The Decision of the Vienna Higher Regional Court on the Insolvency of SIGNA Prime Selection AG: An Analysis

Authors

Mark Krenn, Partner

The decision of the Vienna Higher Regional Court on the appeal by the Republic of Austria against the confirmation of the restructuring plan of SIGNA Prime Selection AG was eagerly awaited. Now it is here, and today I will analyze the decision for you.

Let's briefly recap: The insolvency of SIGNA is one of the largest bankruptcies Austria has ever seen. SIGNA Prime Selection AG filed for bankruptcy on December 28, 2023, as a restructuring procedure with self-administration. In recent years, SIGNA has developed into one of the leading real estate companies in Europe, with a portfolio that includes numerous high-profile properties.

Background of the Insolvency

The problems began when the real estate market changed significantly due to global economic uncertainties and the COVID-19 pandemic. These factors led to a decline in property values and a drastic drop in rental and sales revenues. Additionally, the interest rate hikes in July 2022 further exacerbated the situation. SIGNA struggled with liquidity problems and ultimately could no longer meet its financial obligations.

The Restructuring Plan

As part of the insolvency proceedings, a restructuring plan was created, which was approved by a large majority of the creditors. Although the first-instance court confirmed this plan, the Vienna Higher Regional Court changed this decision and denied confirmation of the restructuring plan on July 5, 2024.

How did it come to this? Let's start with the restructuring plan, which is publicly available in the insolvency file of the Ministry of Justice on the internet:

The restructuring plan envisaged a 30% quota for insolvency creditors, payable within two years of its adoption. To achieve this quota, an orderly continuation and management of ongoing development projects as well as the structured liquidation of existing properties were to be carried out.

However, the implementation of the restructuring plan depended heavily on securing bridge financing, which was to be raised through a mass credit in the triple-digit million range. This financing was necessary to ensure the solvency of the German holding companies, which hold all the key properties (including those in Austria) and to avoid their insolvency, thus enabling an orderly liquidation. If SIGNA were unable to prevent or terminate these insolvency proceedings through financial support to the holding companies, the proceeds from property sales would not be available or not be available in time for SIGNA's restructuring. This bridge financing had not been secured by the time the restructuring plan was confirmed.

Nevertheless, the proposed restructuring plan of SIGNA was approved by a large majority of the creditors (both by headcount and by claim capital) and ultimately confirmed by the Commercial Court of Vienna.

The Appeal of the Republic of Austria

The Republic of Austria, which had also registered tax claims, appealed against the court's confirmation of the restructuring plan, arguing essentially that the restructuring plan was not feasible. The Vienna Higher Regional Court followed this appeal and modified the decision of the commercial court by denying confirmation of the restructuring plan.

But how can it be that the Republic of Austria, which according to media reports went from being a creditor of SIGNA to a debtor of SIGNA (apparently tax debts were offset against tax credits, resulting in an overall tax credit for SIGNA), appeals as an insolvency creditor? And for what reasons can the court ultimately deny confirmation of a restructuring plan that was accepted by a large majority of the creditors?

The Legal Justification

As reported in the media, the Republic of Austria became a debtor of SIGNA due to a tax credit during the insolvency proceedings, meaning it owed money to SIGNA. Although I do not know the concrete details, this is irrelevant for answering the question of why the appeal of the Republic of Austria was not dismissed: According to Section 109, Paragraph 1 of the Insolvency Code, a claim is deemed established in insolvency proceedings if it is acknowledged by the insolvency administrator and not disputed by any entitled insolvency creditor. This was the case here: The Republic of Austria's claim was acknowledged at the verification meeting and no proceedings have been initiated since to extinguish the claim. Therefore, the claim formally continued to exist, and the Republic of Austria was thus entitled to appeal.

Reasons for Rejecting the Restructuring Plan

So, we can turn to the question of why the appellate court denied confirmation of the restructuring plan, even though the clear majority of creditors voted for the restructuring plan.

The legislator has subjected the restructuring plan procedure to a multi-stage strict control by the insolvency court, which is to safeguard the interests of all affected creditors – not just those who participate in the vote. The court is therefore required to review ex officio whether the prerequisites for confirming the restructuring plan are met. The restructuring plan may only be confirmed if:

1. The remuneration of the insolvency administrator and the rewards of the creditors' protection associations are determined and paid or secured by the insolvency administrator,

2. All due and established other mass claims are paid as well as the mass claims asserted in court or by an administrative authority, of which the insolvency administrator has been informed, are secured, and

3. The conditions for confirmation provided for in the restructuring plan are met.

When Is a Restructuring Plan Unacceptable?

A restructuring plan application is, among other things, unacceptable under Section 141, Paragraph 2, Number 6 of the Insolvency Code if it is obviously impossible to fulfill the restructuring plan. Obvious impossibility is assumed, for example, in restructuring plan applications whose fulfillment depends on the unsecured financing by third parties or the completely uncertain outcome of a procedure due to lack of assets and income. If there is a ground for inadmissibility, the restructuring plan must be denied confirmation. An improvement or amendment is no longer permissible at this stage of the proceedings, as the invalid restructuring plan has already been voted on.

The Decision of the Appellate Court

In the present case, the appellate court concluded that fulfilling the restructuring plan is currently "obviously impossible."

The mass credit required as essential in the restructuring plan could not be obtained. Contrary to media reports, the appellate court found from the records that there was only a claim to credit funds amounting to €50 million. However, almost €27 million would already have to be raised for procedural costs, so the financing target deemed necessary by SIGNA and the insolvency administrator was missed. Additionally, timely access to the necessary funds through property sales was not feasible according to the court. Therefore, the court considered the proposed restructuring plan unfeasible because the funding deemed necessary by SIGNA to stabilize the German holding companies had failed.

Furthermore, the Vienna Higher Regional Court also considered the restructuring plan unfeasible because SIGNA's funds were insufficient to meet a 30% quota. SIGNA has always assumed a distributable net asset value of around €1.3 billion and has never revised this figure upwards. This was essentially derived as follows:

According to the court, the restructuring plan was based on very optimistic assumptions about future developments, which are very uncertain, and therefore its calculative feasibility required critical scrutiny. The court then dealt in great detail with the figures presented in the proceedings.

The court found that the insolvency administrator had indicated the amount of acknowledged insolvency claims at around €5.8 billion. The insolvency administrator further assumed in her estimate that subsequent claims of around €1 billion would be recognized. She also used this amount as the basis for her remuneration.

Based on total claims of around €6.8 billion, SIGNA would have to raise €2.04 billion to fulfill the restructuring plan. A consulting firm, which had issued an opinion solely on the adequacy of a shorter-term liquidation, assumed under consideration of positive potentials that in the best case around €1.7 billion could be realized.

However, after deducting loans, costs, and operational expenses, according to the court, only around €1.64 billion would remain, which is well below the required €2.04 billion. The court found that even under the insolvency administrator's optimistic assumptions, only a quota of around 24% could be achieved. Additionally, other claims were not considered in this calculation. Therefore, the court concluded that the 30% restructuring plan quota is not achievable even under the best conditions, making the plan obviously unfeasible.

Outlook

The Higher Regional Court has permitted the ordinary appeal to the Supreme Court. This can now be filed within 14 days, which I expect will happen. This will likely postpone the decision until autumn. As soon as the decision is made, I will report again.