Insolvency 2019 Second Edition

Last Updated November 20, 2019

Austria

Law and Practice

Authors



Fellner Wratzfeld & Partners advises clients in all areas of reorganisation and restructuring, and also with respect to insolvency law issues. The team provides comprehensive advice to companies and creditors, and leads restructuring negotiations on behalf of all insolvent parties. Its work in this area also includes the acquisition of companies from insolvent estates, their reorganisation and their return to profitability. While fwp’s practice was for many years better known for acting on behalf of credit institutions, the firm has in recent times also become increasingly involved in advising corporates.

In 2018, as in 2017, the number of insolvent companies in Austria was approximately 5,000 and thus remained at the lowest level in over 20 years. This trend is being continued in 2019: in the first half of the year, only 2,600 companies faced insolvency. The main reason for this was the low interest rate policy of the European Central Bank, which was still able to offset the weakening economy. In addition, in the first half of 2019, the overall liabilities involved in insolvency proceedings as well as the number of affected employees decreased. The liabilities affected amounted to approximately EUR850 million, which is 5% below the first half of 2018, and 8,100 employees were affected, which is 12% below the comparable period in 2018. Nonetheless, in the first half of 2019 the number of affected liabilities was still considerably higher than in the first half of 2017. In addition, in the first half of 2019, there were 16 major insolvencies (such as the insolvency of the technology company SFL technologies GmbH; the manufacturer of aluminium foils, plastic foils and garbage bags Alufix-Folienverarbeitungsgesellschaft m.b.H.; and the fashion chain Charles Vögele (Austria) GmbH), which is twice as many as in the same period of 2018. Thus, the developments in the Austrian insolvency market are not as positive as they might appear at first glance.

Compared to the first half of 2018, in the first half of 2019 the number of private insolvency proceedings decreased by 8% to around 5,000 cases. However, the number of private insolvency proceedings was still considerably higher than in 2017. The reason for the increase in private insolvencies is apparently that debtors have easier access to debt regulation due to the substantial reform of the law applicable to insolvencies and private individuals, which came into force in November 2017. In addition, in 2017 individuals withheld applications for insolvency until the respective amendment to the Federal Austrian Insolvency Act (Insolvenzordnung) entered into force, which led to a significant decrease in the insolvencies of private individuals in 2017. This amendment provides, inter alia, for a significant change to the debt relief of private insolvency debtors. Provided all statutory prerequisites are met, a private debtor may now achieve debt relief within a time period of three years (before the amendment came into force the time period was seven years). Moreover, the new law abolished the minimum insolvency quota of 10%.

On 20 June 2019, the European Parliament and the Council passed the long-discussed Directive (EU) 2019/1023 on restructuring and insolvency for further harmonisation of the insolvency statutes of the member states. The respective Directive lays down rules on preventive restructuring frameworks available for debtors in financial difficulties when there is a likelihood of insolvency similar to the US Chapter 11 proceedings; procedures leading to discharge of debt incurred by insolvent entrepreneurs; and measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt. Austria as well as the other EU members states are obliged to implement this Directive until June 2021.

The legal framework for insolvencies of business entities (as well as individuals) in Austria is codified in the Insolvency Act. Within this legal framework, three different types of proceedings are provided:

  • reorganisation proceedings with debtor in possession (the debtor retains, basically and subject to certain restrictions, control over the estate’s assets);
  • reorganisation proceedings without debtor in possession (a court-appointed 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).

The legal representatives of an entity must file for insolvency in a case where the entity is "insolvent" according to the meaning in the Insolvency Act. The criteria are met if the debtor is illiquid or over-indebted. The Insolvency Act does not provide a legal definition for illiquidity and over-indebtedness. Legal literature and case law have broadly defined "illiquidity" as a situation where the debtor lacks sufficient cash (including existing credit lines) to meet its current needs and obligations. The Supreme Court of Austria has ruled that illiquidity shall be assumed when the debtor is unable to pay more than 5% of its debt obligations that are due and payable. Over-indebtedness is held to have occurred when liabilities on the debtor’s balance sheet exceed the debtor’s assets. However, substantive over-indebtedness (materielle Überschuldung) of a company does not automatically lead to the obligation to file for the commencement of insolvency proceedings – the company must also not have a positive going-concern prognosis (see 12.1 Duties of Directors, below).

A debtor is obliged to file for insolvency with the competent court, without undue delay, once its financial situation meets the statutory criteria for insolvency, and no later than 60 days after it has been determined that the debtor is insolvent.

