Insolvency law support through the 2. COVID-19 Act

1.
Duty to file for insolvency: Period doubled to 120-days

According to the Austrian Insolvency Code (IO), directors are obliged to file for insolvency proceedings without undue delay, but at the latest within 60 days, as soon as one of the reasons to file for insolvency is in place (ie illiquidity or over-indebtedness). Already the existing rules provided for an extended 120-days period to file if insolvency is caused by a natural disaster. The law previously mentioned floods, avalanches, snow pressure, landslides, rockslides, hurricanes, earthquakes or similar catastrophes of comparable magnitude (Section 69 para. 2a IO). Now, the terms epidemic and pandemic have been added to this list, thus clarifying that the provision also applies in such cases. In the current situation, primarily illiquidity may be relevant (because sales and thus liquidity collapse short-time); however, the provision also applies to over-indebtedness.

The purpose (already of the previous regulation) is to increase the leeway for restructuring efforts and public support if insolvency is caused by such events. According to the legislative materials this is based on the consideration that in the event of a natural disaster it is unclear to what extent and when the debtor will receive compensation from the public authorities, insurance companies or other bodies; however, the debtor should not be obliged to file for insolvency after the expiry of the 60-day period, although compensation payments can be expected in the near future that will enable the company to meet its payment obligations again.

It should be noted, however, that in the current situation the longer period is only applicable if the pandemic is the only or at least one of the insolvency triggers, ie a conditio sine qua non for insolvency. Indirect causation by the pandemic is deemed sufficient.

The new regulation does not change the situation, though, that a company may continue its business operations during this 60/120-day period only if attempts to rescue the business are being seriously pursued and appear promising. 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, despite the prolongation of the period to 120 days, continuing the operations and trying to rescue the business remains challenging from the legal perspective and is associated with risks for directors.

2.
Restructuring plan: No debt resurgence in case of payment default

A further amendment in the insolvency context concerns the possible debt resurgence (Wiederaufleben) in connection with already court approved restructuring plans (Sanierungsplan). By way of background, this relates to the benefits of a restructuring plan, which particularly include the discharge of up to 80% of the liabilities. Such discharge lapses towards creditors whose pro rata claims were not paid within the deadlines provided for in the restructuring plan. In the case of corporate insolvency, such a default is (only) to be assumed if the debtor has not paid a due liability despite a written demand received by the creditor granting him an additional grace period of at least 14 days (Sections 156a (1) and (2) IO).

It is now amended that

• (i) a written demand of a liability due on or after 22 March 2020
• (ii) dispatched by the end of 30 April 2020,
• (iii) does not lead to default pursuant to § 156a para. 1 IO.

This is intended to protect debtors from not being able to pay restructuring plan quotas as a result of the current crisis and slipping back into insolvency due to such demands received by creditors. It remains to be seen whether this very narrow time corridor actually helps the affected companies.

3.
Further measures necessary?

Whether these measures are sufficient is questionable. Other countries are planning more far-reaching measures. In Germany, for example, the duty to file for insolvency and the liability norms for management concerning payments linked to insolvency are discussed to be completely suspended under certain circumstances and the rules on avoidance law are apparently also to be limited; this is mainly aimed at preventing cautious directors from filing for insolvency and at ensuring that companies can continue participating on the market and making payments.

Also, the right of creditors to file for insolvency remains untouched in Austria (so far). Public institutions such as social insurance and tax authorities have e.g. already indicated that they will be reluctant in that regard, though.

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.