First decision relating to the Restructuring Act – Is it going to suffer the same fate as the Corporate Reorganization Act?

It has been more than two years since the introduction of the Restructuring Act (Restrukturierungsordnung), yet surprisingly little has been said or written about it. So far, there have been no restructuring proceedings that have been made public. In a recently published decision (6 R 200/22h), the Higher Regional Court of Vienna clarified a number of important points about the relationship between insolvency proceedings and proceedings under the Restructuring Act, as well as the court's duties when proceedings are initiated. The decision has at least injected some momentum into discussions about the legislation, which is still relatively new.

The decision:

The decision relates to the case of a self-employed accountant and payroll administrator who, after losing a civil lawsuit, was under an obligation to make certain payments. She applied for the opening of restructuring proceedings and for a stay of execution to be granted. In her restructuring plan, she offered the affected creditors a quota of 41%, to be paid over a period of 30 months. Compared to the quota attainable in insolvency proceedings, the creditors would have been financially better off, as she would no longer have been able to practice her profession if insolvency proceedings had been opened and the entrepreneur would have had to accept a considerable loss of income as a result. However, the court of first instance rejected the application on the grounds that she was insolvent and the decision of the court of first instance was subsequently upheld by the court of appeal.

The reasons for the decision:

According to the court's decision, a clear distinction must be made between debtors who are eligible for restructuring and debtors who are insolvent and therefore ineligible for restructuring from the very opening stage of restructuring proceedings. Insolvent debtors should only make use of the insolvency proceedings that are specifically tailored to their situation. This may not be surprising on the face of it, but it is worth noting that substantive insolvency does not constitute a legal obstacle to the opening of restructuring proceedings. The clarification provided by the Higher Regional Court of Vienna is therefore to be welcomed and should help avoid legal uncertainty in the future.

Furthermore, the court of appeal clarified that the court of first instance has a judicial duty to examine the debtor's solvency (or insolvency) in the opening proceedings. Neither the law nor the legislative materials make provision for this. On the contrary, the legislative materials categorically state that the issue of insolvency is not to be examined. However, the standard of review is lowered, as demonstrated by the fact that only a cursory review should be carried out in the opening proceedings to establish whether the debtor is in need of restructuring under Section 7 of the Restructuring Act and is still viable.

Consequently, the Higher Regional Court of Vienna has taken a clear position on important questions of delimitation between the Restructuring Act and the Insolvency Act and has strengthened the role of the court of first instance regarding the opening of proceedings.

Outlook:

This decision has not necessarily made the Restructuring Act more attractive in practice, and it is questionable whether restructuring proceedings will ever really gain a foothold in Austria. From today's perspective, it seems the Restructuring Act could suffer a similar fate to that of the Corporate Reorganization Act (Unternehmensreorganisationsgesetz) and that in practice only a few accompanying provisions of the Restructuring Act will be of significance. In particular, the provisions in Section 26 of the Restructuring Act on the invalidity of certain contractual clauses and the conclusions to be drawn from them for the Insolvency Act have so far kept practitioners busier than restructuring proceedings themselves.