Austria’s insolvency law was fundamentally amended in 2010 by the Austrian Insolvency Amendment Act (in German: Insolvenzrechtsänderungsgesetz − IRÄG). Prior to the amendment, two insolvency procedures were regulated under Austrian law, namely the bankruptcy procedure (in German: Konkursverfahren) and the settlement procedure (in German: Ausgleichsverfahren). Both procedures were regulated in separate legal codes.1Austrian Bankruptcy Act and Austrian Settlement Act (in German: Konkursordnung – KO and Ausgleichsordnung – AO). The 2010 amendment unified these separate codes into one code, the Austrian Insolvency Code (in German: Insolvenzordnung – IO).2Bundesgesetz über das Insolvenzverfahren (Insolvenzordnung – IO) BGBl. I Nr. 29/2010.
Therefore, one unified insolvency procedure (in German: Insolvenzverfahren) is contemplated and regulated by the Austrian Insolvency Code. After filing for insolvency, however, the procedure may be continued either as a bankruptcy procedure or a restructuring procedure (in German: Sanierungsverfahren). Whereas the result of a bankruptcy procedure is the sale of the company’s assets and the liquidation of the company, the restructuring procedure aims to ensure the company’s continuance. Austrian lawmakers introduced the business reorganisation procedure (in German: Reorganisationsverfahren) in 1997. The procedure is aimed to give companies the possibility to undergo a reorganisation procedure before they meet the insolvency prerequisites. However, in practice the reorganisation procedure plays a minor role.
1. Bankruptcy procedure
Condition for opening
The opening of a bankruptcy procedure requires an application by an authorised person, (e.g., the managing director of a limited liability company or a creditor of the debtor). Such application must be filed with the competent court and is appropriate if: (i) the debtor is unable to pay its debts when due (in German: Zahlungsunfähigkeit); or alternatively (ii) the debtor’s debts exceed its assets (in German: Überschuldung) and the business forecast is negative (negative Fortbestehensprognose). The latter insolvency fact (debtor’s debts exceeding its assets) applies only to legal entities, estates, and limited partnerships. Additionally, the debtor applying for a bankruptcy procedure must have sufficient financial means (in German: kostendeckendes Vermögen) to cover the expenditures of the insolvency procedure. As of today, EUR 4,000 is being considered sufficient to cover such expenditures. If the prerequisites for opening the bankruptcy procedure are fulfilled, the court will announce the opening publicly and appoint a liquidator (in German: Masseverwalter)
Creditors’ claims are satisfied from the proceeds of the sale of the debtor’s insolvency estate (in German: Insolvenzmasse). The sale of the insolvency estate may be undertaken by an out-of-court sale (in German: außergerichtliche Veräußerung) or as a court-supported sale (in German: kridamäßige Versteigerung). As the out-of-court sale is generally more promising, such method is preferred in most cases. If the debtor is a legal entity, the distribution of the proceeds to the creditors leads generally to the liquidation of the debtor. However, in the course of the bankruptcy procedure, the debtor may apply for a restructuring plan (in German: Sanierungsplan). If such restructuring plan is accepted by the creditors’ assembly (in German: Gläubigerversammlung), the sale of the debtor’s assets may be forestalled and the debtor may continue its operations.
The success rate of a certain creditor of having its claims against the debtor settled in the course of an insolvency proceeding depends mostly on the status of such creditor. In a bankruptcy procedure, secured creditors may separate their claims from the outstanding creditors (in German: Aus- und Absonderungsrecht). Typically, such creditors: (i) still own the assets which are in the possession of the debtor at the time the bankruptcy procedure is opened; or (ii) have their claims against the debtor secured by, e.g., a pledge. These secured creditors may claim their assets from the debtor or may claim the sale of the pledge. Claims of the outstanding creditors may be satisfied from the proceeds of the insolvency estate. In most cases, the proceeds are not sufficient in order to cover the claims of all creditors. In such case, the proceeds are divided among the creditors according to the creditor’s rank. In 2011, the average quota of a creditor amounted to approximately 17%.
Pros and cons
Pros: The bankruptcy procedure is rather fast and may be completed within approximately six months. Further, it gives the insolvency administrator the possibility to continue its business as the liquidation is a last-resort solution. Also, the creditors have the potential to influence the procedure as the creditor assembly decides whether the debtor, in case of a legal entity, shall be liquidated or continued.
Cons: If the creditor is not secured, the possibility of being satisfied from the insolvency estate is rather small as the average quota amounts to approximately 17%. Further the success of the procedure depends mostly on the liquidator, which is appointed in most cases by the court and is responsible for the execution of the procedure. Hence, the debtor itself has almost no influence on the procedure.
1. Restructuring procedure
Conditions for opening
A prerequisite for opening a restructuring procedure is to file a restructuring plan (in German: Sanierungsplan) with the competent court. In case such restructuring plan is accepted by the creditors’ assembly by simple majority, the debtor may continue its business. If the creditors’ assembly does not accept the restructuring plan, the restructuring procedure continues as a bankruptcy procedure.
