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Legal framework

Legislation

What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?

The relevant primary legislation is the Insolvency Code, which provides for three types of judicial insolvency proceedings for enterprises:

  • bankruptcy proceedings;
  • restructuring proceedings with self administration; and
  • restructuring proceedings without self administration.

There are also special provisions in Austrian company law, tax law and employment law, as well as the EU Insolvency Regulation (2015/848).

Also relevant in practice is the Equity Substitution Act, which potentially qualifies loans granted by shareholders as equity (and therefore statutorily subordinated).

The Business Reorganisation Law provides rules for corporate reorganisation proceedings in relation to a solvent debtor’s business which do not affect creditors’ rights. In practice, such proceedings are rarely applied.

Regulatory climate

On an international spectrum, is your jurisdiction more creditor or debtor friendly?

On the international spectrum, Austrian insolvency law appears to be more creditor than debtor friendly. Key provisions explicitly cover the protection and equal treatment (ie, pari passu and par conditio creditorum) of creditors. However, since a major reform of insolvency law in 2010, debtor-friendly restructuring tools have been strengthened.      

Sector-specific regimes

Do any special regimes apply to corporate insolvencies in specific sectors (eg, insurance, pension funds)?

Special provisions apply for:

  • banks, under the Act on the Recovery and Resolution of Banks;
  • insurance companies, under the Act on the Supervision of Insurance Companies; and
  • pension funds, under the Pension Fund Act.

Reform

Are any reforms to the legal framework envisaged?

The latest material insolvency law reform was implemented in 2010. There are no material reforms envisaged presently, but existing legislation is regularly evaluated.

With the new EU Insolvency Regulation (2015/848) in force since June 2017, the Austrian legislature has amended the provisions of the Austrian Insolvency Code regarding cross-border constellations in an EU and international (ie, non-EU) context.

Further harmonisation efforts discussed at an EU level may lead to changes in Austrian insolvency law in the foreseeable future. These include a possible EU directive on preventive restructuring frameworks, as proposed by the European Commission in November 2016.      

Director and parent company liability

Liability

Under what circumstances can a director or parent company be held liable for a company’s insolvency?

Directors

Generally, as long as directors comply with their general duties of care (eg, fiduciary duties), they cannot be held liable simply because the company has become insolvent.

In the event of insolvency (ie, illiquidity or over-indebtedness within the meaning of the Insolvency Code), directors of the insolvent company must file for judicial insolvency proceedings without undue delay but no later than 60 days after the occurrence of insolvency. This 60-day period is an absolute maximum period and can be taken advantage of only if:

  • serious and promising efforts to restore solvency within the 60-day period are pursued; or
  • an application for judicial restructuring proceedings is prepared with serious efforts.

If directors do not comply with this duty to file, they may become personally liable towards the company and, in certain circumstances, directly liable to creditors.

In addition, directors may face personal liability if they commit criminal offences related to the company’s insolvency or violate other relevant laws (eg, business reorganisation law, tax law or social insurance law).

Shareholders

As a basic principle, shareholders are not held liable in relation to a company’s insolvency. Liability can only arise in exceptional circumstances – in particular, if shareholders:

  • are considered as actual shadow directors; or
  • have actively delayed the insolvency or prevented the directors from filing.

However, majority shareholders may underlie the duty to file if the company does not have a director at all; they also may be held responsible for a cost contribution to the costs of the insolvency proceeding (eg, several thousand euros).

Defences

What defences are available to a liable director or parent company?

Directors

Depending on the actual allegations, directors may argue that:

  • the company was not illiquid or over-indebted at all;
  • illiquidity or over-indebtedness was objectively not apparent;
  • the directors permissibly took advantage of the 60-day period; or
  • performed payments were in accordance with the care of a prudent businessman.

Shareholders

In principle, shareholders may bring forward similar arguments to directors and may additionally argue that they did not act as an actual director (eg, they did not otherwise perform actions which constitute liability) or that the company in fact had a managing director and therefore the duty to file was on them.

Due diligence

What due diligence should be conducted to limit liability?

