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
Restructuring proceedings do not need to be initiated if
Restructuring plan, coordination and confirmation
No mandatory involvement of shareholders - Debt Equity Swap against their will not enforceable
Appointment of a restructuring officer
Option: execution freeze
Effects of the freeze on execution on the occurrence of bankruptcy
Impact of the freeze on execution and the restructuring process on contracts
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.