Chambers and Partners: Insolvency 2023 - Austria

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Austria: Law & Practice and Trends & Developments Markus Fellner, Florian Kranebitter, Elisabeth Fischer-Schwarz and Florian Henöckl Fellner Wratzfeld & Partners

AUSTRIA

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Law and Practice Contributed by: Markus Fellner, Florian Kranebitter, Elisabeth Fischer-Schwarz and Florian Henöckl Fellner Wratzfeld & Partners

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Contents 1. State of the Restructuring Market p.6 1.1 Market Trends and Changes p.6

2. Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations p.7 2.1 2.2 2.3 2.4 2.5 2.6

Overview of Laws and Statutory Regimes p.7 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership p.7 Obligation to Commence Formal Insolvency Proceedings p.8 Commencing Involuntary Proceedings p.9 Requirement for Insolvency p.9 Specific Statutory Restructuring and Insolvency Regimes p.9

3. Out-of-Court Restructurings and Consensual Workouts p.9 3.1 3.2 3.3 3.4 3.5

Consensual and Other Out-of-Court Workouts and Restructurings p.9 Consensual Restructuring and Workout Processes p.10 New Money p.10 Duties on Creditors p.10 Out-of-Court Financial Restructuring or Workout p.10

4. Secured Creditor Rights, Remedies and Priorities p.10 4.1 Liens/Security p.10 4.2 Rights and Remedies p.10 4.3 Special Procedural Protections and Rights p.11

5. Unsecured Creditor Rights, Remedies and Priorities p.11 5.1 5.2 5.3 5.4 5.5

Differing Rights and Priorities p.11 Unsecured Trade Creditors p.12 Rights and Remedies for Unsecured Creditors p.12 Pre-judgment Attachments p.12 Priority Claims in Restructuring and Insolvency Proceedings p.12

6. Statutory Restructuring, Rehabilitation and Reorganisation Proceedings p.13 6.1 6.2 6.3 6.4 6.5 6.6

Statutory Process for a Financial Restructuring/Reorganisation p.13 Position of the Company p.15 Roles of Creditors p.15 Claims of Dissenting Creditors p.16 Trading of Claims Against a Company p.16 Use of a Restructuring Procedure to Reorganise a Corporate Group p.16

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Slovak

Croatia

AUSTRIA CONTENTS

6.7 Restrictions on a Company’s Use of Its Assets p.16 6.8 Asset Disposition and Related Procedures p.16 6.9 Secured Creditor Liens and Security Arrangements p.16 6.10 Priority New Money p.16 6.11 Determining the Value of Claims and Creditors p.16 6.12 Restructuring or Reorganisation Agreement p.16 6.13 Non-debtor Parties p.16 6.14 Rights of Set-Off p.16 6.15 Failure to Observe the Terms of Agreements p.17 6.16 Existing Equity Owners p.17

7. Statutory Insolvency and Liquidation Proceedings p.17 7.1 Types of Voluntary/Involuntary Proceedings p.17 7.2 Distressed Disposals p.17 7.3 Organisation of Creditors or Committees p.18

8. International/Cross-Border Issues and Processes p.18 8.1 8.2 8.3 8.4 8.5

Recognition or Relief in Connection With Overseas Proceedings p.18 Co-ordination in Cross-Border Cases p.18 Rules, Standards and Guidelines p.19 Foreign Creditors p.19 Recognition and Enforcement of Foreign Judgments p.19

9. Trustees/Receivers/Statutory Officers p.19

9.1 Types of Statutory Officers p.19 9.2 Statutory Roles, Rights and Responsibilities of Officers p.19 9.3 Selection of Officers p.20

10. Duties and Personal Liability of Directors and Officers of Financially Troubled Companies p.21 10.1 Duties of Directors p.21 10.2 Direct Fiduciary Breach Claims p.21

11. Transfers/Transactions That May Be Set Aside p.21 11.1 Historical Transactions p.21 11.2 Look-Back Period p.22 11.3 Claims to Set Aside or Annul Transactions p.22

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AUSTRIA Law and Practice

Contributed by: Markus Fellner, Florian Kranebitter, Elisabeth Fischer-Schwarz and Florian Henöckl, Fellner Wratzfeld & Partners

Fellner Wratzfeld & Partners (fwp) comprises a team of more than 70 lawyers, advising clients as a full-service firm but also in all areas of insolvency, reorganisation and restructuring. The fwp team – known as one of the leading teams in Austria, with a strong understanding of business – provides comprehensive advice both to creditors and lenders and has a particularly long

tradition of co-ordinating restructuring negotiations in syndicated and multi-lender situations.

The firm’s holistic approach in this field of practice also includes all forms of distressed M&A in pre-insolvency and insolvency stages, as well as the reorganisation and support of return to profitability – with a specific specialisation in sustainable financing.

Authors Markus Fellner is a founding partner of Fellner Wratzfeld & Partners and head of the insolvency and restructuring practice group. He is highly ranked by peers in this practice area and his impressive track record includes representing some of Austria’s largest banks in restructuring mandates. Markus recently advised the core banks of the traditional Vorarlberg lingerie manufacturer Huber in connection with reorganisation proceedings.

His other key areas of practice include banking and finance, corporate/M&A and dispute resolution. Markus is an author in the insolvency and restructuring field, co-authored a commentary on the Restructuring Regulation, and recently published a multi-jurisdictional commentary on cross-border restructuring regimes.

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Florian Kranebitter is a partner at Fellner Wratzfeld & Partners and specialises in its international transaction practice, including cross-border restructuring and insolvency cases in various industries. Florian co-led in advising the Steinhoff Group’s restructuring, as well as in other restructuring cases, including that of a key supplier of CNH-Group and the Huber Group. He is known for his skills in international restructurings and, in particular, combining his work in multi-lender/multijurisdictional financing. His other fields of specialisation are corporate/M&A, banking and finance, sustainability and ESG. Florian has written publications in the field of insolvency and restructuring and was a speaker on the Restructuring Regulation.

AUSTRIA Law and Practice

Contributed by: Markus Fellner, Florian Kranebitter, Elisabeth Fischer-Schwarz and Florian Henöckl, Fellner Wratzfeld & Partners

Elisabeth Fischer-Schwarz is a senior attorney in the insolvency and restructuring practice group at Fellner Wratzfeld & Partners and has long-term experience in this practice area. She also specialises in banking and finance and dispute resolution, having been admitted to the Austrian Bar in 2017. Elisabeth has authored publications in the field of insolvency and restructuring and the banking and finance sector.

Fellner Wratzfeld & Partners Schottenring 12 A-1010 Vienna Austria Tel: +43 1 53770 0 Email: markus.fellner@fwp.at Web: www.fwp.at

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Florian Henöckl is a senior attorney in the insolvency and restructuring practice group at Fellner Wratzfeld & Partners. He also specialises in banking and finance, as well as corporate/M&A. Florian was admitted to the Austrian Bar in 2021 and recently published a multi-jurisdictional commentary on crossborder restructuring regimes.

AUSTRIA Law and Practice

Contributed by: Markus Fellner, Florian Kranebitter, Elisabeth Fischer-Schwarz and Florian Henöckl, Fellner Wratzfeld & Partners

1. State of the Restructuring Market 1.1 Market Trends and Changes

Company Insolvencies In 2020 and in 2021, the number of insolvent companies in Austria was at the lowest level since 1990. There were only about 3,000 company insolvencies, which marked an overall reduction of almost 40% compared with 2019.

However, this trend ended in 2022, when the pre-pandemic level of around 5,000 in 2019 was almost regained at 4,775 cases. Compared to 2021, there has been an increase of almost 60% in 2022. The number of cases that were not even opened owing to a lack of cost recovery was also almost twice as high in 2022 as it was in 2021.

This can be attributed, among other things, to the fact that companies that were only kept alive through state aid during the COVID-19 pandemic became insolvent after state aid expired owing to lack of viable business model.

This trend continued in the first half of 2023. There were around 12% more companies affected by insolvency than in the same period in the previous year and the figure for the first half of 2019, the final year before the COVID-19 pandemic, was also slightly surpassed. Proceedings not opened for lack of cost recovery also rose by 12%, while the volume of provisional liabilities increased by as much as 33% to EUR1.09 billion. Companies continue to be massively burdened by sharply increased costs, rising energy and raw material prices, high inflation, increased interest charges and severe staff shortages.