As a general rule, directors must monitor the financial status of the company based on functional accounting and internal control mechanisms. If financial or operational difficulties arise, directors must adapt their actions to the company’s situation. In particular, they should record every step taken and look for external experts’ support in order to assess whether the company is illiquid or over-indebted and, if so, how it can manage a turnaround. Written evidence about timely and proper external advice can be a key argument against personal liability in later court disputes.    

Position of creditors

Forms of security

What are the main forms of security over moveable and immoveable property and how are they given legal effect?

Movable property

The main types of security available for movable property are pledges and transfers of title for the purpose of taking security. Assets serving as security can be receivables, bank accounts (eg, deposits) or machines. There is no official register of such securities and they do not require the involvement of a notary. Still, strict publicity requirements must be complied with.

In practice, the most relevant form of security is the assignment of receivables as a security device. In order to gain valid security over receivables, the third-party debtor must be notified of the assignment or appropriate records in the assignor’s accounts must be kept.

The priority of a pledge or assignment depends on the time the respective publicity requirement was met.

Immovable property

The two main types of security available for immovable property are mortgages and the transfer of title in property. When creating a mortgage, the debtor remains owner of the property. When transferring the title over property, the debtor transfers the ownership to a trustee, which holds the property for the debtor under a trust agreement.

Both types of security require notarisation and must be registered with the Public Land Registry in order to become valid. The priority of security usually depends on the chronological order of entry into the Public Land Registry.

Ranking of creditors

How are creditors’ claims ranked in insolvency proceedings?

The Insolvency Code does not explicitly provide for formal rules on classes or ranking of creditors’ claims. Systematically, the following creditor groups can be ranked as follows:

  • Creditors with a right to property regarding assets of the debtor’s estate and creditors with security on assets of the debtor’s estate – such rights are generally not affected by the opening of insolvency proceedings and must be directly claimed towards the debtor or insolvency administrator;
  • Creditors that can demand full payment out of the debtor’s estate because their claims arise after opening of the insolvency proceedings (eg, trade creditors contracting with the administrator or landlords for lease payments commencing after opening of proceedings) – such claims must be directly filed to the debtor or insolvency administrator;
  • Unsecured creditors – such claims must be filed by formal submission to the insolvency court and receive an insolvency quota; and
  • Statutorily or contractually subordinated creditors – such claims can be filed only if allowed by the court.

Can this ranking be amended in any way?

Generally, this ranking is compulsory. Creditors may declare subordination before or within insolvency proceedings; in practice, this is often done by shareholders or major creditors in order to support the debtor company.

Foreign creditors

What is the status of foreign creditors in filing claims?

Foreign creditors have the same rights as Austrian creditors.

Where the EU Insolvency Regulation (2015/848) is applicable, foreign creditors (ie, creditors coming from another EU member state) can file their claims in any official language of bodies of the European Union. However, the Austrian insolvency court or insolvency administrator may ask for translations or validations of relevant documents.      

Unsecured creditors

Are any special remedies available to unsecured creditors?

Against the debtor, as a general rule, no. Unsecured creditors must file their claims by formal submission to the insolvency court.

Under certain circumstances there may be direct remedies out of personal liability towards the debtor company’s directors (eg, for delay in filing for insolvency) or – in very rare cases – shareholders (eg, for acting as shadow directors).

Debt recovery

By what legal means can creditors recover unpaid debts (other than through insolvency proceedings)?

Outside of insolvency proceedings, creditors can demand payment under general rules (eg, a payment demand or court litigation). On the basis of an enforceable court judgment, the creditor can directly enforce and seize the debtor’s assets.

Within insolvency proceedings, no individual enforcement actions towards the debtor are possible (ie, there is a statutory moratorium). Creditors must instead file their claims in the insolvency proceedings and the insolvency administrator will approve or reject such claims. In case of rejection, the creditor may sue the administrator for approval.

Is trade credit insurance commonly purchased in your jurisdiction?

Yes, especially in business-to-business relationships.

Liquidation procedures

Eligibility

What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?

The Insolvency Code governs three types of judicial insolvency proceedings for enterprises:

  • bankruptcy proceedings;
  • restructuring proceedings with self administration; and
  • restructuring proceedings without self administration.

Bankruptcy proceedings can be compared to (non-voluntary) liquidation proceedings.

