Austrian Supreme Court has finally annulled SIGNA Prime Selection AG’s restructuring plan

In the history of Austria’s economy, few insolvency cases have caused as much uproar as the insolvency of the SIGNA real estate group. The insolvency of SIGNA Prime Selection AG (“Company”) as a major subsidiary of SIGNA is one of the largest of all time in Austria, especially in terms of the amount of claims filed. Moreover, this case is of great interest as the Company holds numerous highly prestigious properties in Vienna and abroad. It is widely considered the centrepiece of SIGNA, drawing particular attention from media outlets.

On 28 December 2023, the Company filed for insolvency as it was no longer able to meet its financial obligations. Specifically, it filed a petition for what is known as a restructuring procedure with self-administration, which has been highly contested and subject to several court cases since the application was made.

The Restructuring Plan

First, the Company submitted for approval to its creditors a so-called restructuring plan, as required under Austrian insolvency law. Indeed, a large majority of the Company’s creditors approved the restructuring plan, as did the Commercial Court of Vienna as the competent insolvency court. In its restructuring plan, the Company proposed a quota of 30% for the insolvency creditors’ claims, payable within a period of two years after adoption.

The Decision of the Vienna Higher Regional Court

The Republic of Austria, which had registered tax claims against the Company, decided to appeal the court's confirmation of the restructuring plan shortly afterwards. In brief, the Republic of Austria argued in its appeal that the restructuring plan lacked certain formal requirements and was generally not feasible, meaning that in its opinion it was unlikely to succeed, and should thus be rejected. 

The court followed the Republic of Austria’s argumentation and ruled on 5 July 2024 that the restructuring plan was indeed unfeasible, mainly because the company lacked funding to meet the quota of 30%. Moreover, the court confirmed that the Republic of Austria was eligible to bring forward such an appeal, although it had turned out to be a debtor rather than a creditor in view of tax benefits enjoyed by the Company in the meantime.

The Decision of the Austrian Supreme Court

The Company as the debtor submitted another final appeal to the Austrian Supreme Court in response to this second instance decision. 

The Supreme Court confirmed in its decision dated 31 October 2024 that the Republic of Austria was indeed eligible to appeal against the restructuring plan. First, the court reiterated that all insolvency creditors have the right to appeal against such a plan, in particular if they registered their claim in time, as the Republic of Austria did. Second, a claim is deemed to be registered in insolvency proceedings when it has been recognized by the administrator and not been disputed by an insolvency creditor.

In addition, and most importantly, the Supreme Court confirmed that under Section 152a of the Insolvency Code, the approval of a restructuring plan requires (i) the determination and at least assurance (i.e. the securing) of the insolvency administrator’s and creditor unions’ compensation and (ii) the fulfilment of certain agreed conditions in the restructuring plan. 

The Supreme Court held that pursuant to Section 125 Paragraph 5 of the Insolvency Code, any agreement between the insolvency administrator and the debtor about the compensation of the insolvency administrator would be void. A deferral of payment by the insolvency administrator, which the administrator had suggested in view of the Company’s lack of funds to pay his fees, would qualify as an illegal arrangement pursuant to the law. Hence, offering a mere deferral of the administrator’s fees to the Company would have no effect on the legal requirement that the compensation needs to be at least assured (i.e. secured). Consequently, there would be no legal basis for the Company as debtor to first generate sufficient funds during the insolvency proceedings, and only thereafter pay the insolvency administrator’s – as well the creditor unions’ – compensation. 

It can thus be concluded that a full deferral of the insolvency administrator’s compensation must not be considered by the insolvency court when approving a restructuring plan. In the Supreme Court’s view, a company as debtor must have at least sufficient funds available to pay (or secure) all the procedural, including the administrator’s, costs in full in order to be eligible for a restructuring proceeding and a related plan. Given the Company’s failure to comply with these formalities, the Supreme Court denied and declared the restructuring plan to be null and void, without having to go into further details or analysis regarding the “feasibility” of the restructuring plan. Consequently, the Company has now been put into bankruptcy proceedings and will be liquidated in the years to come. 

Learnings and Take-Away Points

Much can and will be said and written about this landmark Supreme Court decision. While many will argue that the court took an approach that was (too) strict and formalistic, there is in our view not much to criticize about the court’s line of legal analysis and argumentation. It turns out that both the administrator and the insolvency court could probably have done a better job in fulfilling the quite clear statutory guidelines for approving a restructuring plan. What is of course a pity is the fact that the Supreme Court did not go into further detail as regards the “feasibility” of restructuring plans. The insolvency law community in Austria was hoping for further clarification and analysis on that issue. Understandably, however, the court did not feel the need to expound upon this issue in any further detail in view of the formal deficiencies in the restructuring proceeding. 

From the creditors’ perspective, it is of course on the one hand regrettable that the creditor plan previously approved was finally annulled, and many days and weeks of work in that respect proved to be useless. However, on the other hand and from a commercial perspective, there is certainly hope for the creditors that they will finally walk away with a quota of (much) more than merely 30% of their claims, the minimum quota that needed to be offered by the Company in the chosen type of restructuring proceeding.