The Federal Act on International Insolvency Law (Federal Law Gazette 2003/36) implemented Directive 2001/24/EC on the reorganization and winding up of credit institutions (Directive 2001/24/EC). Several provisions were inserted in the Austrian Bankruptcy Code (Konkursordnung-KO) and the Austrian Banking Act (Bankwesengesetz-BWG).
These provisions entered into force on May 5 2004.
The new provisions regarding bankruptcy proceedings will be applicable to credit institutions that are authorised in a contracting state of the European Economic Area (EEA) and will also be applicable to credit institutions domiciled outside the EEA, if they have at least a branch in an EEA state (§ 243 KO).
§ 244 (1) KO provides that Austrian courts shall have jurisdiction for the opening of bankruptcy proceedings over the assets of credit institutions authorised in the EEA only if the credit institution is authorised in Austria according to § 1 (1) BWG, meaning it has obtained a licence from the Financial Markets Supervisory Authority (Finanzmarktaufsichtsbehörde, FMA).
§ 244 (2) KO provides that Austrian courts shall have jurisdiction for the opening of bankruptcy proceedings over the assets of credit institutions domiciled outside the EEA, if they have a branch in Austria.
Under § 250 KO the decision of a court (or other governmental authority) in an EEA state to open proceedings to liquidate a credit institution will be recognized in Austria without further formalities. Such proceedings take effect in Austria as soon as they become effective in the state in which the proceedings were opened.
Insolvency proceedings to liquidate a credit institution domiciled outside the EEA shall be recognized in Austria if (i) the debtor's centre of main interest is in that other state and (ii) these insolvency proceedings are comparable to Austrian proceedings.
Special receivership proceedings and regulatory measures
Special receivership proceedings under §§81 seq BWG and regulatory measures under § 70(2) BWG constitute reorganization measures as defined in Article 2 of Directive 2001/24/EC.
Austrian authories shall have jurisdiction for the opening of special receivership proceedings and the adoption of regulatory measures against credit institutions authorized in Austria according to § 1 (1) BWG as well as against branches of foreign credit institutions in Austria.
Assets situated abroad
Reorganization measures (bankruptcy proceedings, special receivership proceedings, regulatory measures) in respect of a credit institution authorized in Austria will also cover the credit institution's assets (including its branch offices' assets) located in the EEA.
Set-off and close-out netting
The Austrian legislator literally adopted Article 23 (Set-off) and Article 25 (Netting agreements) of Directive 2001/24/EC in §§ 223 and 233 KO (with respect to bankruptcy proceedings) respectively §§ 81c BWG and 81l BWG (with respect to special receivership proceedings and regulatory measures).
Under § 223 KO and § 81c BWG, the opening of insolvency proceedings shall not affect the right of creditors to demand the set-off of their claims against the claims of the debtor, where such set-off is permitted by the law applicable to the insolvent debtor's claim.
Close-out netting is, however, more than mere set-off. It is a process agreed upon in so-called netting agreements involving (i) the termination of open transactions on the occurrence of an event of default, (ii) the liquidation of those transactions so as to attribute to them a value (usually either by reference to their market value or to the cost of replacing them) and (iii) the aggregation of the values attributed to those transactions, giving rise to a single net debt owed by one party to the other.
Art 25 of Directive 2001/24/EC states that netting agreements shall be governed solely by the law of the contract that governs such agreements.
Neither the explanatory remarks of the Austrian legislator to § 233 KO and § 81l BWG nor Directive 2001/24/EC in respect of the underlying provision of Article 25 provide guidance for a definition of the term netting agreement. In our opinion, Isda Master Agreements, for example, constitute netting agreements within the meaning of § 233 KO and §81l BWG.
If § 233 KO and § 81l BWG apply, it is therefore a matter of the law governing the netting agreement whether close-out netting is enforceable in insolvency proceedings over the assets of an Austrian credit institution.