EU harmonisation on insolvency law continues – Proposal for a new Directive on the table
On 7 December 2022, the European Commission published a Proposal for a Directive of the European Parliament and of the Council harmonising certain aspects of insolvency law COM(2022) 702 final (the “Proposal”), aiming to bring further harmonisation in the context of insolvency law within the European Union. The Proposal does not come as a surprise as the European Commission already anticipated such further harmonisation as part of the Action Plan to build up a European Capital Markets Union. On the other hand, the latest harmonisation initiative in this area, Directive (EU) 2019/1023 on restructuring and insolvency (“PRD 2019”), has not even been implemented in all Member States. In the following, selected key aspects of the Proposal shall be summarised and analysed, including first thoughts on what it may bring for Austria. To anticipate already, by and large we would expect the most need for amendments in Austrian law in terms of pre-pack proceedings and simplified winding-up proceedings for microenterprises.
1. Background and scope of the Proposal
Same as in previous EU legislative documents, the Explanatory Memorandum of the Proposal again highlights that insolvency law has been identified as a key area for achieving a true European Capital Markets Union because the level of cross border investment and cross border business relationships could not reach its potential due to the absence of more convergence in insolvency regimes. Therefore, the key objective of the proposed Directive is to contribute to the proper functioning of the Internal Market and to remove obstacles to the exercise of Fundamental Freedoms (such as Free Movement of Capital and Freedom of Establishment), which result from differences between national laws and procedures in the area of insolvency (Recital 1 of the Proposal – references in this paper are if not stated otherwise references to the Proposal).
The proposed harmonisation aims to achieve common rules on the following subject matters (see also Article 1 (1)):
- avoidance actions;
- the tracing of assets belonging to the insolvency estate;
- pre-pack proceedings;
- the duty of directors to submit a request for the opening of insolvency proceedings;
- simplified winding-up proceedings for microenterprises;
- creditors’ committees;
- the drawing-up of a key information factsheet by Member States on certain elements of their national law on insolvency proceedings.
Similar to other European legislative initiatives in this area, the proposed Directive shall not apply to insurance undertakings, credit institutions and alike and also not to natural persons except for entrepreneurs (Article 1 (2)).
2. Avoidance actions (Title II, Articles 4 to 12)
Articles 4 to 12 propose common rules on avoidance actions in order to protect the value of the insolvency estate for creditors (Recital 5). In the following, the main aspects are summarised including some remarks from an Austrian law perspective:
2.1 Stricter provisions under national law permissible (Article 5)
The proposed Directive shall not prevent Member States from adopting or maintaining provisions providing a greater protection of the general body of creditors than those set out in the Proposal. This may lead to a “minimum standard”, but the level playing field will therefore likely not become the same throughout all Member States. This is also relevant for Austrian law (see hereafter).
2.2 Preferences (Article 6)
Legal acts benefitting a creditor or a group of creditors by satisfaction, collateralisation or in any other way can be declared void if they were perfected (i) within three months prior to the submission of the request for the opening of insolvency proceedings, under the condition that the debtor was unable to pay its mature debts, or (ii) after the submission of the request for the opening of insolvency proceedings (Article 6 (1)).
In case of so-called congruent coverages (Recital 8), meaning that a due claim of a creditor was satisfied or secured in the owed manner, a legal act can only be declared void if additionally, the creditor knew or should have known that the debtor was unable to pay its mature debts or that a request for the opening of insolvency proceedings has been submitted (in case of closely related parties, the creditor’s knowledge shall be presumed (Article 6 (2)).
According to Article 6 (3) lit a, legal acts performed directly against fair consideration to the benefit of the insolvency estate shall also be excepted from this avoidance provision.
What does it mean for Austria?
