COVID-19: Switching to the crisis mode

The corona crisis has reached the Austrian economy quickly and heavily and leads to many companies facing major challenges. The problems are manifold. They range from interruptions in the supply chain (and associated problems in the processing of orders), organisation or maintenance of operations (keyword: home office) to dramatic drops in sales. The customers stay away and revenues collapse. Whether and, in the positive, when and to what extent state support or compensation will be available is not yet foreseeable in detail. However, the first bridging guarantee schemes have already been announced.

Therefore, management is forced to switch to the crisis mode. In addition to business management measures, the legal framework must also be kept in mind to prevent COVID-19 from becoming a liability trap.

Directors are above all obliged to keep an eye on the current as well as the expected business development. If the development falls short behind plan, directors must react and adapt the plans and identify a necessary need for action.

The supervisory board must be informed in case of important events, in particular in case of circumstances that are of considerable importance for the profitability or liquidity of the company. In addition, a meeting of shareholders might have to be convened (for example in case of loss of half of the nominal capital or if the interests of the company require it for other reasons). Supervisory board members can and may even have to actively request reports in order to get a full picture of whether and how directors are dealing with the situation.

A drop in sales can quickly lead to a shortage of liquidity. If a company is unable to pay more than 5% of its due debts, illiquidity (Zahlungsunfähigkeit)within the meaning of the Austrian Insolvency Code can usually be presumed. Illiquidity is one of the reasons provided for in the Austrian Insolvency Code, which oblige managing directors to apply for the opening of insolvency proceedings without undue delay, but at the latest within 60 days. IIf the reason for insolvency was (partly) caused by a natural disaster, this period is exceptionally extended to 120 days. If the corona pandemic leads to insolvency, there are therefore good reasons for the longer period (120 days) to apply.

The company may continue its business operations during this 60/120-day period if attempts to rescue the business are being seriously pursued and appear promising. However, all creditors must in principle be treated equally; therefore, it would be inadmissible at this stage to pay in full aggressive or particularly important creditors while leaving out others. It may also be inadmissible to provide (additional) collateral to keep credit lines open. On the other hand, it is permissible to make reasonable payments with an immediate exchange (Zug-um-Zug) and those that are absolutely necessary for the continuation of the business operations.

Therefore, in case of a (foreseeable) shortage of liquidity, immediate action must be taken (deferal of maturities, payment in instalments, shareholder support, cost cutting etc.). Should shareholders or third parties indicate support, directors may however only rely on such support once a binding commitment has been made.

If a company is part of an (international) group of companies, it should be noted that the duties of the directors are owed first and foremost to the respective company and not the group. If therefore liquidity is withdrawn from the company in the interest of the group and allocated to other companies (e.g. within a cash pool or through (short-term) loans), directors may risk personal liability. Particularly, in crisis situations, such measures must therefore be taken with the utmost caution.

In any case, measures and corresponding decision-making processes should be well documented. In many cases, external experts may also have to be consulted.

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.