The conditions to open any of the above proceedings are illiquidity or over-indebtedness.

A company is considered ‘illiquid’ if it is unable to pay all due debts in due time and is not in a position to acquire the necessary funds to satisfy its due liabilities within a reasonable period of time. Only matured liabilities are relevant. Liabilities not yet due and deferred or statutorily subordinated liabilities not yet payable need not be considered.

A company is considered ‘over-indebted’ if the company’s liabilities exceed its assets based on liquidation values and the company has a negative forecast for continued existence. In practice, assessment of the latter is usually the key challenge for debtors or their directors.

As soon as one of these insolvency conditions applies, the duty to file for insolvency for directors is triggered and the debtor (as well as creditors) can file for bankruptcy proceedings.

Rules on restructuring proceedings do not apply for banks, insurance companies and pension funds. Besides, entities are not explicitly barred from initiating insolvency proceedings.

Procedures

What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?

Insolvent liquidation

Insolvent liquidation proceedings (ie, bankruptcy proceedings) require the debtor’s insolvency (ie, illiquidity or over-indebtedness) and are initiated after application by the debtor or a creditor. If the debtor files an application, bankruptcy proceedings are usually opened very quickly (ie, within a few days). If a creditor files, the court must first assess whether the creditor is formally entitled to file and whether the debtor is indeed insolvent. This process may take weeks or even months.

If the above requirements are met and the debtor’s assets are sufficient to cover the costs of the proceedings, bankruptcy proceedings are formally opened by the court and an insolvency administrator is appointed. In such proceedings, the administrator is called the ‘Masseverwalter’ and merely acts as a liquidator.

There are no structural or legal differences between liquidation proceedings filed by the debtor or a creditor.

Insolvency administrators usually try to sell the whole (or main parts) of the debtor’s business as a going concern. If this is impossible, the business gets closed and the administrator sells the assets in bundles or piece by piece.

Proceedings may last for several months or several years, as the case may be. After all assets have been sold, a final court hearing is scheduled and the proceeds are distributed among the creditors (ie, the final distribution of the insolvency quota). The proceedings end by court order.

Other than restructuring proceedings, bankruptcy proceedings cannot be debtor-in-possession proceedings. Still, even if bankruptcy proceedings are opened, a debtor can file for a restructuring plan and thereby has the chance to restructure the business as a going concern, achieve a debt discharge of up to 80% and regain control.

Solvent liquidation

Besides liquidation proceedings (ie, bankruptcy proceedings) based on insolvency law, there are corporate law rules providing for voluntary liquidation of a solvent debtor. Such are usually not relevant in an insolvency scenario.

How are liquidation procedures formally approved?

By court order.

Certain extraordinary measures within the proceedings (eg, the sale of the business or major assets such as real estate) must be approved by court and a formally appointed creditors’ committee.

What effects do liquidation procedures have on existing contracts?

Generally, contracts are not automatically terminated or amended by the opening of insolvency proceedings (ie, bankruptcy or restructuring proceedings). Still, there are special provisions in the Insolvency Code relevant to contracts:

  • If both contract partners have fully performed their contractual obligations, contracts can in principle be affected only by an ex post challenge by the administrator (mainly under avoidance law);
  • If mutually binding contracts have been fully or partly unperformed by both sides, the administrator may choose whether to be bound to the contract or withdraw from it. If the administrator decides to withdraw, damages suffered by the contracting partner can only be filed as insolvency claims. This general rule does not apply for lease or similar contracts and employment contracts;
  • If a creditor (and not the debtor) has performed a contract, the creditor merely has an insolvency claim for its loss resulting from the non-performance by the debtor; and
  • If the debtor (and not the creditor) has performed the contract, the insolvency administrator can claim contractual performance by the other party.

Special rules for lease and employment contracts

In case of long-term agreements such as lease or employment contracts (or similar contractual relationships), the Insolvency Code provides specific termination rules which are mostly in favour of the insolvent debtor. In terms of employment law, the code in certain circumstances provides for easier termination for both parties (ie, administrator and employees). This particularly helps the administrator if he or she wants to sell the business or valuable parts of it.

