17 minute read
7. Bankruptcy and Insolvency
Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners
trian law in most instances. By way of example, this would apply to pledges over the shares in Austrian companies, pledges over or security assignments of receivables governed by Austrian law, and the creation of pledges/mortgages over Austrian real properties.
Therefore, it is common market practice that security rights over assets located in Austria and/or provided by Austrian-domiciled transferors/pledgors are documented in security documentation that is governed by Austrian law.
Immunity waivers are typically upheld in Austria.
6.3 A Judgment Given by a Foreign Court
As regards the enforcement of non-Austrian judgments or awards, there are three basic categories.
Court Judgments from EU Member States Owing to the Brussels Ia Regulation, which applies in Austria, judgments from other EU member states are generally recognised and enforced in Austria without any additional procedures or retrial of the merits of the case. Limited exceptions may apply in the case of substantial deviations from Austrian law (ie, those that contravene the Austrian ordre public).
Court Judgments from Non-EU Member States Outside the scope of applicability of the Brussels Ia Regulation, enforceability of a foreign court judgment depends on whether there is a bilateral treaty between the home state of a lender/security holder and Austria. As a substantive criterion, Austrian law on the enforcement of court judgments requires reciprocity to be ensured under bilateral treaties or regulations. In addition, it is required that the defendant in the enforcement proceedings had the opportunity to participate in the original proceedings before the foreign court and that the relevant judgment may no longer be challenged before the courts and/ or authorities of the foreign state.
Enforcement of a foreign (non-EU) court judgment may nevertheless be denied if aimed at an action that may not be enforced or is not permissible under the laws of Austria or if the ordre public would be violated as a result.
Arbitral Awards Austria has ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Arbitral proceedings and the enforcement of arbitral awards are common in Austria, which maintains a leading international arbitral institution (the Vienna International Arbitral Centre, or VIAC).
6.4 A Foreign Lender’s Ability to Enforce Its Rights
Impediments for a foreign lender enforcing security in Austria are largely technical and administrative. Competent courts may request cost advances in civil law court proceedings, unless the relevant claimant is domiciled in the EU or in a state that is a party to the Hague Convention on Civil Procedure of 1 March 1954. In addition, translation requirements will apply if the transaction is not documented in German.
7.1 Company Rescue or Reorganisation Procedures Outside of Insolvency
The Austrian legislator introduced “reorganisation proceedings”, which should be initiated if a “need for reorganisation (Reorganisationsbedarf)” is identified, in 1997. However, this regime
Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners
was and continues to be without any practical relevance.
Besides that, since July 2021 the new Restructuring Act provides a pre-insolvency restructuring regime in line with the EU Directive 2019/1023 on Restructuring and Insolvency. A debtor may use the procedures provided by the Restructuring Act to avert insolvency and ensure the viability of its company in the event of “probable insolvency”, which is the case if the existence of the debtor’s company would be at risk without restructuring. The procedure is not available to companies that are illiquid within the meaning of the Insolvency Act.
The core of the restructuring procedure under the Restructuring Act is a restructuring plan that defines classes of “affected creditors”. In order for the restructuring plan to come into effect, the majority of the creditors in each class is required in the first instance; a cram-down is also possible. In addition, the court has to confirm the restructuring plan.
Restructuring Therefore, other than insolvency proceedings, out-of-court restructuring efforts constitute the prevailing market procedure in Austria. Unless there are specific lending arrangements (for example, syndicated loans with market-standard majority rules), effective out-of-court restructuring efforts that seek a uniform pro rata debt reduction require the consent of all lenders to:
•a definitive settlement (typically requiring a haircut); or •organised contractual arrangements with a view to: (a) the implementation of a restructuring under a standstill agreement; and (b) restructuring contractual provisions. If such a settlement and/or regime is established with majority consent, the dissenting lenders will fully retain their legal position and remain entitled to full repayment, subject only to a quota reduction in insolvency proceedings.
The same considerations apply to liabilities incurred under bonds. Unlike other European jurisdictions, Austrian legislation has not yet adopted collective action clauses. Therefore, in principle, the restructuring of a bond by way of, for example, a possibly temporary moratorium or haircut would require the consent of all bondholders. Recent Austrian practice has seen individual cases where a special joint representative (Kurator) has been appointed in order to represent bond creditors if their joint interests are affected.
In any structuring of such out-of-court settlements/restructuring, the potential risks of an ensuing insolvency and related legal action (such as a challenge to or voidance of pre-insolvency contractual arrangements by an insolvency administrator) must be considered.
