DORDA
  February 25, 2021 - Austria

Bankruptcy Avoidance - But How? An Important Step in Facilitating the Preventive Restructuring of Companies

Good news in times of crisis: The eagerly awaited draft of the Restructuring and Insolvency Directive Implementation Act (RIRL-UG) was published yesterday. The law with which Directive (EU) 2019/1023 (Restructuring Directive) is implemented in Austria is to come into force on July 17, 2021 (at the end of the implementation period). The review phase will run until April 6, 2021.

Especially against the background of the likely ongoing corona pandemic, the draft law will come late, but hopefully in good time - especially for those companies that find themselves in financial distress (at the latest when the current bankruptcy relief and deferral options cease to exist). Everyone expects their number to increase significantly in the second half of 2021.

The heart of the draft is the new restructuring order (ReO), which provides for judicial restructuring proceedings for entrepreneurs - both legal and natural persons who run a company. The aim is to enable early (!) Preventive restructuring of entrepreneurs via a restructuring plan in order to avoid bankruptcy. Surprisingly, it is planned that the ReO should join the URG (which in practice is de facto not used) (instead of repealing the URG).

In particular, the proposed simplified restructuring procedure could in future play an important role in practice in order to restructure financial liabilities safely, quickly and even against the will of individual creditors (currently 100% creditor approval is required for this). However, it remains to be seen whether the other planned restructuring tools will be sufficient in practice to actually represent an attractive alternative to the reorganization procedure under the URG or - more relevant in practice - to the judicial reorganization procedure. On the basis of the present draft, however, this is doubtful, in particular,

An overview of the most important changes:

A. New business restructuring opportunities

1. The restructuring process according to the ReO

The ReO provides for a judicial, but basically not public, restructuring procedure with self-administration, whereby a feared stigmatization of the debtor is to be avoided. The main difference to the (already possible) out-of-court settlement is that the consent of all creditors is no longer mandatory, but the consent of a qualified majority of creditors (head majority and at least 75% sum majority) per creditor class is sufficient with judicial confirmation. Under certain circumstances, the lack of consent of individual creditor classes can also be replaced by a judicial confirmation.

1.1 Company restructuring / recorded debtors

The restructuring procedure according to the ReO is open to legal persons as well as natural persons who run a company (for the temporary COVID special regulation for the debt relief of all other natural persons, see point B.). Companies from the financial services sector are not included.

1.2 Excepted Claims

Exempt from the new preventive restructuring process according to the current draft are in particular existing and future claims of current or former employees as well as claims arising after the initiation of the restructuring process. It is therefore not possible for the company to reorganize operations in the restructuring process, but only to restructure the existing liabilities.

1.3 The restructuring process

Requirements for initiating restructuring proceedings

  • Request from the debtor
  • The existence of a "probable insolvency" of the debtor (especially in the event of impending insolvency or an equity ratio below 8% and a fictitious debt repayment period of over 15 years) and
  • Current payments can be made within the next 90 days (no insolvency)

Restructuring proceedings do not need to be initiated if

  • the restructuring plan or the restructuring concept is obviously unsuitable or the application is improper (e.g. because there is no probable insolvency or the bankruptcy is evident from the execution data),
  • a restructuring or reorganization procedure has already been initiated in the last 7 years or
  • the bodies have falsified accounts.

Disposal restrictions

  • Debtor retains full or partial self-administration
  • The court can prohibit certain legal acts or make them dependent on the consent of the court or - in practice the normal case - the restructuring officer (restrictions may not go as far as in bankruptcy proceedings)

Restructuring plan, coordination and confirmation

  • Mandatory submission of a restructuring concept when submitting an application; submission of a restructuring plan within a period to be determined by the court of a maximum of 60 days; it makes sense to present the restructuring plan immediately
  • Debtor has the choice of which creditors / claims are included in the plan (objective justification required for non-inclusion); involved creditors vote on plan
  • Affected creditors are obligatory (optional for SMEs) to be divided into a maximum of five creditor classes - (i) secured (lien and similar rights), (ii) unsecured, (iii) bond, (iv) worthy of protection and (v) subordinated creditors.
  • Voting on the restructuring plan in the restructuring plan statute (also possible virtually) within 30-60 days (advance transmission of the plan to the creditors concerned at least two weeks before the vote); Necessary majorities: Double majority per creditor class:
    • Head majority (> 50%) and
    • Total majority (at least 75%) of the claims of the creditors present at the vote
  • Equal treatment requirement for creditors in the same class
  • Cross-class cram-down possible : the court can confirm the restructuring plan even if it is rejected by one or more (!) Classes; Requirement:
    • Formalities complied with
    • Rejecting creditor classes are treated on an equal footing with peer classes and better off than subordinate classes (relative priority rule)
    • No class will receive more than the full amount of their claim
    • Majority of the classes including the secured creditors class agree OR majority of the creditor classes that would likely receive a quota in an insolvency proceeding agree.
  • Rejecting creditors can request a review of compliance with the creditors' interests (verification that the restructuring plan does not put creditors in a worse position than in fictitious insolvency proceedings)
  • Refusing affected creditors can appeal against confirmation of the restructuring plan; In principle, there is no suspensive effect, but this can be granted unless a corresponding security is lodged with the court

