Austria

BREAKING: COVID-19 considerations for directors

1. What are the key issues for directors during the COVID-19 crisis?

Financial sustainability: In this time of crisis and the resulting adverse financial effects on companies, the directors must ensure the solvency and short- and long-term financial sustainability of the company. Directors must closely monitor the financial state of the company and keep the insolvency indicators under Austrian law in mind: (i) inability of the company to pay its debts as they fall due (“Zahlungsunfähigkeit”) or over-indebtedness in terms of insolvency law (“insolvenzrechtliche Überschuldung”), which is generally the case if the company’s liabilities exceed its assets at liquidation values under Austrian GAAP on a standalone basis and if there is a negative forecast regarding the company’s future survival (negative going-concern prognosis (“negative Fortbestehensprognose”)) (see answer to question 12 below for more information). Further, directors must also monitor the equity ratio and the notional debt repayment period of the company, as insolvency or over-indebtedness in connection with an equity ratio that is below 8% and a notional debt repayment period that is longer than 15 years would constitute a state of crisis with serious implications for the repayment of shareholder loans resulting from the very strict Austrian capital maintenance rules (see below for COVID-19 related exemptions). Directors of companies threatened with insolvency should (i) seek specialist advice, both legal and financial, (ii) ensure that all directors and key stakeholders are kept informed, and (iii) keep a verifiable record of their decision making, and the materials available to them to review. In light of the uncertainty regarding the economic recovery and the global lockdown measures, directors will also have to come up with plans and strategies to keep the company solvent in a variety of scenarios. If the company is part of a group, the directors must bear in mind that they owe their duties to the company itself and not to the group or the parent company.

Risk: Even if the company’s solvency is not in question, directors are likely to be faced with a number of difficult decisions as they develop their strategy for the company. For example, the need to ensure safe working conditions for staff will often conflict with purely commercial objectives. Consumer-facing companies will also have to manage new reputational issues as public expectations of these companies shift as a result of the crisis, and ensure their communication strategy is adequately prioritised. Directors need to find a way to balance these competing considerations, in the long-term interest of the company.

Logistics: Directors should address the logistical challenges that international lockdown rules and social distancing create. Existing operations, including supply and distribution chains, and internal processes, such as accounting, reporting and HR management, will be disrupted and will have to be adapted. During the crisis, it may be difficult for directors to hold meetings in the normal way due to working from home and social distancing being the norm at this time. Care should be taken to ensure that changes to decision-making processes do not adversely affect the company’s tax residence. Methods of communication with shareholders should be reviewed, and consideration given to any upcoming shareholders’ meetings which may now be held digitally in certain circumstances pursuant to a law passed in light of the COVID-19 crisis, or any required shareholder authorisations. Shareholder authorisations may be obtained by written resolutions if provided for by the articles of association and communications to shareholders can in many cases be sent electronically (subject to any prohibitions in the company’s articles of association).

2. What government relief measures have been made available to directors?

The Austrian government has announced numerous measures in connection with the COVID-19 crisis and passed several laws to implement those measures. Directors need to monitor the measures announced and assess which of them are relevant to their company.

The most relevant measures for companies in Austria include:

  • Digital shareholder meetings (video conference: acoustic and optical two-way connection in real time from any place), even without these being explicitly permitted in the articles of association of the company; at least half of the shareholders that have a right to attend must actually digitally attend the meeting for a meeting to be validly held and decisions to be validly passed.
  • Annual financial statements:
    • fines that could normally be imposed by the commercial register courts for a company failing to submit annual financial statements on time have been suspended for the time being
    • the time period within which private and public limited companies need to prepare their annual financial statements (usually within the first 5 months of the business year) has been extended by 4 months
    • the time period within which private and public limited companies need to file their annual financial statements with the commercial court (usually within the first 9 months of the business year) has been extended by 3 months
    • this also applies to consolidated financial statements and other accounting documents which shall be prepared and submitted within the specified periods.
  • Exemption from the ban on repayment of certain shareholder loans granted in a crisis situation (see above for the definition of a crisis) if they were granted in the period 5 April 2020 to 30 June 2020 for no more than 120 days and the loan amount has actually been paid out, provided that the company does not provide a pledge or other comparable security from its assets for the loan.
  • Insolvency law: the obligation of the debtor to file for insolvency in the event of over-indebtedness does not apply in the event of over-indebtedness occurring in the period from 1 March 2020 to 30 June 2020. If the company is over-indebted at the end of this period, an insolvency petition must be filed within 60 days of 30 June 2020 or within 120 days of the occurrence of over-indebtedness, whichever period ends later. However, if the company becomes insolvent in the period from 1 March 2020 to 30 June 2020, the directors must still file for insolvency within 120 days of the company having become insolvent.
  • Exemption from paying out-of-court enforcement costs if a contracting party whose economic performance is significantly affected by the COVID-19 crisis defaults on payment obligations that became or will become due in the period from 1 April 2020 to 30 June 2020 and a cap on interest on arrears of 4%.
  • Notarial deeds (including certifications) can now generally also be drawn up using electronic means of communication.
  • UBO filings: the periods for reporting data on the ultimate beneficial owners of companies have been suspended in certain cases (ongoing period for submission of data had not yet expired by the end of 16 March 2020 or the start of the period falls within the period from 16 March 2020 to the end of 30 April 2020) and will start again on 1 May 2020.
  • Exemption from official fees for documents and administrative acts performed directly or indirectly as a result of the necessary measures in connection with handling the COVID-19 crisis situation are exempt from fees and federal administrative charges. Legal transactions that are necessary for the implementation of measures in connection with handling of the COVID-19 crisis situation are exempt from stamp duty.
  • Extended possibility for government-subsidised short-time working (“Kurzarbeit”; reduction of the working time of employees to 10% to 90% of the average working time, while they receive between 80% and 95% of their salary, which is subsidised by the government).

Please note that many of these measures will only remain in place until 31 December 2020.

3. What changes have been made to directors’ duties as a consequence of the COVID-19 crisis?

The legal framework for the duties of directors has largely remained the same (except for the relief measures described above). A director must manage the company and act on behalf of the company in line with its business purpose, in the best interest of the company and in accordance with the instructions of the shareholders, applying the diligence of a prudent businessman. Further, a director must observe the business judgement rule, i.e. when he/she makes discretionary business decisions (“judgement calls”) he/she must not allow himself/herself to be guided by extraneous interests and must act for the benefit of the company on the basis of appropriate information. The requirement to base a decision on appropriate information must take into account that decisions in times of crisis often have to be made very quickly and that it is neither possible nor necessary to obtain all potentially relevant information.

Even in times of crisis, the shareholder approval requirements (e.g. in the articles of association or in rules of procedure) must be strictly observed. Acting without the required consent of the shareholders can only be justified in exceptional cases of imminent danger if management can assume that the shareholders will give their consent at a later date.

Practically speaking, directors will have to monitor the financial state of the company more closely, and due to many employees still working from home also adapt their internal method of communication and supervision.

Directors duties and responsibilities

1. What form does the board of directors take?

Austrian private limited companies generally have a management board (“Geschäftsführung”) consisting of one or more directors. Usually the articles of association determine the number of directors. All directors on the management board are managing directors and thus have an executive function.

An additional supervisory board (“Aufsichtsrat”) is only mandatory in certain cases, namely if:

  • the stated share capital exceeds EUR 70,000 and the number of shareholders exceeds 50
  • the number of employees of the company on average exceeds 300
  • the company centrally manages or, by means of a direct interest exceeding 50%, controls private or public limited companies, and the total combined number of employees of the controlling and controlled companies exceeds 300
  • the company is a general partner (Komplementär”) in a private limited liability partnership (“Kommanditgesellschaft”) and the total combined number of employees of the company and the private limited liability partnership exceeds 300
  • employee representatives have the statutory right to nominate members of the supervisory board pursuant to Part VIII of the Austrian Labour Relations Act (“Arbeitsverfassungsgesetz”) as a result of a cross-border merger, or
  • the company is a company of public interest (“Unternehmen von öffentlichem Interesse”).