By and large, the requirements under Article 6 already seem to be covered by Sections 30 and 31 of the Austrian Insolvency Code (“IO”). These provisions allow (i) for an avoidance of satisfactions or collateralisations taking place while the debtor was already actually insolvent (materiell insolvent) within the meaning of the IO (ii) up to one year before the opening of the insolvency proceedings. The fact that the Proposal links the deadline to the submission of the opening request and not to the opening of proceedings itself would in our eyes not per se lead to implementation need in Austria because of the overall much longer Austrian avoidance period. Further, the concept of congruent or incongruent satisfactions or collateralisations is already known to Austrian insolvency law and addressed in Section 30 IO. Finally, Sections 30 and 31 IO also provide exceptions in case of legal acts performed directly against fair consideration by providing a so-called direct exchange exception (Zug-um-Zug-Ausnahme) and a shift of burden of proof for closely related parties. It should be mentioned that Article 6 seems to only be linked to cash-flow insolvency (“debtor was unable to pay its mature debts”). The relevant Austrian provisions are stricter as they are linked to cashflow insolvency/illiquidity (Zahlungsunfähigkeit) as well as balance sheet insolvency/over-indebtedness (Überschuldung) within the meaning of the IO. The distinction is not only theoretical because balance sheet insolvency is very often in place much earlier than cashflow insolvency and insolvency administrators also regularly argue with avoidance based on balance sheet insolvency. Such stricter national rules are permissible (see before point 2.1) but the Proposal could – if desired by the Austrian legislator – level the path for less strict rules in that regard.
2.3 Legal acts against no or a manifestly inadequate consideration (Article 7)
Further, legal acts against no or a manifestly inadequate consideration can be declared void where they were perfected within a time period of one year prior to the submission of the request for the opening of insolvency proceedings or after the submission of such request (Article 7 (1)). This shall not apply to gifts and donations of symbolic value (Article 7 (2)).
What does it mean for Austria?
Also this provision should in our view already be by and large covered by the IO (Section 29) which allows for a challenge of legal acts up to two years before the opening of insolvency proceedings. It shall still be noted that Austrian law also provides a further exception if any such legal act was made in order to meet a legal obligation.
2.4 Legal acts intentionally detrimental to creditors (Article 8)
Finally, intentionally detrimental acts can be declared void if (i) those acts were perfected either within a time period of four years prior to the submission of the request for the opening of insolvency proceedings or after the submission of such request; and (ii) the other party to the legal act knew or should have known of the debtor’s intent to cause a detriment to the general body of creditors. Same as in Article 6 (2), also here a shift of burden of proof in relation to the latter subjective criterium is applied (Article 8 (1)).
What does it mean for Austria?
In terms of intentionally detrimental acts Austrian law is partly stricter and partly less strict than the Proposal. According to Section 28 (1) IO, legal acts can be challenged if they occurred up to ten years before the opening of insolvency proceedings and if the other party knew that the debtor acted with the intend to cause a detriment to its creditors. If the other party did not know but should have known of such intent, the avoidance period is “only” two years before the opening of insolvency proceedings. In the latter point – should the text of the Proposal find its way in a final Directive - the Austrian legislator would therefore need to amend the current Austrian provisions.
2.5 Consequences of avoidance actions (Articles 9 to 12)
The consequences of avoidance actions include in particular the unenforceability of the claims resulting from a voided act as well as the obligation of the party benefitting from the legal act to fully compensate the insolvency estate for the detriment caused; set-off is prohibited (Article 9 (5)). The limitation period for all claims resulting from an avoidable legal act is three years from the date of the opening of insolvency proceedings (Article 9 (3)).
The Member States shall ensure that claims of the insolvency estate shall also be assignable to a creditor or a third party (Article 9 (4)).
What does it mean for Austria?
To summarise, the provisions of the Proposal on the consequences of avoidance actions are broadly similar to those under Austrian law (sections 38 to 43 IO). It shall be noted, though, that the limitation period under Austrian law is one year (Section 43 (2) IO); the three year period of the Proposal is arguably too long given the interest of other parties to have planning security at one point. The requirement that Member States have to ensure that claims of the insolvency estate shall also be assignable to a creditor or a third party is already met in Austria since the Austrian Supreme Court decision 17 Ob 6/19k (although not explicitly stated in the IO yet). Further, the prohibition to set-off claims of the other party against the avoidance claim of the insolvency estate is as well provided for by Austrian law (Section 42 IO).
