Austria implemented Directive (EU) 2019/1023 on preventive restructuring frameworks with the Restructuring Regulation, which came into force on July 17, 2021, and introduced (further) judicial proceedings for preventive restructuring. Practice, however, has shown that the reorganization plan in insolvency proceedings and out-of-court restructuring remain the methods of choice in Austria.
Even after the introduction of preventive restructuring proceedings, the reorganization plan – essentially a debt cut subject to the approval of creditors as part of insolvency proceedings – continues to be the central element in the reorganization of companies under Austrian insolvency law. Around one-fifth of Austrian companies’ insolvencies end with a reorganization plan. The basic prerequisite is the offer of a 20% quota (or 30% in the case of self-administration) to all insolvency creditors, with the claims of secured creditors remaining unchanged. The instrument is flexible and can be used not only in proceedings that have been applied for by the debtor itself but also during bankruptcy proceedings (even if applied for by a creditor).
Although not regulated by law, out-of-court restructurings also continue to be of significant importance. According to a study conducted by JKU Linz University Professor Stefan Mayr, 70% of attempted out-of-court restructurings in Austria are successful.
In contrast, preventive restructuring procedures have always been a wallflower in Austria. Back in 1998, Austria introduced the pre-insolvency restructuring Corporate Reorganization Procedure (Unternehmensreoganisationsgesetz). While it is still in place, it has never become mainstream. In the last 25 years, there have only been roughly six proceedings under this law. Solely the crisis indicators created alongside its introduction (equity ratio below 8%, notional debt duration over 15 years) are of practical relevance. Even after Austria implemented the directive on preventive restructuring frameworks, the situation did not change. The newly created Restructuring Regulation (Restrukturierungsordnung) has been in force for more than two years, but there have not been any proceedings to date.
Why have pre-insolvency reorganization proceedings yet to become well-established in Austria? The answer seems simple.
On the one hand, companies are often not prepared to take (early) court-ordered restructuring measures. Even within traditional insolvency proceedings, restructuring measures are usually only applied for when there is no other way out and when the statutory obligations to file an application (i.e., within 60 days of the occurrence of insolvency or over-indebtedness) can only barely be met, if at all.
On the other hand, there simply seems to be no need for pre-insolvency restructuring proceedings as the advantages of preventive restructuring proceedings over other debt relief options are hardly recognizable.
Judicial reorganization proceedings, provided they are well prepared, can be completed within four months. They therefore last just a little longer than the pre-insolvency proceedings available in Austria, which are required by law to last between 30 and 60 days. Austrian insolvency law is also flexible enough to allow debtors to discharge their debts by offering a reorganization plan for the entire duration of bankruptcy proceedings.
On the other hand, many restructurings are conducted out of court and customized agreements are made with the respective main creditors. Those are much more flexible than preventative restructuring procedures. Although out-of-court restructurings are not regulated by law, the INSOL Principles were adapted to Austrian specifics in April 2013 upon the initiative of three major Austrian banks and a law firm.
Although these guidelines, consisting of eight principles, are not legally binding, they document the common understanding of best practices. They are to be applied in cases with liabilities of more than EUR 30 million and the involvement of at least three banks.
It should be noted that the restructuring procedure created in 2021 would be a suitable instrument, especially for larger companies with financial liabilities, especially if a settlement has already been reached with the majority of financial creditors and only a few so-called “chord disruptors” are preventing the completion of the restructuring. Due to the well-functioning practice of out-of-court restructurings based on the above-mentioned principles though, the preventive restructuring procedure is obviously still not perceived as an actual alternative in Austria. However, the expected future developments suggest that this could change.
By Susanne Fruhstorfer, Partner, and Andreas Howadt, Senior Associate, Taylor Wessing
This article was originally published in Issue 10.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