The restructuring plan prescribes the conditions for debtor’s restructuring. The minimum quota is 20%. Such amount must be distributed to the creditors within two years from the date of the acceptance of the restructuring plan. The restructuring plan must set out a schedule for repayment (e.g., equal monthly instalments). By accepting the restructuring plan, the creditors waive their claims against the debtor in excess of the minimum quota of 20%. In the event the debtor fails to comply with the restructuring plan, the total value of the creditors’ claims prior to the restructuring plan is renewed.
Since the amendment of Austria’s insolvency law in 2010, the number of restructuring procedures constantly increased. In 2011, every fifth insolvency procedure was executed as a restructuring procedure. However, since such procedure is relatively new, it will take some time in order to better assess the success rate thereof.
Pros and cons
Pros: The significant advantage of the restructuring procedure for the creditors is the higher minimum quota of 20% as compared to the average quota of 17% for bankruptcy proceedings. Additionally, the debtor may continue its business under the condition of compliance with the restructuring plan. In case the restructuring plan sets forth a minimum quota of 30% and if the debtor provides the court with further reassuring information, such as a detailed inventory, reorganisation measures, finance plan, among other things, the debtor may even stay in control over the business operations and therefore, is not fully depended on the liquidator.3Restructuring procedure with self administration (in German: Sanierungsverfahren mit Eigenverwaltung des Schuldners). In such scenario, the liquidator only supervises the procedure instead of executing it.
Cons: The restructuring period of two years may not be extended. This has negative consequences on debtors who manage to recover their business in the course of the restructuring procedure. Before the amendment in 2010, creditors could have demanded a higher quota in such case but also could have granted to the debtor additional time in order to finalize the reconstruction. After the amendment, such extension is not possible any more. Hence, the creditors may demand a higher quota but cannot grant to the debtor additional time for finalization of the restructuring.
2. Debt regulation procedure
The debt regulation procedure (in German: Schuldenregulierungsverfahren) regulates the insolvency of physical persons and sole proprietors. It is more accessible to debtors than bankruptcy or restructuring procedures because the prerequisite of showing sufficient financial means for such proceedings does not have to be fulfilled under certain circumstances. The relief of debt occurs mainly in two ways, namely through (i) the repayment schedule (in German: Zahlungsplan) and (ii) the levy procedure (in German: Abschöpfungsverfahren).
The repayment schedule is a simplified version of the restructuring procedure. The main differences between the repayment schedule and a restructuring plan are that the repayment schedule does not require a minimum quota and that the repayment term may amount up to seven years. In case the creditors agree on the repayment schedule, the court determines for the debtor a reasonable term to comply with the repayment schedule and to repay the debts. If the debtor fails to comply with the repayment schedule, such schedule will become null and void and the debtor will lose all benefits connected with such repayment schedule.
The levy procedure constitutes the last resort in order to relieve the debtor of its debts. The application for such procedure shall be granted by the court only if the repayment schedule is rejected. After initiation of the procedure, the court appoints an escrow agent (in German: Treuhänder) who is responsible for the execution of the procedure and distribution of the assets to the creditors. In the course of the procedure the debtor shall comply with numerous obligations such as obtaining appropriate employment, treating every creditor equally, and omitting new debts, among other things. The court ends the procedure if: (i) three years from the day of the initiation have passed and the creditors have received at least 50% of their claims; or (ii) the term of the procedure (maximum seven years) has elapsed and the creditors have received at least 10% of their claims. The court then announces that the debtor is released from all claims not satisfied in the course of the levy procedure.
3. Business reorganisation procedure
The business reorganisation procedure shall give an enterprise in distress the possibility to prematurely prevent insolvency. The prerequisite for such business reorganisation procedure is a certain need for reorganisation (in German: Reorganisationsbedarf). Such need for a reorganization procedure is assumed, inter alia, in case the annual financial statements show an equity ratio of 8% and a debt-settlement period (in German: fiktive Schuldentilgungsdauer) of at least 15 years. If the enterprise applies for such reorganisation procedure, the court appoints an auditor who prepares a report analysing whether a reorganisation procedure would effectively prevent the enterprise from insolvency. The Austrian Code on Reorganisation Procedures4Unternehmensreorganisationsgesetz – URG, BGBl. I Nr. 114/1997. grants certain incentives to enterprises who apply for such procedure. One such incentive, among others, is the exemption of certain measures (e.g., taking up of reorganisation loans and shareholder loans) from the challenge of the creditors. On the other hand, if the enterprise omits such procedure, the respective law proscribes negative consequences, such as the liability of the management of a corporation which did not apply for such procedure. For instance, if the corporation becomes insolvent within two years, the management shall become liable for the debts of the corporation up to an amount of EUR 100,000, unless the management can prove that the insolvency would have occurred regardless of a reorganisation procedure.
In practice, the reorganisation procedure has a minor importance as companies fear the negative publicity which may derive from such procedure and the consequences connected therewith.