Apart from the legal representatives, any creditor is entitled to file for insolvency in the form of liquidation (bankruptcy) proceedings, provided such creditor has a claim (irrespective of its maturity date) against the debtor. Any form of reorganisation proceedings, however, can only be filed by the debtor. Where a delay in filing for insolvency by a legal representative of an insolvent entity is influenced by a shareholder of the entity, the shareholder could also face claims for damages by the creditors and could also be found to be criminally liable.

As stated above in 2.4 Procedural Options, creditors are entitled to file for insolvency in the form of liquidation proceedings, provided such creditor has a claim (irrespective of its maturity date) against the debtor.

Insolvency proceedings are opened by the insolvency court at the request of the debtor, or a creditor if the debtor is illiquid or over-indebted. Reorganisation proceedings can already be initiated if there is a danger of illiquidity. For the definition of illiquidity and over-indebtedness, see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership, above.

In principle, legal entities as well as individuals can be subject to insolvency proceedings under the Insolvency Act. However, neither reorganisation proceedings with, nor reorganisation proceedings without, debtor in possession apply to credit institutions, insurance companies and pension funds as there are specific provisions for these entities (under the Banking Act, Insurance Company Supervision Act and the Pension Fund Act).

With respect to credit institutions, the Bank Recovery and Resolution Directive (BRRD) has been implemented in Austria through the Austrian Recovery Bank and Resolution Act (Sanierungs- und Abwicklungsgesetz – BaSAG), which came into force in January 2015. The resolution process of former Hypo Alpe-Adria-Bank was the first to take place in Austria under this regime.

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, the Business Reorganisation Act is in practice “dead law” as entities do not make use of this legal act.

Austrian law does not provide a legal framework for out-of-court restructuring proceedings, and preliminary mandatory and consensual restructuring negotiations are not provided for in the Insolvency Act.

As mentioned above in 2 Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations, in a case where the insolvency of a debtor is established (ie, over-indebtedness or illiquidity in terms of the Insolvency Act), the legal representatives must file for insolvency with the competent court within a time period of 60 days at the latest. Any attempts at out-of-court restructurings have to observe this deadline as well, which means that such restructuring without the involvement of the court must take place (and be legally enforceably settled) prior to insolvency or within the 60 days’ time limit.

This is not applicable in Austria.

This is not applicable in Austria.

In practice, out-of-court restructurings may be attempted by way of voluntary debt relief (including subordination), economic reorganisation of the business or equity injections, all according to the provisions of private law. Creditors might decide to grant debt relief in order to avoid formal insolvency proceedings and the negative effect this might have on the entity's public image. A prerequisite for such “quiet relief” is that all the creditors affected are prepared to grant relief. However, each creditor can independently decide whether to initiate enforcement proceedings (Exekutionsverfahren) or insolvency proceedings. Therefore, creditors often bind their consent to the consent of the rest of the creditors as a pre-condition for their support.

Apart from the necessity to gain the consent of all the creditors, a potential disadvantage of out-of-court restructurings is the risk of voidance of agreements that were concluded at a time when the debtor was already insolvent, which can diminish the estate. An advantage of out-of-court restructuring is that these proceedings are not registered in the insolvency database. Furthermore, out-of-court restructuring is potentially much faster, provided that all the parties participate.

In accordance with statutory provisions, Austrian law recognises the following as security instruments over assets: pledges (Pfand), transfers of securities (Sicherungsübereignungen), assignments of securities (Sicherungszessionen), and reservations of title (Eigentumsvorbehalte).

Whereas pledges are intended to secure the individual claim of a creditor and the ownership of an asset remains with the debtor, a transfer of security aims to transfer the ownership of the asset to the creditor, who will only transfer the asset back to the debtor once the debt is fully paid. These two types of securities require registration with the land register where the asset concerned is real property. Priority is granted according to the chronological entry in the land register.

The Austrian Supreme Court recently ruled that the transfer of security in movable property validly acquired in Germany still exists after the movable property is moved to Austria, even if the publication requirements for its continued existence in Austria are not met.

With an assignment of securities, the debtor assigns claims against a third party to the creditor. This type of security requires strict acts of publication (eg, notification of third-party debtors or annotation in the books). Priority depends on the time at which the publicity requirement is met.

In Austria, no special procedures apply to foreign creditors.

As to the enforcement of secured creditor rights, see 5 Unsecured Creditor Rights, Remedies and Priorities, below.