The articles of association may provide for an optional supervisory board. The supervisory board has a controlling function, and thus its members are non-executive.

2. What is the role of non-executive or supervisory directors?

The supervisory board of an Austrian private limited company (if the company has a supervisory board) must supervise the management of the company. This primarily includes supervising higher-level aspects of corporate policy, corporate planning, the coordination of decision-makers, performance review and the filling of management positions in the company.

In supervising the management of the company, the supervisory board has a number of rights and duties:

  • it may at any time request a report from the directors on the affairs of the company, including its relations with a group company
  • it may inspect and examine the books and records of the company as well as its assets, in particular the company’s cash, securities and products
  • it must convene a general meeting if the well-being of the company so requires
  • certain management acts require the prior approval of the supervisory board (such as the acquisition and sale of equity interests as well as the acquisition, sale and closure of companies and plants, the raising of bonds, loans and credits that exceed a certain amount individually and in total in a fiscal year and the definition of general principles of business policy)
  • it must review the annual accounts, any proposal for the distribution of profits as well as a separate non-financial report, if any, and must report thereon to the general meeting, and
  • it is authorised to represent the company in legal transactions with the directors of the company and, after having received the approval of the shareholder(s) of the company, to initiate litigation proceedings against the directors in connection with these legal transactions if necessary.

Further obligations may be conferred on the supervisory board by the articles of association or by a shareholder resolution.

3. Who can be appointed as a director?

There are few restrictions on who can become a director. In particular, a director is not required to reside in Austria and does not have to be of a certain nationality. Only a physical person with full legal capacity can be appointed as a director. A legal entity or a partnership may not be appointed. Special provisions apply to directors who are shareholders. A company may have one or more directors. Usually the articles of association determine the number of directors.

The company must be effectively managed from within Austria. Otherwise it might be regarded as liquidated and taxed on built-in gains. A supervisory board must consist of at least three members. Additional members may be appointed unless the number of members is restricted by the articles of association. Usually the number of members of the supervisory board is determined by the articles.

Members of the supervisory board may not simultaneously be directors, permanent substitutes for directors, or employees of the company (unless the company has a works council; see the answer to question 4 below). Also, an individual must not be a member of the supervisory board of more than 10 private or public limited companies (in certain cases 20; the role as chairman of a supervisory board counts as two supervisory board positions) and he/she must not be a director of a subsidiary of the company.

4. How is a director appointed?

Directors are appointed by a shareholder resolution. Directors may also be appointed by a provision in the articles of association, if they are shareholders. The term of office is not limited unless the articles provide otherwise.

Notification of the appointment, signed by the director(s), together with certified evidence of the appointment (e.g. a certified shareholder resolution), as well as a certified sample signature of the director, must be filed with the Commercial Register. The company must pay a small registration fee.

The members of the supervisory board are appointed by a shareholder resolution for a maximum of around five years (until the shareholders’ resolution on discharging the supervisory board member from liability for the fourth business year after appointment). The articles of association may provide for a shorter term. If the employees have established a works council (which requires a minimum of five employees), the works council may nominate one additional member to the supervisory board for every two members of the supervisory board elected by the shareholders. The articles of association may also grant certain shareholders the right to appoint members of the supervisory board.

Notification of the appointment or nomination, signed by the director(s), must be filed with the Commercial Register. Again, the company must pay a small registration fee.

5. How is a director removed from office?

A director (managing director or supervisory board member) may be removed at any time by a shareholder resolution.

