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5. Guarantees and Security
Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners
the agreed interest rate is clearly disproportionate to market terms and conditions, owing to the weakness, predicament or inexperience of the borrower. In the retail sector, various information duties and formal requirements apply to consumer loans.
In commercial lending, relevant examples are almost non-existent.
5.1 Assets and Forms of Security Shares Security rights over shares are the most common security instrument in certain types of financing transactions under Austrian law. Perfection and enforcement vary among the different types of legal forms, of which the limited liability company (Gesellschaft mit beschränkter Haftung,or GmbH) is by far the most common.
GmbH Security rights over GmbH shares are typically created in the form of a pledge. Although the full title transfer in a GmbH share requires the form of an Austrian notarial deed, this does not apply to a share pledge; therefore, this is done only in written form. In addition to the GmbH share pledge agreement and in order to facilitate enforcement, the pledgor typically grants:
•a notarised power of attorney, which authorises the pledgee to sell and transfer the shares on their behalf; and •a written voting power of attorney, which will normally only be used in case of default.
The perfection of a GmbH share pledge requires the notification of the company. Separate confirmation letters, either counter-signed or with confirmation of receipt, were common in the past. However, in intra-group scenarios, the company frequently co-signs the share pledge agreement proper in order to document proper notification (and perfection).
AG Given that shares in joint stock corporations (Aktiengesellschaft, or AG) are typically certificated as securities, which is legally prohibited in the case of GmbH shares, the major difference between a GmbH and an AG share pledge is the perfection requirements. As is the case with the GmbH, the AG share pledge agreement requires no specific form and is therefore customarily drawn up in simple written form.
As a basic rule, the perfection of in rem security over movables requires that the pledgee obtains direct or indirect possession, which may be mediated by a third party (such as an account bank) but not the pledgor. Only shares in stockexchange listed companies (or companies envisaging such admission) and shares traded on an MTF may be certificated in bearer form. This is effected through a global share certificate, followed by the introduction of the shares into an electronic clearing system. In that case, a pledge may be created by transferring the shares to the pledgee’s securities deposit account or blocking the pledgor’s account in the pledgee’s favour.
Registered shares that are certificated in physical form must be transferred to the pledge. Shares that are not certificated may only be pledged in accordance with the rules on assignments (ie, notification of the company).
Partnerships Pledges over shares in partnerships – both limited partnerships (Kommanditgesellschaft, or KG) and unlimited partnerships (Offene Gesellschaft,
Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners
or OG) – do not require a specific form and are therefore commonly drawn up in writing and perfected through notification of the company.
Transfer restrictions Companies’ articles of association frequently provide for transfer restrictions that may include a shareholder consent/resolution requirement for the pledge or a transfer of shares/interest in those companies. In order to avoid risks such as unenforceability or delays during enforcement, it is advisable to have these requirements removed from the articles or to obtain the requisite consent in advance.
Enforcement Austrian law provides for court-conducted enforcement proceedings unless there is a specific contractual enforcement arrangement in place between the security holder and the security provider that, inter alia, requires a valuation of the asset prior to its commercialisation (except where there is a defined market or stock exchange price). The requisite rules aiming at preserving the pledgor’s interest during enforcement must be followed meticulously when drafting security agreements. Overall, direct enforcement by the pledgee is standard market practice in financing transactions in Austria.
Receivables Security rights over receivables may be effected either by pledge or full transfer (assignment) of rights for security purposes. Although both forms occur in practice, security assignments are more common as they provide full title to the secured party.
The transfer of receivables requires an assignment agreement between the assignor and the assignee, unless the assignor and the obligor have agreed on a valid assignment restriction. However, if an assignment is effected for security purposes, the same requirements as for pledges will apply and disclosure of the pledge/ transfer is necessary. In the case of receivables not recorded in the creditor’s/assignor’s books and records (which is rare in business practice), the notification of the obligor is considered sufficient. In the case of receivables being so recorded, Austrian case law has developed an increasingly stringent approach that requires the pledge/assignment to be annotated in both the list of obligors of the assignor and the list of open accounts.
