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Insolvency – Andreas Foglar-Deinhardstein, Foglar-Deinhardstein, Vienna, Austria

The Austrian Insolvency Laws Reform in 2010 – Restructuring instead of Ruining

Representatives of the Austrian Chamber of Commerce have urged for a reform of the Austrian Insolvency Law for many years. For the benefit of safeguarding the existence of companies during the current economic crisis , the Austrian federal government answered the call from the industry. On 2 March 2010 it decided on a governmental bill on the reform of the current Insolvency Law. On 21 April 2010 the national assembly passed the Insolvency Law Amendment Act 2010 (Insolvenzrechts-Änderungsgesetz 2010). Very recently, on 20 May 2010, the Insolvency Law Amendment Act 2010 was published in the Federal Law Gazette (BGBl 2010/29).

In an international comparison the existing insolvency law already offers good chances for the reorganization of enterprises. The prior goal of the Insolvency Law Amendment Act 2010 is to further increase the already high share of successful reorganizations of companies in Austria. On the one hand this goal is realized through the implementation of statutory provisions encouraging the debtor to apply for an insolvency proceeding already at an early stage, when the economic recovery is still possible. On the other hand this aim is implemented through the simplification and unification of the insolvency procedural statutes: a single Insolvency Act (Insolvenzordnung, IO) is created with uniform procedural rules that regulate bankruptcy and reorganization proceedings. The Judicial Composition Code (Ausgleichsordnung, AO) has been abolished as a result of the reform.

Overview of present types of insolvency proceedings

Currently, the insolvency of companies is subject to one of the following two proceedings: Either to the bankruptcy proceedings (Konkursverfahren) governed by the Austrian Bankruptcy Code (Konkursordnung, KO) that either end in a compulsory composition or a liquidation of the debtor, or to the judicial composition proceedings (Ausgleichsverfahren), covered by the Judicial Composition Code (Ausgleichsordnung, AO) aimed solely at restructuring. Bankruptcy proceedings represent the vast number of judicial insolvency proceedings. The judicial composition proceedings only play a minor role as bankruptcy proceedings offer for a restructuring possibility in form of the so called compulsory composition proceeding (Zwangsausgleich), which works the same ways as the judicial composition proceedings but requires a lower minimum quota (20% instead of 40%).

Core Points of the Reform

The core goals of the reform are:

  1. Increasing the chances to reorganize companies thereby safeguarding their existence;
  2. Simplifying insolvency proceedings thereby averting a delay of debtors’ applications for bankruptcy;

iii.    Reducing the number of rejections of insolvency due to lack of assets thereby providing for an increased creditor protection;

  1. Discontinuing of stigmatization of the bona fide economic failure.

Description of Reformative Changes

Just as with the current bankruptcy proceeding, the new insolvency proceeding also provides for the liquidation or judicial rearrangement of enterprises. The rearrangement is no longer called compulsory composition (Zwangsausgleich) but instead restructuring plan (Sanierungsplan). Within the restructuring proceedings the new act differentiates between restructuring proceedings with self-administration (under the supervision of an administrator), essentially corresponding to the present judicial composition proceedings, and restructuring proceedings without self-administration, essentially corresponding to the present compulsory composition proceeding. Prerequisite for a promising restructuring proceeding with self administration is that a minimum quota of 30% (until now 40% for judicial composition proceedings) is offered by the debtor and that the proceeding is prepared diligently, i.e. through the provision of a detailed restructuring plan (Sanierungsplan). The restructuring plan must state how the next 90 days of the going concern and the settlement of preferential claims (Masseforderungen) will be achieved. The self-administration can be revoked, if the creditors do not accept the restructuring plan.

As is the case with current bankruptcy proceedings, the restructuring proceedings without self-administration are aimed at the reorganization of the company and the prevention of the closure and liquidation of the company. The necessary minimum quota for restructuring proceedings without self-administration amounts to 20%.

For the acceptance of a restructuring plan, only a simple majority of heads and a simple majority of capital of creditors (as opposed to the now required capital quote of 75%) is necessary. According to some authors the lowering of the approval requirements may constitute a massive interference in creditor rights. If the restructuring proceedings as described fail to succeed, the proceedings are converted into the bankruptcy proceedings according to the new law.

Another significant change is the partial restriction of the right to cancel continuous contracts that are essential for the survival of the enterprise, for instance energy, lease or tenancy agreements, within the first six months after the opening of the insolvency proceeding. The restriction of cancellation is nevertheless limited, i.e. a cancellation remains possible, if it is indispensable to avoid serious personal and economical disadvantages of the contracting party, or if statutory set grounds for dissolution remain upright. Certainly the dissolution of an agreement remains valid, if the debtor does not carry out his duties as of the opening of the insolvency proceeding. Upon request the restructuring administrator, former liquidator (Masseverwalter), has to declare within a period of five working days (excluding Saturdays), if he, for his part, considers adhering to the contracts. Restructuring administrators have warned that in complex cases they will not be able to decide within such a short period of time.

In addition the reform amends the regulations on the creditors’ right of rescission from legal transactions concluded by the debtor with third parties, i.e. close relatives or creditors (Anfechtungsrecht) that discriminate other creditors, provided that the detriment has been objectively foreseeable, i.e. if the remedial design (Sanierungskonzept) was objectively impractical. The legal transactions that directly adversely affect the creditors will be explicitly listed in the new Insolvency Act. This clarification shall provide for an increased legal comfort in particular to banks financing an enterprise that is in distress.

Coming into force of the Insolvency Act

The Insolvency Law Amendment Act 2010 came into effect on 1 July 2010 and is applied to insolvency proceedings opened after 30 June 2010. The Judicial Composition Code (Ausgleichsordnung, AO) ceased to be in force after 30 June 2010. However, it will remain applicable to composition proceedings that were opened before 1 July 2010.

Andreas Foglar-Deinhardstein

andreas.foglar-deinhardstein@fdblawyers.com

The information included in this article is intended for guidance purposes only and should not be regarded as a substitute for taking proper legal advice

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