INTRODUCTION
This chapter will address the questionnaire from the perspective of Austrian law, with particular focus on the Bankruptcy Code (Konkursordnung, or BC) and the Reorganisation Code (Ausgleichsordnung or RC).
Under Austrian law there are two different insolvency proceedings. Bankruptcy proceedings are governed by the BC, which provides for a liquidation but also for a reorganisation of the insolvent company, if the debtor offers payment of at least 20 per cent of its debts within a period of two years (s 141(3) BC). Bankruptcy proceedings have to be commenced if the debtor is insolvent or if the debtor is over-indebted and there is no positive forecast for the continuance of the debtor’s business. Upon commencement of the bankruptcy proceedings the competent court appoints a bankruptcy administrator who basically takes over the management of the debtor. The debtor himself may no longer dispose of its assets or create obligations or liabilities for the estate.
Reorganisation proceedings are governed by the RC. Under a reorganisation proceeding the debtor has to offer payment of at least 40 per cent of its debts within a maximum period of two years (s 3(1)(3) RC). Proceedings have to be commenced if the debtor is insolvent or is soon going to be insolvent, or if the debtor is over-indebted and there is no positive forecast for the continuance of the debtor’s business. The administrator does not take over the management of the debtor. The debtor is allowed to continue business transactions in the ordinary course of business. Pursuant to section 8 RC the debtor may not without the administrator’s prior approval sell or encumber real estate, pledge or encumber his assets, put a guarantee or make business transactions free of charge. Also, any business transactions outside the ordinary course of business requires the administrator’s prior approval.
In the following, the bankruptcy and reorganisation proceedings are referred to together as insolvency proceedings.
A. DOMESTIC FAMILY OF COMPANIES
1. If insolvency proceedings must be commenced for the family of companies, does your law permit a joint proceeding, ie, a single court file, a single judge, a single list of creditors, single notice list, or must the case for each member of the family proceed separately with no practical acknowledgement of the related proceedings?
Under Austrian insolvency law the commencement of insolvency proceedings over the estate of one company of a corporate family does not automatically result in the commencement of insolvency proceedings over the estates of all companies of this corporate family. The RC and the BC only provide for a joint proceeding if insolvency proceedings are to be commenced over the estate of a private partnership and of its personally liable partner. In this case, the jurisdiction of the court competent for the commencement of the insolvency proceedings of the private partnership is also competent for the partner’s insolvency proceedings (s 65 BC and s 1(1) RC).
However, the BC does not generally prohibit the appointment of only one administrator for the bankruptcy proceedings of companies of a corporate family. Pursuant to section 80b BC, however, the bankruptcy administrator has to be independent of the insolvent companies and of all creditors involved in the insolvency proceedings. Therefore a bankruptcy administrator must not be appointed for the proceedings of two companies which have claims against one another (see also answer to question 2). The same applies under the RC (s 29(3) RC) and in the event that one member of a corporate family is subject to a reorganisation proceeding and another member to a bankruptcy proceeding.
Under Austrian law it is also not prohibited that the same judge be competent for the insolvency proceedings of several members of a corporate family. The allotment of insolvency proceedings to a judge depends on the assignment of cases at the competent insolvency court, which usually depends on the first letter of the debtor’s name.
(a) What if the members of the family are organised under, or operate in, different locations within your country? Can a company from a distant location in your country commence its bankruptcy proceedings where its affiliate is located, if the affiliate has already commenced its bankruptcy proceeding?
Generally speaking, the answer to this question is no. The venue for the insolvency proceedings is governed by section 63 BC. Section 1 RC refers to this provision for the determination of the venue for the reorganisation proceedings. A bankruptcy proceeding may be commenced in the jurisdiction in which the insolvent company carries on its business activities, ie in which the company’s management is located.
If the company does not conduct its business in Austria, a bankruptcy proceeding may be commenced in the jurisdiction in which the insolvent company has an establishment or, where there is no such establishment, where there are assets of the insolvent company. If more than one court would be competent to commence insolvency proceedings, the first court that commences the proceedings remains competent (s 63(3) BC).
There are no exceptions to the rules described above except the one mentioned under question 1. Therefore, a company cannot simply file for the commencement of proceedings with a different court only because insolvency proceedings for another member of the corporate family were commenced by this court. The court has to ex officio verify its jurisdiction. If the court where the application to commence insolvency proceedings is filed is not competent it has to ex officio or upon application rule that it is transferring the case to the competent court (s 44(1) Austrian Law on Court Jurisdiction – Jurisdiktionsnorm or JN.
(b) To the extent your country has different types of insolvency proceedings (such as Chapter 11 reorganisation and Chapter 7 liquidation in the US), do the members of the corporate family all have to proceed under the same type of proceedings?
Technically the answer to this question is no. The decision whether to apply for the commencement of reorganisation or bankruptcy proceedings will depend on whether the debtor shall be enabled to continue its business and on the debtor’s available assets.