Given the requisite legal restrictions, the notification of the obligor of an assignment/pledge is mostly withheld until an enforcement event occurs.
Pledges and security transfers are not restricted to present receivables of the assignor but may extend also to future receivables or certain classes thereof, if and to the extent that such receivables are properly described in the security agreement.
Cash/Accounts Cash collateral is most commonly granted in the form of account pledges, which are not subject to specific formal requirements and are therefore typically drawn up in written form. Perfection requires the notification of the account bank. The standard business terms and conditions of Austrian banks contain a pledge arrangement over any and all assets of the customer transferred to the bank’s custody, including accounts with a positive balance. In order to create an effective third-party pledge (to a pledgee other than the account bank), this standard pledge agreement is customarily waived or subordinated.
Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners
Real Property Real property can be provided as security in the form of a pledge (Hypothek) under Austrian law. In addition to a pledge agreement, which does not require a specific form, the registration of the pledge in the land registry is required. For this purpose, the pledgor/owner of the property needs to provide a specific consent declaration regarding the registration, which must be notarised.
Multiple pledges over one individual property are possible and will rank towards each other in terms of priority, as per registration in the land register.
The registration of a pledge over real property in the land register is subject to a significant registration fee (1.2% of the secured amount), which is typically borne by the pledgor. Under certain circumstances (eg, where there is abundant other security or impeccable financial standing), lenders may temporarily refrain from the registration while having readily executed pledge documentation in place for immediate registration at their discretion.
Movables Although security arrangements relating to movable goods such as equipment or inventory are not subject to specific formal requirements, Austrian law imposes stringent standards on perfection that require either the physical transfer of the pledged goods or equivalent measures. In the case that a physical transfer is too onerous, transfer “by way of token” will be considered sufficient.
A full title transfer for security purposes will be possible in such cases but is subject to identical perfection requirements in order to avoid circumvention. Given these requirements, pledge over movable assets is not common – in particular, when related to assets that are necessary for the daily operations of the pledger.
In individual cases, lenders and borrowers agree on pledges on the contents of warehouses. These are, however, subject to strict requirements under case law that entail signage of the goods affected and the engagement of a special guardian. The latter will be bound by instructions solely of the pledgee and assure that no goods are removed from a warehouse without the pledgee’s consent or in the case of direct replacement.
Intellectual Property Rights Trade mark pledges do not require a specific form. In terms of perfection, a registration of the pledge is considered necessary and standard; however, this requires notarisation of the pledgor’s consent declaration.
Patent pledges require a registration in the patent register.
Copyrights may not be pledged or transferred as such. However, licences may be established or be the subject matter of security rights to achieve an equivalent economic result.
The concept of a “floating charge”, or other universal or similar security interest over all present and future assets of a company, is not recognised by Austrian law. Rather, security arrangements must be made specifically with respect to each and every asset and type of asset and take into account observation of the relevant perfection requirements, which vary significantly.
Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners
Austrian law does not restrict downstream guarantees (or other security). However, there are stringent limitations on upstream and crossstream security.
Distributions to direct or indirect shareholders may only be effected by corporations – such as an AG, a GmbH or a GmbH & Co KG (ie, a limited partnership in which the only unlimited partner is a GmbH) ‒ in the form of:
•formal dividend distributions, based on a balance sheet and appropriate shareholders’ resolution, in the case of a capital decrease (which also requires a shareholders’ resolution); or •potential liquidation surplus.
In addition, a company and its shareholders or affiliates may enter into transactions with each other on arm’s length terms and conditions. This requirement entails that the company will only enter into such transactions with its shareholder or affiliates if and to the extent that it would equally (but hypothetically) enter into the transaction on identical terms and conditions with any unrelated third party.
