AUSTRIA Law and Practice

Contributed by: Markus Fellner, Florian Kranebitter and Mario Burger, Fellner Wratzfeld & Partners

corporate benefits as an adequate means of justification for granting upstream and side-stream guarantees. Requirements for such corporate benefit are that the corporate benefit must not be disproportionate to the risk and that it must be specific and not only general, such as a general “group benefit”. Austrian case law on these restrictions is based on a case-by-case evaluation and has become increasingly stringent over the last 20 years. In practice, it is advisable to have the management of the company assess the proposed transaction in accordance with the above criteria. Potential consequences of a breach of these Austrian capital maintenance rules include personal liability of the management as well as nullity of the respective transaction. The above principles do not only apply in respect to funds or loans paid by a company but to all benefits granted by such, including guarantees for borrowings.

The granting of guarantees on a commercial basis in Austria qualifies as banking business pursuant to Section 1, paragraph 1, No 8 of the Austrian Banking Act (Bankwesengesetz –BWG). While there is no statutory exemption for group financings, it is recognised that guarantees do not require a banking licence to the extent that they are granted solely for the obligations and liabilities of group companies with a view to achieving a group’s other overriding commercial goals.

6.3 Requirement for Guarantee Fees

In Austria there is no requirement for a guarantee fee. However, the parties commonly agree on the payment of a guarantee fee to the guarantor.

7. Lender Liability

7.1 Equitable Subordination Rules

Under the Austrian Equity Substitution Act (Eigenkapitalersatz-Gesetz – EKEG), a lender who is granted extensive rights of control over the borrower, together with decisive influence on the borrower’s business in the loan agreement or any related security document may, for the purposes of the Act, be qualified as a shareholder of the borrower. A loan made by such lender to a borrower which is in a “crisis” is considered as equity subordinated to the claims of all secured and unsecured creditors of such subsidiary. Therefore, the borrower is prohibited to repay the loan to the lending shareholder as long as the crisis subsists. A debtor is considered to be in a crisis if it is in any of the following situations:

• illiquidity (Zahlungsunfähigkeit) within the meaning of Section 66 of the Austrian Insolvency Act (Insolvenzordnung – IO);

• over-indebtedness (Überschuldung) within the meaning of Section 67 of the Austrian Insolvency Act; or

• thin capitalisation (an equity ratio of less than 8% and the fictional debt redemption period longer than 15 years), unless no reorganisation of the debtor is required under the Austrian Reorganisation Act (Unternehmensreorganisationsgesetz).

However, the extending of loans that were initially granted before a crisis was imminent is not considered as equity in order to help with keeping up liquidity of a struggling company to a certain extent.

7.2 Claw-Back Risk

If contracts are not mutually fulfilled on or before the date insolvency proceedings started, the insolvency administrator can choose between