Private Insolvencies In the first half of 2023, the number of private insolvency proceedings amounted to approximately 4,549 cases, which is an increase of about 5.3% from the first half of 2022. Com6

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pared with the first half of 2019 (the last “normal year” before the COVID-19 pandemic), however, this is still around 450 fewer cases.

In the first half of 2023, the economic environment was difficult for many people in Austria, as the costs for food, housing and energy remained at a high level. However, this led to a comparatively small increase of 5.3% in private insolvencies compared with the same period of the previous year. The fact that there were still fewer private insolvencies than in 2019 may be attributed to the fact that people are more careful with their money in times of crisis. Nevertheless, this could result in a larger increase in the near future, especially if crisis factors intensify – although it can be assumed that if the situation continues to deteriorate, even if only temporarily, there will also be state aid to mitigate the effects (particularly in the private sector).

EU Directive and Implementation in Austria On 20 June 2019, the European Parliament and the European Council passed Directive (EU) 2019/1023 on Restructuring and Insolvency (“the Directive”) in order to further harmonise the insolvency statutes of the EU member states.

The Directive lays down rules on preventive restructuring frameworks available to debtors in financial difficulties where there is a likelihood of insolvency. The Directive also includes procedures leading to discharge of debt incurred by insolvent entrepreneurs and measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt.

Austria implemented the Directive at the very last moment, effective from 17 July 2021, unlike other EU countries (eg, Germany, which implemented this law at the beginning of 2021).

Austria implemented the Directive by adopting the Restructuring and Insolvency Directive

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Implementation Act (Restrukturierungs- und InsolvenzRichtlinie-Umsetzungsgesetz), which includes a separate new law comprising provision for the restructuring of companies – namely, the Restructuring Act (Restrukturierungsordnung).

It also amended certain other laws, including the Insolvency Act (Insolvenzordnung). The Restructuring and Insolvency Directive Implementation Act complements the procedures and pre-insolvency options introduced by the Restructuring Act (see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership).

National Legislative Measures At the national level, several legislative changes were adopted in the field of insolvency law to mitigate the economic consequences of the COVID-19 pandemic. Besides the temporary suspension of the obligation to file for insolvency, the Austrian legislature decided that bridge loans taken out in the period between 1 March 2020 and 30 June 2021 to pre-finance the salaries of employees on short-time work – as well as their immediate repayment upon receipt of the shorttime working assistance – cannot be challenged pursuant to Section 31 of the Austrian Insolvency Act if the loan was not secured by the borrower’s assets and the lender was not aware of the borrower’s illiquidity when the loan was granted.

(For details regarding avoidance under Austrian insolvency law, see 11. Transfers/Transactions That May Be Set Aside.) Given that these state measures have tried to overcome a situation where entrepreneurs have been hit by the economic effects directly or indirectly caused by the shutdowns of businesses (including supply chains), and those effects no longer exist (or, at least, not to a sufficient extent), these measures have ceased.

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2. Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations 2.1 Overview of Laws and Statutory Regimes

The legal framework for insolvencies of business entities (as well as individuals) in Austria is codified in the Insolvency Act. Besides that, the new Restructuring Act has been providing a regime for restructuring since July 2021 (see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership for details).

2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership

The Insolvency Act provides three different types of proceedings: • reorganisation proceedings with debtor-inpossession – in which the debtor retains, generally and subject to certain restrictions, control over the estate’s assets; • reorganisation proceedings without debtorin-possession – in which a court-appointed insolvency administrator takes control; and • liquidation (bankruptcy) proceedings – in which a court-appointed insolvency administrator takes control of the task of selling the estate’s assets at a maximum value, with the proceeds being paid out to the creditors.

In addition to the foregoing, since July 2021, the new Restructuring Act has provided Austria with a pre-insolvency restructuring regime in line with the Directive. The following are some of the cornerstones of the Restructuring Act.

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• A company may use the procedures provided by the Restructuring Act (at the request of the debtor only) to enable the debtor to avert insolvency and ensure the viability of its company in the event of “probable insolvency” – ie, the existence of the debtor’s company would be at risk without restructuring. This is particularly the case if: (a) insolvency is imminent; or (b) the equity ratio falls below 8% and the national debt repayment period exceeds 15 years.

The procedure is not available to companies that are illiquid within the meaning of the Insolvency Act (see 2.3 Obligation to Commence Formal Insolvency Proceedings).

• The core of the restructuring procedure (in principle, a self-administration procedure) is a restructuring plan that defines classes of “affected creditors”. For the restructuring plan to come into effect, a majority of the creditors in each class is required in the first instance – ie, the sum of the claims of the creditors agreeing to the restructuring plan must amount to at least 75% of the total sum of the claims of the creditors included in the restructuring plan – and a cram-down is also possible. In addition, the court must decide on the confirmation of the restructuring plan.

• Court approval of a restructuring plan also depends on whether the “creditor interest criteria” is met, if requested by nonconsenting creditors. The “creditor interest criteria” basically requires that a nonconsenting creditor is not treated worse than in a (regular) insolvency proceeding.

• At the debtor’s request, the court may order a stay of execution proceedings for a period of up to three months (extendable to a

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maximum of six months) in order to support negotiations on a restructuring plan.

• The Restructuring Act also provides for a “simplified procedure” tailored to include financial creditors only.

2.3 Obligation to Commence Formal Insolvency Proceedings

The legal representatives of an entity must file for insolvency in a scenario where the entity is “insolvent” according to the meaning in the Insolvency Act. This criterion is met if the debtor is: • illiquid (zahlungsunfähig); or • over-indebted (überschuldet).

Although the Insolvency Act does not provide a legal definition for illiquidity and over-indebtedness, legal literature and case law have broadly defined “illiquidity” as a situation where the debtor lacks sufficient cash (including existing credit lines) to meet its current needs and obligations. The Supreme Court of Austria has ruled that illiquidity is to be assumed when the debtor is unable to pay more than 5% of its debt obligations that are due and payable.

On the other hand, “over-indebtedness” is when liabilities on the debtor’s balance sheet exceed the debtor’s assets (at liquidation value) – although a company’s substantive overindebtedness (materielle Überschuldung) per se is not sufficient to trigger the obligation to file for the commencement of insolvency proceedings.

Moreover, it is essential that the entity does not have a positive “going concern” prognosis (see 10.1 Duties of Directors).

A debtor is obliged to file for insolvency with the competent court, without undue delay, once its financial situation meets the statutory criteria for

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insolvency and no later than 60 days after entering into the status of insolvency. If insolvency is only imminent, either restructuring proceedings under the Insolvency Act or reorganisation proceedings under the new Restructuring Act may be initiated at the debtor’s request. In such a scenario, there is a “parallel world” in terms of possible regimes that may be selected by a debtor.

2.4 Commencing Involuntary Proceedings

Besides a company’s legal representatives, any creditor is entitled to file for insolvency in the form of liquidation (bankruptcy) proceedings, provided such creditor has a claim against the debtor – irrespective of the claim’s maturity date. Proceedings in the form of reorganisation proceedings, however, can only be initiated at the debtor’s initiative.

2.5 Requirement for Insolvency

Insolvency proceedings are to be opened by the insolvency court at the request of the debtor or a creditor, if the debtor is illiquid or overindebted. Reorganisation proceedings (pursuant to the Insolvency Act) can already be initiated if there is a danger of illiquidity. For definitions of “illiquidity” and “over-indebtedness”, please refer to 2.3 Obligation to Commence Formal Insolvency Proceedings.

2.6 Specific Statutory Restructuring and Insolvency Regimes

In principle, legal entities as well as individuals can be subject to insolvency proceedings under the Insolvency Act. However, neither reorganisation proceedings with – nor reorganisation proceedings without – debtorin-possession apply to credit institutions, insurance companies and pension funds, as there are specific provisions for these entities (under the Banking Act, the Insurance Company 9

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Supervision Act and the Pension Fund Act, respectively).

As regards credit institutions, the Bank Recovery and Resolution Directive (BRRD) was implemented in Austria through the Austrian Recovery Bank and Resolution Act (Sanierungsund Abwicklungsgesetz, or BaSAG), which came into force in January 2015. The resolution process of the former Hypo Alpe-Adria-Bank was the first to take place in Austria under this regime.

