This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.
As a measure against the economic crisis the Austrian legislator has prepared a reform of the Austrian Insolvency Law. The motto is "restructuring instead of ruining" ("Sanieren statt Ruinieren"). That the changes proposed in the governmental draft will significantly support judicial restructuring is to be doubted.
The Austrian Insolvency Law knew two separate insolvency proceedings: (i) composition proceedings aimed solely at restructuring and (ii) bankruptcy proceedings, which either end in a compulsory composition or a liquidation of the debtor. The Insolvency Reform Law 2009 (Insolvenzrechtsänderungsgesetz 2009; IRÄG 2009) removes this duality of bankruptcy and composition and creates a single insolvency proceeding. Legislatively the current bankruptcy act was adapted and renamed the insolvency act.
Compulsory composition becomes restructuring plan
Just as with bankruptcy proceeding, the new insolvency proceeding may lead to liquidation or judicial rearrangement (i.e. partial release of debt). The rearrangement is no longer called compulsory composition but instead a restructuring plan. If the debtor – as is currently possible – simultaneously with the bankruptcy petition files a restructuring plan and the restructuring plan meets the formal requirements, then the insolvency proceeding is to be called a restructuring proceeding. Now, for the acceptance of a restructuring plan, only a simple majority of heads and a simple majority of capital (as opposed to the previous 75% capital quota) is required.
While the semantic change from a compulsory composition to a restructuring plan, and from a bankruptcy proceeding to a restructuring proceeding, is overdue, to appropriately promote the "Austrian success story", compulsory composition of the lowering of the approval requirements with respect to capital to simple majority constitutes a massive interference in creditor rights. Compulsory composition was repeatedly carried by the principle of hope in the past. To the detriment of overruled creditors, receivers and bankruptcy courts have often supported composition proposals whose fulfilment was not secured and explained that the approval of the majority of creditors is a sufficient justification. Due to the lowering of the quota, receivers and insolvency courts are now to examine more thoroughly the possibility of the fulfilment of restructuring plans in the interest of overruled creditors.
Restructuring proceedings with self administration
The supposedly most significant change in the IRÄG 2009 is the abolishment of the in practice irrelevant composition proceeding. Of all corporate insolvency proceedings opened in 2008, only 1.3% were composition proceedings that did not lead to a bankruptcy proceeding. As the main reason for the unsuitability of composition proceedings the legislator has identified the higher minimum quota (40% instead of 20%). In the new restructuring proceeding with self administration, the legislator lowered the minimum quota to 30%.
However, self administration has its price. In addition to statements currently required in composition filings (in particular regarding the financing of the composition), the debtor must now submit a detailed status (overview of the assets and debts) and a finance plan, which must state how the next 90 days of the going concern and the settlement of preferential claims (Masseforderungen) will be achieved. In order to achieve a restructuring plan with self administration, preparation must therefore begin early. Counselling practice has shown that debtors usually seek counsel when insolvency petitions are overdue. To expect that under such circumstances a detailed status, finance plan and restructuring plan will be drawn up is in practice unfeasible.
The review of the financial plan and the assessment of the ability to fulfil the restructuring plan will be done by a court appointed restructuring administrator. He is supposed to report within three weeks (!) whether the financial plan and the restructuring plan can be fulfilled and whether there are reasons to revoke self administration. Whether the restructuring plan can be fulfilled can hardly be predicted within three weeks. The risks of a misjudgement with unclear consequences of liability will lead restructuring administrators to file vague reports and insolvency courts will appoint a receiver "just to be safe".
Self administration will therefore – just as with composition proceedings – remain the exception.
A missed chance
The procedural changes of the IRÄG 2009 unfortunately do not bring the hoped for innovation. The first very large corporate insolvency proceeding in Austria will show that the instruments which have proven to be apt in smaller proceedings will prove insufficient for large corporations. The Austrian insolvency law still lacks fast protection from creditors, which as a pre-proceeding before the initiation of insolvency proceedings would allow the debtor (possibly together with a court appointed administrator) to gain an overview and prepare the appropriate proceeding.
The new Austrian insolvency law further lacks a possibility to allow creditors to participate in a successful restructuring through the acquisition of shares. This suggestion, which was published in the Roadmap 2008, was mentioned in the draft and is planned to be thoroughly assessed and kept for a possible later reform. Hopefully that will not be too late for some corporations.
The procedural changes of the Insolvency Reform Law 2009 unfortunately do not bring the hoped for innovation.
This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
