Austria is gearing up to implement the EU Directive on Restructuring and Insolvency (known as the Restructuring Directive). We anticipate that the Restructuring Regulation (ReO) will enter into force on 17 July 2021.
The core element of the Restructuring Directive (and of the implementing law) is the promotion of a new restructuring procedure, to avoid the need for formal insolvency proceedings.
The restructuring proceedings
The new restructuring proceedings are aimed at facilitating restructuring efforts without requiring formal insolvency proceedings.
In contrast to insolvency proceedings, these proceedings will not necessarily be disclosed in the Austrian edict database (Ediktsdatei).
The proceedings are in principle available to both natural persons as well as legal entities. However, natural persons who do not operate a business, most insurance companies, and most credit institutions are excluded from the scope of the new law. Employee claims are also excluded from all effects of restructuring proceedings.
Prerequisite: "likely insolvency"
The application for restructuring proceedings will require the "likely insolvency" of the debtor. However, it cannot already be insolvent when applying.
According to the draft law, "likely insolvency" is defined as circumstances in which the continuity of the debtor's business would be endangered without the restructuring. This would specifically be the case if insolvency is imminent, or if the equity ratio has fallen below 8% and the notional debt repayment period, taking into account all the entity's debts, exceeds 15 years.
The draft law provides for both "normal" as well as "simplified" proceedings.
Normal proceedings
During normal proceedings, a debtor may apply for restructuring proceedings at the insolvency court once insolvency is "likely". The application requires thorough preparation and the applicant must provide multiple documents (eg cashflow for the next 90 days, list of all assets of the applicant etc) with the application.
Suspension of enforcement
A stay of enforcement – and therefore protection against the dissolution of contracts that are important for the continued operation of the business – is only granted upon application by the debtor. It also only extends to creditors named by the court in the court order granting the suspension of enforcement.
The stay of execution is only valid for three months. However, applicants can apply to extend it by a maximum of six months.
Return of creditor classes and cram downs
Another new feature of the draft law is the reintroduction of creditor classes in the restructuring procedure. Creditor classes were abolished in Austria by the 1983 amendment to the insolvency regulations.
The Austrian legislator has now provided for five classes in the restructuring procedure:
- secured creditors
- unsecured creditors
- bondholders
- particularly vulnerable creditors (with claims below €10,000)
- subordinated creditors.
The vote on the restructuring plan (essentially, the sum of the measures planned by the debtor, including the envisioned debt cut) is held in creditor classes. The passing vote requires a head and claims majority of 75% in each class.
A restructuring plan that is not accepted in each creditor class can be confirmed by the court regardless, at the debtor's request (a cross-class cram down).
Creditors voting against the restructuring plan may apply for verification that they are not worse off because of the restructuring plan when compared to the outcome of insolvency proceedings under the Insolvency Code. If the court concludes that they would be worse off, it must reject the restructuring plan.
Self-administration and restructuring officers
In principle, the debtor can continue to run its own business during the restructuring proceedings. In the creditors' interests, the court may prohibit the debtor from taking certain actions.
At the debtor's request or by the court under certain circumstances, a restructuring officer may be appointed. The restructuring officer’s role is to safeguard the interests of all parties involved.
Protection against avoidance
To facilitate the conclusion or financing of a restructuring plan, financing (or interim financing) in connection with restructuring proceedings is protected against avoidance in subsequent insolvency proceedings.
As a counterbalance, the time periods under the Insolvency Code for other avoidance claims are extended by the duration of the restructuring proceedings.
Simplified proceedings
In the simplified proceedings, restructuring plans that have already been agreed in advance are to be confirmed by the court without opening restructuring proceedings.
The requirements for the simplified proceedings are relatively strict and they require – even more than the "normal" restructuring procedure – extensive preparatory work. For example, an expert opinion must be submitted with the application confirming (among other things) that the proposed restructuring plan would not put any of the affected creditors in a worse position than insolvency proceedings.
The scope of simplified proceedings is limited to "financial creditor". This term refers to more than just bank creditors; it applies to all receivables financiers, including suppliers supplying on terms with uncharacteristically long payment terms (more than 180 days).
The cross-class cram down possible in the normal restructuring procedure is not available in the simplified procedure.
Simplified restructurings are not published in the edict database. While there are advantages to avoiding publicity, only published proceedings are recognised under the European Insolvency Regulation. The effect of unpublished proceedings will therefore be limited to Austria.
Outlook
It remains to be seen how the new proceedings will be accepted in practice. Given the economic effects of the pandemic and the imminent end of multiple COVID-19 related measures, we suspect that at least initially there will be quite a few restructuring proceedings.
Find out more
To discuss the issues raised in this article in more detail, please reach out to a member of our Banking & Finance team.
