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The Insolvency Law Reform Act 1997 (effective as of October 1 1997) introduces a new procedure, designed to facilitate the rescue of financially troubled companies. The reorganization procedure (Unternehmensreorganisation) can be initiated by any business entity (with the exception of banks, pension funds and insurance and securities companies) which are in need of reorganization but which are not yet insolvent.

The procedure is not mandatory. However, managing directors of companies may be held personally liable if they fail to initiate the procedure although their company is legally assumed to be in need of reorganization. This assumption applies if the company's equity ratio is below 8% and the hypothetical repayment period for the company's debts, calculated in accordance with the Act, exceeds 15 years. If the auditor's report on the company's accounts reveals that these two criteria are met, and if the managing directors nevertheless decide not to initiate a reorganization procedure, they are jointly and severally liable for those liabilities of the company not covered by the company's assets, if insolvency proceedings are opened within two years. Each director's liability is limited to Sch1 million (US$81,000).

The reorganization procedure is opened by court order issued on application from the company. The company must present a reorganization plan within 60 days. A special court-appointed auditor must then examine the proposed reorganization within a 30-day period. If the proposed measures are considered suitable and viable, court proceedings will be terminated and the company can start its reorganization. Measures taken in accordance with the reorganization plan may not be set aside by courts on grounds of discrimination or preferential treatment of creditors. Moreover, shareholder loans may not be classified as quasi-equities in case of a subsequent insolvency.

Peter Huber and Jörg Zehetner

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