Austrian case law on these restrictions is based on a case-by-case evaluation and has become increasingly stringent during the past 20 years. In practice, it is advisable to have the management of the company assess the proposed transaction under the business judgement rule in accordance with the aforementioned criteria, with particular attention paid to the risks involved. The existence of the company must not, in any event, be threatened by entering into such a transaction. A breach of the capital maintenance rules would lead to personal liability of the management and nullity of the transaction.
In order to mitigate the relevant risks, limitation language restricting the potential enforcement of upstream or cross-stream security arrangements is common in Austria. As there are no clear guidelines on the admissibility of upstream or cross-stream guarantees (eg, the limitation to certain financial criteria), any type of proposed limitation language is necessarily ambiguous to some extent and decreases the commercial value of upstream or cross-stream security significantly.
5.4 Restrictions on Target
For joint stock corporations (AGs), there is an outright prohibition on providing financial assistance in relation to the acquisition of their own shares, including granting advance payments, loans or providing security to a third party in order to provide such assistance. Exceptions only exist for transactions that take place in the ordinary course of business by credit institutions.
Austrian legislation on other corporations (GmbH) does not contain comparable restrictions. As to substance, however, these restrictions are similar to those for the AG in view of the Austrian capital maintenance rules, as per Austrian case law.
5.5 Other Restrictions
The most relevant risks in relation to the grant of security guarantees are valuations of the principles of accessoriness and capital maintenance rules.
In addition to that, Austrian insolvency law provides for an elaborate set of provisions permitting an insolvency administrator to challenge
Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners
and void certain transactions entered into prior to the opening of the insolvency proceedings of a security provider. The insolvency administrator is entitled to rescind acts of the bankrupt company if a specific rule (subject to additional criteria) on such rescission applies and where such acts:
•have been completed prior to the opening of insolvency proceedings; •affect the assets of the estate; and •are detrimental to the estate’s creditors.
In Austria, there are no significant costs associated with the grant of security or guarantees for credit or loan agreements. Besides, no specific prior consent by authorities or statutory interest representation (eg, works council) is required.
5.6 Release of Typical Forms of Security
Formalities on the release of security depend on the type of security that has been granted.
Accessory security (eg, pledges or suretyships) will automatically lapse in the event of a full satisfaction of the secured liabilities. In these cases, no specific formal requirements would apply to the “release” of security. Nevertheless, release agreements or confirmations on repayment (which may take the form of pay-off letters issued in advance of such payment) are customary.
In the case of non-accessory securities, depending on the type of security, a formal re-transfer or similar act may be required in order to reverse the original creation of a security right.
In case of securities recorded in registers (such as mortgages or trade mark pledges), certain formal requirements may apply to the deletion of the relevant security right – even if the pledges are accessory securities. The deletion of a mortgage from the land register, for instance, will only be possible if the pledgee consents to the release and this is executed in an authenticated form.
These requirements and documentary deliverables may cause significant complexity in certain refinancing transactions, such as where:
•an outgoing lender/security holder only agrees to a release of security (or the issuance of confirmations) upon full repayment; and •a new lender/security holder insists on the creation/perfection of the security as a condition precedent for drawdown.
In these scenarios, escrow arrangements are common market practice.
5.7 Rules Governing the Priority of Competing Security Interests
Austrian rules on the creation of securities generally follow the principle of priority when it comes to the in rem perfection of security rights.
Contractual arrangements varying this principle are permissible among creditors – for example, intercreditor agreements in syndicated loan transactions. This, however, would not have to be observed by an insolvency administrator and/ or court in the case of enforcement and/or insolvency proceedings.
In syndicated financing transactions, the appointment of a joint agent/security agent constitutes significant mitigation for larger groups of creditors against this legal concept. This is because the proceeds from an enforcement or insolvency proceedings would be disbursed to the agent/ security agent for the account of a larger group