2. Does your law permit, or prohibit, a single administrator/trustee/ receiver to administer the assets and the liabilities of the entire corporate family?
As outlined under question 1(a), Austrian law does not explicitly prohibit the appointment of a single insolvency administrator to administer the assets and liabilities of companies of a corporate family. However, since an insolvency administrator is legally bound to be independent, the same insolvency administrator may not be appointed for companies having claims against each other.
(a) If so, is there a hearing for the court to determine whether the administration by a single party is appropriate? Are secured and unsecured creditors or other parties in interest allowed to object or be heard at such hearing?
In general, no hearing is held prior to the appointment of an administrator by the insolvency court. The insolvency court is free to choose one of the natural or legal persons listed as potential administrators in the official administrator list. If the appointed administrator refuses to accept the appointment, the insolvency court is bound to appoint a different person.
The insolvency administrator is obliged to inform the insolvency court of any grounds likely to influence his independence (s 80b BC). The reasons disclosed by the administrator are to be discussed in the first meeting of the creditors or; if disclosed at a later time, in a creditor’s meeting especially convened for this purpose (s 80b BC). If the appointment of the administrator is revoked, a new administrator has to be appointed; this, however, has no effect on the insolvency proceedings prior to the new appointment.
All persons affected by the appointment of the insolvency administrator, such as the debtor or any of its creditors, have the right to file an appeal against the appointment. Secured creditors, whose rights are not affected by the commencement of the insolvency proceedings, do not, however, have this right. The appeal has to be filed within 14 days after the public announcement of the commencement of the proceedings and such an appeal does not have a suspensive effect (s 71c BC and s 76 RC).
If the reasons for a dismissal of the appointed administrator arise, or are discovered at a later time when an appeal against the appointment is no longer admissible, an application can be filed with the insolvency court to dismiss the administrator (s 87 BC). Such an application may be filed by the debtor, by a member of the board of creditors or by resolution of a creditors’ meeting.
(b) What about joint representation by other professionals, such as law firms or accounting or auditing firms?
In most cases a professional firm may provide services to all the members of a corporate family outside or in bankruptcy or reorganisation proceedings. However, when there are material conflicts among the members of the corporate family, joint representation will not be allowed.
A lawyer must not represent or advise two companies having material conflicts against each other. Furthermore, a lawyer who, for example, draws up a contract for two parties may not represent or advise one party of this contract against the other in connection with conflicts arising from or in connection with this contract. Finally, a lawyer may not represent a company against another company if the lawyer formerly represented that company. The same applies to a lawyer who is a member of the same law office as such a lawyer.
3. Does your law encourage or discourage overlapping boards or management teams for separate members of a corporate family?
Austrian law neither encourages nor discourages overlapping boards or management teams for separate members of a corporate family. There are no explicit legal provisions concerning overlapping boards or management teams.
Under Austrian case law directors or members of the supervisory board of a parent company may be elected as members of the supervisory board or as directors of a subsidiary. It is also allowed that one member of the parent company’s supervisory board is a member of the subsidiary’s supervisory board and another one is director of this subsidiary.
Directors of a subsidiary must, however, not be elected as members of the supervisory board of the parent company, since this would result in a conflict of interest because the directors of the subsidiary are to a certain degree dependent on the executive officers of the parent company.
A director of two related companies which have dealings with one another must, however, be careful to ensure that the dealings are fair and bear comparison with dealings between unrelated companies. A director of two related companies who permits transactions favouring one company to the detriment of the other may be personally liable to the wronged company (s 84 Austrian Stock Corporation Act – Aktiengesetz or SCA) and s 25 Austrian Act on Companies with Limited Liability – Gesetz über Gesellschaften mit beschränkter Haftung or ACLL) for any damage caused hereby.
Furthermore, any transactions between a parent company and a subsidiary or two sister companies having the same parent company which are in favour of either the parent company or of one sister company may constitute an illegitimate payback of the share capital and may result in personal liability of the director to the subsidiary or wronged sister company (s 84 SCA and s 25 ACLL).
(a) If the directors of a parent company are not directors of the subsidiary, but they either directly manage the affairs of the subsidiary anyway, do your country’s laws render such people de facto or ‘shadow’ directors of the subsidiary?
There are no explicit laws in Austria that provide for de facto or shadow directors of a company. Under Austrian case law, however, a shareholder of a company, in most cases the majority shareholder, or any other person who in fact fulfils the task of the director, is deemed to be a de facto director. If the appointed director, however, does fulfil his/her tasks, another person can only be qualified as de facto director if the appointed person loses or never had control over the duties handed over to the de facto director.
The de facto director may under the same prerequisites as the appointed person(s) be personally liable for damages caused to the company (see question 9).
(b) Do the duties or responsibilities of officers or directors of a family of companies change when the companies become insolvent? For example does their duty shift from a responsibility to the shareholders to a responsibility to the creditors. What if only one of the companies is insolvent?