In all three types of proceedings provided for in the Insolvency Act (reorganisation proceedings with debtor in possession, reorganisation proceedings without debtor in possession, and liquidation proceedings) claims are classified and ranked in the following order of priority:

Secured Creditors

Secured creditors either have claims of separation to receive assets (Aussonderungsanspruch) and/or claims of separation to receive the proceeds of enforcement after sale (Absonderungsanspruch). Neither of these claims is affected by the commencement of insolvency proceedings – apart from possible voidance claims (Anfechtung). The secured creditor merely has to inform the administrator and, lacking acknowledgement of the claim, potentially file a lawsuit against the insolvency administrator in order to enforce the senior security. However, secured creditors are subject to the restraint that no secured claim can be paid within six months from the commencement of insolvency proceedings in case such claims might jeopardise the business continuity of the debtor. Only if the enforcement is vital to prevent severe economic disadvantage to the secured creditor may this provision be disregarded.

Estate Claims

The next rank is taken by estate claims (Masseforderungen), which, according to the statutory provisions, are to be satisfied prior to the other insolvency claims. Estate claims encompass, inter alia, the costs of the insolvency proceedings; the expenses of the management and administration of the estate; claims for labour, services and goods furnished to the estate post-filing; and the costs of the insolvency administrator. Preferential creditors of estate claims share in such claims on a pro rata basis.

Insolvency Claims

Ranked behind estate claims are insolvency claims (Insolvenzforderungen), which are claims of unsecured creditors and may be filed with the competent court within a time period after the commencement of insolvency proceedings as fixed by the court. Those insolvency creditors who filed a claim that was not contested by the insolvency administrator also share in such claims on a pro rata basis.

Subordinate Claims

Subordinate claims may result from contractual provisions or from statutory provisions. Subordinate creditors do not participate in the insolvency proceedings in general, but only if a surplus for distribution is generated.

The commencement of formal in-court insolvency proceedings automatically leads to a stay against all actions of unsecured creditors, whereas secured creditors are generally not affected by the opening of insolvency proceedings.

As stated below in 7.2 Distressed Disposals, insolvency creditors can commence legal proceedings against the court-appointed insolvency administrator if the insolvency administrator contests the creditor’s claim.

Estate claims are to be paid by the insolvency administrator without any filing procedure. If estate claims are not paid by the insolvency administrator, estate creditors may apply to the insolvency court for remedy (Abhilfeantrag) or assert their claims by bringing an action against the insolvency administrator.

This is not applicable in Austria.

Insolvency creditors must first file their claims with the insolvency court within the time limit set by the court. In the examination hearing, which usually takes place 60 to 90 days after the opening of the insolvency proceedings, the insolvency administrator decides whether a creditor’s claim is contested or not. If the claim is contested by the insolvency administrator, the respective creditor must commence legal proceedings in order to obtain an insolvency claim. How long these proceedings take depends on the complexity of the case and whether the parties file remedies against the court decision of the first and second instance.

As stated above in 5.3 Rights and Remedies for Unsecured Creditors, estate claims are to be paid by the insolvency administrator without any filing procedure. Estate creditors may apply to the insolvency court for remedy (Abhilfeantrag) or assert their claims by bringing an action against the insolvency administrator if estate claims are not paid by the insolvency administrator.

This is not applicable in Austria.

In Austria, no special procedures apply to foreign creditors.

Prior to the commencement of insolvency proceedings, unsecured creditors may enforce a claim pursuant to the Austrian Enforcement Act (Exekutionsordnung).

As stated above in 5.1 Differing Rights and Priorities, estate claims are to be fulfilled prior to insolvency claims. If the insolvency estate is not sufficient to satisfy all estate claims, the following order of priority shall be observed:

1) the expenses of the management and administration of the estate;

2) costs of the insolvency proceedings including the remuneration of the insolvency administrator;

3) claims for labour, services and goods furnished to the estate post-filing; and

4) other estate claims.

In insolvency proceedings, claims are classified and ranked in the order of priority as described above in 5.1 Differing Rights and Priorities.

The Insolvency Act provides for two kinds of reorganisation proceedings, either with or without debtor in possession (see 2 Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations, above). The main focus of these proceedings lies in the continuation of the debtor's business or parts thereof. In order for the provisions of reorganisation proceedings to be applicable, the debtor has to be the one who files for the opening of these proceedings and the debtor must provide a restructuring plan (Sanierungsplan) to the court. For proceedings with debtor in possession, the management remains in place and the debtor retains control over the estate’s assets within the scope of ordinary business. Nonetheless, a court-appointed insolvency administrator monitors the management of the debtor and the business situation. Also, specific actions such as the review of claims and the contesting of transactions (avoidance) are reserved for the administrator.

