The Supreme Court stated that any security provided by a subsidiary as security for the debt of its direct or indirect shareholders shall be void if

a) the creditor and the debtor have intentionally acted to the disadvantage of the company providing the security; or

b) if the creditor knows that the providing of the upstream security was not permitted or due to a lack of diligence it has not discovered that the security provided does not meet the legal requirements.

Security granted by a subsidiary for its direct or indirect shareholders shall only be permitted in the event that the subsidiary receives an adequate fee for providing the security and that the debt for which the security is granted does not exceed the economic capabilities of the subsidiary.


Section 52 of the Act on Joint Stock Companies (Aktiengesetz) and section 82 of the Act on Companies with Limited Liability (GmbH-Gesetz) provide that shareholders of a company are only entitled to dividends. All other payments to shareholders are considered prohibited repayment of share capital. Such repayments are void. They can be reclaimed from the receiving shareholder within five years. Any managing director authorizing such a payment will also be personally liable to the company for repayment thereof. Also the providing of security for debts of a shareholder, whether direct or indirect, constitutes prohibited repayment of share capital if the payments under the security are not covered by distributable dividends. Any such payments can be reclaimed from the shareholders. Now the Austrian Supreme Court states that the company may raise the defence that such a transaction is void and unenforceable not only against its shareholders but also against creditors to whom the security rights were granted unless the test as set out above is being met.


Any security provided by subsidiaries of a debtor shall be revalued. The banks shall in particular request information from their debtors whether the respective subsidiary receives an adequate fee for providing the security and whether the subsidiary is in a position to repay the secured debt if the bank calls on the security. The bank, however, is not under an obligation to make independent enquiries whether the information received from the debtor is correct or not. The financing of MBOs and LBOs will become more difficult as the target company will not be able to provide security for the debt of the purchaser unless the above described test is being met.


Supreme Court June 25 1996, 4 Ob 2078/96r

For further information on this topic please contact Louis Foramitti at Ortner Pöch Foramitti Rechtsanwälte OEG by telephone (+431 535 37 21) or by fax (+43 1 533 15 55) or by e-mail ([email protected]).
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