Generally speaking the answer to this question is no. The commencement of insolvency proceedings does not have an impact on the duties or responsibility of directors of the insolvent company. The directors always have to act in the company’s best interests and fulfil their functions with the diligence of a proper businessman (s 25 ACLL and s 84 SCA).
If the prerequisites for the commencement of insolvency proceedings are fulfilled and the directors fail to duly apply for the commencement of insolvency proceedings, they may pursuant to s 69(2) BC be personally liable also to the creditors of the company for the damage caused by such a delay (see answer to question 9).
In a reorganisation proceeding, the directors remain responsible for the representation of the debtor and can further act on behalf of the debtor. However, important legal transactions, such as the sale of real estate, have to be approved by the appointed reorganisation administrator before they are concluded (see Introduction).
In a bankruptcy proceeding all legal transactions on behalf of the debtor have to be made by the bankruptcy administrator. The directors, however, remain in their offices and are responsible to support the bankruptcy administrator during the course of the bankruptcy proceedings. They are, however, not allowed to dispose of the debtor’s assets or create new liabilities on behalf of the debtor.
There are no differences as to the directors’ duties, either, if only one company of a corporate family becomes insolvent.
4. Are there rules and do they change regarding members of the corporate family transferring assets among one another (such as by way of loans, capitalisation, other transactions) when the members are insolvent?
It is not uncommon for members of a corporate family to have claims against one another or equity investment in one another. However, the provisions concerning the preservation of the share capital and the provisions of the Act on Equity Substitute Payments (Eigenkapitalersatzgesetz or AESP) have to be observed.
The provisions concerning the preservation of the share capital (s 52 SCA and s 82(f) ACLL) forbid the payback of the company’s share capital to the shareholders. Such paybacks can either be direct payments or other legal transactions, such as the granting of a loan or the pledging of assets, if such a transaction would not have been concluded with a third person and results in an advantage for the shareholder. The illegal payback of the share capital makes the transaction null and void. In insolvency proceedings any transaction between members of a corporate family will be strictly scrutinised by the insolvency administrator, who will – if appropriate – demand the payback.
Unless it is hazardous for the company’s financial existence, assuming the risk for the liabilities of another company of a corporate family can be justified on economic grounds. The self-interest of the company and the risk involved have to be considered. The Austrian Supreme Court in Civil and Criminal Law Matters ([OGH] 1 December 2005, 6 Ob 271/05d) ruled that to answer the question of whether a transaction between companies of a corporate family is regarded as a legitimate transaction or as an illegal payback of share capital depends on whether a diligent manager would have dealt with a third party under the same conditions: thus it can be justified on economic grounds. These can be the economic linkage with other companies of the corporate family, and also in general the dependency on the maintenance of the corporate family’s structure and therefore also the general interest of the corporate family, as long as this is also in the company’s self-interest.
In general, the companies of a corporate family are allowed to continue to enter into legal transactions with one another after insolvency proceedings have been commenced for one or more members of the corporate family. These transactions, however, have to be in accordance with the above-mentioned provisions. Furthermore, it is not unusual that a member of a corporate family grants a loan to another company of this family in order to enable the company to continue the business operation in insolvency proceeding or to finance a settlement agreement. Such payments are, however, subordinated (see question 5(b)).
(a) Are cash sweep procedures allowed, that is, all cash from all subsidiaries is swept out to one account controlled by one of the family entities and then redistributed among the family members to pay bills?
Austrian law does not explicitly forbid cash sweep procedures per se. They would be considered short-term loans from one member of a corporate family to another. In order for the cash sweep procedure to be legally admissible, all participating members need to have an advantage from such a procedure (for the admissibility of legal transactions between companies of a corporate family see the answer given above).
Once members of a corporate family enter into a reorganisation proceeding they are allowed to continue ordinary business with other members of the family (s 8(1) RC.). As long as the debtor is not required to give a pledge or other security and as long as the loan does not exceed an amount for the legal transaction not to be considered to be in the ordinary course of business, the debtor would in general not need the administrator’s approval. If, however, as practised in a cash sweep procedure, all cash from the debtor would be swept out and the debtor loses control over the amount of cash disposable to run the business, such a procedure will be considered as outside the ordinary course of business and therefore require approval by the administrator.
Pursuant to s 30(1) RC it is the administrator’s task to preserve the debtor’s assets and keep the business going. However, the latter is only true if keeping the business going is in the creditors’ best interest. Otherwise, the administrator is obliged to close the debtor’s business. The administrator is personally liable for any negligent act to the detriment of the creditors (s 30(3) RC). It is therefore highly unlikely that the administrator will approve of cash sweep procedures because he/she has no control over to whom a loan is granted and if such a loan might be classified as an equity substitute payment.
