Austrian Restructuring Code in force
On 26 July 2021, the Restructuring and Insolvency Directive Implementation Act was issued in the Federal Law Gazette BGBl I No. 147/2021. As a result, the new Restructuring Regulation (ReO) entered into force with effect from 17 July 2021.
Since the first legislative draft published in February, around 50 partly very critical statements have been contributed to the legislative process (one of them by our firm). The legislative initiative itself was broadly welcomed, but criticism was voiced in many cases, both conceptually and in detail. The legislator has partially adopted the proposals for improvement. In its basic structure and core points, the ReO however, largely corresponds to the draft published in February (see already our last newsletter).
Simplified restructuring proceeding as a new success model?
The legislator has generally implemented the requirements set in Directive (EU) 2019/1023 rather conservatively. Still, by implementing simplified proceedings limited to financial creditors, at the same time also new ground has been boldly broken. This "fast-track proceeding", which does not require a court hearing, could become a real success model. The very existence of such a proceeding could already change the dynamics of negotiations in restructurings.
In such proceedings, creditors do not vote on a restructuring plan in a court hearing, but debtors can instead submit a restructuring agreement signed in advance by at least a 75% majority of each (financial) creditor class. After hearing the creditors concerned, such agreement can be sanctioned by the court quickly without any further procedural steps.
Simplified proceedings are non-disclosed, the debtor remains entirely in possession and the appointment of a restructuring expert is not permissible. The "quality" of the process is rather ensured by the mandatory submission of an expert opinion commenting on the class formation, the best-interest-of-creditors test as well as the prospects of avoiding insolvency and ensuring viability of the debtor company.
In the ministerial draft, it was not yet clear whether a cross-class cramdown would also be available in these proceedings (which was also criticised in our submitted statement). Also the final wording speaks rather against such availability, although the overall context of the ReO also provides arguments in favour of an applicability of the cross-class cramdown in simplified proceedings. It remains to be seen which view will prevail.
Creditor protection is ensured by the fact that rejecting creditors can raise violations of the best-interest-of-creditors test (if they were treated worse than in an insolvency proceeding) and/or (but only in case of applicability of the cross-class cramdown) of the relative priority rule (see already our last newsletter) by appealing the court sanctioning.
Another point of criticism on the ministerial draft was unfortunately not taken up: In the simplified proceedings, debtors cannot apply for a moratorium. Thus, holdout creditors can continue jeopardising consensual negotiations by starting enforcement actions. Moreover, reliefs provided by the ReO on director's liability (and the duty to file for insolvency) do therefore not apply in simplified proceedings and are, as such also linked to a moratorium being granted.
It is unclear whether the simplified proceedings, if desired by the debtor, can be published in the public electronic register, which would facilitate recognition within the EU. The ReO provides for this possibility for the regular proceedings, but it is not distinct in that regard in relation to the simplified proceedings. Such recognition is, of course, very important for companies trading cross-border with foreign creditors.
Shareholders as the new holdouts?
Despite widespread criticism in the course of the legislative process, shareholders cannot be included and crammed down in a restructuring plan against their will. Thus, a debt-to-equity swap can still not be enforced against shareholders. Even "out-of-the-money" shareholders can therefore potentially block restructurings. If shareholders do not join the table for whatever reason, promising restructurings that are in the interest of the company and the creditors must therefore continue to be "structured" around the shareholders (as far as legally possible). In our view therefore, an opportunity has been missed to bring insolvency and corporate law instruments relevant to restructurings closer together.
No avoidance protection for new money at all?
A cornerstone for successful restructurings is the willingness of contractual partners and especially financiers to (continue) contracting with the debtor company and to maintain business relations. Avoidance risks in a possible later insolvency jeopardise this. Directive (EU) 2019/1023 therefore requires a certain avoidance protection for interim and new financings granted in the context of a restructuring, as well as other restructuring, related transactions (such as supplier payments).
The ministerial draft of the ReO provided for an already relatively limited avoidance law protection, according to which at least an avoidance of a legal transaction was excluded based on the argument of an indirect disadvantage in relation to the insolvency ground of over-indebtedness (all other avoidance rules of the Austrian Insolvency Code (IO) remained unaffected). In the final ReO, this may have been limited once again: Avoidance protection now only applies if the opposing party "was not aware of the debtor's illiquidity". What may sound like a purely linguistic adjustment could lead to an entire undermining of the avoidance protection. As is generally the case in the IO (para 67 (2)) and therefore also in avoidance law, the term “illiquidity” automatically also includes “over-indebtedness”. Since the initiation of restructuring proceedings requires the likelihood of insolvency and the submission of a (conditional) forecast on the company’s continued existence (see already our last newsletter), knowledge of a possible over-indebtedness would probably be obvious in the vast majority of cases. On the other hand, the time limits for avoidance under the IO are not suspended by restructuring proceedings (as was still envisaged in the ministerial draft).
However, we do not believe that such a result was the legislator's intention. Rather, „illiquidity” is to be interpreted restrictively here and does not include “over-indebtedness”. Anything else would not only hinder restructurings but would in our view contradict the requirements set in Directive (EU) 2019/1023.
Legislator continues to adhere to the URG
The legislator continues to hold on to the reorganisation proceedings under the Austrian Reorganisation Code (URG), which is used in practice only very rarely (if at all). In the future, a debtor seeking restructuring may thus be able to choose, possibly even simultaneously (e.g. in the event of imminent illiquidity) between regular restructuring proceedings (under the ReO), simplified restructuring proceedings (under the ReO), reorganisation proceedings (under the URG) as well as restructuring proceedings with or without self-administration (under the IO). Flexibility and a large toolbox are in principle a good thing. However, it is not likely that the proceedings under the URG will be used more in the future. It would have been better to repeal the URG.
The ReO provides a mixed picture. Courageous innovations such as the simplified proceedings are offset by weak points such as the lack of a debt-to-equity swap.
The law can support the Austrian private workout practice, the simplified proceedings have potential. Whether the ReO will be accepted on the broad market and become relevant especially for smaller companies remains to be seen. Now it is up to the practice to use the new instruments and bring the ReO to life. Given the many vague terms and new concepts, this will be an exciting task.
Overall, we do not expect any major changes in the domestic market (for now). However, with the EU already working on further harmonisation initiatives in insolvency law, more reforms could follow soon.
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.