2.6 Relation to PRD 2019 (Article 12)
Article 12 finally makes clear that the provisions on avoidance actions shall not affect Article 17 and 18 PRD 2019. Any payments or collateralisations in relation to new or interim financing granted in the context of a preventive insolvency procedure under the PRD 2019 shall be considered as legal acts performed directly against fair consideration to the benefit of the insolvency estate (Recital 10).
Summary from an Austrian perspective
Overall, the avoidance provisions set out in the Proposal should in our eyes not lead to significant implementation need in Austria as they reflect many concepts already familiar to Austrian law. Austrian law is – in the interest of the general body of creditors and therefore permitted under Article 5 – still in many aspects stricter than the provisions in the Proposal. As mentioned in the previous points, the Proposal would still require some changes in Austrian law. Whether it also (re-)ignites broader discussions on the current Austrian avoidance regime (e.g. the fact that Sections 30, 31 IO are also linked to balance sheet insolvency/over-indebtedness) remains to be seen.
3. Pre-pack proceedings (Title IV, Articles 19 to 35)
Articles 19 to 35 provide a detailed set of rules on provisions of pre-pack proceedings – at this point a restructuring tool not yet existing in many Member States, amongst them Austria. The European Commission thereby takes over the momentum of the recent judgment of the European Court of Justice on Heiploeg of 28 April 2022 C-237/20 where the ECJ described under which circumstances a pre-pack proceeding may be in line with the insolvency exception of Article 5 (1) of Directive (EU) 2001/23/EC on transfers of undertakings (“TOU-Directive”). The Proposal explicitly refers to those sources making clear that it does not intend to interfere with employee protection under the TOU-Directive (see page 4 of the Proposal).
The provisions on pre-pack sales are based on the general assumption that more value can be recovered in liquidation by selling the business or parts thereof as a going concern rather than by piecemeal liquidation. This shall be promoted by allowing a debtor in financial distress with the help of a monitor to seek possible interested acquirers and preparing the sale of the business as a going concern before the formal opening of insolvency proceedings so that the assets can be quickly realised shortly after such opening. The pre-pack proceedings shall therefore consist of two phases namely a preparation phase and a liquidation phase (Recital 22).
In the following, only a general overview shall be given. So far, Austria does not provide any formal framework on pre-pack sales; summarised comments from an Austrian perspective will therefore be made at the end of this section.
3.1 General (Articles 19 and 20)
- (No) interference with national insolvency laws: Pre-pack proceedings under national law shall comply with the provisions of the Proposal. Besides, the provisions of the national insolvency laws such as the ranking of claims or the distribution of proceeds shall apply (Article 19 (2)).
- Alignment with other EU legal acts: According to Article 20, the liquidation phase under the Proposal shall be considered as insolvency proceeding within the meaning of Regulation (EU) 2015/848 on insolvency proceedings (“EIR 2015”) – this brings especially legal certainty in terms of jurisdiction, governing law and recognition – and shall also be considered as bankruptcy or insolvency proceeding for the purposes of Article 5 (1) of the TOU-Directive – this is the takeaway from the Heiploeg ECJ Judgment mentioned before.
3.2 Preparation Phase (Articles 22 to 24)
- Monitor: Debtors shall be able to request the court to appoint a monitor who shall be in charge to (i) document and report each step of the sale process, (ii) justify why it considers that the sale process is competitive, transparent, fair and meets market standards, (iii) recommend the best bidder as the pre-pack acquirer, (iv) state why the best bid does not constitute a manifest breach of the best-interest-of-creditors test (Article 22 (1) and (2)), and (v) shall be liable for damages in case of non-compliance (Article 31) – in short: the monitor shall ensure that the sales process is not abused and leads to the best possible result. Monitors must meet the criteria applicable to insolvency practitioners and may also be appointed as insolvency practitioners in the subsequent liquidation phase (Article 22 (3)).
- Debtor in possession: The debtor shall remain in control of its assets and the day-to-day operations of the business (Article 22 (4)).