In a bankruptcy proceeding, however, it is the administrator who enters into legal transactions on behalf of the debtor and who has to decide, whether he/she continues to conduct business under such a procedure. Pursuant to s 114a BC the administrator’s task is to preserve the debtor’s assets and to keep the business going at least until the court hearing which is held no later than 90 days after the commencement of the proceedings and during which time the creditors decide whether or not the business shall be kept going (s 114a(1) BC). The administrator is only allowed to keep the business going if the continuance of the business is not inevitably to the creditors’ detriment. If a third party is willing to guarantee for an amount equal to the potential losses for a period of three years (calculated on the basis of the losses incurred during the last 12 months before the commencement of the proceedings), by statutory definition further losses may not be deemed ‘inevitable’.
When keeping the business going, the administrator has to keep in mind that he/she is personally liable for negligent acts to the detriment of the creditors (s 81(3) BC). It is therefore highly unlikely that the administrator is going to continue participating in a cash sweep procedure and risk losing control over the debtor’s estate.
Furthermore, the bankruptcy administrator will have to examine whether the cash sweep procedure prior to the commencement of the proceedings can be avoided pursuant to s 27 ff BC. Each transaction under such a procedure will have to be examined and can be avoided:
Since in a cash sweep construction at least the company allocating the cash ought to know of the financial situation of each participating company, it is likely that at least some of the transactions under such a procedure can be avoided.
(b) What if the redistribution results in a healthy subsidiary funding the shortfalls in another subsidiary that is losing money?
If this appears outside insolvency proceedings, a creditor may set aside such a redistribution if the assets concerned are necessary to satisfy his claim. The creditor must prove that the transaction is either entered into (1) in order to discriminate against other creditors, or (2) as a means of dissipating the assets, or (3) free of charge (s 1 ff Act on Challenging Legal Transactions – Anfechtungsordnung – AnfO).
Furthermore, if the cash sweep procedure is hazardous to the company’s existence the directors are personally liable for any damage caused to the company. Also, the provisions concerning the preservation of the share capital have to be considered. Finally, if this other company is in a crisis in the sense of the AESP, there is the risk that any loans granted to that company are qualified as equity substitute payments (see also question 5(b)).
If such funding finally results in the commencement of insolvency proceedings concerning the formerly sound company, the administrator is going to scrutinise such transactions and to check whether they can be avoided (see question 4(a)).
5. How does your law treat claims of one member of a corporate family against other members of the corporate family?
(a) Are such claims invalid or unenforceable?
Neither the RC nor the BC distinguishes between claims of group members and claims of third parties. All claims duly filed may participate in insolvency proceedings but are subject to the scrutiny of the administrator. The administrator will check whether any loan was granted to the debtor at a time when the latter was in a ‘crisis’ in the sense of the AESP, in which case the loan will be subordinated (see also question 5(b)). Furthermore, the administrator is going to check whether he/she can find a reason for the avoidance of the transaction (see question 4(a)).
(b) If not, are such claims on equal footing with those of third party creditors, or are they subordinated, or is there other treatment required or permitted under your law?
Under section 43 RC and section 148 BC, creditors who are deemed to be close affiliates and whose claims have been approved by the administrator may vote on a settlement proposal. Only negative votes, however, will be considered. Shareholders who hold (or held during the last year before the proceedings were commenced) at least 25 per cent of the share capital are deemed to be close affiliates.
Furthermore, the AESP provides that a loan granted by certain shareholders to the debtor in times of a financial crisis constitute an equity substitute payment. A company is deemed to be in a financial crisis if the company is illiquid, over-indebted or if the net equity ratio (s 23 Corporate Reorganisation Code, or CRA) is less than eight per cent and the fictional duration for pay back of all debts exceeds 15 years (s 24 CRA).
A loan granted in crisis by a shareholder holding at least 25 per cent of the share capital or having control over the debtor (eg, either by holding the majority of the voting rights or having the right to elect or dismiss the majority of the directors of the debtor) or even by any other persons having control over the debtor is qualified as an equity substitute payment. A company is also qualified as a shareholder within the scope of that Act if the company has shares in another company which latter has controlling influence over the debtor, if the lender indirectly holds 33 per cent of the debtor, or if the lender directly or indirectly has a controlling share in a company that holds at least 25 per cent of the debtor’s share capital.
Furthermore, a company is deemed to be such a shareholder, even without holding a share in the debtor, if the creditor is under the uniform management together with another legally separate company for economic purposes or pooled in a controlling majority (affiliated group), and grants a loan due to instructions of another member of the affiliated group that
(1) directly or indirectly holds a controlling share in the lender and (2) is a shareholder within the meaning of that law (s 9 AESP). In that case the lender has a claim for payment against the instructing company who upon payment takes over the lender’s legal position, if the lender cannot obtain payback from the debtor itself.
If the loan is qualified as an equity substitute payment, the shareholder may not demand payback of the loan or interest payments until the debtor is financially reorganised. Furthermore, in a proceeding where a settlement offer was accepted, the shareholder cannot demand payment exceeding the settlement quota.