Restructuring within Insolvency Proceedings Other than typical insolvency proceedings aimed at the full liquidation of a company’s assets, Austrian law provides for restructuring proceedings in the course of insolvency proceedings based on a so called “restructuring plan” (Sanierungsplan).
These proceedings provide for a certain minimum (at least 20%) of the debtor’s liabilities to be repaid during a maximum period of two years. As an additional differentiation, these proceedings may be opened by an insolvency court providing for self-administration of the debtor, in which the management bodies would retain their operational responsibility, as opposed to the
Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners
withdrawal of self-administration, which would mean a restructuring administrator (similar to an insolvency administrator) takes over day-to-day management.
Such insolvency court restructuring proceedings can be and frequently are initiated without a prior agreement among the creditors of the debtor. However, it is common in Austrian restructuring practice that the key terms and conditions of such a restructuring settlement before the court are pre-agreed among the majority of the debtor’s creditors.
7.2 Impact of Insolvency Processes
As a general rule, any and all claims against a debtor will immediately become due upon the opening of insolvency proceedings. Therefore, there is no requirement for separately terminating a loan agreement, for example. Any agreement on rescission or termination rights, which would apply in the case of the opening of insolvency proceedings, are also generally null and void under Austrian insolvency law.
In relation to assets that are within the possession of the obligor in an insolvency proceeding but subject to in rem rights of third parties, Austrian insolvency law provides for specific rights of segregation that permit the relevant proceeds to be passed on to secured creditors following the enforcement of security. If this segregation right is asserted, but disputed by the insolvency administrator on behalf of the estate, the administrator has the option of redeeming the outstanding debt or initiating separate enforcement proceedings.
In cases where turning over an asset to a secured creditor would put the continuation of the debtor’s business at risk, the claim for the returning of the asset is suspended for period of six months from the opening of the insolvency proceedings – unless such moratorium would cause an undue hardship to the party holding the security interest.
On a separate note, it must be considered that security rights may be challenged or voided by the insolvency administrator if they have been created within certain time limits applied to the opening of insolvency proceedings and are subject to additional criteria.
7.3 The Order Creditors Are Paid on Insolvency
There are two basic categories of creditors: senior creditors (ranking pari passu) and junior creditors. A junior ranking of debt may be agreed in lending documentation on junior/hybrid financial instruments or subordinated loans, as well as via retroactive subordination waiver (Rangrücktritt), which would result in the relevant creditor not being repaid in the course of insolvency or liquidation proceedings until and unless any and all non-junior creditors have been repaid.
Other than that, statutory law may order mandatory subordination in the case of certain shareholder loans deemed to qualify as equity financing. This equitable subordination will apply if and to the extent that financing is provided by a qualified shareholder to an Austrian company during a “crisis”, whch is assumed if certain financial ratios are fulfilled.
“Quotas” (ie, proceeds obtained in the course of insolvency proceedings) obtained by unsecured senior creditors are typically fairly low. Junior debtors, along with equity holders, do not typically receive proceeds from insolvency proceedings.
Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners
7.4 Concept of Equitable Subordination
The Act on Substitution of Equity Capital (Eigenkapitalersatzgesetz) governs the treatment of shareholder loans to companies in financial distress, except in the case of short-term loans. If the lender has a significant stake or influence over the borrower and the shareholder loan is granted while the borrower is in a “financial crisis” (eg, over-indebted or illiquid or meeting certain financial indicators), the loan will be treated as equity capital of the company for as long as the financial crisis persists. Neither the principal amount nor the interest may be paid to the shareholder. The same applies on collateral granted by the shareholder for loans granted by a third party.
Although the Act on Substitution of Equity Capital automatically re-qualifies the loan as equity, creditors may also – within the meaning of Section 67(3) of the Insolvency Act – subordinate their claims in rank in such a way that the claims must be honoured in case of the debtor’s insolvency or its liquidation only if all non-subordinated creditors have been satisfied. In both cases, the claim may be disregarded when assessing the (over-)indebtedness status of a debtor.
7.5 Risk Areas for Lenders
The key risk or impact of the insolvency proceedings over the assets of a borrower lies in the fact that the responsibility for enforcing any contractual rights and/or securities is no longer with the creditor or ordinary courts but with the insolvency administrator instead. Although this may not in all instances be a detriment in terms of substance, it typically causes significant delays.
