Avoiding insolvencies –support measures extended again
Following the insolvency law amendments by the 2nd COVID-19 Act in March 2020 (which in particular doubled the period to file for insolvency to 120 days), the legislator introduced improvements in the 4th COVID-19 Act in April 2020, which have been extended several times, most recently until 31 January 2021 with Law Gazette No. I 2020/113 on the Amendment of 2nd COVID-19 Act dated on 14 October 2020.
The purpose is clear. Companies should not be forced into insolvency because of the COVID-19 crisis. In addition, directors who are fighting for a restructuring and an economic turnaround of their companies should not be exposed to unnecessary liability risks. Bridge loans to pre-finance short-time work assistance should be excluded from insolvency avoidance and short-term loans from shareholders should be facilitated.
More recently, critical voices have been stating that the support measures would only delay insolvencies and that a “wave of bankruptcies” would be approaching next year. In the explanatory notes to the further extension of the support measures, the legislator does not go into such arguments in detail but justifies the extension with the continuing economic consequences of the COVID-19 crisis.
The situation is therefore still as follows:
Suspension of the duty to file for insolvency in case of over-indebtedness
The reasons for insolvency according to the Austrian Insolvency Code (IO) are on the one hand illiquidity (Zahlungsunfähigkeit) and on the other hand over-indebtedness (Überschuldung; applies for limited liability and comparable companies).
Over-indebtedness occurs when a company has a negative status of assets and liabilities based on liquidation values and when there is no positive forecast on the company’s continued existence (Fortbestehensprognose). Nothing has changed in this regard, but in particular the current uncertainties in the preparation of such forecasts have led to difficulties with this reason for insolvency. The legislator has therefore reacted.
Since the 4th COVID-19 Act, the filing of an insolvency application within the statutory filing period(s) remains for now “only” mandatory in the event of illiquidity; in the event of over-indebtedness, the duty to file for insolvency is temporarily suspended, provided that over-indebtedness occurs in the period between 1 March 2020 and 31 January 2021;this period has been further extended with the newest Amendment of 2nd COVID-19 Act. Correspondingly, during the same period, the opening of insolvency proceedings on the basis of over-indebtedness upon application of a creditor is also excluded.
The law does not require that the over-indebtedness must have been caused by the COVID-19 pandemic. However, by referring back to 1 March 2020, it is probably intended to ensure that the main beneficiaries are those companies whose over-indebtedness was caused by the pandemic. Whether or not the over-indebtedness occurred in the period relevant could lead to discussions in case of dispute.
Should the company still be over-indebted after 31 January 2021, an insolvency application must be filed the later of (i) 60 days after 31 January 2021 or (ii) 120 days after the occurrence of over-indebtedness.
According to the legislative materials, the new law takes especially into account that due to the crisis, companies “slip” into a negative balance sheet, but on the other hand are unable to provide for a valid forecast on their continued existence due to the current and continuing uncertain market situation. It shall be prevented that companies must file for insolvency only because they are over-indebted as a result of the above situation. The criteria used to identify non-viable companies under the previous economic conditions are, according to the legislator, not helpful in the current crisis.
The duty to file for insolvency in case of illiquidity remains unaffected (see below). In practice, the most important effect of the above suspension of the duty to file related to over-indebtedness may therefore likely be the corresponding exemption from liability for directors (see further below).
Continuing duty to file for insolvency in case of illiquidity
The duty to file for insolvency in case of illiquidity remains unaffected (as well as the right of creditors to file for insolvency in this case).
Illiquidity (in a nutshell) means that the existing liquid funds are not sufficient to pay all due debts within a reasonable period of time and that these funds can also not be provided any time soon (e.g. through loans, shareholder contributions and the like).
The duty to file for insolvency is 120 days if insolvency was at least partly caused by the pandemic; this was already introduced by the 2nd-COVID-19 Act (see Insolvency law assistance through the 2nd COVID-19 Act). Due to the suspension of the duty to file in connection with over-indebtedness, this period may for the time being primarily be relevant in case of illiquidity.