If a shareholder acts as guarantor for the debtor or gives a pledge in order to enable the debtor to receive a third party loan at a time at which the granting of a loan by the shareholder would result in an equity substitute payment, the lender may realise the pledge or directly demand payback from the shareholder for as long as the debtor is in financial crisis or during insolvency proceedings. If the shareholder pays the debtor’s debt, the shareholder may only take recourse against the main debtor after the latter is financially reorganised or, in case a settlement proposal was accepted, in the amount of the settlement quota.
Claims arising from equity substitute payments are only going to be satisfied in a bankruptcy proceeding after all other claims have been paid (s 57a BC). In a reorganisation proceeding such claims are entirely excluded (s 23a(2) RC).
Any rights to segregation of an asset or pledges granted for a loan which qualifies as equity substitute payment expire upon commencement of insolvency proceedings. They only revive if the bankruptcy proceedings are terminated due to the fact that the estate is not sufficient to cover the costs of the bankruptcy proceedings, or if the reorganisation proceedings are terminated without an acceptance of a settlement proposal.
6. Does your law allow for the pooling of assets and liabilities of all members of the corporate family, so that a creditor of one member becomes, in essence, a creditor of all members?
Austrian law does not provide for a pooling of assets and liabilities of the members of a corporate family. The creditor of one company may demand payment from that company, only, unless another company guaranteed for such a debt or unless special laws provide for a liability of another company due to special circumstances, such as those mentioned under question 5(b), where a shareholder within the scope of the AESP acts as a guarantor for the debtor or gives a pledge in order to enable the debtor to receive a loan from a third party at a time when the granting of a loan by the shareholder would result in the qualification of the loan as an equity substitute payment. In such an event the lender may realise the pledge or directly demand payment from the shareholder for the duration of the financial crisis of the debtor.
The RC or the BC do not provide explicitly for the liability of another company for the debtor’s debts. Shareholders of a debtor may, however, be liable if an application to commence insolvency proceedings is not duly filed by the directors because the shareholders influenced the directors to that effect (Austrian Supreme Court for Civil and Criminal Law Matters [OGH] 9 February 1988, ÖBA 1998, 828).
Furthermore, the shareholders may be liable to creditors if the debtor has insufficient capital and this fact with a probability exceeding the normal business risks will cause losses to creditors (Austrian Supreme Court for Civil and Criminal Matters [OGH] 15 December 1994, ecolex 1996, 65).
Pursuant to section 25 CRA the shareholders may be liable for an amount of up to €100,000 each if the directors suggest the commencement of a reorganisation proceeding under said Act but the shareholders vote against the commencement, although its prerequisites are fulfilled. They may then be held liable for damages if an insolvency proceeding is subsequently commenced because no reorganisation proceeding was conducted according to the CRA.
(a) If so, is such pooling automatic or does it require a factual showing and court involvement?
As outlined above, Austrian law does not provide for a pooling of assets and liabilities.
(b) What proceedings (motion, request, trial, etc) are required for the court to order the pooling of assets and liabilities?
As outlined above, Austrian law does not provide for a pooling of assets and liabilities.
No.
See above.
7. How are secured creditors treated with respect to a family of companies? For instance, if a creditor has a security interest in the assets of one member of the family, and a guarantee from another member of the family, are both such claims valid in insolvency proceedings of the entire family?
As outlined in question 5, neither the RC nor the BC distinguish between inter-company claims and third party claims. The same applies to securities.Unless the security was given by the debtor within the last 60 days before the commencement of a reorganisation or bankruptcy proceeding (which would result in the automatic ineffectiveness during the proceedings and which applies to both inter-company securities and others: see s 12 RC and s 12 BC), they are in general valid and enforceable.
However, an exception has to be made to the extent that a security given by the debtor prior to the commencement of a bankruptcy proceeding can be subject to avoidance (see answer to question 4(a)).
Furthermore, securities given by the debtor in context with equity substitute payments become ineffective upon commencement of insolvency proceedings (see also question 5(b)). They only revive if bankruptcy proceedings are terminated because the estate does not cover the costs of the proceedings.
A security given by another corporate family member for a loan granted by a third party which would qualify as an equity substitute payment if granted by the other member of the corporate family can be realised by the lender until the debtor is financially reorganised. If a payback is made by this member instead of by the debtor, this member may only subrogate against the debtor after a settlement agreement was formally adopted and received confirmation by the court and only up to the amount of the settlement quota.
8. Do your laws or courts provide for post-insolvency commencement of new financing that allows continued operation of the business and provides adequate protection to the lender who made the loan?
Austrian insolvency law neither contains any specific provisions on post-commencement financing, nor are its more general provisions so designed as to promote borrowing after commencement of the proceeding. Nonetheless, post-commencement borrowing is possible under Austrian insolvency law, of course. The relevant statutory framework will depend on the nature of the proceedings:
Reorganisation proceedings
In reorganisation proceedings, the debtor pursuant to section 8 RC remains in charge of the business, so it is only he (and not the administrator) who may take out new loans. However, post-commencement loans pursuant to section 8(2) RC require the administrator’s permission. Providing collateral for such loans out of the debtor’s property – a rare event, because property not needed for the continuation of the business generally must be sold – is also subject to the administrator’s consent.