Besides the options provided by the Restructuring Act, entities that are not insolvent but are having financial difficulties can apply for statutory restructuring of their business under the Business Reorganisation Act (Unternehmensreorganisationsgesetz). However, the Business Reorganisation Act is effectively “dead law” as entities do not make use of this.

3. Out-of-Court Restructurings and Consensual Workouts 3.1 Consensual and Other Out-of-Court Workouts and Restructurings

Austrian law previously did not provide a legal framework for out-of-court restructuring proceedings, nor were preliminary mandatory and consensual restructuring negotiations provided for in the Insolvency Act until the implementation of the Restructuring Act. However, Austrian restructuring practice already entailed – to a large extent – an out-of-court restructuring approach, which inherited some of the cornerstones of the new Restructuring Act. As the new Restructuring Act has only been effective since July 2021, there is no relevant evidence of the extent to which this new law will be used (either entirely or in a complementary manner) with regard to,

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for example, the simplified procedure limited to financial creditors.

rest of the creditors as a pre-condition for their support.

3.2 Consensual Restructuring and Workout Processes

Besides the necessity to gain the consent of all the creditors, a potential disadvantage of outof-court restructurings is the risk of voidance of agreements that were concluded at a time when the debtor was already insolvent, which can diminish the estate. An advantage of outof-court restructuring is that these proceedings are not registered in the insolvency database.

Furthermore, out-of-court restructuring is potentially much faster, provided that all the parties participate.

As mentioned in 2. Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations, in a case where the insolvency of a debtor is established (ie, over-indebtedness or illiquidity under the Insolvency Act), the legal representatives must file for insolvency with the competent court within 60 days at the latest.

Any attempts at out-of-court restructurings must observe this deadline as well, which means that such restructuring without the involvement of the court must take place (and be legally settled and enforceable) prior to insolvency or within the 60-day time limit.

3.3 New Money

This is not applicable in Austria.

3.4 Duties on Creditors

This is not applicable in Austria.

3.5 Out-of-Court Financial Restructuring or Workout

In practice, out-of-court restructurings may be attempted by way of voluntary debt relief (including subordination), economic reorganisation of the business, or equity injections – all according to the provisions of private law.

Creditors might decide to grant debt relief in so as to avoid formal insolvency proceedings and the negative effect this might have on the entity’s public image. A prerequisite for such “quiet relief” is that all the creditors affected must be prepared to grant relief. However, each creditor can independently decide whether to initiate enforcement proceedings (Exekutionsverfahren) or insolvency proceedings. Therefore, creditors often bind their consent to the consent of the 10

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4. Secured Creditor Rights, Remedies and Priorities 4.1 Liens/Security

In accordance with statutory provisions, Austrian law recognises the following as security instruments over assets: • pledges (Pfande); • transfers of securities (Sicherungsübereignungen); • assignments of securities (Sicherungszessionen); and • reservations of title (Eigentumsvorbehalte).

4.2 Rights and Remedies

Whereas pledges are intended to secure the individual claim of a creditor and the ownership of an asset remains with the debtor, a transfer of security aims to transfer the ownership of the asset to the creditor, who will only transfer the asset back to the debtor once the debt is fully paid. These two types of securities require registration with the land register where the asset concerned is real property. Priority is

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granted according to chronological entry in the land register.

With an assignment of securities, the debtor assigns claims against a third party to the creditor. This type of security requires strict acts of publication (eg, notification of third-party debtors or annotation in the books). Priority depends on the date on which the publicity requirement is met.

In the case of a retention of title clause, ownership (in particular, ownership of goods) is not transferred from the creditor to the debtor until the purchase price has been paid in full.

If the goods are further processed, then joint ownership arises.

is affected by the commencement of insolvency proceedings – apart from possible voidance claims (Anfechtung). The secured creditor merely has to inform the administrator and, in the absence of acknowledgement of the claim, potentially file a lawsuit against the insolvency administrator in order to enforce the senior security. However, secured creditors are subject to the restraint that no secured claim can be paid within six months from the commencement of insolvency proceedings in case such claims jeopardise the business continuity of the debtor.

This provision may only be disregarded if the enforcement is vital to prevent severe economic disadvantage to the secured creditor.

4.3 Special Procedural Protections and Rights

Estate Claims The next rank is taken by estate claims (Masseforderungen), which – according to the statutory provisions – are to be satisfied prior to other insolvency claims. Estate claims encompass (inter alia):

5. Unsecured Creditor Rights, Remedies and Priorities

• the costs of the insolvency proceedings; • the expenses of management and administration of the estate; • claims for labour, services and goods furnished to the estate post-filing; and • the costs of the insolvency administrator.

As regards the enforcement of secured creditors’ rights, see 5. Unsecured Creditor Rights, Remedies and Priorities.

5.1 Differing Rights and Priorities

In all three types of proceedings provided for in the Insolvency Act (reorganisation proceedings with debtor-in-possession, reorganisation proceedings without debtor-in-possession, and liquidation proceedings), claims are classified and ranked in the following order of priority.

Secured Creditors Secured creditors can claim rights of segregation to receive assets (Aussonderungsanspruch) and/or claim rights of segregation to receive the proceeds of enforcement after sale (Absonderungsanspruch). Neither of these claims 11

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Preferential creditors of estate claims share in such claims on a pro rata basis.

Insolvency Claims Ranked behind estate claims are insolvency claims (Insolvenzforderungen), which are claims by unsecured creditors and may be filed with the competent court within a limited period following the commencement of insolvency proceedings as fixed by the court. Those insolvency creditors who filed a claim that was not contested by the

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insolvency administrator also share in such claims on a pro rata basis.

Subordinate Claims Subordinate claims may result from contractual provisions or from statutory provisions.

Subordinate creditors do not generally participate in the insolvency proceedings, unless a surplus for distribution is generated. However, in practice, a high degree of diligence is required in drafting subordination agreements so as to determine the extent of subordination (ie, full or partial) and the scenarios in which it takes effect.

In comparison, the new Restructuring Act provides that debtors (apart from SMEs) are obliged to divide their creditors into specific classes and all creditors of the same class must be treated equally (if permissible and no classes are formed, all creditors must be treated equally).

The categories of classes are mandatory and are as follows: • secured creditors – creditors with claims for which a pledge or a comparable security has been granted from the debtor’s assets (claims of secured creditors are to be included in this class with the amount covered by the security, whereas any unsecured part of the claim falls into the class of creditors with unsecured claims, which means that the same creditor may fall into more than one class, depending on their type of claim); • unsecured creditors; • vulnerable creditors – this class includes, in particular, creditors whose claim does not exceed EUR10,000 (it is the intention of the law to cover in this class the claims of creditors who do not have, as a matter of fact or as a consequence of the nature of their business, the opportunity to spread their risk (eg, suppliers of a debtor)); and 12

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• bondholders – provided that in such class not only bondholders but, more generally, holders of securitised titles will be covered; and • creditors with subordinated claims.

5.2 Unsecured Trade Creditors

The commencement of formal in-court insolvency proceedings under the Insolvency Act automatically leads to a stay against all actions of unsecured creditors. However, secured creditors are generally not affected by the opening of insolvency proceedings.

5.3 Rights and Remedies for Unsecured Creditors

Under the Insolvency Act, insolvency creditors can commence legal proceedings against a court-appointed insolvency administrator if the insolvency administrator contests the creditor’s claim (see 7.2 Distressed Disposals).

Estate claims are to be paid by the insolvency administrator without any filing procedure. If estate claims are not paid by the insolvency administrator, estate creditors may apply to the insolvency court for remedy (Abhilfeantrag) or assert their claims by bringing an action against the insolvency administrator.

5.4 Pre-judgment Attachments

Pre-judgment attachments are not applicable in Austria.

5.5 Priority Claims in Restructuring and Insolvency Proceedings

In insolvency proceedings, claims are classified and ranked in the order of priority as described in 5.1 Differing Rights and Priorities.

