A comprehensive framework

In respect of the insolvency of companies, the Austrian Insolvency Code (Insolvenzordnung) provides the legal framework for three forms of insolvency proceedings (actually one uniform proceeding with three names depending on the procedural route taken): (i) bankruptcy proceedings (Konkursverfahren), for which a bankruptcy administrator (Masseverwalter) is appointed; (ii) restructuring proceedings without self-administration (Sanierungsverfahren ohne Eigenverwaltung), for which a bankruptcy administrator is also appointed and in which only a few provisions differ from those for a bankruptcy proceedings; and (iii) restructuring proceedings with self-administration (Sanierungsverfahren unter Eigenverwaltung), which are designed as a special form of restructuring proceedings and for which a restructuring administrator (Sanierungsverwalter) is appointed to supervise the debtor's management of the business (the debtor-in-possession concept).

The common term for both bankruptcy administrator and restructuring administrator is insolvency administrator (Insolvenzverwalter).

While bankruptcy proceedings aim at the debtor's liquidation (the sale of the whole insolvency estate and distribution of sales proceeds), restructuring proceedings aim at the preservation of the debtor as a going concern. To that end, a restructuring plan (Sanierungsplan) must be prepared by the debtor and presented to its unsecured creditors for approval. Such restructuring plan presented in the course of restructuring proceedings with self-administration must offer satisfaction of all preferred claims and at least 30% of the insolvency claims. In case of a restructuring plan to be adopted in the course of restructuring proceedings without self-administration, the minimum threshold is lowered to 20%.

If the adopted restructuring plan is fulfilled, the debtor is discharged of all its past debts.

It is worth pointing out that special rules, building on the rules of bankruptcy proceedings pursuant to the Insolvency Code, apply to credit institutions and insurance undertakings. Furthermore, Austrian law provides for reorganisation proceedings (Reorganisationsverfahren), which – although not constituting insolvency proceedings – may affect creditors' separation rights.

Courts and creditors' committee

Insolvency proceedings are administered by the competent provincial courts (in Vienna the Commercial Court) acting as an insolvency court. The insolvency court presides over the insolvency proceedings and, among others, approves the sale of the debtor's business (in whole or in part). Further, the insolvency court may choose to appoint a creditors' committee (Gläubigerausschuß) to support and supervise the insolvency administrator if the debtor's business is particularly large or if the nature of the debtor's business so requires.

The creditors' committee consists of three to seven members. The appointment has to be based on proposals by the creditors, representatives of the debtor's employees, and other special interest groups. In practice, the creditors' committee often consists of representatives of professional creditors' organisations. It approves the sale or the lease of the debtor's business and all of the debtor's moveable or immoveable assets. Furthermore, the creditors' committee has to audit the cash administered by the insolvency administrator.

In the insolvency proceedings, important notices and communications (such as the opening, appointment and members of the creditors' committee, hearings, or approved restructuring plan) of the insolvency court are published in an online edict database (http://www.edikte.justiz.gv.at/).

Insolvency/effective date

To be regarded as insolvent, a debtor must pass one or both of two tests. The first is the cash-flow test. This is one of illiquidity: it is unable to pay its debts as and when they fall due and payable, provided that such payment delay is not only temporarily where there is a high probability that liquid funds will be available in the near future. Courts allow the debtor a grace period, which (depending on the court) may take up to two months, to overcome its payment delays before they consider the debtor illiquid.

The second is the balance sheet test, which concerns over-indebtedness: liabilities on the debtor's balance sheet exceed the assets, in the presence of a negative going concern forecast (Fortbestandsprognose).

The effective date of an insolvency is the date on which the debtor is, as a matter of fact, insolvent. The effective date is crucial with respect to a number of issues, including managing directors' obligation to file for the opening of insolvency proceedings and hardening periods. Very often, the date is determined through an expert opinion in court proceedings.