Pursuant to section 30(1) RC it is the reorganisation administrator’s task to preserve the debtor’s property and keep the business going, but only if the latter is in the creditors’ best interest. ‘Creditors’ best interest’ is thus the decisive criterion for permitting new loans. Section 30(3) RC provides for the administrator’s personal liability for damages caused to creditors. The administrator will therefore only permit new loans if their repayment is secured and becomes due at a time when he/she has already been relieved of his duties as administrator).
With regard to the lender, generally speaking, repayments on post-commencement loans are not affected by the reorganisation proceedings (s 10(4) RC). The debtor has to pay the instalments in full, irrespective of the conditions set forth in a settlement agreement. If, however, a settlement agreement is formally adopted and confirmed by the court and the debtor subsequently fails to meet his payment deadlines and thus bankruptcy proceedings are opened, the lender’s legal position becomes insecure. Loans granted during reorganisation in subsequent bankruptcy proceedings will only have privileged ranking if granted in order to facilitate the continuation of the business. The lender will have to prove that this was the case. Also, the legal criteria that need to be applied when assessing whether or not a loan was granted in order to ‘facilitate the continuation of the business’ are not entirely clear, which adds to the risk a lender takes. Any security provided out of the debtor’s property, however, especially rights in rem, will remain valid and binding even in cases of a failed reorganisation (normally, though, the debtor will have no assets to pledge).
Bankruptcy proceedings
In bankruptcy proceedings, the debtor is divested of all powers regarding the assets of the estate. Unlike in reorganisation proceedings, post-commencement borrowing by the debtor is therefore out of the question. Financing is entirely in the hands of the administrator.
Pursuant to section 114a(1) BC the administrator, once appointed, must continue operations until the first court hearing takes place, during which hearing he is supposed to report on the debtor’s financial and economic situation. At this first hearing, upon the creditors’ resolution the insolvency court will issue an order on whether or not the business will be continued. The court must not shut down the operation if a third party is willing to place a guarantee.
This guarantee is one, if hardly attractive way from the guarantor’s perspective, of post-commencement financing. It must not be secured by property that is part of the estate and, if the guarantee is enforced, the guarantor has no recourse against the estate.
Loans taken out by the bankruptcy administrator are a different matter. Section 46(1)(2) BC provides that all claims out of the administration of the estate and all claims out of transactions the administrator entered into after the opening of proceedings are privileged. Repayments on loans taken out after the proceedings fall within that category. The administrator, being personally liable to the creditors for negligent conduct, will therefore only take out new loans if third parties provide security or the new debt is beyond doubt covered by the means of the estate. Strictly speaking, taking out new loans by the administrator will only be held negligent if, at the time the loan is taken out, it is more likely than not that the administrator will fail to repay the loan in full. Obviously, though, judging the likelihood of the full repayment of a loan is not an easy task and the necessity to do so will hardly encourage the administrator to enter into loan agreements.
In the absence of sufficient security provided by third parties, taking out new loans after the opening of a bankruptcy proceeding is dangerous both from the bankruptcy administrator’s and the lender’s view.
9. Are directors and officers subject to civil or criminal sanctions if:
(a) Fraud or misrepresentation of a company’s finances are discovered?
Directors are subject to both civil and criminal sanctions if fraud or misrepresentation of a company’s finances are discovered. The most common sanctions are: Section 159 Criminal Code (Strafgesetzbuch – StGB): Pursuant to this provision (1) concealing, destroying or squandering property, (2) entering into extraordinarily risky transactions that do not fall within the scope of ordinary business of the debtor, (3) excessive spending that is manifestly out of proportion with the debtor’s financial circumstances, (4) failure to establish an operational accounting system and (5) annual financial statements at all or in a timely fashion, is a criminal offence that may be punished by imprisonment for up to one year if the action or omission in question is grossly negligent and has lead to the debtor’s insolvency.
Section 156 Criminal Code: Pursuant to this provision, anyone who conceals, gives away or damages parts of his property, feigns or acknowledges non-existing liabilities or in any other way in fact or apparently impairs the value of his/her estate to the detriment of creditors may be sentenced to prison for between six months and five years. If the damage caused exceeds €50,000 the punishment may be increased to a maximum of 10 years of prison.
Pursuant to section 161 Criminal Code, sections 159 and 156 are applicable on executive officers of companies.
Section 255 SCA, section 122 ALLC: Pursuant to these provisions, almost any intentional misrepresentation by any member of the executive or supervisory board (or, for that matter, other agents or liquidators of the company) regarding the financial circumstances of the company is a criminal offence that may be punished by imprisonment for up to one year or a fine of up to 360 units (a unit being, depending on the financial circumstances of the offender, an amount of between €2 and €500).
All of these criminal sanctions may entail personal liability to pay damages if the act or omission in question has caused damage to a creditor. Given their diversity and legal complexity, the numerous possible civil law claims possible in this context and the intricacies of their enforcement cannot be discussed here.
