One of the primary objectives of the reformed Austrian Insolvency Act ("IO"), which entered into force on 1 July 2010, has been to increase the number of successful corporate reorganisations and to facilitate the continuation of business operations during financial crises. After the initiation of insolvency proceedings, the creditors of an insolvent debtor shall not be entitled to revoke or terminate contracts that are essential for continuing the debtor's business operations.

Coherent and clear rules for restructuring proceedings

The development of coherent and clear rules for restructuring proceedings shall support corporate reorganisation and the continuation of business operations during financial crises. One of the new pillars of the Austrian Insolvency Act is the possibility to open restructuring proceedings (Sanierungsverfahren) which are essentially carried out on the basis of the rules for bankruptcy proceedings (Konkursverfahren). In case of restructuring proceedings, within the ordinary course of business the management of the company can either remain with the company's managing director(s) or be transferred to an insolvency administrator to be appointed by the competent court.

Corporate reorganisation conducted by the managing director(s)

Recent experience shows that the possibility to initiate restructuring proceedings and to have a corporate reorganisation carried out by the managing director(s) has been widely accepted. However, if the managing director(s) shall remain in charge, certain requirements need to be met. In particular a minimum quota of 30% of the company's liabilities must be offered to the creditors and a restructuring plan (Sanierungsplan) must be submitted to and accepted by the creditors within 90 days of the initiation of the insolvency proceedings.

Failure to meet requirements under statutory law

If the debtor fails to meet certain requirements under statutory law or to withdraw the proposed restructuring plan, the competent court can either transfer the management to an appointed insolvency administrator or transform the restructuring into bankruptcy proceedings.

Limitations regarding the termination of contracts

Within a period of six months after the initiation of insolvency proceedings, a contracting partner of an insolvent debtor shall not be entitled to terminate a contract if doing so would jeopardise the continuation of the debtor's business operations during a financial crisis. Article 25a IO, however, provides for a termination right for good cause subject to certain statutory exceptions. Nevertheless, termination by the debtor's contracting partner of a material contract on the following grounds is expressly excluded: (a) deterioration of the debtor's financial situation and/or (b) a debtor's default on payments that have fallen due prior to the initiation of insolvency proceedings.

The jeopardy to the continuation of the debtor's business operations might not only result from termination of a particular contract assessed on a stand-alone basis. Even though such a contract might not be qualified as material for continuation of the debtor's business on a stand-alone basis, the termination of several independent contracts in aggregate (e.g., termination of numerous distribution agreements) might trigger the termination restrictions under the Austrian Insolvency Act.

Despite these termination restrictions, certain terms and (payment) conditions of existing contracts may be amended (e.g., introduction of advance or cash payment, provision of collateral), unless the termination restrictions would thereby be circumvented. The fulfilment of the contract must not become (indirectly) impossible due to the adoption of an amendment.

Whereas certain Austrian law provisions contain statutory termination rights for cause in case bankruptcy proceedings having been initiated (e.g., article 22 para 2 of the Austrian Act on Commercial Agents - "HVertrG"), the restriction of termination of a material contract within six months after opening of insolvency proceedings is generally overriding.

Any agreements between the contracting parties and/or provisions in a contract pursuant to which the respective contract can be terminated or shall be dissolved if the contracting partner is insolvent (or has initiated insolvency proceedings) are generally invalid (article 25b IO). Article 25b IO also applies to agreements entered into before 1 July 2010.

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.