according to criteria such as:

• the place of conclusion of the underlying agreement;
• whether the funding was made available via an Austrian bank account;
• whether Austrian real estate was used as collateral;
• whether there is a targeted approach to the Austrian market; or
• whether the relevant banking services were specifically conceived for the Austrian market – as long as there is a certain Austrian nexus (eg, Austrian bank account, Austrian borrower), there is a risk that the banking licence requirement applies, even if the lending activity is conducted from a place outside of Austria.

Non-licensed lenders may only engage in lending to the extent that such activity is exempted from the requirement to hold a banking licence – eg, (i) the acquisition of loan portfolios by special securitisation purpose entities or (ii) the issuance of bonds by the borrower and the purchase of such bonds by the lender (instead of granting a loan to the borrower).

Furthermore, the BWG provides for an exemption for the licence requirement in connection with lending in relation to certain market participants.

Other than those outlined in the foregoing, there are no other crucial issues in debt finance transactions from an Austrian law perspective to highlight.