As opposed to out-of-court restructuring, in reorganisation proceedings the debtor is protected from the commencement of enforcement proceedings and may be granted partial debt relief via a majority decision.

Restructuring Plan

However, as with liquidation proceedings, the debtor has the possibility to use the conclusion of a restructuring plan as an opportunity to rehabilitate its business. In case such restructuring plan is agreed upon in the course of liquidation proceedings, the debtor pays the quota agreed, which then leads to a residual debt discharge (Restschuldbefreiung). This possibility to rehabilitate plays an important role in practice.

Requirements

For restructuring proceedings, a restructuring plan by the debtor must be submitted to the court with financial records of the past three years that show the debtor’s ability to pay 20% of its debt to unsecured creditors within a period of two years. If the debtor can prove that a payment of 30% within a period of two years is feasible, the debtor may additionally apply for debtor in possession. The restructuring plan must further provide for full payment of all estate claims (Masseforderungen) and evidence of the debtor’s ability to fund the estate claims for a period of 90 days following the filing for the commencement of restructuring proceedings. The debtor must provide such restructuring plan within 90 days of the opening of insolvency proceedings.

Approval

In general, the approval of a suggested restructuring plan is subject to a “double majority requirement” of the creditors in the restructuring plan hearing, which is set by the court and made public by way of a formal edict of the court. Not only is it necessary to achieve a majority of those insolvency creditors who are present and entitled to vote (whereas no specific quorum applies), but also a majority of approving creditors has to be reached on the admitted and present aggregate insolvency claims. Fully secured creditors are not entitled to vote.

If the creditors approve a restructuring plan, the insolvency court – as a second step – also has to confirm the restructuring plan. A possible reason for the court to deny confirmation would be an infringement of the principle of equal treatment of the creditors by granting preferential treatment to a specific creditor.

Obligations

Once the restructuring plan is approved, confirmed and legally binding, the debtor is relieved of the obligation to pay to the creditors the amount exceeding the quota as outlined in the reorganisation plan, which also includes the limitation on the creditors to set off their claims against this quota where general requirements are met. The effects of the legally binding restructuring plan also apply to those creditors that did not vote for the restructuring plan or did not participate at all. The insolvency proceedings are thus concluded. However, any rights of secured creditors that either have claims of separation to receive assets (Aussonderungsanspruch) and/or claims of separation to receive the proceeds of enforcement after sale (Absonderungsanspruch) must not be affected by the restructuring plan. Also, the restructuring plan may provide for the appointment of a trustee to either supervise the execution of the restructuring plan (überwachter Sanierungsplan) or to manage the estate with the mandate to fulfil the restructuring plan (Treuhändersanierungsplan mit Vermögensübergabe).

If a debtor defaults on the payment of a quota as provided for in the restructuring plan, the respective creditor’s claim comes into effect again, but only proportional to the unpaid quota.

Where the statutory criteria for insolvency (over-indebtedness or illiquidity) are not yet met, a debtor may also file for the opening of reorganisation proceedings under the Business Reorganisation Act (Unternehmensreorganisationsgesetz). However, these proceedings are not relevant in practice as the consent of all creditors is required.

Austrian law does not contain specific provisions on pre-packaged sales or debt-for-equity swaps.

As stated above in 6.1 Statutory Process for a Financial Restructuring/Reorganisation and in 2 Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations there are two types of reorganisation proceedings, namely reorganisation proceedings with debtor in possession and reorganisation proceedings without debtor in possession. In both proceedings, the main focus lies in the continuation of the debtor's business or parts thereof. Whereas in reorganisation proceedings with debtor in possession the debtor retains, basically and subject to certain restrictions, control over the estate’s assets and is only monitored by the insolvency administrator, in reorganisation proceedings without debtor in possession the insolvency administrator takes control.

In reorganisation proceedings, claims are classified and ranked in order of priority as described above in 5.1 Differing Rights and Priorities.

The Insolvency Act provides for a court-appointed creditors’ committee, which is explained in detail in 9.3 Selection of Officers, below.

If the restructuring plan suggested by the debtor is approved by the required majority of creditors and also confirmed by the insolvency court (for details, see 6.1 Statutory Process for a Financial Restructuring/Reorganisation), the debtor must pay only the agreed quota to the dissenting creditors.

