Protective measure under Section 78
Increasing trends of recent case law
Protective measures
Cross-border protective measures
Comment
In some cases of insolvency, it may be necessary to take special measures which affect the debtor or third parties in order to prevent the insolvent assets from diminishing. These cases are governed by Section 78 of the Insolvency Code, which offers the possibility of ordering individual protective measures with regard to the debtor and third parties. In particular, recent case law has extended the scope of application of these protective measures.
Protective measure under Section 78
As a matter of principle, opening insolvency proceedings already imposes a so-called 'dual restriction' on the debtor. On the one hand, any legal acts taken by the debtor after opening insolvency proceedings and affecting the insolvent assets are ineffective with regard to the creditors. On the other hand, the debtor is deprived of the power to dispose of the insolvent assets by their actual transfer to the insolvency administrator. However, in certain cases the protection of the insolvent assets thereby created will reach its limit if the debtor (or its legal representative), with the obvious intent to cause damage, takes action contrary to the legal provisions and attempts to thwart the insolvency administrator's efforts to protect the assets (eg, by abducting various assets). Although these intentions, being legally ineffective, will not jeopardise or diminish the assets in a legal sense, the arising situation forces the insolvency administrator to institute tedious and, in some cases commercially futile, legal proceedings.
In order to obviate these problems, Austrian insolvency law offers the possibility of ordering individual protective measures according to Section 78 of the code. In addition to blocking bank accounts, redirecting the debtor's mail to the insolvency administrator and similar measures, Section 78 allows individual measures to protect the insolvent assets. These measures must generally be ordered by the relevant insolvency court on an ex officio basis, but may also be requested or suggested by both the insolvency administrator and the creditor.
According to Section 78, protective measures can be directed against the debtor (or its legal representative) and individual, sufficiently defined third parties and can be ordered when insolvency proceedings are opened (or later on). In practice, these measures are often effective instruments to protect the assets, as they are directed towards the interfering or injuring party and may also be enforced against it. In most cases, these measures take the form of actions to be taken or bans. However, other measures (eg, keeping documents or securities) are admissible.
Increasing trends of recent case law
In any case, the insolvency court may order protective measures only if there is a specifically indicated risk posed to the assets by the debtor or third parties. Further, previous case law permitted only measures against any de facto action by the debtor or individually designated third parties, but not against legal acts taken by these (eg, exercising voting rights in shareholders' meetings). The Supreme Court's most recent case law now deviates from this strict separation between de facto and legal acts and now allows the insolvency court to order protective measures in respect of legal acts of the debtors (and probably also those taken by third parties), provided that these are necessary to protect the insolvent assets.
Any breach of such protective measures may generally even result in the debtor or its legal representative being arrested. If the protective measure is directed towards third parties, a fine might be imposed. In both cases, the practical significance is negligible. The true advantage of such protective measures is their dissuasive effect, rather than in the actual penalties imposed.
Cross-border protective measures
According to the lex concursus principle, within the scope of application of the council regulation on insolvency proceedings, the law of the state opening the proceedings applies. Accordingly, cross-border protective measures may be taken to protect assets that are located in other member states. These measures must in turn be recognised and enforced by the courts of the member states, while certain limitations apply in this context on a case-by-case basis (eg, in connection with restrictions on the personal freedom).
In many cases, protective measures according to Section 78 may be useful tools to prevent the debtor from taking de facto effective measures (difficult or impossible to be reversed) which diminish the insolvent assets. In particular, creditors and their legal representatives should always bear in mind that this possibility is available. Should they become aware of any acts that the debtor intends to take which could damage the insolvent assets, they could suggest these protective measures and thereby counteract such acts, ultimately preventing the diminishment of their recovery rate. In particular, this applies to those cases where the insolvency administrator does not share the creditors' concerns or where no insolvency administrator has yet been appointed.
For further information on this topic please contact Alexander Isola at Graf & Pitkowitz Rechtsanwälte GmbH by telephone (+43 316 833 777) or email ([email protected]). The Graf & Pitkowitz website can be accessed at www.gpp.at.