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6. Statutory Restructuring, Rehabilitation and Reorganisation Proceedings 6.1 Statutory Process for a Financial Restructuring/Reorganisation

Reorganisation Proceedings Under the Insolvency Act The Insolvency Act provides for two kinds of reorganisation proceedings, either with or without debtor-in-possession (see 2. Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations). The main focus of these proceedings is the continuation of the debtor’s business (or parts thereof). In order for the provisions of reorganisation proceedings to be applicable, the debtor must be the one who files for the opening of these proceedings and the debtor must provide a restructuring plan (Sanierungsplan) to the court. For proceedings with debtor-in-possession, the management remains in place and the debtor retains control over the estate’s assets within the scope of ordinary business. Nonetheless, a courtappointed insolvency administrator monitors the debtor and the business situation. Also, specific actions such as the review of claims and the contesting of transactions (avoidance) are reserved for the administrator.

Unlike an out-of-court restructuring, in reorganisation proceedings the debtor is protected from the commencement of enforcement proceedings and may be granted partial debt relief via a majority decision.

However, as with liquidation proceedings, the debtor has the chance to use the conclusion of a restructuring plan as an opportunity to rehabilitate its business. Where this restructuring plan is agreed upon in the course of liquidation proceedings, the debtor pays the quota agreed, which then leads to a residual debt discharge 13

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(Restschuldbefreiung). This opportunity to rehabilitate plays an important role in practice.

Restructuring Plan Requirements For restructuring proceedings, a restructuring plan by the debtor must be submitted to the court, together with financial records for the past three years that show the debtor’s ability to pay 20% of its debt to unsecured creditors within a period of two years. If the debtor can prove that a payment of 30% within a period of two years is feasible, the debtor may additionally apply for debtor-in-possession. The restructuring plan must further provide for full payment of all estate claims (Masseforderungen) and evidence of the debtor’s ability to fund the estate claims for a period of 90 days after filing for the commencement of restructuring proceedings.

The debtor must provide such restructuring plan within 90 days of the opening of insolvency proceedings.

In general, the approval of a suggested restructuring plan is subject to a “double majority requirement” of the creditors in the restructuring plan hearing, which is set by the court and made public by way of a formal edict of the court. Not only is it necessary for the majority of those insolvency creditors who are entitled to vote to be present (no specific quorum applies), but approval from the majority of creditors also has to be reached on the admitted and present aggregate insolvency claims. Fully secured creditors are not entitled to vote.

Confirmation If the creditors approve a restructuring plan, the insolvency court – as a second step – must also confirm the restructuring plan. A possible reason for the court to deny confirmation would be an infringement of the principle of equal treatment

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of the creditors by granting preferential treatment to a specific creditor.

Austrian law does not contain specific provisions on pre-packaged sales or debt-for-equity swaps.

Effects Once the restructuring plan is approved, confirmed and legally binding, the debtor is relieved of the obligation to pay the creditors the amount exceeding the quota as outlined in the reorganisation plan, which also includes a limitation on the creditors to set off their claims against this quota where general requirements are met. The effects of the legally binding restructuring plan also apply to those creditors that did not vote for the restructuring plan or did not participate at all.

The insolvency proceedings are thus concluded.

Pre-insolvency Regime Under the Restructuring Act As outlined in 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership, the Restructuring Act provides a new pre-insolvency restructuring regime for Austria.

However, any rights of secured creditors who claim rights of segregation to receive assets and/or claim rights of segregation to receive the proceeds of enforcement after sale must not be affected by the restructuring plan. Also, the restructuring plan may provide for the appointment of a trustee to either supervise the execution of the restructuring plan (überwachter Sanierungsplan) or to manage the estate with a mandate to fulfil the restructuring plan (Treuhändersanierungsplan mit Vermögensübergabe).

If a debtor defaults on the payment of a quota as provided for in the restructuring plan, the respective creditor’s claim comes into effect again, but only in proportion to the unpaid quota.

Where the statutory criteria for insolvency (over-indebtedness or illiquidity) are not yet met, a debtor may also file for the opening of reorganisation proceedings under the Business Reorganisation Act. However, these proceedings are not relevant in practice, as the consent of all creditors is required.

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Application The prerequisite for the commencement of restructuring proceedings under the Restructuring Act is application by the debtor – as well as the “probable insolvency” of the debtor, which must be stated in the application.

The application for the initiation of restructuring proceedings must be accompanied by a restructuring plan or, at least, a restructuring concept.

Commencement The commencement of restructuring proceedings under the Restructuring Act does not prevent the opening of insolvency proceedings. Only the granting of a stay of execution (Vollstreckungssperre) prevents the opening of insolvency proceedings. In this regard, it does not matter whether the stay was granted against one or more creditors. It must, however, be effective – meaning that it must have been served on at least one creditor.

Requirements The restructuring plan must describe the debtor’s economic situation – in particular, their assets, liabilities and the company itself. In addition, the restructuring plan must contain the proposed restructuring measures and their duration, the reduction and deferral of claims, as well as the effects on jobs and any new financial support.

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Besides that, a financial plan for the duration of the restructuring measure must be prepared.

The affected creditors (including classification into creditor classes) as well as the unaffected creditors must be listed in the restructuring plan, together with a factual justification for their inclusion/non-inclusion in the restructuring plan. The plan must also include a (conditional) forecast of the company’s continued existence and a description of the necessary pre-conditions for the success of the plan.

Approval First, the court will examine the completeness of the information contained in the restructuring plan, as well as the appropriateness of the formation of the classes of creditors and the selection of the creditors concerned. After that, the creditors vote on the restructuring plan. In principle, the restructuring plan must be approved by the majority of the creditors included in each class, whereby the sum of the claims of the creditors agreeing to the restructuring plan must amount to at least 75% of the total sum of the claims of the creditors included in the restructuring plan.

Confirmation The court must then decide whether to confirm the restructuring plan. Confirmation requirements include: • that the legal provisions on voting, voting rights and acceptance have been complied with; • that new financing provided for in the restructuring plan is necessary for the implementation of the plan; and • that the implementation of the plan does not unreasonably prejudice the interests of creditors.

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If the consent of all classes of creditors is not obtained, the confirmation by court (called a “cross-class cram-down”) requires that – in addition to the general requirements – the majority of the classes of creditors agree to the restructuring plan.

6.2 Position of the Company

As stated in 6.1 Statutory Process for a Financial Restructuring/Reorganisation and in 2.

Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations, under the Insolvency Act there are two types of reorganisation proceedings – namely, reorganisation proceedings with debtor-in-possession and reorganisation proceedings without debtor-in-possession. In both types of proceedings, the main focus lies in the continuation of the debtor’s business (or parts thereof). In reorganisation proceedings with debtor-in-possession the debtor retains, basically and subject to certain restrictions, control over the estate’s assets and is only monitored by the insolvency administrator – whereas in reorganisation proceedings without debtor-in-possession, the insolvency administrator takes control.

In restructuring proceedings under the Restructuring Act, the debtor also retains control over the estate’s assets. However, in certain cases, a restructuring officer must be appointed. In addition to assisting the debtor or the creditors in the negotiation of a restructuring plan, restructuring officer is tasked with monitoring the debtor’s activities during negotiations and reporting to the court.

6.3 Roles of Creditors

In reorganisation proceedings, claims are classified and ranked in order of priority as described in 5.1 Differing Rights and Priorities.

The Insolvency Act provides for a court-

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appointed creditors’ committee, which is explained in detail in 9.3 Selection of Officers.

6.8 Asset Disposition and Related Procedures

If the restructuring plan suggested by the debtor is approved by the required majority of creditors and also confirmed by the court (see 6.1 Statutory Process for a Financial Restructuring/Reorganisation), the debtor must pay only the agreed quota to the dissenting creditors.

It is the insolvency administrator’s responsibility to realise the debtor’s assets. The Insolvency Act does not provide specific deadlines or timelines to be observed by the insolvency administrator when realising the assets in the course of liquidation proceedings. When all the proceeds have been distributed among the creditors, the insolvency proceedings are concluded.

6.5 Trading of Claims Against a Company

6.9 Secured Creditor Liens and Security Arrangements

6.4 Claims of Dissenting Creditors

According to the Austrian Supreme Court, the trade of an insolvency claim against a company during insolvency proceedings is to be recognised. In the event of the acquisition of a claim after the opening of insolvency proceedings, the acquirer generally enters into the insolvency participation claim (Konkursteilnahmeanspruch) of the former creditor.