(b) They allow the company to continue to operate while knowing it does not have the ability to pay the debt being incurred?
Section 69 BC provides that directors must apply for the commencement of bankruptcy proceedings without undue delay, at the very latest within 60 days after the company falls insolvent. A delay will not be deemed undue if the directors applied for the commencement of reorganisation proceedings. The directors are, however, only allowed to wait for the said period of 60 days if they seriously attempt to reorganise the company’s finances. Within this period of 60 days the directors are allowed to conclude transactions which are necessary for the ordinary running of the business.
Notwithstanding the grace period mentioned above, the directors are personally liable to the company and/or creditors for all damages suffered due to a belated application. Creditors of the company, who were already creditors at the time the bankruptcy proceedings ought to have been commenced, are entitled to the payment of the difference between the amount they received in the course of the bankruptcy proceedings and the amount they would have received if the bankruptcy proceedings had been commenced without undue delay (Quotenschaden). Creditors, whose claims have their origin at a time after the insolvency proceedings ought to have been commenced are entitled more or less to full damages, reflecting the fact that they would not have entered into any transaction if an insolvency proceeding had been duly commenced (Vertrauensschaden).
Under section 25 ALLC and under section 84 SCA directors are also personally liable to the company to make up for all payments effected after they ought to have applied for the commencement of insolvency proceedings.
Furthermore, the directors may also be subject to personal liability under section 22 CRA. Under this provision, the directors are personally liable to the company to a maximum amount of €100,000 each, if insolvency proceedings are commenced and either:
(c) Same as (b) above but the directors believe that if some event occurs (eg chance to obtain new contract in prospect, new equity infusion, or new financing) it will be able to save the company and pay its bills?
The directors are not personally liable if there are serious attempts to reorganise the company’s finances after the company has fallen insolvent, but only for a maximum period of 60 days (see above). If such attempts at reorganisation fail, the directors must apply for the commencement of insolvency proceedings without delay.
B. INTERNATIONAL FAMILY OF COMPANIES
1. If one or more members of the corporate family is incorporated under or governed by the laws of another country, does that change your answers to any of the questions set forth above?
The general answer is no. With respect to cases that fall within the scope of the European Insolvency Regulation (Council Regulation (EC) 1346/2000 of 29 May 2000 on insolvency proceedings, Official Journal L 160, 30 June 2000 – EIR), however, one qualification must be made.
The EIR contains no specific rules on group insolvency (on the reasons for that – deliberate – omission cf Virgós/Garcimartín, The European Insolvency Regulation: Law and Practice, No 61). Nonetheless, the courts of some EU Member States have construed the EIR’s provisions on jurisdiction in such manner as to virtually consolidate separate insolvency proceedings regarding a parent company and its subsidiaries.
Pursuant to Article 3(1) EIR, the courts of the state in which the debtor company has its ‘centre of main interests’ (COMI) are competent to open main insolvency proceedings. The COMI of a subsidiary may be located at the statutory seat of the debtor company’s controlling parent company, so that both COMI fall within the same jurisdiction, but this is not necessarily the case. Especially the British, but also German and Italian courts on various occasions have held that in fact the COMI of a subsidiary was identical with that of its (insolvent) controlling parent. Thus, main insolvency proceedings for both parent company and subsidiary (or subsidiaries) were commenced and the same person was appointed as liquidator for all the estates (cf Case C-341/04 Eurofood IFSC Ltd currently pending before the European Court of Justice, or also Amtsgericht München of 4 May 2004 in the Hettlage case). Some of the reasoning given for the rulings is questionable, yet under the EIR a decision to open insolvency proceedings handed down by the court of a EU Member State generally must not be challenged by the courts of other EU Member States.
Thus, even if the statutory seat of a company is in Austria, it is quite possible that the courts of another Member State open consolidated proceedings regarding the parent company and the Austrian subsidiary (cf the Hettlage case). As already mentioned above, Austrian insolvency law, however, does not provide for any consolidation of the proceedings or estates.
At least in theory, however, commencing insolvency proceedings by the very same court under the EIR for both parent company and subsidiary (having their respective statutory seats in different EU Member States) presupposes sound reasoning as to why the subsidiary’s COMI coincides with the COMI of its parent company.
2. If insolvency/restructuring proceedings are instituted for corporate family members in different countries:
(a) What controls as to where the case must be filed (eg, centre of main interest, principal place of business, location of parent etc)?
Austrian international insolvency law is governed both by its national statutes, especially the BC, but also by EU law, above all the EIR. The delineation of the respective scopes of applicability of these instruments can prove difficult, but generally speaking insolvency proceedings that have ‘intra-community effects’, ie effects upon at least two EU Member States other than Denmark (Denmark being exempted from the territorial scope of the EIR), will be governed by the EIR, which supersedes any contradicting national insolvency law.