- Stay: If the debtor is in a situation of likelihood of insolvency or insolvent in accordance with national law, it shall according to Article 23 be entitled to apply for a stay of individual enforcement actions within the meaning of Articles 6 and 7 PRD 2019. This is in line with the idea standing behind the PRD 2019 that preventive restructuring frameworks shall not necessarily be formalised proceedings but rather be more like a modular system where in the individual case, a debtor can select the tool(s) needed. By referencing also to Article 7 PRD 2019, in our eyes not only a stay of individual enforcement actions is included, but also a suspension of the duty to file for insolvency (Article 7 (1) PRD 2019) as well as of the right of creditors to file for insolvency (Article 7 (2) PRD 2019).
- Non-public process: The Proposal does not include the requirement to publish the initiation of the preparation phase, which is why it can be assumed that it is intended as non-public (see publicity to interest parties as follows).
- Principles applicable to the sale process: It shall be ensured that (i) the sale process carried out is competitive, transparent, fair and meets market standards (Article 24 (1)) and that (ii) where the sale process only produces one binding offer, that offer shall be deemed to reflect the business market price (Article 24 (2)). In that process, the monitor plays a key role and shall also be responsible to ensure that the sale meets those standards (see already above). Complying with market standards in this context should according to the Proposal require that the process is compatible with the standard rules and practice on mergers and acquisitions in the Member States concerned, which includes an invitation to potentially interested parties to participate in the sale process, disclosing the same information to potential buyers, enabling the exercise of due diligence by interested acquirers and obtaining the offers from the interested parties through a structured process (Recital 26). Member States may depart from the above provisions if the court runs a public auction in the liquidation phase (Article 24 (3), see below).
3.3 Liquidation phase (Articles 25 to 29)
- Monitor to be re-appointed: Member States shall ensure that the court appoints the monitor also as the insolvency practitioner in the liquidation phase (Article 25).
- Sale based on monitor proposal or public auction: The sale shall be made either (i) to the acquirer proposed by the monitor, provided that the monitor has issued an opinion confirming that the sale process run during the preparation phase was compliant with the above formal requirements (Article 26 (1)) or (ii) a public auction referred to in Article 24 (3) shall be made lasting no longer than four weeks and initiated within two weeks as of the opening of the liquidation phase. In the latter case, the offer selected by the monitor shall serve as the “stalking-horse bid” (Recital 27) and be used as the initial bid in the public auction (Article 26 (2)).
- (Automatic) Transfer of executory contracts: Executory contracts of the debtor necessary for the continuation of the debtor’s business shall be automatically assigned to the acquirer without consent of the debtor or the counterparty (Article 27 (1), which shall not apply if the acquirer is a competitor to the debtor’s counterparty). Only the court may decide to terminate such executory contract if the termination is in the interest of the debtor’s business or part thereof (exceptions apply, see Article 27 (2)). Loan agreements are in our view not to be considered executory contracts. The same applies to employment agreements (otherwise the above-mentioned reference to the TOU-Directive would not make sense).
- No successor liability: On the other hand, Member States shall ensure that acquirers shall not take over any debts and liabilities relating to the debtor’s business unless an acquirer expressly consents (Article 28).
3.4 Criteria to select the best offer (Articles 30 and 35)
- National law applies: The criteria to select the best bid in the pre-pack proceedings shall be the same as the criteria used to select between competing offers in winding-up proceedings under national law (Article 30).
- Transaction risks may lead to exclusion: If there is an appreciable risk of a delay ensuing from a procedure based on competition law or of a negative decision by a competition authority, the monitor shall facilitate the presentation of alternative bids (Article 35 (1)). Where an offer entails an appreciable risk of a delay due to the above reasons, that offer may be disregarded provided that such offer is not the only existing offer and the delay in the conclusion of the pre-pack business sale with the bidder concerned would result in a damage for the debtor’s business or part thereof (Article 35 (3)). As there could be also other types of transaction risks relating to an individual bidder (for instance foreign direct investment control), the wording of the Proposal on competition law might arguably be to narrow.