Insolvency proceedings

The debtor is obliged, "without culpable delay", to apply for the opening of insolvency proceedings no later than 60 days after the insolvency effective date. During this 60-day period, the managing directors may make reasonable efforts to prepare for a filing of restructuring proceedings or agree with the creditors on an out-of court settlement. Typically, the insolvency proceedings are opened immediately upon application by the debtor. Further, in the case of imminent insolvency, the debtor may (but is not obliged to) apply for the opening of restructuring proceedings.

A creditor may file for the opening of insolvency proceedings over the assets of a debtor. In its court filing the creditor must demonstrate (by providing prima facie evidence) that it has a due claim against the debtor, which would become an insolvency claim, and that the debtor is insolvent. Prima facie evidence of the debtor's insolvency can be provided by showing, for example, that the debtor has been subject to a number of unsuccessful enforcements.

After an initial examination, the creditor's filing must be served on the company, and the company must be informed by the court of the possibility to apply for restructuring proceedings subject to timely submission of a restructuring plan. Subsequently, there must be a hearing to negotiate on the requirements for the opening of the proceedings, which must be decided upon by court order.

Together with the decision of the opening of insolvency proceedings, the insolvency court in its sole discretion appoints an insolvency administrator.

The court conducts several hearings during insolvency proceedings, the most important being the general creditor's meeting (Gläubigerversammlung), the hearing on the examination of filed claims (Prüfungstagsatzung) at which the insolvency administrator rejects or acknowledges the claims filed by the creditors, and the hearing on the insolvency administrator's report (Berichtstagsatzung) at which the insolvency administrator submits a report on the status of the insolvency proceedings. The general time frames for insolvency proceedings are shown in the box.

No creditor may pursue remedies (such as voidance proceedings) against third parties during insolvency proceedings. Only the insolvency administrator is entitled to do so. Each member of the creditors' committee may, however, file an application with the court to have the insolvency administrator removed from office. Additionally, the court may at any time remove the insolvency administrator.

Effects of initiation of insolvency proceedings

In general

The initiation of insolvency proceedings brings about substantive and procedural law effects as of the beginning of the day that follows the publication of the insolvency edict in the edict database. As of this point in time, the managing directors lose the power to dispose over the insolvency estate – except in respect to legal acts in the course of ordinary business undertaken in restructuring proceedings with self-administration – and legal acts by the managing directors performed thereafter are ineffective as far as the creditors are concerned.

Termination of contracts

As a general rule, bilateral agreements are not automatically terminated in case of the opening of insolvency proceedings. However, in a case where a bilateral agreement has not been fully fulfilled by both the debtor and the other party to such agreement, the insolvency administrator has the choice whether to continue and fulfil such agreement or to prematurely terminate such agreement within a certain time period to be set by the court upon application of one of the parties.

Further, any appointment as a legal representative (Vollmachtsnehmer) or as an agent (Auftragnehmer) granted by a debtor will cease to be valid upon the opening of insolvency proceedings over its assets.

Additionally, the insolvency administrator has certain preferential rights to terminate employment contracts in case the debtor's enterprise or a part thereof is closed or downsized during insolvency proceedings.

A debtor's contractual partner must not terminate contracts concluded with the debtor for a period of six months if such termination could endanger the continuation of the debtor's business (which is the case most of the times). However, this does not apply to the obligations of lenders to make (further) disbursements under a loan agreement.

Voidance

The insolvency administrator has the right to contest legal actions entered into by the debtor to the detriment of its general creditors which have taken place within certain hardening periods ranging – depending on the legal ground for voidance – from six months (where the creditor should have known of the insolvency) to 10 years (where the creditor knows of the debtor's intention to cause disadvantage to other creditors) before the effective date.

Automatic stay

Any individual enforcement action brought against the debtor's assets by any of its unsecured creditors is subject to an automatic stay upon the opening of insolvency proceedings.