6.6 Use of a Restructuring Procedure to Reorganise a Corporate Group

The restructuring laws (including the new Reorganisation Act) do not provide for means of corporate restructuring. However, the restructuring plan may also provide restructuring measures.

6.7 Restrictions on a Company’s Use of Its Assets

The sale or lease of the debtor’s company (or parts thereof) and the sale or lease of all or the main movable fixed assets and current assets – as well as the sale or lease of real property – requires the approval of the insolvency court as well as the creditors’ committee. As long as reorganisation proceedings are pending, the debtor’s business basically may not be sold.

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This is not applicable in Austria.

6.10 Priority New Money

This is not applicable in Austria.

6.11 Determining the Value of Claims and Creditors This is not applicable in Austria.

6.12 Restructuring or Reorganisation Agreement

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

6.13 Non-debtor Parties

This is not applicable in Austria.

6.14 Rights of Set-Off

The Insolvency Act provides for the possibility of set-off of claims if such claims have already been subject to compensation according to general civil law at the time of commencement of the restructuring proceedings, irrespective of the fact that such claims might not have been due or might have been subject to a condition at the time of commencement of the proceedings.

Furthermore, creditors should consider that a set-off is not possible for claims that arose within the six months prior to the commencement of

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insolvency proceedings if the creditor knew (or negligently did not know) about the insolvency.

Claims subject to set-off do not need to be formally filed in insolvency proceedings.

If the creditor does not make use of the right to set off during the restructuring proceedings, the creditor may basically only set off against the restructuring plan quota of their claim after final confirmation of the restructuring plan and cancellation of the restructuring proceedings.

6.15 Failure to Observe the Terms of Agreements

As stated in 6.1 Statutory Process for a Financial Restructuring/Reorganisation, if a debtor defaults on the payment of a quota as provided for in the restructuring plan, the respective creditor’s claim comes into effect again – albeit only proportional to the unpaid quota.

6.16 Existing Equity Owners This is not applicable in Austria.

7. Statutory Insolvency and Liquidation Proceedings 7.1 Types of Voluntary/Involuntary Proceedings

As opposed to restructuring proceedings with or without debtor-in-possession under the Insolvency Act, liquidation proceedings aim to realise the assets of the estate and distribute the proceeds among the creditors. Restructuring proceedings that fail are transformed into liquidation proceedings.

As explained in 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership, the legal representatives of an entity must file for insolvency 17

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in a case where the entity is insolvent within the meaning of the Insolvency Act (ie, if the debtor is over-indebted or illiquid). A debtor is obliged to file for insolvency proceedings with the competent court without undue delay once its financial situation meets the statutory criteria for insolvency, and no more than 60 days after it has been determined that the debtor is insolvent.

Besides the legal representatives, any creditor is entitled to file for the commencement of insolvency proceedings in the form of liquidation proceedings – provided such creditor has a claim (irrespective of its maturity date) against the debtor.

7.2 Distressed Disposals

The commencement of insolvency proceedings leads to an ex lege discontinuance of any legal procedure to which the debtor is party and in respect of any enforcement actions being taken against the debtor.

In liquidation proceedings the court appoints an insolvency administrator to assume control.

The management of the debtor can no longer engage in any legal acts on behalf of the debtor from the time of the opening of insolvency proceedings. The court issues an official edict to be disclosed on the electronic noticeboard of the courts (Ediktsdatei), in which the date of the examination hearing is announced. Until this date, creditors may file their claims with the court. The court-appointed insolvency administrator decides in the examination hearing whether a creditor’s claim is contested or not; if it is contested, the respective creditor must commence legal proceedings in order to obtain an insolvency claim.

The main focus of the insolvency administrator lies with the realisation of assets and the distribution of the proceeds among creditors accord-

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ing to the quota. When realising assets by way of sale of the debtor’s company, the insolvency administrator must first establish whether continuance is possible – if not, the creditors’ committee must agree and the confirmation of the insolvency court is required.

7.3 Organisation of Creditors or Committees

In general, the creditors’ committee must be consulted for each significant action of the insolvency administrator. Furthermore, certain actions have to be communicated to the insolvency court (such as settlement agreements or the fulfilment or termination of bilateral agreements where one party has not fulfilled its contractual obligations at the time of commencing insolvency proceedings). Others have to be confirmed by the insolvency court – for example, the sale of the entire business of the debtor.

In addition to the insolvency administrator, the Insolvency Act provides for a court-appointed creditors’ committee, which is explained in detail in 9.3 Selection of Officers.

8. International/Cross-Border Issues and Processes 8.1 Recognition or Relief in Connection With Overseas Proceedings

The Insolvency Act provides for recognition of the effects of insolvency proceedings opened in a non-EU member state (irrespective of an international treaty or the reciprocity principle), as well as decisions rendered in such proceedings, where the centre of main interests (COMI) of the debtor is located in the respective foreign country and the insolvency proceedings are comparable to such proceedings in Austria – especially if Austrian creditors are treated in 18

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the same manner as creditors from the state of the opening of proceedings. However, recognition is denied if: • insolvency or composition proceedings have already been opened in Austria; • interim measures have been ordered; or • recognition leads to a result that clearly conflicts with public policy.

As regards EU member states, the EU Insolvency Regulation stipulates that any judgment opening insolvency proceedings handed down by a court of an EU member state that has jurisdiction shall be recognised in all other EU member states from the moment that it becomes effective in the state where the proceedings were opened.

The courts of the member state within the territory of the debtor’s COMI have jurisdiction to open insolvency proceedings.

The COMI is the place in which the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties. The debtor’s COMI is determined at the time of filing for insolvency. Therefore, debtors can influence the international jurisdiction – and thus the applicable insolvency law – by the timely shifting of the COMI to another EU member state in order to achieve easier debt relief.

8.2 Co-ordination in Cross-Border Cases

In cross-border cases, Austrian insolvency courts – as well as insolvency administrators – co-operate with foreign administrators by way of disclosure of information relevant to the foreign insolvency proceedings and by granting the foreign administrator the opportunity to participate in the decision of the realisation of assets located in Austria or the realisation of reorganisation plans.

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8.3 Rules, Standards and Guidelines

As stated in 8.1 Recognition or Relief in Connection with Overseas Proceedings, in terms of insolvency proceedings in a non-EU member state, the Austrian Insolvency Act determines which jurisdiction’s decisions, rulings or laws govern or are paramount. In relation to EU member states, the EU Insolvency Regulation applies.

8.4 Foreign Creditors

Foreign creditors are not dealt with in a different way in insolvency proceedings in Austria.

8.5 Recognition and Enforcement of Foreign Judgments

The cross-border enforcement of court decisions between EU member states is controlled by various regulations – in particular, Regulation 1215/2012, which regulates the recognition and enforcement of judgments in civil and commercial matters. Within its scope of application, judicial decisions are enforceable in another member state without any further proceedings. This may only be refused in a few exceptional cases, such as: • if recognition is manifestly contrary to public policy (ordre public) in the member state addressed; or • if the defendant was not able to arrange their defence in the proceedings in which the judgment was rendered.

Judgments of non-EU member states may be declared enforceable in Austria if, inter alia, reciprocity is granted by international treaties and the judgments are enforceable in the state of origin. The EC adopted a proposal for EU accession to the Hague Recognition and Enforcement Convention, an international treaty to facilitate the recognition and enforcement of judgments 19

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in civil and commercial matters that are passed in non-EU member states.

9. Trustees/Receivers/Statutory Officers 9.1 Types of Statutory Officers

Where insolvency proceedings under the Insolvency Act are initiated by the debtor and are conducted as reorganisation proceedings with debtor-in-possession, the management remains in place and the debtor retains control over the estate’s assets within the scope of ordinary business. Nonetheless, a court-appointed insolvency administrator (or, in the case of reorganisation proceedings with debtor-in-possession, a “reorganisation administrator”) monitors the management of the debtor and the business situation, while at the same time preventing the discrimination of creditors. Also, specific actions – such as the review of claims and the contesting of transactions (avoidance) – are reserved for the reorganisation administrator.

9.2 Statutory Roles, Rights and Responsibilities of Officers

In liquidation and reorganisation proceedings without debtor-in-possession, the estate is administered by a court-appointed insolvency administrator. Specific actions are reserved for the insolvency administrator. Where there is a contract with a mutual obligation to perform, for example, the insolvency administrator may elect to assume or withdraw from such contract if not all the parties have fully performed at the time of the commencement of insolvency proceedings.