Rules on termination

Under certain circumstances, contracts which are essential for the ongoing business of the debtor may be protected from termination by the contractual partner for a specific period (ie, up to six months). Clauses which allow the contractual partner of the debtor to terminate a contract just because of the opening of insolvency proceedings (ie, ipso facto clauses) are void.

What is the typical timeframe for completion of liquidation procedures?

Proceedings may last for several months or several years. The timeframe depends on the complexity of the proceeding and whether the administrator can sell the business in full as a going concern or must sell assets separately. Potential lawsuits usually influence the timeframe.

Role of liquidator

How is the liquidator appointed and what is the extent of his or her powers and responsibilities?

The liquidator is appointed by the court out of a list of potential administrators. Administrators are usually lawyers; in most cases, the individual lawyer and not the law firm is appointed. There is no formal right of the debtor or creditors to influence the court’s selection. The administrator’s tasks include to evaluate, inventory and sell the debtor’s assets. The administrator must meet the objective standards of a professional expert. In his or her authority, the administrator can:

  • close contracts;
  • withdraw from or terminate contracts;
  • negotiate settlements;
  • sue contractual partners; and
  • seek support by external experts.

A breach of the described duties may lead to personal liability.

Court involvement

What is the extent of the court’s involvement in liquidation procedures?

The court is competent for all main decisions and thus decides on:

  • the opening of the proceeding;
  • the appointment of the administrator and any creditors’ committee; and
  • the end of the proceeding.

Besides, the court will supervise the proceeding and especially the actions of the administrator, and may need to take decisions or enact orders in this context. Certain measures (eg, sale or shutdown of business) must be formally approved by the court.

Creditor involvement

What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?

Unsecured creditors can enforce their individual rights by filing their claims as insolvency claims and thereby participate in the insolvency quota. Creditors with a right to property over the assets of the debtor’s estate and secured creditors can claim preferential treatment limited to the owned property or the value of the security.

Creditors which have filed their insolvency claims can participate and vote in the creditors’ meetings and in court hearings and thereby contest claims filed by other creditors. Creditors are party to the proceedings, have formal access to the court files and can challenge certain court decisions in such capacity.

The creditors can further participate by the appointment of a creditors’ committee. This must be appointed by the court in complex proceedings and in case of the sale of the business. The committee supports and supervises the administrator, and must approve certain of his or her actions.

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in liquidation procedures?

As liquidation proceedings (unlike certain types of restructuring proceedings) are not debtor-in-possession proceedings, the directors may no longer manage the company. Still, they remain formally appointed and must cooperate and share relevant information with the administrator.

Shareholders do not lose their formal status as shareholders but may not give directives to the administrator or participate in court hearings (unless they are also creditors).

Restructuring procedures

Eligibility

What are the eligibility criteria for initiating restructuring procedures? Are any entities explicitly barred from initiating such procedures?

The Insolvency Code governs three types of judicial insolvency proceeding in relation to enterprises:

  • bankruptcy proceedings;
  • restructuring proceedings with self administration; and
  • restructuring proceedings without self administration.

The conditions to open any of the above proceedings are illiquidity or over-indebtedness.

A company is considered ‘illiquid’ if it cannot pay all due debts in due time and is not in a position to acquire the necessary funds to satisfy its due liabilities within a reasonable period of time. For the assessment of illiquidity only matured liabilities are relevant. Liabilities not yet due and deferred or statutorily subordinated liabilities that are not yet payable need not be considered.

A company is considered to be ‘over-indebted’ if its liabilities exceed its assets based on liquidation values and the company has a negative forecast for continued existence. In practice, assessment of the existence of the latter is usually the key challenge for debtors.

As soon as one of these insolvency conditions applies, the duty to file for insolvency for directors is triggered and the debtor can file for restructuring proceedings with or without self administration. In case of impending illiquidity the debtor may file for restructuring proceedings, but does not have to do so. Creditors cannot file for restructuring proceedings.

Rules on restructuring proceedings do not apply for banks, insurance companies or pension funds. Besides, entities are not explicitly barred from initiating insolvency proceedings.

Procedures

What are the primary formal restructuring procedures available in your jurisdiction and what are the key features and requirements of each?

