A successful harmonization and facilitation of the restructuring process?
On 26 July 2021, the ReO (Restrukturierungsordnung), which transposed the requirements of the EU Directive on Restructuring and Insolvency ("RIRL") on a preventive restructuring framework in Austria, was published. The RIRL entered into force retroactively on 17 July 2021. The RIRL already met with criticism at the European level. In particular, it was debated whether it was needed at all. The RIRL gives the member states a great deal of scope for implementation, whereby the Austrian legislator has undertaken a minimal implementation. The aim of the ReO is to give bona fide debtors an opportunity to take advantage of a preventive restructuring procedure in the event of impending insolvency averting unnecessary insolvency proceedings and liquidations of viable companies and giving companies a second chance to save their viability. Harmonizing the rules on restructuring procedures also preserves the legal certainty of cross-border investors.
The definition of the term "probable insolvency"
Prior to the entry into force of the ReO, there was confusion as to how the Austrian legislator would define the term "probable insolvency", which is a prerequisite for the application. It based its definition on already existing constructs and is found in § 6 para 2 ReO. According to § 6 para 2 ReO "probable insolvency" occurs if the existence of the debtor's company would be endangered without restructuring, especially in the case of imminent insolvency; it is presumed - but does not have to exist - if the equity ratio falls below 8% and the notional debt repayment period exceeds 15 years (already known warning indicators from the URG). The legislator has adopted a broad definition giving the debtors the opportunity to initiate restructuring proceedings at an early stage and thus give their company a promising second chance. In any case, the company must be viable, which the debtor must state in the application to open restructuring proceedings.
The restructuring plan
The debtor's restructuring plan is supposed to give a rough overview of the existing liabilities and contain restructuring measures - mostly in the form of a deferral or reduction of claims. The special feature of the restructuring plan is that the debtor decides which creditors to include in the plan and divides these creditors into creditor classes. The debtor's categorization of creditors provides equal treatment within the creditor classes. In contrast to the unanimous out-of-court restructuring, acceptance only requires a double majority, consisting of a majority of the present included creditors in each class and a cumulative majority of at least 75% of the total amount of all claims of the present included creditors in each creditor class, failing which there will be a cross-class cram-down. Outvoted creditors are protected in that they may not be placed in a worse position by the decision than they would be in the event of a liquidation of the company or a restructuring plan. If there is a liquidation distribution, this results from the order of insolvency law. The core of the procedure is the possibility, with the consent of a majority of creditors, to provide for debt reductions through the restructuring plan drawn up by the debtor, even against the will of individual creditors
The role of creditors and shareholders in the restructuring process
The creditor does not have the right to apply for the opening of restructuring proceedings, whereas in insolvency law he does have the right to file for the opening of insolvency proceedings. When initiating restructuring proceedings, the debtor can apply for an enforcement bar of a maximum of three months, the effects of which go beyond those of the execution bar, include extrajudicial realizations, and affect all types of claims, including collateralized claims. This is also associated with a ban on opening insolvency proceedings depriving creditors of the possibility of filing for the opening of insolvency proceedings in case of over-indebtedness. Consequently, the enforcement bar can influence only affected creditors of the restructuring plan. In addition, the enforcement bar entails a contract termination bar of essential contracts - except in the case of the debtor's default - that are necessary for the continuation of the daily operation of the debtor's business. To a determined extent, the ReO also involves shareholders in the restructuring process, insofar as they are subject to a “prohibition of obstruction” of the restructuring plan. There is also no separate creditor class for Shareholders and therefore they cannot be overruled by way of a cross-class cram-down. If the plan includes measures that require shareholder approval (e.g. capital increase), then the provisions of company law must be applied and if it does not interfere with the legal or economic position of the shareholders, a court order may replace their consent under company law.
An outlook on the practical relevance of the ReO
With the restructuring procedure, a new regulation was created intending to be available to a company as a preliminary stage to insolvency. Austria already has such a regulation, which essentially complies with the provisions of the RIRL - the reorganization procedure (URG). In practice, it is hardly used. The restructuring procedure is most comparable to the redevelopment process according to insolvency law (IO). There is competition between the ReO and IO, which can be a potential source of danger for the abusive use of the restructuring procedure and subsequently lead to the delaying of insolvency. The advantage of the restructuring procedure is its pre-insolvency character allowing the debtor to continue operating his business. In practice, it is questionable how many debtors will succeed in restructuring proceedings, as they are designed for debtors who must have a well-organized and functioning accounting system and have the financial means to prepare the application (in particular the restructuring plan). The positioning of the ReO between the already existing regulations remains to be seen.