Furthermore, if the debtor is a tenant, the insolvency administrator can decide to terminate the lease contract as long as they respect the statutory notice period or a shorter contractual

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notice period. If the debtor is a landlord, the insolvency administrator steps into the contract without requiring additional special termination rights.

Also, the insolvency administrator may terminate employment contracts upon partial or total shutdown of the business. In case of such shutdown, the insolvency administrator only has to observe the statutory notice periods and – if applicable – the collective bargaining agreement. A contractually agreed longer notice period to terminate employment contracts is not applicable.

Moreover, the Insolvency Act provides for a sixmonth moratorium in case a contracting partner wants to terminate a contract with the debtor that is essential for business continuation. These contracts may only be terminated for good cause, and the deterioration of the economic situation of the debtor or default of payment of claims which were due before the commencement of the insolvency proceedings are not considered to constitute such good cause.

9.3 Selection of Officers

In general, insolvency administrators are selected by the court from the official list of insolvency administrators. Under the Insolvency Act, an administrator must be a respectable and reliable person who is experienced in business and proficient in insolvency matters, including commercial law and business management if business entities are involved. Furthermore, the insolvency administrator must be independent of the debtor and the creditors.

Remuneration of Insolvency Administrator On the one hand, in the case of a liquidation, the insolvency administrator is statutorily remunerated with a percentage of the gross revenues realised from the liquidation. On the 20

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other hand, in the event of continuation, the insolvency administrator is entitled to a special remuneration. With the 2017 amendment of the Insolvency Act, the minimum remuneration for the insolvency administrator has been increased.

Public Information The identity of the insolvency administrator is made public with the official notice of the court, to be disclosed on the electronic noticeboard of the courts. This also contains information on the type of insolvency proceedings to be opened and the timeline for the meeting of the creditors and the examination hearing regarding the claims registered by the creditors.

Removal of Insolvency Administrator The insolvency administrator is monitored by the insolvency court, who can remove the administrator from office for good cause, either ex officio or upon request. A motion for removal can be filed at any time by the debtor or any member of the creditors’ committee and must contain a reason for removal. Prior to rendering a decision, the court may hear the members of the creditors’ committee – as well as the insolvency administrator – if feasible.

Creditors’ Committee The Insolvency Act provides for a further statutory body in the form of a court-appointed creditors’ committee, consisting of three to seven members, which supervises and supports the insolvency administrator. In general, it is at the court’s sole discretion – albeit also upon the request of the creditors – whether to install a creditors’ committee if the characteristics or the particular scope of the debtor’s business make it imperative. However, the court is obliged to appoint such a committee if the debtor’s business is to be sold.

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The members of the creditors’ committee are also chosen by the court at its sole discretion – although the creditors, representatives of the works council and other special interest groups have a right to propose certain members. The members of the creditors’ committee are to be disclosed on the electronic noticeboard of the courts.

10. Duties and Personal Liability of Directors and Officers of Financially Troubled Companies 10.1 Duties of Directors

Under the Insolvency Act, a prerequisite for the filing of insolvency proceedings is the illiquidity or over-indebtedness of the debtor. Where one of these criteria is met, the entity is deemed insolvent. For lack of a legal definition of the term, Austrian case law and commentary define illiquidity as a situation where a debtor lacks the means to pay all claims due and will not be able to obtain the necessary means to do so in the foreseeable future. Over-indebtedness is measured according to a two-step process, as follows.

• First, a potential material insolvency is established by calculating whether the liabilities of the debtor exceed its assets.

• Second, if the entity is materially insolvent, it is only deemed to be over-indebted under the Insolvency Act where a positive “going concern” prognosis is not feasible.

In general, a managing director must act in a diligent manner. Any failure to act diligently exposes the managing director to liability visà-vis the company. The corresponding claims of the company, which may not be settled if payments by the managing directors are required 21

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for the satisfaction of the creditors, are subject to a five-year limitation period.

10.2 Direct Fiduciary Breach Claims

If a debtor meets one of the above-mentioned criteria for insolvency under the Insolvency Act (see 10.1 Duties of Directors), the legal representatives are obliged to file for insolvency without undue delay, and no later than 60 days after determining that the debtor is insolvent. If the entity is illiquid or over-indebted and the legal representatives fail to file for insolvency without undue delay – or, in any event, no later than within the 60-day time period – then the legal representatives expose themselves to possible civil and criminal charges (including fraud or undue preference for a creditor) for impairment of the creditors’ interests. Disregarding the 60-day time limit is one of the few cases where a legal representative of a limited liability company may be held personally liable for damage inflicted on the company’s creditors (ie, a possible reduction of the insolvency quota). Furthermore, the legal representatives may be liable to the entity for any payments executed while already in a state of insolvency.

11. Transfers/Transactions That May Be Set Aside 11.1 Historical Transactions

The provisions of the Insolvency Act dealing with voidance rights aim at safeguarding the insolvent estate to the satisfaction of creditors. Legal acts and transactions that have taken place within certain time periods prior to the commencement of insolvency proceedings over the assets of the debtor – and which relate to the assets of the insolvent (illiquid or over-indebted) debtor – can be contested by the insolvency administrator. Therefore, the satisfaction of a pledgee can

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never be detrimental to the debtor’s assets, as the creditor only obtains the equivalent of what would be the outcome of a sale in the course of insolvency proceedings.

The general prerequisites for avoidance under Austrian insolvency law are as follows: • the avoidance results in an increase of the insolvency estate (Befriedigungstauglichkeit); and • the challenged legal act or transaction caused the direct or indirect discrimination of creditors (Gläubigerbenachteiligung).

The discrimination of creditors will only be affirmed if the settlement fund (Befriedigungsfonds) available to creditors in the insolvency proceedings has been reduced in comparison with the amount available at the time of the contested legal act.

11.2 Look-Back Period

A transaction can be contested for intent to discriminate (Benachteiligungsabsicht), squandering of assets (Vermögensverschleuderung), freeof-charge disposal (unentgeltliche Verfügung), preferential treatment of creditors (Begünstigung), and knowledge of illiquidity (Kenntnis der Zahlungsunfähigkeit). The look-back period varies from provision to provision, ranging from a maximum of ten years (for intent to discriminate) to 60 days prior to the commencement of insolvency proceedings (for preferential treatment of creditors) – although certain periods are shortened where the third party knew or should have known (ie, negligently did not know) the respective facts.

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11.3 Claims to Set Aside or Annul Transactions

Voidance claims can be asserted by the insolvency administrator on behalf of the estate only (irrespective of the type of insolvency proceedings) within a period of one year from the opening of insolvency proceedings. Furthermore, the administrator may raise the plea of voidance without any time limit.

AUSTRIA Trends and Developments

Trends and Developments Contributed by: Markus Fellner, Florian Kranebitter, Elisabeth Fischer-Schwarz and Florian Henöckl Fellner Wratzfeld & Partners

Fellner Wratzfeld & Partners (fwp) comprises a team of more than 70 lawyers, advising clients as a full-service firm but also in all areas of insolvency, reorganisation and restructuring. The fwp team – known as one of the leading teams in Austria, with a strong understanding of business – provides comprehensive advice both to creditors and lenders and has a particularly long

tradition of co-ordinating restructuring negotiations in syndicated and multi-lender situations.

The firm’s holistic approach in this field of practice also includes all forms of distressed M&A in pre-insolvency and insolvency stages, as well as the reorganisation and support of return to profitability – with a specific specialisation in sustainable financing.

Authors Markus Fellner is a founding partner of Fellner Wratzfeld & Partners and head of the insolvency and restructuring practice group. He is highly ranked by peers in this practice area and his impressive track record includes representing some of Austria’s largest banks in restructuring mandates. Markus recently advised the core banks of the traditional Vorarlberg lingerie manufacturer Huber in connection with reorganisation proceedings.

His other key areas of practice include banking and finance, corporate/M&A and dispute resolution. Markus is an author in the insolvency and restructuring field, co-authored a commentary on the Restructuring Regulation, and recently published a multi-jurisdictional commentary on cross-border restructuring regimes.

