Extract taken from 'The Lending and Secured Finance Review' – edition 5
Credit support and subordinationi Security
Austrian law recognises various types of securities, and lending transactions typically involve pledges over various asset classes, such as receivables (trade receivables, intra-group receivables, insurance receivables, etc.), bank accounts, real estate and (to the extent applicable in the context of the security package) intellectual property rights.
In the context of structuring an Austrian security package, Austrian law does not recognise the establishment of security interests over a fluctuating pool of assets (i.e., no floating charge). A security may only be valid if the collateral assets as well as the secured obligations are specified, or at least specifiable.
A pledge or mortgage under Austrian law is an accessory right and will, therefore, be subject to the same legal consequences as the secured obligations, meaning that, for example, if the secured obligation is terminated or not valid, the same would apply to the pledge.
Furthermore, a pledge cannot be separated from the secured obligation, which means that it can only be held and enforced by the creditor of the secured obligation. In the context of Anglo-Saxon and German syndicated financing transactions, this is typically achieved by the use of (English or German law-governed) parallel debt concepts. As far as Austrian secured lending transactions are concerned, usually a joint-and-several-creditor structure allowing a security agent to hold the security is implemented, pursuant to which the security agent has its own entitlement to the secured claims in its own name and on its own behalf.
Because of its accessory nature, the pledge will cease by operation of Austrian law upon payment (or other discharge) of the underlying secured obligation.
For a security (in rem) to be validly established, a public act (perfection step), in addition to an agreement, is required. The steps to be undertaken to perfect the relevant security interest depend on the asset class. The necessary act of publicity for a mortgage is registration with the land register. As far as, for example, pledges over receivables are concerned, either (1) the pledgor must make a corresponding annotation in its books and accounts, or (2) the relevant third-party debtor needs to be notified. In this context, as long as a third-party debtor has not been notified accordingly, the debtor may settle its obligations towards the pledgor with debt-discharging effect by paying to the pledgor.
Since, as outlined above, the concept of a floating charge is not recognised under Austrian law, the creation and perfection of security interests over movable assets would require the delivery of the collateral assets into the custody of the security agent or a delegate of the security agent acting as custodian. As a result of this requirement and related asset disposition control mechanics that need to be complied with to stand the tests of the Austrian courts, the taking of security over inventory depends on its importance (cost–benefit analysis) in the context of the security package.
In connection with costs associated with the establishment of securities, mortgages, for example, are subject to court fees for registration of the mortgages in the relevant land registers (in principle, 1.2 per cent of the secured amount) as well as stamp duties (in principle, 1 per cent of the secured amount), unless an exemption pursuant to the Austrian Stamp Duty Act applies (see Section III).ii Guarantees and other forms of credit support
Guarantees are a very commonly used instrument in terms of credit support. Abstract guarantees under Austrian law are characterised by their non-accessory nature, meaning that any obligations under the guarantee remain unaffected by any changes to the underlying (secured) obligations.
However, in that context, despite the abstract nature of a guarantee, the validity, binding effect and enforceability may be limited or otherwise affected by, among others:
- equitable principles of general applicability of Austrian civil law (e.g., the prohibition to abuse legal rights or similar concepts); and
- applicable insolvency, reorganisation, fraudulent conveyance, avoidance, moratorium or similar laws of general application relating to or affecting the enforcement of creditors' rights and remedies.
Thus, although in principle no defences or objections arising out of the arrangements underlying the (abstract) guarantee can be raised by a guarantor, a guarantor may, despite the abstract nature of the guarantee, raise defences and objections arising out of the guarantee agreement itself (if any). Such defences or objections may in particular concern (1) the invalidity of the guarantee agreement, (2) the issuance of an inadequate (payment) demand under the guarantee agreement or (3) the non-occurrence of the guaranteed event.
In terms of Austrian stamp duty considerations, though suretyships in principle would be within the catalogue of transactions that are subject to Austrian stamp duty, abstract guarantees, if structured carefully, should not trigger Austrian stamp duty as guarantee agreements are not within the scope of legal transactions enumerated in the Austrian Stamp Duty Act. In this respect, the Austrian tax authorities will only treat an agreement as a guarantee for stamp duty purposes if certain prerequisites are met (e.g., if the guarantor agrees to make unconditionally, without recourse to the validity or existence of the secured obligations, any such payment under the guarantee as the counterparty may demand and to waive any objections thereto). Moreover, according to a recent decision by the Austrian Supreme Court, a 'guarantee' securing the due performance of a debtor's payment obligations was qualified as a surety upon first demand for civil law purposes since, pursuant to that decision, the court held that the accessory nature is not entirely eliminated given the guarantor may be entitled to raise defences arising out of the underlying (guaranteed) obligations.
Other instruments of credit support used occasionally in the context of Austrian secured lending transactions are bills of exchange and letters of comfort (which may, depending on the letter's nature, qualify as either a strong or soft letter of comfort).iii Priorities and subordination
As far as the ranking of (in rem) security interests is concerned, generally under Austrian law, the first come, first served principle applies, meaning that the timing of performance of the relevant perfection step is decisive for the ranking between competing security interests, with the earlier security interest being senior in rank to the later security interest.
Since Austrian law security (other than, for example, real estate) is not registered with any public registers but perfection of certain collateral assets is achieved via, for example, notices to third-party debtors, lenders have to rely on there being no encumbrance or negative pledge representations and undertakings provided for by the security provider.
For limitations that may affect the validity, binding effect and enforceability of a security interest, see Section V.
Subordination is typically achieved by either structural or contractual subordination. For purposes of contractual subordination, usually either intercreditor arrangements or subordination agreements are entered into.