3.5 Stricter rules for closely related bidders (Article 32)
- Additional protection: Probably having in mind controversial discussions held on so-called “phoenix pre-packs”, Article 32 provides stricter rules in case of bidders closely related to the debtor. Amongst others (i) the status of the close relation must be disclosed to the monitor in a timely manner, (ii) other parties to the sale process must receive adequate information on the existence of such closely related parties and (iii) parties not closely related are granted sufficient time to make an offer (Article 32 (1)).
- Breach may lead to successor liability: Member States may provide that the court can revoke the benefits of Article 28 (see above) leading to a possible successor liability for the debts of the insolvent seller (Article 32 (1) para 2). The wording of this provision suggests that also other sanctions can be provided for in national law.
- Best-interest-of-creditors test must be met: If the offer of the related party is the only existing offer, Member States shall introduce additional safeguards at least including the duty for the monitor and the insolvency practitioner to reject an offer if it does not satisfy the best-interest-of-creditors test (Article 32 (2)). Why this test shall only be linked to offers of related parties (in other cases, the monitor must “only” state why it does not constitute a manifest breach of such test, see further above on Article 22 (2)) is in our view not really comprehensible as a pre-pack sale should in any case lead to at least the same or a higher recovery as a piecemeal liquidation (and if not, such sales should not be approved).
3.6 Value maximising measures (Article 33)
- Interim financings shall have super priority: In order to maximise the value of the debtor’s business, necessary interim financings shall receive priority in subsequent insolvency proceedings and security interests over the sale proceeds may be granted to providers of interim financings in order to secure reimbursements.
- Credit bidding: Further, interim financing shall be eligible to be set-off against the price to be disbursed under the offer when provided by interested bidders.
3.7 Creditor protection (Article 34)
- Right to be heard: Creditors as well as equity holders shall have the right to be heard by the court before the authorisation or the execution of the sale of the debtor’s business or parts thereof. This shall not be the case if creditors or equity holders are out of the money or creditors of executory contracts are not affected by the proceedings.
- Release of security interests: Security interests shall be released in pre-pack proceedings under the same requirements that would apply in winding-up proceedings. From the perspective of Austrian law this does especially mean that the security cannot be transferred to a purchaser without distributing the net sales proceeds to the secured creditor (see especially Section 120 IO).
- Further protection under national law possible: The fact that pre-pack proceedings shall not interfere with other provisions of national insolvency laws means additional protection mechanisms under national law (such as rights of appeal, file inspection, creditor committees etc) can remain in place or can be introduced.
What does it mean for Austria?
Overall, the practical relevance and arguable success of pre-pack proceedings in the United States, England and – until the ECJ case law on Smallsteps and Plessers – also in Member States such as the Netherlands or Belgium shows that such proceedings can be a valuable and practical tool to ensure business continuity, protect employees as well as creditor rights. At the same time, the lack of procedural frameworks also caused several and often also justified concerns in terms of abuse and circumvention of such rights and interests. An initiative to push forward formalised rules on pre-pack proceedings is therefore in our eyes as such to be welcomed. As many Member States, amongst them Austria, do not yet provide a formalised framework on pre-pack proceedings, the Proposal might in this point lead to significant implementation work and therefore probably also to controversial discussions. As Austrian law already allows quick and efficient going concern sales in insolvency scenarios, which are often also well prepared (although not in a formalised process yet), we think that an implementation in Austria would not cause significant need for change, though. Requirements such as Section 117 (2) IO to publish a business sale for at least 14 days (or in case of an imminent loss in value even eight days according to section 117 (3) IO) as well as other formal requirements such as an approval of the creditors’ committee and the insolvency court (Section 117 (1) IO) could be linked with a newly implemented preparation phase including a monitor pre-selecting the best bidder to be used as a “stalking horse bid” relatively easy. More need for change would be required if the Austrian legislator also used the option of a sale without public auction solely based on the opinion of the monitor. Exclusions of successor liability in case of purchases of a business out of insolvency proceedings are already in place in Austrian law. Further need for change may still be caused in the details e.g. in relation to the assignment of executory contracts as under current Austrian law, the automatic transfer of agreements in case of a business transfer under Section 38 of the Austrian Commercial Code does not apply in case of purchases out of insolvency proceedings (as this is anyway partly and in our view rightly criticised, this may be a good occasion for a new discussion on this point).