A director may resign at any time by giving notice to the company. However, such a resignation may constitute a breach of duty or a breach of contract. The resignation has immediate effect if there are substantial grounds for the resignation; otherwise it becomes effective 14 days after the general meeting or each shareholder has been notified of the resignation. If the company has multiple directors, the remaining director(s) need to be notified of the resignation as well; if the company has a supervisory board, the chairman of the supervisory board must also be notified. Even if only one director was appointed, resignation is still possible. A director has certain obligations to clarify to the company any business activities carried out by him/her in the course of his/her term and during the five years following his/her removal or resignation. If directors are appointed for a fixed term, or are subject to “rotation”, their appointment will terminate if they are not reappointed.

A member of the supervisory board who was appointed by a shareholder resolution automatically ceases to be a member of the supervisory board after his/her term of appointment expires. If a member of the supervisory board was appointed by a certain shareholder based on a right afforded to that shareholder in the articles of association, said shareholder may dismiss that supervisory board member at any time.

A member of the supervisory board may also resign with immediate effect if there are substantial grounds for the resignation, by giving notice to the company. If that is not the case, the resignation must be declared in advance and in such a way that an adequate substitute member may be found.

Notification of removal or resignation of a director, signed by the new or remaining director(s), must be filed with the Commercial Register. The company must pay a small registration fee.

6. What authority does a director have to represent the company?

In general, the directors can only represent the company together (joint power of representation). The articles of association may provide for a different form of representation and usually provide that one or two directors or, if there is more than one director, one director together with a “Prokurist” (authorised signatory with limited power to represent) may jointly represent the company.

In principle, the power of representation of directors towards third parties is unrestricted and cannot be restricted by the articles of association or the shareholders. The actions of directors properly representing the company – i.e. exercising such powers as are conferred by law or by the articles – are valid and binding towards third parties regardless of whether or not prior approval by the shareholders or by the supervisory board is required and has been obtained.

A director has full authority to manage the company. However, such authority may (for internal purposes only) be restricted by the articles or by a shareholder resolution. In many cases the articles will provide that certain key managing acts will be subject to prior approval of the shareholders or supervisory board. With few exceptions (such as collusion of the director with a third party to the detriment of the company), a breach of a restriction on a director's authority to represent the company does not invalidate the director’s actions vis-à-vis third parties.

7. How does the board operate in practice?

All directors have the same rights and duties and are jointly obliged to manage the company. However, and notwithstanding each director’s overall responsibility, certain management roles may be allocated to specific persons by the articles, by a shareholder resolution, by resolution of the supervisory board, by internal guidelines for directors and/or by the management board itself.

The shareholders may give binding instructions to the directors on any managing acts unless otherwise provided by the articles or unless there is a supervisory board.

8. What contractual relationship does the director have with the company?

Appointment of a director by a shareholder resolution does not of itself constitute a contract with the company or entitle a director to remuneration. A company’s articles will generally only entitle members of the supervisory board to reimbursement of expenses. Supervisory board members' fees commensurate with their duties may be payable to the extent specified in the articles of association or approved by a resolution of the shareholders.

A director may also have a contractual relationship with the company, for example as an employee under a service agreement or as an independent contractor providing services under a consultancy agreement. Termination of any such contract will not automatically terminate the directorship. Termination of the directorship by a director will not automatically terminate, but may constitute a breach of, the related contract.

9. What rules apply in respect of conflicts of interest?

In the case of a conflict of interest, a director must refrain from any action that might be detrimental to the company.

A director cannot represent the company in dealings with himself/herself, or with a third party represented by himself/herself, unless the company consents by a shareholder or supervisory board resolution or unless the company’s interests are not negatively affected. A director who is the sole shareholder of the company may represent the company in dealings with himself/herself (in some cases, such self-dealing will require the drawing up of a document certified by a notary public).

Directors must not accept any loans from the company without prior approval of the shareholders or the supervisory board.

The directors must not transact business within the company’s line of business for their own account or for the account of others, nor may they be general partner in a partnership or a member of the management or supervisory board of another company in the same line of business, without prior approval of the shareholders or of the supervisory board.