According to the Austrian Supreme Court, the trade of an insolvency claim against a company during insolvency proceedings is to be recognised. In the event of the acquisition of a claim after the opening of insolvency proceedings, the acquirer generally enters into the insolvency participation claim (Konkursteilnahmeanspruch) of the former creditor.

This is not applicable in Austria.

The sale or lease of the debtor’s company or parts thereof, the sale or lease of all or the main movable fixed assets and current assets, as well as the sale or lease of real property, requires the approval of the insolvency court as well as the creditors' committee. As long as reorganisation proceedings are pending, the debtor’s business basically may not be sold.

As stated in 7.7 Use or Sale of Company Assets During Insolvency Proceedings, below, it is the insolvency administrator's responsibility to realise the debtor's assets.

This is not applicable in Austria.

This is not applicable in Austria.

This is not applicable in Austria.

This is not applicable in Austria.

This is not applicable in Austria.

As explained in 7.7 Use or Sale of Company Assets During Insolvency Proceedings, the Insolvency Act provides for the possibility of set-off of claims if such claims have already been subject to compensation according to general civil law at the time of commencement of the restructuring proceedings, irrespective of the fact that such claims might not have been due or might have been subject to a condition at the time of commencement of the proceedings. If a creditor does not make use of their right to set off during the restructuring proceedings, they may basically only set off against the restructuring plan quota of their claim after final confirmation of the restructuring plan and cancellation of the restructuring proceedings.

As stated in 6.1 Statutory Process for a Financial Restructuring/Reorganisation, if a debtor defaults on the payment of a quota as provided for in the restructuring plan, the respective creditor’s claim comes into effect again, but only proportional to the unpaid quota.

This is not applicable in Austria.

As opposed to restructuring proceedings with or without debtor in possession under the Insolvency Act, liquidation proceedings aim at realising the assets of the estate and distributing the proceeds among the creditors. Restructuring proceedings that fail are transformed into liquidation proceedings.

As explained above in 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership, the legal representatives of an entity must file for insolvency in a case where the entity is insolvent within the meaning of the Insolvency Act (ie, if the debtor is over-indebted or illiquid). A debtor is obliged to file for insolvency proceedings with the competent court without undue delay once its financial situation meets the statutory criteria for insolvency, and no longer than 60 days after having determined that the debtor is insolvent. Apart from the legal representatives, any creditor is entitled to file for the commencement of insolvency proceedings in the form of liquidation proceedings, provided such creditor has a claim (irrespective of its maturity date) against the debtor.

The commencement of insolvency proceedings leads to an ex lege discontinuance of any legal procedure to which the debtor is party and with respect to any enforcement actions being taken against the debtor.

In liquidation proceedings the court appoints an insolvency administrator to assume control. The management of the debtor can no longer engage in any legal acts on behalf of the debtor from the time of the opening of insolvency proceedings. The court issues an official edict to be disclosed in the electronic notice board of the courts (Ediktsdatei), in which the examination hearing is determined. Until this date, creditors may file their claims with the court. The court-appointed insolvency administrator decides in the examination hearing whether a creditor’s claim is contested or not; if it is contested, the respective creditor must commence legal proceedings in order to obtain an insolvency claim. The main focus of the insolvency administrator lies with the realisation of assets and the distribution of the proceeds among creditors according to the quota. When realising assets by way of sale of the debtor’s company, the insolvency administrator must first establish whether the continuance is not possible, in which case, the creditors’ committee has to agree and the confirmation of the insolvency court is required.

As stated above in 6.1 Statutory Process for a Financial Restructuring/Reorganisation, if a debtor defaults on the payment of a quota as provided for in the restructuring plan, the respective creditor’s claim comes into effect again, but only proportional to the unpaid quota.

This is not applicable in Austria.

This is not applicable in Austria.

In general, the creditors' committee has to be consulted for each significant action of the insolvency administrator. Furthermore, certain actions have to be communicated to the insolvency court (such as settlement agreements or the fulfilment or termination of bilateral agreements where one party has not fulfilled its contractual obligations at the time of commencing insolvency proceedings) and others have to be confirmed by the insolvency court (such as the sale of the entire business of the debtor).

Apart from the insolvency administrator, the Insolvency Act provides for a court-appointed creditors’ committee, which is explained in detail in 9.3 Selection of Officers, below.

The Insolvency Act does not provide specific deadlines or timelines to be observed by the insolvency administrator in the course of liquidation proceedings when realising the assets. When all the proceeds have been distributed among the creditors, the insolvency proceedings are concluded.