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Florian Kranebitter is a partner at Fellner Wratzfeld & Partners and specialises in its international transaction practice, including cross-border restructuring and insolvency cases in various industries. Florian co-led in advising the Steinhoff Group’s restructuring, as well as in other restructuring cases, including that of a key supplier of CNH-Group and the Huber Group. He is known for his skills in international restructurings and, in particular, combining his work in multi-lender/multijurisdictional financing. His other fields of specialisation are corporate/M&A, banking and finance, sustainability and ESG. Florian has written publications in the field of insolvency and restructuring and was a speaker on the Restructuring Regulation.

AUSTRIA Trends and Developments

Contributed by: Markus Fellner, Florian Kranebitter, Elisabeth Fischer-Schwarz and Florian Henöckl, Fellner Wratzfeld & Partners

Elisabeth Fischer-Schwarz is a senior attorney in the insolvency and restructuring practice group at Fellner Wratzfeld & Partners and has long-term experience in this practice area. She also specialises in banking and finance and dispute resolution, having been admitted to the Austrian Bar in 2017. Elisabeth has authored publications in the field of insolvency and restructuring and the banking and finance sector.

Fellner Wratzfeld & Partners Schottenring 12 A-1010 Vienna Austria Tel: +43 1 53770 0 Email: markus.fellner@fwp.at Web: www.fwp.at

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Florian Henöckl is a senior attorney in the insolvency and restructuring practice group at Fellner Wratzfeld & Partners. He also specialises in banking and finance, as well as corporate/M&A. Florian was admitted to the Austrian Bar in 2021 and recently published a multi-jurisdictional commentary on crossborder restructuring regimes.

AUSTRIA Trends and Developments

Contributed by: Markus Fellner, Florian Kranebitter, Elisabeth Fischer-Schwarz and Florian Henöckl, Fellner Wratzfeld & Partners

Effects of Recent (Geopolitical) Crises Following Russia’s invasion of Ukraine and Hamas’ attacks on Israel, new geopolitical crisis factors have emerged, leading to significant direct and indirect impacts on businesses.

The sanctions imposed by the EU and the USA have resulted in disruptions to Austrian companies’ direct business relations with Russia and Belarus. The sanctions restrict the import and export of goods and services (military goods embargo, sectoral and goods and servicerelated restrictions, but also restrictions on luxury goods) as well as access to capital and financial markets and the implementation of payment transactions. These immediate effects had a massive impact on companies, particularly with regard to business relationships maintained with sanctioned companies in Russia and Belarus.

Austrian companies also are being affected by the indirect effects of a deterioration in the overall economic situation. This manifests itself in significant price increases in a wide variety of areas, triggered above all by rising energy prices.

Austria is heavily dependent on Russian gas.

The inflation rate is rising steadily and has led to the European Central Bank (ECB) increasing the base rate. This, in turn, increases the capital costs for companies.

The domestic real estate market is particularly affected by the rising energy prices and the high inflation that has led to the ECB increasing the base rate. In addition, high commodity prices, disrupted supply chains and international political instability are causing confidence in the real estate sector to decline. For this reason, property prices in Austria are currently stagnating after years of regular increases. However, there has been no collapse of the market, even though property prices are currently considered over25

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valued. Even if the real estate industry has not yet collapsed, it is clear that it is under massive strain due to the economic environment and that there is a need to stabilise it.

Further Rise in Out-of-Court Restructuring Some companies will be able to counteract the negative effects of the ongoing crisis at an early stage and will be able to continue their operational activities without major adjustments.

If, however, there are deficits that cannot be eliminated immediately, restructuring should take place as early as possible. First of all, the main stakeholders need to be identified and negotiations started. The group of central stakeholders is to be expanded from the “traditional” participants (customers, suppliers and banks) to include the specific crisis-factor-indicated stakeholders. The company and these stakeholders should jointly agree on a package of measures that will lead the company out of the crisis in a targeted manner, tailored to the individual case.

In order to find a tailor-made restructuring solution, out-of-court restructuring makes sense – especially for international restructuring. In the international environment, restructuring measures can largely be chosen freely and disputes over jurisdiction can be avoided.

A special aspect that needs to be considered is that companies are currently under pressure from the “war in Ukraine” crisis factor and still recovering from the COVID-19 crisis. A package of measures must therefore also take this aspect into account. In addition to resorting to well-known and proven restructuring and reorganisation measures (deferrals and haircuts), this requires the inclusion of special restructuring and reorganisation instruments. At this point, for example, viable alternatives include:

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Contributed by: Markus Fellner, Florian Kranebitter, Elisabeth Fischer-Schwarz and Florian Henöckl, Fellner Wratzfeld & Partners

• the restructuring trust, which is used in particular in the event of a crisis-related lack of free collateral; or • the debt-equity swap, by which liabilities can be converted into shares in a company.

In the end, a successful restructuring is largely dependent on the company being immediately aware of the effects and counteracting further negative developments. Depending on the intensity of the crisis, negotiations must be held with the stakeholders concerned and a viable restructuring concept must be drawn up at an appropriately early point in time.

Insolvency and Restructuring Procedures to Cope With the Latest Crisis Factors In Austria, the following four types of restructuring and insolvency procedures are available for business entities.

Reorganisation proceedings with debtor-inpossession The main focus of these proceedings lies in the continuation of the debtor’s business (or parts thereof). The debtor generally retains control over the estate’s assets, subject to certain restrictions, and is only monitored by a courtappointed insolvency administrator.

Reorganisation proceedings without debtorin-possession The continuation of the debtor’s business is also the main focus of these proceedings. However, the insolvency administrator takes control.

Liquidation (bankruptcy) proceedings The court-appointed insolvency administrator takes control of the task of selling the estate’s assets at a maximum value, with the proceeds being paid out to the creditors.

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Preventive restructuring framework In addition to these three types of insolvency proceedings and following the EU Directive on restructuring and insolvency (Directive (EU) 2019/1023), companies are also able to restructure through a preventive restructuring framework (Restrukturierungsverfahren) under the new Austrian Restructuring Act. These restructuring proceedings (eg, the preventive restructuring mechanism) should enable debtors to continue their business (or parts thereof), in spite of financial difficulties. The debtor is only monitored by court or, in specific cases, by a court-appointed restructuring administrator.

At present, it can be assumed that the war in Ukraine is the most prominent factor for struggling Austrian companies. In this respect, it is likely that companies that are pursuing economically viable options will only need short-term support. This has led to a particular focus on out-of-court restructurings based on a restructuring agreement.

The Austrian Restructuring Act In Austria, the Restructuring Act came into force at a comparably late stage – ie, at the end of July 2021. The Restructuring Act is, in principle, applicable to all entrepreneurs (including sole proprietors). Certain exemptions apply – for example, credit institutions, insurance companies and the public sector are excluded from the scope of this restructuring regime, pursuant to Section 1 paragraph 1 of the Austrian Banking Act. The restructuring proceeding is available to companies in the event of “likelihood of insolvency” (Section 6 of the Austrian Restructuring Act). This is the case if: • insolvency is imminent; or

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Contributed by: Markus Fellner, Florian Kranebitter, Elisabeth Fischer-Schwarz and Florian Henöckl, Fellner Wratzfeld & Partners

• the equity ratio falls below 8% and the notional debt repayment period exceeds 15 years.

The restructuring mechanism must be initiated at the request of the debtor and is intended to enable the debtor to avert insolvency and ensure the viability of its company (Sicherstellung der Bestandfähigkeit). The right to apply for the initiation of restructuring proceedings is only available to the debtor and not third parties.

Similar to the obligation to file for insolvency in the case of illiquidity or over-indebtedness, the debtor must take restructuring measures (ie, file for restructuring) if there is a likelihood of insolvency. If the entity faces a likelihood of insolvency and the legal representatives fail to file for restructuring, the legal representatives expose themselves to possible civil (and criminal) charges.

The procedure is not available to companies that are insolvent within the meaning of the Insolvency Act. Under the Austrian Insolvency Act, a debtor is deemed insolvent if the debtor is illiquid or over-indebted.