As per their specific set of duties under the insolvency legislation, prior to the opening of insolvency proceedings the insolvency administrator will typically closely scrutinise any and all contractual and, in particular, security arrangements entered into by the borrower for the benefit of a creditor. This may not only result in delays in enforcement but also in alleged claw-back of claims on the grounds of the nullity/avoidance of contractual arrangements, including the creation of security rights.
8. Project Finance
8.1 Introduction to Project Finance
On a general note, there is no specific legal framework for project financing in Austria. Therefore, which laws and regulations apply for a specific transaction will largely depend on the type (and industry sector) of that project.
If special purpose vehicles are engaged in a project finance transaction, these are largely in the legal form of a GmbH. In terms of practical application, project finance transactions are employed in the fields of infrastructure, energy and real estate. As an additional specific, PPP transactions are increasingly common in Austria.
It is a matter of the individual circumstances and negotiations among the parties involved whether a transaction is agreed on a recourse or nonrecourse basis – that is, whether the sponsors or shareholders of the special purpose vehicle will assume personal liability and/or provide security for liabilities incurred in connection with the project.
8.2 Overview of Public-Private Partnership Transactions
The relevant legislation for the implementation of PPP transactions in Austria involves numerous areas of law, both at the Austrian federal level and in provincial laws and municipal regulations. Areas of interest include corporate law
Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners
(regarding the structuring of a project), general civil law, public procurement, subsidies, zoning and permissions, and administrative law in all its variations (eg, environmental, health, other industry-specific laws).
The legal structure of PPPs will largely depend on the type and sector of the project implemented. Possible structures include all standard models, with variations dependent on the project’s property and legal title, and whether the operation and funding is provided by either the private investor, the public sector or a combination of both. As is commonly recognised in the PPP field, these forms of co-operation could take the form of the operating model, the co-operation model, the concession model, the contracting model or the leasing model.
In terms of market practice, PPP models are applied for a variety of transactions, including areas such as roads, logistics, education and – most recently and increasingly – healthcare. Prior to structuring a project finance transaction in Austria, a full analysis of any and all risks involved would be required, including operational risks, design, development and construction risks, and political risks. In addition, from a commercial perspective, the repayment and/or credit risks need to be taken into account.
In the absence of any specific legal provisions on project finance transactions, there are equally no requirements, government approvals, taxes, fees or charges. The requisite requirements instead follow the regime for other financing transactions.
Depending on the type of projects funded under such transactions, specific regulatory approvals (such as environmental, building, planning/zoning, antitrust, competition and health permits) may be required. In addition, depending on the identity of the co-sponsor/co-investor, laws and regulations on public procurement and subsidies may apply.
Regarding the financing documentation for PPPs, there is no general requirement for a public filing and/or publication.
In terms of governing law, there are no specific rules as compared to “normal” financing transactions. Therefore, there is a certain degree of flexibility as to the governing law for the lending arrangement proper. For security arrangements, it is customary to agree on the applicability of Austrian law.
Regulatory approvals are generally subject to the laws of Austria.
8.4 The Responsible Government Body
With regard to the oil and mining sector, the Federal Minister of Sustainability and Tourism is the competent authority. The primary legislation for the oil and mining sector is the Federal Mineral Raw Materials Act 1999.
The competent regulators in the gas sector are Energie-Control Austria (E-Control) and the Federal Minister of Sustainability and Tourism. The main legislation for the gas sector is the Federal Gas Industry Act 2011.
For the generation, transmission, distribution and supply of electricity, the competent regulators are E-Control and the Federal Ministry of Sustainability and Tourism. Together with provincial electricity statutes, the Federal Electricity Industry and Organisation Act 2010 sets out the principal regulatory framework.
Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners
8.5 The Main Issues When Structuring Deals
The main issues, both legal and non-legal, to be considered when structuring a project finance transaction include:
•the technical design, development and construction of the project; •risks involved in its factual operation; •any political risks (which, apart from surprising changes of legislation, are largely absent in Austria); •the risk of disputes; and •the overall credit and repayment risk from a commercial perspective.
Risks are typically mitigated by conducting due diligence in the requisite areas (legal, financial, technical, environmental, etc).
The preferred legal form for project companies in Austria are the GmbH or the GmbH & Co KG. The principal difference between these is the direct attribution of profits and losses to limited partners (ie, the tax transparency of the GmbH & Co KG). Also, it must be noted that a GmbH provides great flexibility from a corporate law perspective, in that the majority requirements and composition of corporate bodies are largely flexible and rights of direction for the management of a project company are statutory.