The Insolvency Act provides for the possibility of set-off of claims if such claims have already been subject to compensation according to general civil law at the time of commencement of the liquidation proceedings, irrespective of the fact that such claims might not have been due or might have been subject to a condition at the time of commencement of the proceedings. Furthermore, creditors have to consider that a set-off is not possible for claims that arose within the last six months prior to the commencement of insolvency proceedings and the creditor knew (or negligently did not know) about the insolvency. Claims subject to set-off do not need to be formally filed in insolvency proceedings.

The Austrian Limited Liability Company Act (GmbHG) provides for the possibility to liquidate a limited liability company in addition to the provisions regarding insolvency.

The Insolvency Act provides for the recognition of the effects of insolvency proceedings opened in another country (irrespective of an international treaty or the reciprocity principle), as well as decisions rendered in such proceedings, in case the centre of main interests of the debtor is located in the respective foreign country and the insolvency proceedings are comparable to such proceedings in Austria, in particular, if Austrian creditors are treated in the same manner as foreign creditors in the foreign proceedings. However, recognition is denied if insolvency or composition proceedings have already been opened in Austria, or interim measures have been ordered, or recognition leads to a result that clearly conflicts with public policy.

In cross-border cases, Austrian insolvency courts as well as insolvency administrators co-operate with foreign administrators by way of disclosure of information relevant to the foreign insolvency proceedings and by granting the foreign administrator the opportunity to participate in the decision of the realisation of assets located in Austria or the realisation of reorganisation plans.

With regard to EU member states, any judgment opening insolvency proceedings handed down by a court of a member state must be recognised in all the other member states from the time that it becomes effective in the member state where proceedings were opened.

The courts of the member state, within the territory in which the debtor has the centre of its main interests (COMI), have jurisdiction to open insolvency proceedings. The COMI is the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties. The debtor’s COMI is determined at the time of filing for insolvency. Therefore, debtors can influence the international jurisdiction, and thus the applicable insolvency law, by timely shifting the COMI to another EU member state in order to achieve easier debt relief.

The Insolvency Act offers no special treatment for foreign creditors.

Where insolvency proceedings under the Insolvency Act are initiated by the debtor and are conducted as reorganisation proceedings with debtor in possession, the management remains in place and the debtor retains control over the estate’s assets within the scope of ordinary business. Nonetheless, a court-appointed insolvency administrator (or in the case of reorganisation proceedings with debtor in possession, a reorganisation administrator) monitors the management of the debtor and the business situation, at the same time preventing the discrimination of creditors. Also, specific actions such as the review of claims and the contesting of transactions (avoidance) are reserved for the reorganisation administrator.

In case of liquidation and reorganisation proceedings without debtor in possession, the estate is administered by a court-appointed insolvency administrator.

Specific actions are reserved to the insolvency administrator. For example, with regard to contracts with a mutual obligation to perform, where not all the parties have fully performed at the time of the commencement of insolvency proceedings, the insolvency administrator may elect to assume or withdraw from such contract. Furthermore, if the debtor is a tenant, the insolvency administrator can decide to terminate the lease contract as long as they respect the statutory notice period or a shorter contractual notice period. If the debtor is a landlord, the insolvency administrator steps into the contract without additional special termination rights. Also, the insolvency administrator may terminate employment contracts upon a partial or total shut-down of the business. In case of such shut-down, the insolvency administrator only has to observe the statutory notice periods and, if applicable, the collective bargaining agreement. A contractually agreed longer notice period to terminate employment contracts is inapplicable. Moreover, the Insolvency Act provides for a six-month moratorium in case a contracting partner wants to terminate a contract with the debtor that is essential for business continuation. These contracts may only be terminated for good cause, whereas a deterioration of the economic situation of the debtor or default of payment of claims which were due before the commencement of the insolvency proceedings are not considered to constitute such good cause.

In general, insolvency administrators are selected by the court from the official list of insolvency administrators. Under the Insolvency Act, an administrator must be a respectable and reliable person experienced in business with proficiency in insolvency matters, including commercial law and business management, where business entities are involved. Furthermore, the insolvency administrator must be independent of the debtor and the creditors. On the one hand, in case of liquidation the insolvency administrator is statutorily remunerated with a percentage of the gross revenues realised from the liquidation. On the other hand, in the event of continuation the insolvency administrator is entitled to a special remuneration. With the 2017 amendment of the Insolvency Act the minimum remuneration for the insolvency administrator has been increased. The identity of the insolvency administrator is made public with the official notice of the court, to be disclosed in the electronic noticeboard of the courts (Ediktsdatei), which also contains information on the type of insolvency proceedings to be opened, and the timeline for the meeting of the creditors and the examination hearing regarding the claims registered by the creditors.

