Austria: Majority Shareholders' Obligation To File For Insolvency Proceedings Enacted 1 July 2013

With effect as per 1 July 2013, the Austrian legislator has enacted an amendment to the Limited Liability Companies Act (GesRÄG 2013) providing primarily for a decrease of the minimum share capital to EUR 10,000, as well as a decrease of the formation costs. These changes are aimed at maintaining Austrian limited liability companies' competitiveness in comparison to other European limited capital companies and to fostering the formation of new limited liability companies also by small service providers. In connection with such amendment act, a new provision has been introduced to the Insolvency Act (Section 69 subparagraph 3a), according to which majority shareholders of an insolvent company shall be obliged to file for insolvency proceedings in case such company does not have any legal representatives.

Existing Filing Obligation

Up until 1 July 2013, only the legal representatives of a capital company (i.e. the managing directors of a limited liability company or the directors of a stock corporation) -- but generally not other agents, supervisory board members or shareholders -- were obliged to file for insolvency proceedings if the prerequisites of insolvency under the Insolvency Code ("IC") are met. The insolvency tests provided for under the IC are illiquidity or over-indebtedness of the company. In case these legal prerequisites of insolvency are met, the filing for insolvency proceedings must be submitted with the competent court without culpable delay, but in any event within 60 days.

Under limited circumstances, the legal representatives' obligation to file for insolvency proceedings was extended by Austrian Supreme Court rulings to so-called "de facto" managers and former directors.

Under such case law, a "de facto" manager is considered a person who assumes authority as director without being formally appointed as such. However, the required level of "assumption of directorial authority" has been left open by courts. In the underlying court case, the shareholder made all economically relevant decisions, while the managing director was only appointed pro forma and never actually acted as a managing director. Austrian scholars have opined to conclude that there was factual management, the factual director must take a permanent and distinct role as a representative of the company, whereas the repeated use of a shareholder's authority to instruct management of a limited liability company shall not be sufficient to exceed the critical threshold. In order to be qualified as "de facto" manager, a person must "according to the overall impression of its acts" take charge of the fate of the company.

In relation to the liability of a former director for procrastination in the initiation of insolvency proceedings, the Austrian Supreme Court has held that a director of an insolvent company cannot escape it responsibility, even if he/she resigns and is deregistered as a director from the commercial registry. Thus, if an obligation to file for insolvency proceedings has already arisen, the resignation by or recall of the company's directors does not present a solution.

Additional Filing Obligation of Majority Shareholders as of 1 July 2013

With effect as of 1 July 2013, Section 69 subparagraph 3a IC provides that if a domestic or foreign capital company has no legal representatives, the obligation to file for insolvency proceedings lies upon the shareholder with a participation of more than half of the share capital.

According to its wording, the provision applies to capital companies, which from an Austrian perspective includes limited liability companies and stock corporations. However, where referring to shareholders ("Gesellschafter") and share capital ("Stammkapital"), the provision uses the terminology only of the Austrian Limited Liability Company Act. It is remarkable that this provision shall apply not only to domestic capital companies, but also to foreign capital companies. It remains open to what extent this provision can actually be enforced in relation to foreign capital companies.

Further, the provision shall apply if a capital company has no legal representatives, which suggests a formal approach dependent on whether or not the company has in fact appointed legal representatives. It remains unclear, however, whether the provision shall also apply to those cases in which a capital company's legal representatives are unable or unwilling (for whatever reason) to perform their duties of office.

Finally, if the provision applies, the obligation to file for insolvency shall only be upon a shareholder whose participation accounts for more than half of the company's share capital. The provision again seems to take a formal approach in that respect, not taking into account a shareholder's voting power and his/her ability to influence the appointment of the company's legal representatives. Thus, the provision would not apply to a shareholder with a participation of less than half of the company's share capital but who is nevertheless in a position – e.g. due to a shareholder agreement or special right in the articles of association – to appoint one or more of the legal representatives. According to the parliamentary explanatory notes for the amendment, the filing obligation shall be upon the majority shareholder even if such shareholder has no possibility to influence the appointment of the company's legal representatives. That situation is generally the case in an Austrian stock corporation, where the directors are appointed by the supervisory board and not the shareholders.

The wording of the provision read in conjunction with the parliamentary explanatory notes also seems to suggest that this filing obligation applies only to direct majority shareholders of an insolvent company without legal representatives, but not also to any indirect majority shareholders of such company.

Liability for Creditors' Shortfall

A managing director who fails to file for insolvency in due time is personally liable towards the company's creditors for the damages suffered by them as a result of the delayed filing. Such liability due to delayed filing will also be incurred by majority shareholders if the new Section 69 subparagraph 3a IC is applicable. In this context it should be noted that such liability is unlimited and in particular not limited to the majority shareholder's capital contribution in the relevant company. To that effect, Section 69 subparagraph 3a IC constitutes a case of piercing the corporate veil prescribed by law superseding under certain circumstances the above described doctrine on "de facto" managers developed by Austrian courts and legal scholars.

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.