In brief: guarantees and collateral for acquisition financing in Austria

Guarantees and collateral

Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?

Austrian corporate law provides for a rigorous system of capital maintenance rules that, among other things, prohibit the return of equity from a company to its shareholders. A company cannot make payments to the shareholder other than the distribution of profit or in the course of a formal reduction of statutory capital. The provisions on the repayment of capital also include any benefits granted by the company to its shareholders when no ‘adequate consideration’ is received in return. Any agreement between a company and its shareholders, or any third party granting a benefit to the shareholders that would not, or not in the same way, have been granted to a third party is void.

The Austrian courts have broadly interpreted this mandatory principle and held that the prohibition of the return of equity generally also encompasses the granting of security by a company for a loan extended to its shareholders or any other group company other than such company’s subsidiaries (eg, up-stream or cross-stream guarantees or pledges of assets). However, what can be drawn from the Supreme Court’s past decisions is that the granting of security by a company for a loan of its shareholders is permissible if:

• it is at arm’s length, hence, adequate consideration is received in return and, after due investigation by the company, no doubts towards the reliability and solvency of the borrower (ie, the shareholder) are established that could give reason to believe that potential recourse claims might fail; or
• the granting of security is for the guarantor’s operational benefit.

In terms of foreign-registered companies, the above-mentioned restrictions of Austrian corporate law do not apply.

Pursuant to the Stamp Duty Act, certain legal transactions are subject to stamp duty. In terms of security rights, the most notable are cessions (subject to 0.8 per cent stamp duty) as well as sureties and joint debt (subject to 1 per cent stamp duty). To avoid stamp duty in financing or acquisitions, pledges and abstract guarantees are primarily used as collateral, as these forms of security are not listed in the Stamp Duty Act. The act also contains a general exception for transactions that create collateral to secure the repayment of a loan.

Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?

There are no specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares. However, in this instance, Austrian capital maintenance rules will usually restrict the possibility to grant such security or assistance. Further, Austrian courts have applied the capital maintenance rules even more rigidly in cases where the target had to provide security for the funding for its own acquisition.

Further, if the value of a pledged claim exceeds the value of the secured obligations significantly, depending on the respective circumstances of the individual case, the pledgee might be obliged to release the (excess) security. In the event of over-collateralisation contrary to public policy, the security granted may even be void.

What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?

Under Austrian law, security can be provided in various ways and forms. The most common kinds of security are pledges, sureties, joint debt and guarantees. Equally, common security instruments are the transfer of ownership in moveable property or the security cession of receivables.

A ‘floating charge’ or similar security interest over all present and future assets of a company is generally not recognised by Austrian law. Security agreements must be entered into for all assets and types of assets that will serve as security. Further, the different perfection requirements, which may vary significantly from one type of security to another, must be duly observed.

However, there are certain exceptions to these general principles. For example, it would be possible under Austrian law to pledge or assign all present and future receivables as security if such (future) receivables are sufficiently individualised. In this regard, the Austrian courts held that the global cession or pledge of all future claims arising from a particular business operation is permissible, even though the future debtors are not yet known, provided that the perfection requirements are strictly adhered to.

Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?

Under Austrian law, the creation of collateral requires a valid agreement (title) and, in many cases, certain publicity acts for its perfection. The different requirements for the perfection of the various types of collateral are regulated by the general principles of civil law as codified in the General Civil Code and interpreted by the Austrian courts. For certain types of collateral, such as pledges over real estate, registered IP rights (eg, trademarks and patents) or other registered rights, registration of the pledge usually is necessary for its perfection.

For the pledge or security cession of receivables, the primary mode of perfection would be the notification of the third-party debtor. In the case of receivables that are recorded in the pledgor’s books due to the statutory bookkeeping obligation, an appropriate book entry in the pledgor’s or assignor’s books may be used as an alternative mode of perfection.