The insolvency administrator is monitored by the insolvency court, who can remove the administrator from office for good cause, either ex officio or upon request. A motion for removal can be filed at any time by the debtor or any member of the creditors' committee and must contain a reason for removal. Prior to rendering a decision, the court may hear the members of the creditors' committee, and the insolvency administrator, if feasible.

The Insolvency Act provides for a further statutory body, a court-appointed creditors’ committee, consisting of three to seven members, which supervises and supports the insolvency administrator. In general, it is in the court’s sole discretion whether to install a creditors' committee (also upon request of the creditors), if the characteristics or the particular scope of the debtor’s business make it imperative. However, the court must appoint such a committee if the debtor’s business is to be sold. The members of the creditors’ committee are also chosen by the court at its sole discretion, but the creditors, representatives of the works council and other special interest groups have a right to propose certain members. The members of the creditors’ committee are to be disclosed on the electronic noticeboard of the courts (Ediktsdatei).

In practice, professional advisers act as counsel to the debtor or to a creditor in all types of insolvency proceedings under the Insolvency Act. A prerequisite for this kind of mandate is a valid engagement with the client, just as with any other mandate.

As stated above in 10.1 Typical Advisers Employed, a prerequisite for the mandate of professional advisers is a valid engagement with the client. Therefore, compensation is also subject to a specific agreement between the adviser and the client.

Most of the time, attorneys are engaged as professional advisers, due to the fact that the exercise of rights in insolvency proceedings requires substantiated knowledge of insolvency law.

No judicial approval is required for such mandates.

Professional advisers owe duties and responsibilities to their client, pursuant to the contract concluded with the client and the law.

Neither the Insolvency Act, nor any other national law, makes specific provisions for arbitration in insolvency proceedings. As the insolvency court has sole exclusive jurisdiction for insolvency proceedings, any kind of choice of forum clause would be void. Also, the insolvency administrator is not bound by arbitration agreements entered into by the debtor prior to the commencement of insolvency proceedings, apart from those contained in contracts that the administrator entered into in their role as insolvency administrator.

This is not applicable in Austria.

This is not applicable in Austria.

This is not applicable in Austria.

This is not applicable in Austria.

Under the Insolvency Act, a prerequisite for the filing of insolvency proceedings is the illiquidity or over-indebtedness of the debtor. Where one of these criteria is met, the entity is deemed insolvent. For lack of a legal definition of the term, Austrian case law and commentary define illiquidity as a situation where a 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. Over-indebtedness is measured according to a two-step process:

  • firstly, a potential material insolvency is established by calculating whether the liabilities of the debtor exceed its assets; or
  • secondly, if the entity is materially insolvent, only in a case where a positive going-concern prognosis is not feasible is the relevant entity deemed to be over-indebted under the Insolvency Act.

In general, a managing director must act in a diligent manner. Any failure to act diligently exposes the managing director to liability vis-à-vis the company. The corresponding claims of the company, which may not be settled in a case where payments by the managing directors are required for the satisfaction of the creditors, are subject to a five-year limitation period.

If a debtor meets one of the above-mentioned criteria for insolvency under the Insolvency Act, see 12.1 Duties of Directors, the legal representatives are obliged to file for insolvency without undue delay, and no later than 60 days after having determined that the debtor is insolvent. If the entity is illiquid or over-indebted and the legal representatives fail to file for insolvency without undue delay – or in any event, no later than within a 60-day time period – the legal representatives expose themselves to possible civil and criminal charges (including fraud or undue preference for a creditor) for impairment of creditors’ interests. Disregarding the 60-day time limit is one of the few cases where a legal representative of a limited liability company may be held personally liable for damage inflicted on the company’s creditors (a possible reduction of the insolvency quota). Furthermore, the legal representatives may be liable to the entity for any payments executed while already in a state of insolvency.

In Austria, chief restructuring officers are rare, although they are sometimes appointed as members of the board. In their capacity as a board member, they are obliged to report to the supervisory board.

