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Avoiding insolvencies with all means - further measures through the 4th COVID-19 Act

Following the insolvency law amendments by the 2nd COVID-19 Act (which in particular doubled the period to file for insolvency to 120 days), the legislator has now set further measures with the 4th COVID-19 Act announced on April 4.

The goal is clear. The current situation should not force into insolvency because of circumstances beyond their control. 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.

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 mainly for limited liability 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.

Under 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 and 30 June 2020. 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 may lead to discussions in case of dispute.

Should the company still be over-indebted after 30 June 2020, an insolvency petition must be filed the later of (i) 60 days after 30 June 2020 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 uncertain market situation. It shall be prevented that companies must file for insolvency only because they are over-indebted because 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 if 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 2-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 only be relevant in case of illiquidity.

In this context, it is important that according 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.

It is therefore all the more important that the support promised by the public authorities in the form of liquid funds reaches the companies very soon! Otherwise, many will be forced into insolvency, especially as in this case the exemption from liability for directors, which only applies to over-indebtedness, is unlikely to intervene and cautious managers will probably decide sooner rather than later to file for insolvency.

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 (see: Switching to the crisis mode). However, this means that attempts to restructure the business always also entail a liability risk for the directors.

The legislator would like 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 to 30 June 2020). It is not clear yet 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; purely according to the wording of the law, the liability relief could also apply unconditionally.

The concept of this provision is to be welcomed. However, it is to be criticised insofar as it only refers to the provision for Austrian stock corporations (AG), but not to the parallel provision for Austrian limited liability companies (GmbH).

This is surprising, as it is fully recognised that both provisions have the same purpose and that the prohibition of payment relating to GmbH, despite the fact that the wording of the law is different, is also triggered upon occurrence of a reason for insolvency and not on the duty to file for insolvency itself (see e.g. OGH 6 Ob 164/16k). In practice, the provision would be much more relevant for Austrian GmbH, whose number clearly exceeds that of AG. As long as the law does not clarify its application to GmbH as well, one will have to argue with an analogous application. It is therefore to be hoped that the clarification will be made rather sooner than later.

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 30 June 2020 to finance COVID-19 short term work support (see: Corona Short Term Work and Employment Law Implications of Closure of Businesses) can now 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 para 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. In the present case, however, the better arguments speak for the fact that avoidance is generally excluded 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 would be taken ad absurdum. It would therefore have been desirable for the legislator to express this more clearly.

Facilitation of shareholder loans

According to the Austrian Equity Substitution Act (Eigenkapitalersatzgesetz - EKEG), 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 into force (5 April 2020) until 30 June 2020 and if no security is provided for the loan from the assets of the company.

Other new provisions

In addition, the 4th COVID-19 Act also provides for facilitations regarding the payment plan instalments in private insolvency proceedings and some procedural adjustments. In particular, the recently implemented statutory interruption of deadlines in court proceedings (see: Governance of the Judicial System and Procedural Deadlines in times of COVID-19) is not applicable in insolvency proceedings, as particularly in this period the quick processing of insolvency proceedings is required.


Please note: This newsletter merely provides general information and does not constitute legal advice of any kind from Binder Grösswang Rechtsanwälte GmbH. The newsletter cannot replace individual legal consultation. Binder Grösswang Rechtsanwälte GmbH assumes no liability whatsoever for the content and correctness of the newsletter.

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