In this context, it is important that according to the prevailing view there is no illiquidity in case of a temporary payment delay (Zahlungsstockung; if 95% of all due debts can be paid, a payment delay can be presumed). If there is a reasonable prospect of being able to provide sufficient liquid funds within a short period of time (guideline: three months), there is no illiquidity (yet). Bridge loans, public support measures and the like should also be considered. A temporary payment delay does not trigger the duty to file neither the 120-days filing period. However, the distinction between illiquidity and payment delay is often difficult to draw in individual cases.
Liability relief for directors
As soon as a reason for insolvency arises, directors must respect the prohibition of payments (Zahlungsverbot) provided by Austrian corporate law. From this point on, only payments that are absolutely necessary for the continuation of the business are de facto permitted, creditors must be treated equally. However, this means that attempts to restructure the business always also entail a liability risk for the directors.
The legislator wanted to react on this by removing the liability for directors of Austrian stock corporations which is linked to the prohibition of payments corresponding to the suspension of the duty to file in case of over-indebtedness (also in the period 1 March 2020 now to 31 January 2021). It remains to be seen whether the fact that over-indebtedness has already occurred before this period (see above) may lead to the fact that this liability relief is not applicable (presumably yes); purely according to the wording of the law, the liability relief could also apply unconditionally.
The 4th COVID-19 Act refers, according to its wording, only to Section 84 (3) no 6 Austrian Stock Corporation Act. According to the prevailing view, however, the provision applies analogously to Austrian limited liability companies as well (on the basis of Section 25 (3) no 2 Austrian Private Limited Liability Act). A clarification in the explanatory notes in this regard would have been desirable.
It should also be noted that the exemption from liability only applies in the case of over-indebtedness. In the event of illiquidity, the prohibition of payment with all associated liability risks continues to apply.
Limited avoidance of bridge loans granted in connection with short term work
A bridge loan granted in the period up to 31 January 2021 to finance COVID-19 short term work support can only be avoided to a limited extent. Both the granting of the loan and the repayment immediately after receipt of the short-term work support cannot be avoided pursuant to Section 31 IO (avoidance due to knowledge of insolvency) if (i) no security from the assets of the borrower was provided for the loan and (ii) the lender was not aware of a possible illiquidity of the borrower at the time the loan was granted.
This should enable quick and unbureaucratic interim financing until the payment of short-term work support. As one reason for this exception, the legislative materials state in particular that it is currently difficult to draw up a viable restructuring concept (Sanierungskonzept) which may help in excluding avoidance under this provision, just as it is difficult to draw up a forecast on the company’s continued existence (see above).
It should be emphasised that this facilitation does not apply generally to bridge financings, but only to such in conjunction with short-term work support. This is a pity, because it may not be enough. Should e.g. liquidity be required for other reasons and bridge financing being granted, avoidance risks remain if the lender was or should have been (!) aware of the borrower’s illiquidity or over-indebtedness and if the occurrence of a (also indirect) disadvantage for the insolvency estate was objectively foreseeable. The legislator itself emphasises that in the current period a normally helpful and suitable restructuring concept, which can exclude avoidance risks, is usually not possible or only difficult to draw up.
Moreover, it is not entirely clear from the law whether avoidance would be conceivable if a company is over-indebted and the lender was aware of this; this because Section 31 IO also only mentions illiquidity, but according to Section 67 (2) IO also includes over-indebtedness. Although the prevailing view considers the reasons of insolvency (illiquidity and over-indebtedness) equivalent in the context of avoidance law, it would be desirable that in this case avoidance is excluded for the period 1 March 2020 to 31 January 2021 if the borrower is “only” over-indebted, but not illiquid. Otherwise, the protection against avoidance in connection with the suspension of the duty to file for insolvency due to over-indebtedness could be taken ad absurdum.
Facilitation of shareholder loans
According to the Austrian Equity Substitution Act, loans granted by shareholders are potentially considered equity replacing (and therefore subject to a repayment ban) if, among other things, they were granted for more than 60 days. In order to facilitate the granting of loans by shareholders in the current situation, this period is extended to 120 days for loans granted since the new law came initially into force (5 April 2020) to 31 January 2021 and if no security is provided for the loan from the assets of the company.
Please note: This blog merely provides general information and does not constitute legal advice of any kind from Binder Grösswang Rechtsanwälte GmbH. The blog cannot replace individual legal consultation. Binder Grösswang Rechtsanwälte GmbH assumes no liability whatsoever for the content and correctness of the blog.