10. What other general duties does a director have?

A director must manage the company and act on behalf of the company in line with its business purpose, in the best interest of the company and in accordance with the instructions of shareholders, with the diligence of a prudent businessman irrespective of his/her own individual level of skill and experience (duty of care). In managing the company, the director must safeguard the interests of the company and avert any damage to the company. The director has a fiduciary obligation towards the company. According to the business judgement rule, a director is deemed to have acted in line with his/her duty of care and generally may not be held liable for damages resulting from his/her actions if he/she does not allow himself/herself to be guided by extraneous interests when making a management decision and can assume, on the basis of appropriate information, that he/she is acting for the benefit of the company. However, the business judgment rule only applies to discretionary business decisions by the director (judgement calls), not to decisions that are determined by statutory law.

Directors are subject to a wide range of specific statutory duties. Such specific duties include, but are not limited to:

  • operating the business of the company in line with the business purpose and with regard to the principles of maintenance of capital and protection of creditors
  • preparing financial statements and disclosing financial statements to shareholders and to the public
  • setting up an accounting and monitoring system
  • submitting quarterly reports, an annual budget, and reports on extraordinary circumstances to the supervisory board
  • convening shareholder meetings (annually and in the event of loss of half of the stated share capital)
  • initiating court proceedings within a certain statutory period in the event of insolvency
  • initiating reorganisation proceedings in the event that a material and sustained deterioration of the company’s equity ratio is anticipated
  • requesting payments to be made on capital contributions of the shareholders
  • representing the company in any challenge proceedings and notification of such proceedings to the shareholders
  • making submissions to the commercial court regarding certain changes relating to the company, its shareholders, its directors, etc., and
  • in the case of supervisory board members, supervising the management of the company.

Further, the directors are responsible for ensuring that the company fulfils its obligations under public law, such as tax and social security law. This includes in particular the submission of tax or contribution returns as well as the payment of taxes and contributions from the funds of the company.

A director has a confidentiality obligation. Hence, he/she may not disclose certain information to outside third parties if the disclosure of such information could be detrimental to the company. In addition, the obligation to maintain confidentiality also applies to information which the company wishes to keep confidential.

Additional duties may arise from a company’s articles of association or specific instructions given by shareholder resolutions – such as obtaining the consent of the shareholders (or the supervisory board or advisory board, if there is one) for certain types of transactions and measures.

11. To whom does the director owe duties?

The duties of a director are owed to the company. A director’s duties are not owed to any one shareholder, a business partner of the company or to the company’s creditors.

12. How do the director’s duties change if the company is in financial difficulties?

The directors also have to apply the diligence of a prudent businessman in times of financial difficulties. But there are some duties that are specific to times of financial difficulties.

The directors must convene a general meeting of shareholders if the company’s well-being so requires. If half of the share capital is lost or if the equity ratio falls below 8% and the notional debt repayment period is longer than 15 years, this must be done immediately.

The directors must closely monitor the state of the company, because if the company is:

  1. insolvent (“zahlungsunfähig”), i.e. unable to pay its debts as and when they fall due, or
  2. over-indebted in terms of insolvency law (“insolvenzrechtlich überschuldet”), which is generally the case if the company’s liabilities exceed its assets at liquidation values under Austrian GAAP on a standalone basis and if there is a negative forecast regarding the company’s future survival (negative going-concern prognosis (“negative Fortbestehensprognose”)), provided that the insolvency estate’s value is sufficient to cover at least the costs of the insolvency proceedings,

the company is no longer permitted to make payments (cash payments, deliveries of goods or providing securities) to its creditors and the directors must file for insolvency with the competent court without undue delay and in any event no later than 60 days after the occurrence of insolvency.

In the event of insolvency caused by a natural disaster (flood, avalanche, snow pressure, landslide, rockslide, hurricane, earthquake, epidemic, pandemic or similar disaster of comparable magnitude), the directors must file for insolvency no later than 120 days (instead of 60 days) after the occurrence of insolvency.