Separation of assets

The title owner (Eigentümer) or the economic owner (in case of a trust relationship (Treuhandschaft)) of an asset in the possession of the debtor at the time of the opening of insolvency proceedings has a right of separation (Aussonderungsrecht) with regard to its assets. Such separation assets (Aussonderungsgut) do not form part of the insolvency estate (Insolvenzmasse) and the relevant creditor can (subject to a six-month stay as described below) require the surrender of its separation assets.

During a period of six months after the opening of insolvency proceedings, the owner's claims for surrender of its separation asset are stayed (that is a legal respite becomes effective) if such surrender would endanger the continuation of the business conduct of the debtor provided that, among other things, such stay does not cause a severe personal or economic harm to the owner.

Preferential satisfaction

Creditor's rights secured by a right in rem over the debtor's assets or any part thereof (for example, by a mortgage or pledge over bank accounts, receivables, movables) are not affected by the opening of insolvency proceedings. This, however, requires prior perfection of the establishment of the security interest (subject to a six-month stay as described below). Such secured creditors have a right of preferential satisfaction (Absonderungsrecht) with regard to charged assets (Absonderungsgut) and are as such entitled to satisfy their claims out of the enforcement proceeds with regard to such charged assets. To the extent the net enforcement proceeds exceed the amount of secured claims, the excess proceeds are distributed to the unsecured creditors on a pro rata basis.

As is the case with the right to separation, the right of preferential satisfaction of a secured creditor may be subject to a compulsory stay for a period of six months.

Secured creditors who are not only secured by a charged asset but also have a direct claim for payment against the debtor may participate with their claims which are not covered by the charged asset in the pro rata distribution of the insolvency estate in a bankruptcy proceedings or in the restructuring plan.

Position of secured creditors

The rights of a secured creditor depend on the type of its right of preferential satisfaction. If no compulsory stay applies or the six-month period has expired, the secured creditor can assert its claim outside of insolvency proceedings in regular court. The proceeds from the realisation serve the preferred satisfaction of the secured claims.

The most common types of rights of preferential satisfaction found in practice are pledges and mortgages.

• If the charged asset is in the possession of the debtor, the insolvency administrator can apply for court enforcement or dispose of the asset in a private sale. Before such private sale is conducted, however, the insolvency administrator must inform the secured creditor who has a right to object (except for as sale of an asset traded at a stock exchange).
• If the charged asset is in the possession of the secured creditor, the insolvency administrator can neither apply for court enforcement nor conduct a private sale. Instead, the insolvency court can order the secured creditor to realise the charged asset within an appropriate time frame. Depending on the type of charged asset, the secured creditor may either apply for court enforcement or conduct a private sale.

Set-off and netting

A creditor is entitled to exercise its rights of set-off and netting in the course of insolvency proceedings; however, such rights are restricted to claims that have been compensable at the time of the opening of insolvency proceedings. A creditor's claim that has not become due at the time of the opening of insolvency proceedings, as well as a creditor's claim that is subject to a condition, are compensable by operation of law.

Management and estate

As a general rule, the debtor's enterprise (as well as its assets) must not be sold in the course of restructuring proceedings since restructuring proceedings aim at the preservation of the debtor as a going concern. In contrast, bankruptcy proceedings aim at the liquidation of the debtor through the sale of its assets.

Austrian general corporate law provides that in case of a sale of the assets of an enterprise (asset deal), the purchaser assumes all of the seller's legal relationships relating thereto (section 38 of the Enterprise Act). In addition, section 1409 of the Austrian General Civil Code provides for the liability of the purchaser for the obligations of the target business of which the purchaser knows or should have known at the time of the transfer. These rules do not apply in case of a sale in the course of bankruptcy proceedings.

Moreover, the rule that an acquiror of a business in the course of an asset deal assumes by operation of law the respective employment contracts as employer does not apply in bankruptcy proceedings.