4. Directors’ duty to request the opening of insolvency proceedings and civil liability (Title V, Articles 36 and 37)
4.1 General (Recital 33)
Articles 36 and 37 aim to introduce provisions on a duty to request the opening of insolvency proceedings for directors of legal entities. The purpose of those provisions shall be to prevent directors from acting in their self-interest by delaying the submission of a request for the opening of insolvency proceedings despite signs of insolvency.
4.2 Duty to file within three months (Article 36)
Directors must file for insolvency no later than three months after they became aware or can reasonably be expected to have been aware that the legal entity is insolvent.
4.3 Trigger point “insolvency” (Article 36)
What may in our eyes bring uncertainty in relation to Article 36 is that the trigger point (“insolvent”) is not defined in the Proposal. As in terms of avoidance law (see above point 2.2) as well as microenterprises (see below point 5.3), the term “unable to pay mature debts” is used, it may be argued that the term “insolvent” has a wider scope and may e.g. also include a possible balance sheet insolvency under respective national laws. On the other hand, e.g. the German translation of the Proposal uses the term “Zahlungsunfähigkeit” in Article 36. A clarification in that regard would be helpful.
4.4 Civil liability (Article 37 (1))
In case of a breach of such duty, directors shall face civil liability for the damages incurred by creditors as a result of a delayed request. Whether it shall be a direct liability towards creditors or whether liability claims shall be enforced in a bundled way, for instance by an insolvency administrator, is not addressed in the Proposal.
4.5 Stricter provisions remain permissible (Article 37 (2))
The above provisions shall be without prejudice to national rules that are stricter towards directors.
What does it mean for Austria?
Austrian law already provides for a duty to file for insolvency in Section 69 (2) IO with a shorter filing period of generally 60 days. This duty applies generally to debtors (individuals as well as companies) and not only to directors of legal entities; in practice, the latter are the most relevant addressees, though. Many questions which are clearly answered in Austria by the legislator or by case law (trigger point covers cashflow insolvency/illiquidity as well as balance sheet insolvency/over-indebtedness; directors can be liable directly towards creditors for the quota deterioration; in insolvency proceedings the enforcement of damage claims is generally bundled by the insolvency administrator; differentiation between the damage of the general body of creditors and individual damages; etc) are not addressed by the Proposal which stays very much on the surface in relation to such questions. Also, under Austrian law it is clear that the duty to file period is a maximum period meaning that it must be filed for insolvency without culpable delay but at the latest within 60 days. Directors can only make use of this period if they pursue promising restructuring efforts. The wording of the Proposal may be misunderstood that directors can in any case wait for three months which would in our eyes definitely be against its purpose. In summary, in Austria no implementation need would be caused in this context.
5. Winding-up of insolvent microenterprises (Title VI, Articles 38 to 57)
5.1 General (Recital 35)
As according to the Proposal national insolvency laws are not always fit to treat insolvent microenterprises properly and in a proportionate manner (especially the need for faster, simpler, affordable procedures), separate insolvency proceedings should be developed at national levels in accordance with the provisions of the Proposal. The provisions in the Proposal are very detailed and, in the following, only certain aspects shall be addressed.
5.2 Definition of microenterprises (Article 2 lit j)
Microenterprises shall be defined according to the Annex of the Commission Recommendation 2003/361/EC meaning an enterprise employing fewer than ten personsandannual turnover or annual balance sheet not exceeding EUR 2 million. Based on this definition it can be assumed that this would affect a significant number of insolvency proceedings throughout the EU (see also our assessment in relation to Austria further below).
5.3 Precondition of insolvency (Article 38 (2))
Microenterprises shall be deemed insolvent for the purposes of simplified winding-up proceedings when they are unable to pay their debts as they mature (see already above). The conditions for that must be clear, simple and easily ascertainable by the microenterprise concerned.