8.6 Typical Financing Sources and Structures for Project Financings
In Austria, the classic bank or savings bank loan is the most widely used form of financing. In the case of a loan, a distinction must be made between an investment loan and an working capital loan. The investment loan is granted to finance property, plant and equipment (eg, buildings, machinery, vehicles and office furniture), whereas the working capital loan is to prefinance the purchase of raw materials, goods or suppliers.
For the refinancing of exports, Austrian companies can resort to a number of instruments. Flexible mechanisms are available, such as:
•commercial financing with the principal bank; •framework credit or export financing procedures by the Oesterreichische Kontrollbank (OeKB); or •soft loans for selected markets.
Further sources of financing are equity investments or participation in companies, as well as subordinated shareholder loans. Private business angels or professional venture capital providers can also be considered as investors.
The issuance of bonds constitutes another alternative to bank debt financing for projects. However, this is rarely practised in Austria, likely owing to the typically small size of projects by international standards and the fact that capital markets financing is normally taken out by sponsors/operators on a corporate (but not project) level.
8.7 The Acquisition and Export of Natural Resources
Austrian law does not provide for general restrictions on the export or import of natural resources to or from Austria. Exceptions may apply, however, in specific circumstances, such as:
•where environmental protection laws apply (in particular, if such resources qualify as waste); •arms control; •restrictions on the export of products qualifying for “dual use”; or •sanctions concerning specific jurisdictions (current examples being Iran and Russia).
Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners
8.8 Environmental, Health and Safety Laws
Any environmental, health and safety laws that may apply to projects are not governed by a uniform set of rules or supervised by one specific authority. Rather, given Austria’s federal structure and EU membership, the relevant provisions may be found in federal and provincial laws, regulations, technical directives or EU legislation.
The competence for the enforcement of the relevant provision lies with numerous authorities at federal or provincial level (including municipalities).
Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners
Fellner Wratzfeld & Partners (fwp) has a team of more than 120 highly qualified legal personnel. The firm’s major areas of specialisation include banking and finance, corporate/M&A, real estate, infrastructure and procurement law, changes of legal form, reorganisation and restructuring. fwp advises renowned credit institutions and financial services providers on financing projects, representing mainly Austrian and international private companies, but also has clients from the public sector. The firm’s expertise has proven its worth repeatedly, not only in connection with project and acquisition financing, but also in regard to financing company reorganisations. fwp is also able to draw upon substantial experience gained in the financing of complex consortia in the past few years.
Authors
Markus Fellner was admitted to the Austrian Bar in 1998 and has been a partner at Fellner Wratzfeld & Partners since 1999, where he now heads the firm’s banking and finance practice group. He specialises in banking and finance, insolvency law and restructuring, corporate/M&A, and dispute resolution. Markus has published a considerable number of articles and essays on topics related to these areas of expertise, including capital maintenance rules in Austria, M&A, and business restructuring and insolvency. He speaks German, English and Italian. Elisabeth Fischer-Schwarz was admitted to the Austrian Bar in 2017, and has been an attorney at law with Fellner Wratzfeld & Partners since that year. She has particular experience and knowledge in the areas of banking and finance, insolvency law and restructuring, and dispute resolution. Elisabeth speaks German, English and French.
Veronika Seronova was admitted to the Austrian Bar in 2016, and has been an attorney at law with Fellner Wratzfeld & Partners since that year. She has particular experience and knowledge in the areas of banking and finance, labour law, and dispute resolution. Veronika speaks German, English, Slovak and Czech. Mario Burger has been an associate with Fellner Wratzfeld & Partners since 2020. He has particular experience and knowledge in the areas of banking and finance and corporate/M&A. Mario speaks German and English.
Contributed by: Markus Fellner, Elisabeth Fischer-Schwarz, Veronika Seronova and Mario Burger, Fellner Wratzfeld & Partners
Fellner Wratzfeld & Partners
Schottenring 12 A-1010 Vienna Austria
Tel: +43 1 537 70 351 Fax: +43 1 537 70 70 Email: marketing@fwp.at Web: www.fwp.at
CHAMBERS GLOBAL PRACTICE GUIDES
Chambers Global Practice Guides bring you up-to-date, expert legal commentary on the main practice areas from around the globe. Focusing on the practical legal issues affecting businesses, the guides enable readers to compare legislation and procedure and read trend forecasts from legal experts from across key jurisdictions.
To find out more information about how we select contributors, email Katie.Burrington@chambers.com