Contents The restructuring plan must contain the proposed restructuring measures and their duration, the reduction and deferral of claims, and any new financial support. In addition, the restructuring must describe the debtor’s economic situation – in particular, its assets, liabilities and the company. The affected creditors (including classification into creditor classes), as well as the unaffected creditors, must be listed in the restructuring plan together with a factual justification for their inclusion/non-inclusion in the restructuring plan. The plan must also include a conditional forecast of the company’s continued 27

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existence and a description of the necessary pre-conditions for the success of the plan. The restructuring plan must also explain why restructuring proceedings under the Restructuring Act are in the best interests of the creditors compared to insolvency proceedings.

Process The court must examine the completeness of the information contained in the restructuring plan, as well as the appropriateness of the formation of the classes of creditors and the selection of the creditors concerned. Subsequently, the creditors vote whether to approve the restructuring plan.

The restructuring plan is adopted, if a majority of the creditors included in each class approves, whereby the sum of the claims of the creditors agreeing to the restructuring plan must amount to at least 75% of the total sum of the claims of the creditors included in the re-structuring plan.

The restructuring plan is binding on the parties if it is confirmed by court (Section 34 paragraph 1 of the Austrian Restructuring Act). Among the confirmation requirements is that the implementation of the plan must not unreasonably prejudice the interests of creditors.

If the consent of all classes of creditors is not obtained, the confirmation by court – called a cross-class cram-down – is possible if the majority of the classes of creditors agree to the restructuring plan.

Effects Once the restructuring plan is adopted by the affected creditors, confirmed by court and thus becomes legally binding, the debtor is relieved of the obligation to pay the creditors the amount exceeding the quota. The effects of the legally binding restructuring plan only apply to the debtor and the affected parties (Section 39 paragraph 1 of the Austrian Restructuring Act). If the

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debtor defaults on the payment of a quota as provided in the restructuring plan, the relevant creditor’s claim comes into effect again – albeit only in proportion to the unpaid quota.

In the restructuring proceedings under Section 29 of the Austrian Restructuring Act, claims are classified as follows: • secured claims; • unsecured claims; • unsecured claims of vulnerable creditors; • bondholders; and • subordinate claims.

The restructuring proceeding is designed generally as a proceeding with self-administration. The debtor in the restructuring proceedings must in principle retain full or at least partial control over its assets and the day-to-day operation of its business. However, the court may make certain legal acts subject to the approval of a so-called restructuring officer or assign them to a restructuring officer. A restructuring officer must be appointed by court where: • the court has granted a stay of execution and the restructuring officer is necessary to protect the creditor’s interest; • the confirmation of the restructuring plan probably requires a cross-class cram-down; • the debtor or the majority of the creditors so request; or • circumstances are known that indicate selfadministration will lead to disadvantages for the creditors.

In addition to helping the debtor or the creditors in the negotiation of a restructuring plan and to monitor the debtor’s activities during the negotiations, the restructuring officer is obliged to regularly report to the court.

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At the debtor’s request, the court may order a stay of execution proceedings for a period of up to three months (extendable to a maximum of six months) to support negotiations on a restructuring plan. During this stay of execution proceedings, the debtor’s obligation to apply for the opening of insolvency proceedings due to over-indebtedness is suspended.

Moreover, no decision may be passed on a creditor’s application for commencement of insolvency proceedings during the period of the restructuring proceedings.

The Directive (EU) 2019/1023 acknowledges that one of the most important factors for a successful restructuring plan is financial assistance.

Financial assistance needs to be protected, especially from voidance actions. According to the EU legislature, “financial assistance” should be understood in a broad sense as provision of money, third-party guarantees, and the supply of stock as well as inventory, raw materials and utilities. This leads to the protection of two forms of restructuring proceedings often being used – namely, financial measures both from private equity investors (with subordinated loans) and banks (with new bank loans).

Following this broad definition, “new financing” and “interim financing” are bound to be differentiated. “New financing” means financial measures taken to implement a restructuring plan, whereas “interim financing” refers to financial measures necessary to continue the day-to-day business during the negotiations of a restructuring plan. Both new financing and interim financing are protected from voidance claims (Anfechtung) by Section 36a and Section 36b of the Austrian Insolvency Act. Section 45 of the Austrian Restructuring Act provides a special form of a restructuring process

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if only financial creditors are involved. The debtor needs a restructuring agreement with the same content as a restructuring plan, which must be signed by the financial creditors before opening the proceedings. The restructuring agreement is adopted, provided that at least 75% of the total sum of the claims of the creditors included is agreed.

It has not yet been shown post-pandemic whether the new restructuring mechanism is an alternative to the previous debt relief mechanism.

Proposal for a Directive of the European Parliament Harmonising Certain Aspects of Insolvency Law On 7 December 2022, the EC published a proposal for a directive harmonising certain aspects of insolvency law (COM (2022) 702 final). The proposal lays down common rules, especially when it comes to avoidance actions, pre-pack proceedings, the director’s duty to file for the opening of insolvency proceedings, and winding-up proceedings of insolvent microenterprises.

Avoidance actions Articles 4 to 12 deal with common rules for avoidance actions to protect the value of the insolvency estate for creditors. Preferences under the proposed directive and legal acts favouring a creditor or a group of creditors by way of satisfaction, security or otherwise may be declared void if they were perfected: • within three months prior to the filing of the petition to open insolvency proceedings, if the debtor was unable to pay its due debts; or • after the petition to open insolvency proceedings was filed (Article 6 paragraph 1).

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In the case of so-called congruent coverage (Recital 8), which is where a creditor’s due claim has been satisfied or secured in the manner owed, a legal act can only be declared invalid if the creditor knew or should have known that the debtor was unable to pay its due debts or that a petition for the opening of insolvency proceedings had been filed. In the case of related parties, the creditor’s knowledge is presumed (Article 6 paragraph 2).

By and large, the requirements of Article 6 already seem to be covered by Sections 30 and 31 of the Austrian Insolvency Act. Legal acts against no or a manifestly inadequate consideration Pursuant to Article 7, legal acts without consideration or for consideration which is manifestly inadequate may be declared invalid if they have been completed within one year prior to the filing of the petition for commencement of insolvency proceedings or after the filing of the petition. This does not apply to gifts and donations of symbolic value. Again, this provision is likely already sufficiently covered by domestic law – specifically, by Section 29 of the Austrian Insolvency Act. Legal acts intentionally detrimental to creditors Article 8 paragraph 1 provides for the avoidance of legal acts if: • such acts were performed within a period of four years prior to the filing of this application; and • the other party to the legal act knew or should have known that the debtor intended to cause prejudice to the creditors as a whole.

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Pursuant to Section 28 paragraph 1 of the Austrian Insolvency Act, legal acts may be challenged: • up to ten years prior to the commencement of insolvency proceedings if the other party knew that the debtor acted with the intention to disadvantage its creditors; or • up to two years prior to the commencement of insolvency proceedings if the other party did not know of this intention, but should have known.

The latter point would lead to the requirement to amend Austrian law.

Pre-pack proceedings Articles 19 to 35 contain detailed provisions on a restructuring instrument that does not yet exist in this form in Austria. This instrument is based on the assumption that more value can be achieved in liquidation if the company or parts thereof are sold as a going concern than in piecemeal liquidation. The aim is to prepare the sale of the company before the formal opening of the insolvency proceedings and to realise it shortly after the opening.

The pre-pack procedure consists of two stages.

In the preparation stage, the sale process must be started and implemented under the supervision of a court-appointed supervisor (“monitor”) (Articles 22 to 24). Subsequently, in the liquidation stage, the sale is to be implemented after approval by the court (Articles 25 to 29).

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Director’s duty to request the opening of insolvency proceedings The director must file for the opening of insolvency proceedings no later than three months after it has become aware – or may reasonably be presumed to have become aware – of the legal entity’s insolvency (Article 36).

In the event of failure to comply with the obligation to file for insolvency, the management shall be civilly liable for the damage caused to creditors by a late filing (Article 37 paragraph 1).

Austrian law already provides in Section 69 paragraph 2 of the Austrian Insolvency Act for an immediate insolvency filing obligation or, if serious restructuring efforts are pursued, an obligation to file for insolvency within 60 days.

Winding-up of insolvent microenterprises Finally, a simplified insolvency procedure for microenterprises is to be installed.

Microenterprises are qualified as enterprises that employ fewer than ten people and whose annual turnover or balance sheet total does not exceed EUR2 million.

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