The ramifications of the insolvency of a province

Duration 2015

Institute Institute for Civil Law and Civil Procedure

Department Department of Private Law

Unlike in other countries such as Germany, municipalities and provinces in Austria are generally eligible for insolvency. However, the insolvency of a province differs in many respects from when a company or individual person declares bankruptcy. Due to the functions and responsibilities the Austrian constitution assigns to provinces and municipalities, a province could not be allowed to simply disband. These functions and responsibilities include providing social security, child and youth welfare and protective services, subsidized housing, running hospitals, childcare centers and public schools, and promoting sports, tourism, and conservation, to name just a few. This raises the difficult problem of reconciling the province’s constitutional function and guaranteed existence with the provisions of bankruptcy law.

The functions and responsibilities assigned to provinces in the constitution must continue to be fulfilled during insolvency proceedings.

The Province of Carinthia commissioned the study to investigate which of its assets would be affected by insolvency and how this would impact the province and its people. With the impending collapse of the Hypo Alpe Adria bank, the Carinthian government was facing liabilities for the guarantees it had issued, and asked Georg Kodek and Michael Potacs to detail the possible ramifications of insolvency proceedings. Building on the results of earlier research on insolvencies of states, provinces, and municipalities, the study examined the possible impact of insolvency on a province and its responsibilities, such as financing schools, hospitals, and government employee salaries. These issues were analyzed and interpreted from both a private-law and a public-law perspective. The analysis showed that the province’s constitutional functions and responsibilities must be guaranteed even during insolvency proceedings. This functional guarantee means that those assets essential for fulfilling a province’s constitutional functions and responsibilities are excluded from the insolvency estate from the outset, and are therefore not subject to the effects of the insolvency proceedings.

The legal assessment on the insolvency of a province and the impact of the constitutional functional guarantee contributed to the decision to use federal funds to acquire most of Hypo Alpe Adria’s bonds instead of initiating insolvency proceedings.

The legal assessment of the possible outcomes of insolvency proceedings for the province of Carinthia had far-reaching consequences for the way the collapse of Hypo Alpe Adria was handled. The study’s findings, showing that those public assets essential to fulfilling a province’s functions and responsibilities to the public (e.g. operating schools and hospitals) would not be affected by bankruptcy proceedings, were presented to Carinthian provincial parliament. The legal assessment was discussed there, and it contributed to Carinthia’s decision not to initiate insolvency proceedings, as they would not have led to a discharge of the province’s debts. Such a discharge would have required the consent of a majority of creditors, but Carinthia did not have sufficient resources to make creditors an offer that had any hope of succeeding. Ultimately, the Austrian government stepped in and a different resolution was reached. Federal and Carinthian

funds (mostly from the so-called “future fund” into which Carinthia had invested the proceeds from the sale of Hypo Alpe Adria) were used to acquire Hypo Alpe Adria’s bond debt. The bondholders of Heta, the assets resolution company for former Hypo Alpe Adria, were offered a buyback option for the securities by the Province of Carinthia if they waived part of their claims in what is known as a ”haircut.” The Austrian Constitutional Court subsequently ruled that this solution was constitutional. The research thus contributed to securing the functions and responsibilities assigned to provinces in the constitution (SDG 16 “Peace, Justice and Strong Institutions”). The research findings also kicked off a debate on the laws governing the insolvency of provinces. Intensive discussion took place in legal journals and in the media, and some years later as part of the discourse on introducing special laws for insolvency proceedings for provinces.

Interpretation of legal questions concerning the insolvency of provinces

Legal assessment report on the insolvency of a province

Contribution to the constitutional solution and the Province of Carinthia’s decision not to file for bankruptcy