5.4 Opening even in a case of a lack of cost covering assets (Article 38 (3))
The opening and conduct of simplified winding-up proceedings may not be denied on the ground that the debtor has no assets, or the assets are not sufficient to cover the costs of the proceedings. How such costs shall be funded is not addressed in detail, but Member States must ensure a coverage (Article 38 (4)).
5.5 Appointment of insolvency practitioners only upon application (Article 39)
Insolvency practitioners shall only be appointed if the debtor, a creditor, or a group of creditors request such an appointment and the costs for the intervention of the practitioner can be funded by the insolvency estate or by the party that requested such appointment. Otherwise, debtors shall remain in control of their assets and the day-to-day operation of the business. The competent authority can still decide to remove the debtor’s right to manage and dispose of the assets, but this must be based on a case-by-case assessment and view of all relevant elements of law and facts (Article 43 (3)). Remarkably, the court can if no insolvency practitioner is appointed also entrust the right to manage and dispose of the assets to a creditor (Article 43 (4) lit b). In summary, these provisions would transfer many tasks which would – in a typical scenario in Austrian practice – usually be fulfilled by insolvency practitioners to the competent judges and the creditors, whereas the latter would have to pay the costs if they want to have an insolvency practitioner involved.
5.6 Standard request form (Article 41)
Member States shall ensure that microenterprises can submit a request for the opening of simplified proceedings using a standard form (Article 41 (3)), which shall be established by the European Commission (Article 41 (5)).
5.7 Automatic stay (Article 44)
Upon the opening of the simplified winding-up proceedings an automatic stay of individual enforcement actions shall be in place (Article 44 (1)). Individual enforcement actions can be excluded if the enforcement is not likely to jeopardise the legitimate expectations of the general body of creditors and the stay would unfairly prejudice the creditor of that claim (Article 44 (2)). In order to ensure the equal treatment of creditors, the latter exception should in our eyes be limited to cases of enforcement of security or ownership rights.
5.8 Alignment with EIR (Recast) (Article 45)
Simplified winding-up proceedings are public and shall be considered as insolvency proceedings within the meaning of EIR (Recast).
5.9 Simplified lodgement and admission of claims (Article 46)
Claims of creditors may be considered as lodged without any further action from the creditors concerned if the debtor already indicated such claim in its request for the opening of the proceedings or in a later submission during the proceedings (Article 46 (1)). Creditors may still lodge claims not contained or make statements of objection or raise concern on claims included in one of the submissions of the debtor (Article 46 (2)). In the absence of any objection or concern communicated by a creditor, a claim is deemed to be undisputed (Article 46 (3)). The competent authority or an insolvency practitioner where appointed can still also admit or deny admission of claims in accordance with national law (Article 46 (4)).
5.10 Closure of proceedings without distribution possible (Article 49)
If (i) no assets are in the insolvency estate, (ii) the assets are of such a low value that it would not justify the costs or time of the sale and of the distribution or (iii) the apparent value of encumbered assets is lower than the amount owed to the secured creditors and the competent authority considers it justified to allow those secured creditors to take over the assets, (iv) the competent authority can take the decision on the immediate closure of the proceedings without any realisation of the assets (Article 49 (2)).
5.11 Electronic auction systems (Articles 52 and 54)
In order to allow an efficient sale of the assets of the debtor, electronic auction platforms shall be established and maintained as well as interconnected via the European e-Justice Portal.
5.12 Discharge of entrepreneur debtors, founders, owners or members (Articles 55 (2) and 56)
A closure of a simplified winding-up proceeding shall also lead to a discharge of the entrepreneur debtor, or of those founders, owners or members of an unlimited liability microenterprise debtor who are personally liable for the debts of the debtor in accordance with Title III PRD 2019. The closure decision of the simplified winding-up proceeding shall also include a specification of the time period leading to such discharge (Article 55 (2)). This does not apply to personal guarantees assumed for debts of the microenterprise. Still, insolvency proceedings or individual enforcement proceedings over such personal guarantees issued by a founder, owner or member of the person or a family member of an entrepreneur shall be coordinated or consolidated with the simplified winding-up proceedings (Article 57).