The Insolvency Code provides for a restructuring proceeding with self administration (ie, a debtor-in-possession proceeding) and a restructuring proceeding without self administration.

In both proceedings the court appoints an administrator which either merely supervises the debtor (ie, in self administration) or manages and represents the business in full (ie, in proceedings without self administration).

In both proceedings the debtor must present a restructuring plan offering a minimum restructuring quota of:

  • 30% in case of proceedings with self administration; and
  • 20% in case of proceedings without self administration.

This quota must be paid to the creditors within two years of the end of the proceedings. Timely quota payment will lead to a debt discharge.

Creditors cannot present a restructuring plan or counterproposals to a plan presented by the debtor, nor can they force the debtor to present such plan.

Both types of restructuring proceedings provide for:

  • a statutory moratorium for individual enforcement actions;
  • protection of key contracts and assets for up to six months, if necessary for the continuation of the business;
  • the possibility of restructuring the insolvent entity (eg, by terminating contracts, shutting down non-profitable parts of the business or terminating employment contracts); and
  • debt discharge for the debt exceeding the approved restructuring quota.

Among other requirements, proposed restructuring plans must also:

  • be feasible and appropriate in comparison to an alternative liquidation scenario;
  • treat unsecured creditors equally (with certain rare exceptions); and
  • not affect the preferential rights of:
    • creditors with a right to property regarding assets of the debtor’s estate; or
    • secured creditors.

Such proceedings can potentially be finished as quickly as within three months.

Self administration can only be applied together with the initial application and cannot be granted for more than 90 days. After 90 days, the court must revoke self administration; the proceedings continue as restructuring proceedings without self administration or bankruptcy proceedings.

How are restructuring plans formally approved?

The restructuring plan must be:

  • approved by a simple majority of the creditors present in the approval hearing and a simple majority of the represented capital of claims (ie, there is a double-majority requirement); and
  • approved by the insolvency court. The court must assess whether the plan is feasible and appropriate in comparison to an alternative liquidation scenario, among other things. The administrator is obliged to express his or her opinion in this regard.

In case of approval and timely payment of the restructuring quota, the debt exceeding the proposed and paid restructuring quota becomes discharged.

What effects do restructuring procedures have on existing contracts?

Generally, contracts are not automatically terminated or amended by the opening of insolvency proceedings (eg, bankruptcy or restructuring proceedings). Still, special provisions in the Insolvency Code are relevant to contracts.

The general rules are as follows:

  • If both contract partners have fully performed their contractual obligations, contracts can in principle only be affected by an ex post challenge by the administrator (mainly under avoidance law);
  • If mutually binding contracts have been fully or partly unperformed by both sides, the administrator may choose whether to be bound to the contract or withdraw from it. If the administrator decides to withdraw, damages suffered by the contract partner can only be filed as insolvency claims. This general rule does not apply for lease or similar contracts and employment contracts;
  • If a creditor (and not the debtor) has performed a contract, the creditor merely has an insolvency claim for the loss resulting from the non-performance by the debtor; and
  • If the debtor (and not the creditor) has performed the contract, the insolvency administrator can claim contractual performance by the other party.

Special rules for lease and employment contracts

In case of long-term agreements such as lease or employment contracts (or similar contractual relationships), the Insolvency Code provides specific termination rules which are mostly in favour of the insolvent debtor. In terms of employment contracts, the code in certain circumstances provides for easier termination for both parties (ie, administrator and employees) This particularly helps the administrator if he or she wants to sell the business or valuable parts of it.

Rules on termination

Under certain circumstances, contracts which are essential for the ongoing business of the debtor may be protected from termination by the contractual partner for a specific period (ie, up to six months).

Clauses which allow the contracting partner of the debtor to terminate a contract just because of the opening of insolvency proceedings (ie, ipso facto clauses) are void.

What is the typical timeframe for completion of restructuring procedures?

If well prepared and running smoothly, restructuring proceedings can be quick (ie, finished within three months). In restructuring proceedings with self administration, the restructuring plan must be approved within 90 days from the opening of the proceedings. After 90 days, the court must revoke self administration; the proceedings continue as restructuring proceedings without self administration or bankruptcy proceedings.