No mandatory involvement of shareholders - Debt Equity Swap against their will not enforceable

  • No mandatory involvement of the shareholders (eg partners / shareholders) in the restructuring plan is envisaged; Debt equity swap cannot be enforced against the will of the shareholders (this is optional in the RL and is common in many countries)
  • Prohibition of obstruction: Shareholders may not prevent or hinder the acceptance, confirmation and implementation of the restructuring plan for no reason; If necessary, the court can replace the consent required under company law with a resolution

Appointment of a restructuring officer

  • Possible to assist the debtor and the creditors in negotiating and drafting the restructuring plan, if
    • the court orders a suspension of enforcement and such an agent is necessary to safeguard the interests of the parties;
    • the confirmation of the restructuring plan requires a cross-class cram-down or
    • the debtor or the majority of the creditors so request.
  • If circumstances are known that lead to the expectation that self-administration will lead to disadvantages for the creditors (e.g. breach of cooperation or disclosure obligations by the debtor)
  • The remuneration of the restructuring officer is determined by the court and is to be borne by the debtor

Option: execution freeze

  • At the request of the debtor, the court can order a freeze on execution in order to support negotiations on a restructuring plan. This is particularly relevant for tax and duty debts, which are usually immediately executable.
  • This can extend to claims of one or more creditors or creditor classes and may not exceed three months; however, upon request it can be extended to a maximum of six months.
  • Attention : no process lock or deferral of claims provided in the draft

Effects of the freeze on execution on the occurrence of bankruptcy

  • The debtor's obligation to file for insolvency due to over-indebtedness is suspended (no creditor application possible for this reason; no liability of the managers related to over-indebtedness due to the delay in bankruptcy / violation of the ban on payment)
  • Insolvency proceedings due to insolvency are only not to be opened if this is in the general interest of the creditors

Impact of the freeze on execution and the restructuring process on contracts

  • Contract termination block for company-relevant contracts (e.g. rental and license contracts, long-term supply contracts), refusal of performance and contract amendment prohibition by creditors; applies only to creditors who are covered by the suspension of enforcement and only with regard to claims arising before the suspension
  • Inadmissibility of contractually agreed reasons for termination in the case of or in connection with restructuring proceedings, regardless of whether the debtor fulfills his obligation (ipso-facto clauses) or due to deterioration in economic conditions (MAC clauses) 
  • Objective: to enable the company to continue as a going concern
  • Restrictions do not apply to the debtor's claims to the disbursement of loans (the lender continues to have the right to terminate for an important reason or due to deterioration in assets; aim: avoiding the debtor from drawing on open credit lines)

1.4 The simplified restructuring procedure

The simplified restructuring procedure for a quick and secure restructuring "only" of the financial liabilities could be of great practical importance in the event that not 100% of the creditors agree to an out-of-court settlement. In this case the court has to decide on the confirmation of the restructuring plan without initiating restructuring proceedings. The debtor can apply for this simplified procedure if only financial creditors are affected and a majority of at least 75% of the creditors of capital in each creditor class has approved the restructuring plan. The concept of financial creditor is to be understood broadly; all receivables with a financing character are included. Essentially, this is intended to prevent the de facto negotiating power of the "hold out" that has existed so far.

1.5 European restructuring process

At the request of the debtor, the court must publicly announce the initiation of the restructuring proceedings in the edict (European restructuring proceedings). The advantage of this approach is that a block on enforcement can include all creditors (so-called general block on enforcement) and the procedure falls within the scope of the EuInsVO, which enables the cross-border recognition of the restructuring procedure.

2. Significant changes in the IO: Protection for new and bridging financing and other transactions in connection with the restructuring

Restructuring measures are to be facilitated by the fact that new financings, bridging financings and other transactions in connection with the restructuring are as far as possible protected from being challenged if insolvency proceedings are opened at a later date. New financings that are contained in a confirmed restructuring plan and bridging financings that have been approved by the court cannot be challenged as a disadvantageous legal transaction due to overindebtedness according to Section 31 (1) no.3 IO.

Furthermore, a catalog of protected transactions is provided, which should be protected against avoidance if they are appropriate and immediately necessary for the negotiation of a restructuring plan and have been carried out after the enforcement suspension has been granted (e.g. payment of fees and costs for the use of professional advice in close connection with the Restructuring or the payment of employee wages for work already done). The protection against avoidance applies only if the plan has been confirmed by the court or if such transactions have been approved by the court.

Furthermore, the draft stipulates that avoidance periods are to be calculated from the day the insolvency proceedings are opened to be extended by the duration of an insolvency or overindebtedness existing during the restructuring process. This is to prevent abuse by postponing the insolvency proceedings and the associated expiration of the deadline.   

B. Innovations for the discharge of natural persons

Due to the ongoing corona pandemic and the associated economic effects, the draft law provides that honest consumers are given the opportunity to pay off their debts after three years. This is to apply for a limited period of time for the next five years. In addition to the current five-year skimming procedure, a shortened skimming procedure (repayment plan) is to be introduced.