A bankruptcy administrator is only appointed upon the opening of bankruptcy proceedings and restructuring proceedings without self-administration whereby the managing directors lose control over the debtor. In case of restructuring proceedings with self-administration, the managing directors stay in control of the debtor; however, a restructuring administrator having a right to veto certain transactions out of the ordinary business is appointed.

Under the supervision of the insolvency court and the creditors' committee, the insolvency administrator is acting in the interest of all creditors and its main functions are evaluating the merits of insolvency claims filed by creditors; deciding on whether the debtor's business may be continued; examining whether a restructuring plan is in the common interest of all creditors; distribution of liquidation proceeds; and, in case of a bankruptcy administrator, the management of the debtor's business (for certain transactions not part of the ordinary business, the consent of the creditors' committee or insolvency court is required).

As a general rule, the insolvency estate consists of all of the debtor's assets with a monetary value at the time of the opening of insolvency proceedings and all assets which have been acquired during such proceedings.

Shareholder loans

A loan granted by a shareholder to its insolvent subsidiary is treated as equity replacing (eigenkapitalersetzend): it must not be repaid to the lending shareholder and is treated like equity in the insolvency proceedings.

Filing of claims and order of priority

The Insolvency Code distinguishes between insolvency claims (Insolvenzforderungen) and preferred claims (Masseforderungen). While all insolvency claims already existent at the time of opening insolvency proceedings are treated equally in distributions/the restructuring plan and satisfied on a pro-rata basis, the preferred claims are to be paid in full before any of the insolvency claims are to be satisfied.

The Insolvency Codes contains the following exclusive list of preferred claims:

• costs of the insolvency proceedings;
• costs for the maintenance and administration of the insolvency estate and related taxes;
• claims of employees that originate after the opening of insolvency proceedings;
• certain claims upon termination of the employment relationship (it is worth pointing out that there is a statutory security interest created for the benefit of pension claimants or future pension claimants of the employer as far as the employer is required to maintain a reserve of securities for the benefit of pension claimants) and if the employment relationship has been established after the opening of the bankruptcy proceedings;
• contracts which have been assumed and confirmed by the insolvency administrator;
• all claims arising out of legal acts of the insolvency administrator;
• claims based on unjust enrichment of the insolvency estate; and
• awards payable to creditor protection organisations

Directors' liability

In case of a failure to file for the opening of insolvency proceedings in a timely manner, each managing director may become liable to its company for damages caused to the company. Further, they may become directly liable with respect to the creditors; in case of existing creditors (cut-off date is the effective date) for the reduction of their respective quota, and in case of new creditors for the damages suffered by having trusted in the company not being insolvent.

Member of the supervisory board may become liable for not properly fulfilling their supervisory duties.

The managing directors may also become liable for unpaid taxes or pursuant to social security laws if taxes or social security contributions were not paid due to their negligence, or not retained pro rata when making payments to employees of the company. In the latter case, the managing directors may even be subject to criminal liability under social security legislation.

Alric A Ofenheimer
		As a member of the corporate/M&A as well as the restructuring practice group, Alric Ofenheimer represents banks and large corporations in insolvency proceedings and has vast experience in distressed M&A transactions in Austria and the CEE/SEE region. Eisenberger & Herzog Vienna Twin Tower Wienerbergstraße 11 A-1100 Vienna, Austria T: +43 1 606 3647-304 F: +43 1 606 3647-58 E: A.Ofenheimer@ehlaw.at W: www.ehlaw.at

Marcus Benes
		Marcus Benes is a member of the banking and finance as well as the restructuring practice group. He represents banks and large corporations in insolvency proceedings and has wide experience in debt restructuring in Austria and the CEE/SEE region. He holds an LLM from the University of Pennsylvania and an MBA from the Wharton School of the same university. Eisenberger & Herzog Vienna Twin Tower Wienerbergstraße 11 A-1100 Vienna, Austria T: +43 1 606 3647-306 F: +43 1 606 3647-58 E: M.Benes@ehlaw.at W: www.ehlaw.at