Pre-packaged, expedited restructuring is possible within certain boundaries. Payments out of the restructuring plan must be performed within two years of the end of proceedings.

Court involvement

What is the extent of the court’s involvement in restructuring procedures?

The court is competent for all main decisions and thus decides on:

  • the opening of the proceeding;
  • the appointment of the administrator and any creditors’ committee; and
  • the end of the proceeding.

The court must also supervise the proceeding, especially the actions of the administrator, and may need to take decisions or enact orders in this context. Certain measures (eg, the sale or shutdown of the business) must be approved by the court.

Creditor involvement

What is the extent of creditors’ involvement in restructuring procedures and what actions are they prohibited from taking against the company in the course of the proceedings?

Unsecured creditors can enforce their individual rights by filing their claims as insolvency claims in order to participate in the insolvency quota. Creditors with a right to property regarding assets of the debtor’s estate and secured creditors can claim preferential treatment limited to the owned property or the value of the security.

Creditors which have filed their insolvency claims can participate and vote in the creditors’ meetings and court hearings and thereby contest claims filed by other creditors. Creditors can further vote on a proposed restructuring plan which is the strongest participation right in restructuring proceedings. Creditors are party to the proceedings, have formal access to the court files and can challenge court decisions.

The creditors can further participate by the appointment of a creditors’ committee. This must be appointed by the court in complex proceedings and in case of the sale of the business. The committee supports and supervises the administrator, and must approve certain of his or her actions.

Under what conditions may dissenting creditors be crammed down?

Dissenting creditors can be crammed down by a debtor-proposed restructuring plan. Such restructuring plan must be:

  • approved by a simple majority of the creditors present in the approval hearing and a simple majority of the represented capital of claims (ie, there is a double-majority requirement); and
  • approved by the insolvency court. Among other things, the court must assess whether the plan is feasible and appropriate in comparison to an alternative liquidation scenario. The administrator is also obliged to express his or her opinion in this regard.

If these conditions are met, dissenting, non-voting and even non-participating creditors are bound by the restructuring plan and the effected debt discharge.

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in restructuring procedures?

Directors

In restructuring proceedings without self administration, directors may no longer manage the company. Still, they remain formally appointed and must cooperate and share relevant information with the administrator.

In restructuring proceedings with self administration, the debtor remains in control and directors can still run the daily business. The court-appointed restructuring administrator can only:

  • supervise the directors;
  • agree or veto management decisions which are not part of the ordinary business; and
  • perform certain exclusive actions, such as avoidance actions.

Shareholders

Shareholders do not lose their formal status as shareholders but they may not give the administrator directives or participate in court hearings unless they are also creditors.

If the sale of the insolvent business is performed by way of a share deal, shareholders must agree to such share transfer as there are no rules on a statutory debt-to-equity swap in Austria. Essentially, shareholders cannot be forced to sell or transfer their shares against their will. It is common for new investors to finance a restructuring plan by becoming a new shareholder and providing new equity.

Informal work-outs

Are informal work-outs available for distressed companies in your jurisdiction? If so, what are the advantages and disadvantages in comparison to formal proceedings?

Although there are no specific legal provisions for out-of-court restructurings in Austria, they are very common. There are non-mandatory but broadly accepted guidelines which are comparable to the INSOL Global Principles for Multi-creditor Workouts.

The guidelines have the following advantages:

  • The extrajudicial context creates flexibility as there is no strict formal procedure;
  • In the best case – and especially if a low number of creditors is involved – fast arrangements are possible;
  • Restructurings are confidential; and
  • Under certain circumstances, creditors can be treated differently and classes can be formed (eg, of institutional creditors, suppliers and employees).

They have the following disadvantages:

  • The restructurings essentially require the consent of all affected creditors, especially if there are no collective-action clauses in the contractual documentation;
  • During such restructurings, the directors’ obligations to file for insolvency are not ruled out;
  • There is no statutory moratorium; and
  • Restructuring measures may be subject to avoidance rules (ie, there is no statutory safe harbour).

Transaction avoidance

Setting aside transactions

What rules and procedures govern the setting aside of an insolvent company’s transactions? Who can challenge eligible transactions?