Austrian autonomous insolvency law in section 63 BC provides that the place of business – being the place where the debtor executes the main, controlling functions over his/her business – controls where a debtor must file for bankruptcy. The place of business rule, as construed by the Austrian courts, is similar to the COMI concept adopted by the EIR. However, Austrian national insolvency law also permits the commencement of insolvency proceedings if the debtor only has a branch or even merely assets in Austria (s 63(2) BC).
Within the scope of the EIR, the situation is different. Pursuant to Article 3(1) EIR, main insolvency proceedings may only be opened where the debtor company has its COMI (which, by virtue of a rebuttable presumption in Article 3(1) EIR is deemed to be at the place of the company’s registered office). So-called secondary insolvency proceedings may only be opened where the debtor has an establishment – not merely assets – as defined by Article 2(h) EIR: ‘Establishment shall mean any place of operations where the debtor carries out a non-transitory economic activity with human means and goods.’ As opposed to main insolvency proceedings, which have universal territorial scope, secondary insolvency proceedings may only encompass assets situated in the Member State in which the secondary insolvency proceedings are opened.
(b) Do the courts attempt to exercise jurisdiction over the assets of the company filing domestically no matter where located (for example, overseas), or do they limit their jurisdiction to only those assets located in your country?
Again, the answer depends on whether or not the EIR is applicable.
Section 237 BC expressly states that Austrian insolvency courts have jurisdiction over all assets of the debtor, wherever they are located. This is true even if insolvency proceedings are already pending abroad that exercise jurisdiction over the assets in question (cf s 240(2) BC)
– although in such cases, of course, attempts by the Austrian courts to get hold of these assets may have little success. Pursuant to section 237(2) BC, however, the debtor (company) is expressly under the obligation to assist the liquidator in any endeavour to seize property situated outside Austrian territory.
Again, if the EIR is applicable, this situation changes: Austrian courts in main insolvency proceedings will exercise jurisdiction on any assets situated in other EU Member States (cf Art 4(2)(b) EIR). In secondary insolvency proceedings, Austrian courts have no jurisdiction on assets situated in other EU Member States at all, unless these assets have been removed from Austrian territory to the territory of another EU Member State after the opening of secondary insolvency proceedings. With regard to states outside the EU, Austrian courts generally will attempt to exercise jurisdiction over any assets, wherever they are located.
(c) Would your courts enforce a court order from a foreign country that attempted to exercise jurisdiction over assets located in your country but owned by the company that is subject to the foreign insolvency proceedings?
In cases without intra-community effects, Austrian courts will apply section 240 BC. Pursuant to this provision, foreign court orders handed down in the course of insolvency proceedings will be enforced by Austrian courts only if all of the following preconditions are fulfilled:
If these conditions are met, the liquidator (or any other officially authorised person: see section 241(1) BC) may demand enforcement pursuant to sections 82–86 Enforcement Code (Exekutionsordnung – EO) and, subsequently, have the asset in question seized and handed over to him.
In cases that do have intra-community effects, the EIR applies. The EIR contains provisions on the recognition and enforcement of (1) the decision by a court of an EU Member State to open insolvency proceedings and (2) on the recognition and enforcement of all judgments handed down by this court concerning the course and closure of insolvency proceedings, by all other EU Member States (except Denmark). Judgments deriving directly from the insolvency proceedings and which are closely linked with them will also be recognised and enforced. Finally, judgments relating to preservation measures taken after the request for the commencement of insolvency proceedings will be recognised and enforced, as well. All of these judgments are recognised and enforced without further formalities, ie the exercise of jurisdiction over assets located in Austria is possible. The material difference to cases without intra-community effects is that the preconditions set forth above need not be fulfilled, which obviously makes it easier to gather property and initiate enforcement measures on Austrian territory.
(d) Has your country adopted any procedures (such as the Model Law on Cross-Border Insolvency) to address the various issues that arise in dealing with cases of cross-border insolvency?
The EIR and Directives 2001/17/EC (of the European Parliament of the Council of 19 March 2001 on the reorganisation and winding-up of insurance undertakings) and 2001/24/EC (of the European Parliament of the Council of 4 April 2001 on the reorganisation and winding up of credit institutions) represent the only multilateral procedures on cross-border insolvency ‘adopted’ by Austria (strictly speaking, the EIR needs neither adoption nor transformation, but has immediate and superseding effect in all EU Member States).
Furthermore, Austria recently amended its autonomous regime on intra- and extra-community international insolvency, mainly via transformation of the EIR’s (and the Directives’) provisions on applicable law into national law (to a great extent literally; cf new sections 221-234 BC). Obviously because the immediately effective provisions of the EIR together with the new national law on cross-border insolvency were considered sufficient (and to some degree correspond to the UNCITRAL Model Law on Cross-Border Insolvency), Austria has not formally adopted the Model Law, nor has an adoption been subject of further discussion so far. As a serious practical shortcoming, this leads to the fact that no sufficient provisions on court-to-court communication and coordination between parallel insolvency proceedings regarding the same debtor are applicable in Austria.