If security is to be granted over a receivable that will arise only in the future (eg, in the case of an insurance event), perfection through a bookmark is not usually feasible as long as the receivable has not arisen and therefore has not been recorded in the pledgor’s books. In such cases, perfection can alternatively be achieved by notifying the third-party debtor of the pledge or security cession. However, it is also advisable to demand that the pledge or security cession are recorded in the pledgee’s books once the claims have arisen.

With respect to unembodied non-book claims and the pledge of shares in a limited liability company, usually only the notification of the third-party debtor or, in case of a share pledge, the notification of the company constitutes a sufficient act of perfection.

For certain types of collateral, in particular pledges over registered rights (eg, real estate, trademarks and patents), usually the entry of the pledge in the respective register is necessary for perfection.

Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?

Typically, once a security interest is perfected, there are no renewal procedures to keep the lien valid and recorded. However, for the pledge and security cession of receivables perfected through book entry, perfection must be maintained throughout the pledge’s or the security cession’s term, as otherwise the pledge would cease to exist.

Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?

Under Austrian law the approval of a works council is not required for the provision of guarantees or other security by a company. However, works councils, if established, have the right to be notified of the economic situation, including the company’s financial situation, investment projects and other measures envisaged to improve its profitability.

Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?

Austrian civil law generally differentiates between accessory and non-accessory collateral. Accessory collateral, such as pledges or sureties, will be valid only if the secured obligation is valid. Further, this principle of accessoriness also requires the holder of the respective security right to be a creditor of the secured obligation – otherwise the security will be invalid.

Against this background, a security granted under Austrian law will be invalid or unenforceable, or will become invalid or unenforceable if the principle of accessoriness is not adhered to. The validity and enforceability of the accessory security right will thus depend on the validity and continued existence of the respective obligation that is secured by them. Since the accessory security cannot be separated from the secured obligation, it can only be held and enforced by a creditor of the secured obligation.

Austrian law does not recognise a trust arrangement or agency structure whereby security is granted in favour of a security agent that is not a lender but acts as trustee or agent for the other lenders, as it contradicts the principle of accessoriness. In practice, a parallel debt obligation for the benefit of the non-lending agent can be used to bypass this problem as long as the security provider is also a guarantor. However, to date, there is no case law confirming the validity of such parallel debt structures.

What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?

Accessory collateral (eg, pledges or sureties) automatically ceases to exist when the secured obligations are satisfied in full. In such cases, Austrian law does not require a specific formal procedure to release security. In financing transactions, it has, nonetheless, become common practice to conclude release agreements to confirm that the secured obligation has been discharged in full. If the security was registered in a public register such as the Austrian land register (for pledges over real estate) or the Patent Register (for pledges over a patent), the security would have to be deleted from the register. To this effect, usually the consent of the beneficiaries of the security will be required in a notarised form.

With regards to non-accessory securities, the specific release procedure will depend on the type of security in question. Typically, a transfer or similar act (eg, return of the original guarantee to the guarantor) is required to release the security.

Before the release or lapse of security, a beneficiary of such may enforce its rights either through the courts or, in the case of pledges and a respective agreement, realise the security without any court action pursuant to section 466a et seq of the General Civil Code and section 368 of the Business Code, by collecting pledged receivables or dividends, or selling pledged shares or securities – either through public auction or a private sale.

Describe the fraudulent transfer laws in your jurisdiction.

Legal acts affecting the assets of a debtor may be contested outside insolvency proceedings pursuant to the provisions of the Contestation Act if such action is necessary for the satisfaction of creditors. The main grounds for contestation are, among other things, the intention to discriminate against creditors, the squandering of assets and the disposal of assets without consideration.

Further, under Austrian law, any party that hides, discards, sells or damages any part of its assets, forfeits or acknowledges a non-existent liability, or otherwise diminishes its assets, thereby defeating or at least diminishing the satisfaction of creditors or at least one of them, can be criminally charged.

Law stated date

Please state the date on which the law stated here is accurate.

29 July 2020.