What does it mean for Austria?
In order to put this part of the Proposal into perspective it should be highlighted that this would potentially affect a very large number of Austrian business insolvencies (according to statistics published by Creditor Protection Associations (bevorrechtete Gläubigerschutzverbände), a very large number of such insolvencies for instance affects businesses with liabilities of EUR 2 million or less). The statement that microenterprises should have access to efficient winding-up proceedings is certainly also correct. Still, although Austrian law does not provide for a specific kind of proceedings for such types of enterprises, we think that many aspects addressed in the Proposal are already reality in the Austria insolvency practice, to name a few: The fact that in practice the filings of most of the (smaller) creditors are bundled through the Creditor Protection Associations ensures a cost and time efficient process. If a creditor files for insolvency the court can require the creditor to provide an advance on costs, if no cost covering assets are available in the estate (Section 71a IO). If no assets are in the estate, an already opened proceeding can be terminated without distribution (Section 123a IO).
Certain aspects of the Proposal are not covered yet, though, for instance: There is no “safety net” ensuring the opening of proceedings if no advance on costs is provided (discussions on a broadly funded “Insolvency Opening Fund” may therefore be revitalised by the Proposal). Further, in every proceeding, insolvency administrators are appointed. As those are remunerated mostly “success based”, we still have doubts that a limitation of such appointments would indeed lead to a better situation for the winding-up of microenterprises than the current Austrian regime. What may be questionable from an Austrian perspective is the requirement to open proceedings which is under Austrian law in terms of corporations is cashflow insolvency/illiquidity as well as balance sheet insolvency/over-indebtedness. Whether the latter meets the criterium of being “clear, simple and easily ascertainable” (see above point 5.3) can certainly be discussed. Based on previous experience, the required discharge of founders, owners or members of an unlimited liability microenterprise, which would have to be automatically connected with the proceedings of the enterprise as such, will likely be discussed controversially in Austria. A similar connection is currently only provided for rehabilitation plans (Sanierungspläne) (Section 165 IO). In summary it remains to be seen how any final EU requirements on such simplified proceedings for microenterprises may look like. We still expect that many requirements would be covered by the already rather quick and cost-efficient procedures offered by the Austrian IO.
6. Other provisions of the Proposal
Further provisions especially on asset tracing (Title III) and creditors’ committees (Title VII) are not addressed herein. By and large it seems that Austrian law mostly already meets those requirements, though. If the proposed Directive is implemented, in any case a key information fact sheet according to Article 68 would have to be presented also by Austria.
What now and what next?
Whether, when and in which form an actual Directive will be adopted remains to be seen. The fact that also after the PRD 2019, the EU and especially the European Commission continue having harmonisation on insolvency law on their agenda is to be welcomed. We have doubts, though, that at this time when not even the PRD 2019 has been fully implemented in all of the Member States yet, such further harmonisation effort can achieve its full potential. The appetite of the Member States for further amendments in that area may be limited. This may also be the reason why same as already in the EIR (Recast) and PRD 2019, also in the Proposal “hot topics” like the key term of “insolvency” and its scope are still not (proposed to be) harmonised. Finding a common and harmonised definition of insolvency could be a real gamechanger in the strengthening of the Internal Market, which is as a goal highlighted by the European Commission.
While in some Member States, provisions like the proposed avoidance rules or the duty to file for insolvency may lead to the most controversies and need for amendments in the national law, in Austria the proposed pre-pack proceedings would in our eyes be the biggest innovation. Still, we are positive that such proceedings could be easily implemented using many already existing concepts and would also find its place in the Austrian market.
It can be expected that in the coming months and years, discussions and negotiations will lead to possibly significant changes in the wording of the Proposal. We would still not be surprised if the main topics will by and large stay the same. Therefore, Member States should take this initiative certainly seriously and start preparations and evaluations early enough. Last time, in case of the PRD 2019, it took around 2.5 years from proposal to actual adoption of the Directive.
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.