Legal actions and transactions which have taken place within certain clawback periods before the opening of insolvency proceedings may be subject to avoidance actions pursued by the insolvency administrator.

The general requirements for avoidance are that the challenged legal action or transaction:

  • took place within a certain clawback period before the opening of insolvency proceedings (up to 10 years);
  • was directly or indirectly detrimental to the debtor’s creditors; and
  • meets the criteria set by one of the avoidance rules as listed below.

Avoidance claims must be filed by the insolvency administrator within one year of the opening of insolvency proceedings.

The categories of voidable actions or transactions are:

  • avoidance due to intent to discriminate, which has a 10-year clawback period;
  • avoidance due to squandering of assets, which has a one-year clawback period;
  • avoidance of transactions with no consideration and analogous transactions, which has a two-year clawback period;
  • avoidance due to preferential treatment, which has a one-year clawback period; and
  • avoidance due to knowledge of insolvency, which has a six-month clawback period.

Avoidance due to preferential treatment or knowledge of insolvency are most commonly argued by the insolvency administrator. These two categories are explicitly linked to the debtor’s insolvency and are designated to protect the principle of equal treatment of creditors (ie, par conditio creditorum).

If a transaction is successfully challenged by the administrator, received payments or transferred assets must be returned to the insolvent estate.

Operating during insolvency

Criteria

Under what circumstances can a company continue to conduct business during an insolvency procedure?

The regulations of the Insolvency Code generally favour the continuation of the debtor’s business. In this context, the insolvency administrator must continue the business until the first report court hearing, which must take place within 90 days of the opening of proceedings. An earlier closing of business is permissible only if it is obvious that continuation would lead to disadvantage for the creditors. In practice, it is quite common for administrators to demand security for the continuation of the business, such as a guarantee or deposit by shareholders or potential investors.

In principle, creditors can trade with the insolvent company as they do with any other company. If creditors contract with the insolvency administrator during an insolvency proceeding, they must be paid by the administrator in full.

Stakeholder and court involvement

To what extent are relevant stakeholders (eg, creditors, directors, shareholders) and the courts involved in any business conducted during an insolvency procedure?

Directors

In bankruptcy proceedings and restructuring proceedings without self administration, the insolvency administrator is in the driver’s seat and directors can no longer make decisions. However, directors are a major source of information and knowledge for the administrator and are often key for successful proceedings.

In restructuring proceedings with self administration, the debtor remains in possession and is supervised by a restructuring administrator. Certain actions (eg, avoidance actions) are still in the discretion of the administrator and he or she must approve (and can therefore veto) certain decisions of the directors – especially decisions which are not in the ordinary course of the business.

Creditors

Unsecured creditors can enforce their individual rights by filing their claims as insolvency claims and thereby participate in the insolvency quota. Creditors with a right to property regarding assets of the debtor’s estate and secured creditors can claim preferential treatment limited to the owned property or the value of the security.

Creditors which have filed their insolvency claims can participate and vote in creditors’ meetings and court hearings and thereby contest claims filed by other creditors. Creditors can further vote on a proposed restructuring plan which is the strongest participation right in restructuring proceedings. Creditors are party to the proceedings, have formal access to the court files and can challenge court decisions in such capacity.

The creditors as a whole can further participate by the appointment of a creditors’ committee. This must be appointed by court in complex proceedings and in case of the sale of the business. The committee supports and supervises the administrator, and must approve certain of his or her actions.

In principle, creditors can trade with the insolvent company as they do with any other company. If creditors contract with the insolvency administrator during an insolvency proceeding, they must be paid by the administrator in full.

Shareholders

Shareholders do not usually play a major role in proceedings, especially since they cannot formally influence the insolvency administrator’s decisions. Shareholders may still be able to influence proceedings indirectly if they own key assets (eg, real estate or intellectual property).

Financing

Can an insolvent company obtain further credit or take out additional secured loans during an insolvency procedure?

In principle, yes – although it is often a challenge to find sufficient funding within a tight timeframe.

There are two types of financing available for companies undergoing judicial insolvency proceedings: bank financing and investor financing.