In times of crisis (if the company is insolvent, over-indebted or the equity ratio is below 8% and the notional debt repayment period is longer than 15 years), directors need to be very careful when making payments to shareholders, especially if shareholder loans are to be repaid. Shareholder loans that are granted in a crisis may be subject to the repayment ban under the Austrian Equity Repayment Act (“EKEG”). According to the EKEG, shareholder loans may only be repaid after the company has been restructured and is no longer in a crisis. Repayments to a shareholder in spite of the repayment ban violate the prohibition on the repayment of capital contributions, for which directors are personally liable. Such repayments are also invalid.

A director might be directly liable to creditors in cases of insolvency of the company or failure to file for insolvency proceedings in a timely manner due to wilful misconduct or negligence (e.g. for damages resulting from payments having been made after the point in time at which the director should have filed for insolvency). Wilful or negligent violation of creditors’ interests or failure to file for insolvency proceedings on time may constitute a criminal offence.

When the company takes out a loan (interpreted broadly, i.e. if the contractual partner of the company is to make advance payments), a director of the company has a general duty to inform the business partners of the company of the poor economic situation of the company if the company is already in a state in which an application for insolvency would have to be filed or if it is to be expected that the company will be insolvent when payment falls due. If the directors do not do so, they may be personally liable for the resulting damages.

During insolvency proceedings, the company is no longer managed by the directors but, insofar as legal acts affecting the assets are involved, by the insolvency administrator. This also includes accounting and disclosure obligations, but not internal company measures such as the appointment and dismissal of directors.

13. What potential liabilities can a director incur?

A director is fully liable to the company, but not to shareholders, business partners of the company or the company’s creditors (for exceptions, see below), for a wilful or negligent breach of duty. In the case of wilful or negligent breach of duty by two or more directors, they are jointly and severally liable. If the director adhered to the business judgement rule, he/she may not be held liable for damages resulting from his/her discretionary business decisions. The duty of care of directors is an objective one, which is judged on the basis of the measure of a “prudent businessman”. Therefore, directors may also be liable if they lack the skills necessary to fulfil the directors’ duties and cause damage to the company. A director also acts negligently if he/she does not exercise his/her function as a director and remains inactive.

Directors may also be liable for damages resulting from repayment of capital contributions if they caused such damage wilfully or negligently. Also, supervisory board members may be liable for such damage if they violated their supervisory duties with regard to the prohibited transaction wilfully or negligently.

The director may be held liable also directly vis-à-vis creditors of the company if he/she violates a legal provision that aims to protect creditors, e.g. in the event of insolvency of the company or a failure to file for insolvency proceedings in a timely manner due to wilful misconduct or negligence. Wilful or negligent injury to creditors’ interests or failure to file for insolvency proceedings on time may constitute a criminal offence.

In cases of wilful or negligent default in paying taxes or social security contributions, a director may be personally liable to the tax authorities for amounts outstanding or may even be committing a criminal offence. A director may also be criminally liable for wilfully incorrect statements, including financial statements, statements to shareholders or the supervisory board or filings with the Commercial Register.

Further liabilities of a director might arise from criminal acts such as, but not limited to, fraud, embezzlement or the grossly negligent infringement of creditors’ interests.

14. How can a director limit his/her liability?

A director’s liability to the company cannot be limited by agreement. However, it is common practice to pass a resolution on the approval of the director’s acts amounting to a discharge of liability vis-à-vis the shareholders (“Entlastung”) after the close of each business year, thus waiving any recognisable claims by the company.

In principle, a director is not liable for management actions which he/she performs upon binding instructions of the shareholders. However, if such instructions were based on incomplete or incorrect information provided by the director or if they were void because of a conflict with creditor protection provisions under Austrian law or with “ordre public”, the director may be held liable even if he/she respected the shareholders’ instructions. A private limited company may purchase directors’ liability insurance for its directors or the directors may take out such insurance themselves.

Picture of Peter Huber
Peter Huber
Partner
Vienna
Simon-Cook-CMS-AT
Simon Cook
Associate
Vienna