Under Austrian law, a shadow director (faktischer Geschäftsführer) is a person who exerts significant influence on the management without being formally appointed as director of the company. In practice, majority shareholders often act as shadow directors, but any person and thus also creditors can become a shadow director. When managing the company, the shadow director shall exercise the diligence of a prudent businessperson and shall be liable for any resulting damage in the event of a breach of their obligation to the company. The shadow director may also be held liable to creditors for a delay in insolvency if they have not ensured that the formally competent body files for insolvency in the case of ascertainable insolvency. However, there is some disagreement as to whether the shadow director personally has an obligation to file for insolvency. Although, if the shadow director is the majority shareholder, they have in any case a separate obligation to file for insolvency if the application requirements in accordance with the Austrian Insolvency Code (Insolvenzordnung) are met.

Under Austrian law, shareholders are liable to creditors only in exceptional cases. For example, shareholders may be held liable to creditors if they cause the managing directors not to apply for the opening of insolvency proceedings, even though the conditions are met.

The provisions of the Insolvency Act dealing with voidance rights aim at safeguarding the insolvent estate with respect to the satisfaction of creditors. Legal acts and transactions that have taken place within certain time periods prior to the commencement of insolvency proceedings over the assets of the debtor, and which relate to the assets of the insolvent (illiquid or over-indebted) debtor, can be contested by the insolvency administrator. Therefore, the satisfaction of a pledgee can never be detrimental to the debtor’s assets as the creditor only obtains the equivalent of what would be the outcome of a sale in the course of insolvency proceedings.

The general prerequisites for any avoidance under Austrian insolvency law are the following:

  • the avoidance results in an increase of the insolvency estate (Befriedigungstauglichkeit); and
  • the challenged legal act or transaction caused the direct or indirect discrimination of creditors (Gläubigerbenachteiligung).

The discrimination of creditors will only be affirmed if the settlement fund (Befriedigungsfonds) available to creditors in the insolvency proceedings was reduced in comparison with the amount available at the time of the contested legal act.

A transaction can be contested for intent to discriminate (Benachteiligungsabsicht), squandering of assets (Vermögensverschleuderung), free-of-charge disposal (unentgeltliche Verfügung), preferential treatment of creditors (Begünstigung) and knowledge of illiquidity (Kenntnis der Zahlungsunfähigkeit). The look-back period varies from provision to provision, ranging from a maximum of ten years for intent to discriminate, to 60 days prior to the commencement of insolvency proceedings for preferential treatment of creditors, whereas certain periods are shortened where the third party knows or should have known (ie, negligently did not know) of the respective facts.

Voidance claims are asserted by the insolvency administrator on behalf of the estate only (independent of the type of insolvency proceedings), within a time period of one year from the opening of insolvency proceedings. Furthermore, the administrator may raise the plea of voidance without any time limit.

In the Austrian insolvency regime, valuation plays a vital role at the very beginning when insolvency under the Insolvency Act (ie, illiquidity or over-indebtedness) has to be reviewed. In the event of substantive over-indebtedness (materielle Überschuldung) of a company, a positive going-concern forecast (Fortbestehensprognose) can result in an admissible continuation of business despite the financial difficulties. However, substantive over-indebtedness does not equal over-indebtedness under insolvency law. Only the latter requires the filing for insolvency. A positive going-concern forecast eliminates the assumption of over-indebtedness under insolvency law. Also, avoidance under the Insolvency Act can be excluded to a large extent if a positive going-concern forecast can be provided for the company in crisis.

Typically, a valuation in the form of a going-concern forecast has to be provided by the directors of the entity that is potentially in crisis. In practice, the legal representatives often consult external experts, such as auditors, to establish a going-concern forecast. The going-concern forecast must evidence with preponderant probability that the company in crisis will regain solvency within the coming 12 months and, furthermore, that the company in crisis will reach a turnaround within the next two to three years, depending on the business conducted.

Once insolvency proceedings are opened, it is the task of the insolvency administrator to establish whether the debtor’s business should be continued. The insolvency court may only decide to close, or approve the closure of, the debtor’s business, if it is certain that otherwise an increase of the loss may not be avoided.

Fellner Wratzfeld & Partners

Schottenring 12
1010 Vienna
Austria

+43 1 53770

+43 1 53770 70

office@fwp.at www.fwp.at
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Law and Practice

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Fellner Wratzfeld & Partners advises clients in all areas of reorganisation and restructuring, and also with respect to insolvency law issues. The team provides comprehensive advice to companies and creditors, and leads restructuring negotiations on behalf of all insolvent parties. Its work in this area also includes the acquisition of companies from insolvent estates, their reorganisation and their return to profitability. While fwp’s practice was for many years better known for acting on behalf of credit institutions, the firm has in recent times also become increasingly involved in advising corporates.

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