Bank financing

Depending on the individual case, banks may be willing to finance an insolvent business in negotiations with the administrator. Such financing is most often applied in large insolvencies. It is usually short-term and against security (eg, an assignment of receivables arising during the proceeding); and

Investor financing

If the aim of the proceeding is to sell the insolvent business by way of an asset deal, potential purchasers may be willing to finance the continuation of the business until the sale is confirmed by court. If there is no sale of business, but the possible involvement of a new investor on the shareholder level, the new investor may grant financing and thereby fund the ongoing business or a proposed restructuring plan.

Creditors granting financing by contracting with the insolvency administrator must generally be repaid in full. Their main risk, therefore, is that the insolvent estate lacks the funds for repayment.

Employees

Effect of insolvency on employees

How does a company’s insolvency affect employees and the company’s legal obligations to employees?

Generally, employment law applies in insolvency proceedings. The administrator steps into the position of the employer. Employment contracts are not automatically terminated; however, the Insolvency Code provides to a certain degree for easier termination for both parties (ie, administrator and employees). This often helps the administrator, especially if he or she wants to sell the business, or valuable parts of it.

The public Insolvency Contingency Fund secures certain claims of employees arising from the employment contract (eg, salaries or claims arising from the termination).

In case of the sale of the whole or parts of the business out of the insolvency proceedings, employment contracts and related liabilities are automatically assumed by the purchaser only in restructuring proceedings with self administration. Thus, purchasers can cherry-pick to a certain degree in bankruptcy proceedings and restructuring proceedings without self administration. However, the recent ruling of the European Court of Justice in Smallsteps has created some degree of uncertainty regarding the effectiveness of Austrian insolvency and employment law in this regard.

Cross-border insolvency

Recognition of foreign proceedings

Under what circumstances will the courts in your jurisdiction recognise the validity of foreign insolvency proceedings?

The EU Insolvency Regulation (2015/848) also applies in Austria; therefore, foreign insolvency proceedings are automatically recognised in Austria if they are mentioned in Annex A of the regulation. Outside the scope of the regulation, foreign insolvency proceedings are generally recognised if:

  • the centre of main interests is in the country where the proceedings have been commenced; and
  • the basic elements of the foreign proceedings are comparable to Austrian insolvency law.    

Winding up foreign companies

What is the extent of the courts’ powers to order the winding up of foreign companies doing business in your jurisdiction?

Austrian courts can potentially wind up companies irrespective of the country where they were originally established.

The relevant question is whether Austrian courts have international jurisdiction.

Within the scope of the EU Insolvency Regulation, Austrian courts are competent if the company’s centre of main interests is in Austria. If this is not the case but a branch or establishment (as defined by the regulation) is in Austria, Austrian courts are competent to open secondary or territorial proceedings which are limited to assets located in Austria.

Outside the scope of the EU Insolvency Regulation, international jurisdiction is not harmonised and depends on the existence of bilateral treaties. Generally, Austrian courts are deemed internationally competent if the debtor carries on its business in Austria.

Centre of main interests

How is the centre of main interests determined in your jurisdiction?

Austrian courts usually follow the principles set out in the EU Insolvency Regulation and by the European Court of Justice (ECJ). Within the scope of the EU Insolvency Regulation, there is a statutory presumption for the centre of main interests lying in the state where the registered office of a company is located. The thresholds for the proof to the contrary are rather high, as there must be objective elements which are determinable for a third party and indicate that the centre of main interests is in fact in another state. Despite existing ECJ jurisprudence, member states still often have different views on the determination of the centre of main interests (as recently shown in NIKI Luftfahrt GmbH, where Austrian and German courts both considered themselves competent for main insolvency proceedings).

Cross-border cooperation

What is the general approach of the courts in your jurisdiction to cooperating with foreign courts in managing cross-border insolvencies?

Within the scope of the EU Insolvency Regulation, insolvency courts of different member states must collaborate and communicate as set out in the regulation. These rules also apply for the collaboration and communication between administrators appointed in different member states and between courts and administrators. Such rules are especially relevant in the context of group insolvencies.

Outside the scope of the EU Insolvency Regulation, there are no detailed formal rules regarding international cooperation. Austrian courts and administrators must provide foreign administrators with the information necessary for the performance of a foreign insolvency proceeding.