COVID-19 Legal Update: Changes in insolvency law II

Amendments to the insolvency code by the 4th COVID-19 Act

7. April 2020 – need2know

On 3 April 2020, the National Council passed the 4th COVID 19 Act (Federal Law Gazette I No. 23/2020), which introduced a number of new and more stringent provisions in the area of insolvencies. These are briefly presented and also critically examined below:

The changes to the Insolvency Code (IO) as such, reflected in Art. 33 of the 4th COVID-19 Act are of no great importance. They concern notifications and the issuing of an appointment document for the liquidator. Much more important are new features of Art. 37 within the framework of the 2nd COVID-19-Justice Accompanying Act, which contain massive substantive changes:

1. Time limits in insolvency proceedings:

  • The interruption of time periods (and deadlines) in proceedings of administrative authorities according to General Administrative Procedure Act (“AVG”) until 30 April 2020 does not apply to insolvency proceedings, and periods already interrupted thereby shall start anew.
  • In insolvency proceedings, the court may reasonably extend procedural deadlines by a maximum of 90 days.
  • Further changes in deadlines and changes in notices are also disregarded, as are simplifications of payment plans in private insolvencies, all of which only affect insolvency proceedings that are already pending.

2. Suspension of the obligation to file for insolvency in case of over-indebtedness:

The new regulation on the obligation to file an application for insolvency in the event of over-indebtedness is now based on the much more sensible German regulation. This was sought by various interested parties. While previously only the 60-day period for filing an insolvency petition in the case of over-indebtedness was extended to 120 days, the new regulation now actually offers a “breather” for companies that have become over-indebted in the current crisis, without changing anything about the fact that appropriate measures (such as the preparation of a survival plan) must be taken immediately:

  • In the event of over-indebtedness occurring after 1 March 2020, there is no obligation to file for insolvency proceedings until 30 June 2020.
  • Likewise, insolvency proceedings on account of over-indebtedness shall not be opened during this period at the request of the creditor.

This regulation was urgently necessary in order to prevent law-abiding managing directors/board members from commissioning continuation plans that would be meaningless – because they cannot be done seriously in the current climate – and which ultimately would only lead to further liabilities for the consultants who prepare them. However, this regulation does not apply in case of inability to pay. In such a case, as before, the insolvency application must be filed “without culpable delay“. It is interesting to note that the new provision does not, as originally intended, only apply to over-indebtedness “after the entry into force of this Federal Act“, but also to those companies whose over-indebtedness occurred after 29 February 2020.

This arrangement is sensible and welcome. However, the question of how to deal with those insolvency proceedings that have already been opened as a result of over-indebtedness occurring from 1 March 2020 remains open.

3. Bridging Loans:

One of the banks’ demands to the legislator was to rule out the possibility of challenging bridging loans, which in the current COVID 19 crisis should be granted as quickly and un-bureaucratically as possible. In the event of subsequent insolvency of the borrower, the repayments of loans granted during the corporate crisis can be contested by the insolvency receiver, although the lender had to recognise this crisis. The banks’ demand to exclude this if they were to pay out loans more or less unchecked seems understandable.

However, the legislator has not sufficiently complied with this: Only for those debtors who fall under the suspension of the obligation to file for insolvency in the case of over-indebtedness (see point 2. above) was a challenge on the grounds of having to know (i.e. not with positive knowledge) of the insolvency (§ 31 IO) excluded, provided that the loan was granted in connection with short-time work and no further collateral was provided for it. It is not entirely comprehensible why the text again refers to “insolvency” in line with the provision of § 31 IO, when it nevertheless is aimed to regulate the granting of credit in the case of “over-indebtedness”. The provision falls short in several additional respects. The following criteria must be met cumulatively in order to avoid a challenge:

  • The debtor must have become insolvent due to over-indebtedness occurring between 29 February 2020 and 30 June 2020.
  • The bank must not have been positively aware of the insolvency (or over-indebtedness?) when the loan was granted.
  • The loan must have been issued solely as a bridging loan until the payment of the short-time employment allowance.
  • Repayment must be made immediately after receipt of the short-time employment allowance.
  • The credit may not be secured by any security provided from the debtor’s assets.

It is doubtful whether this scheme will be suitable to encourage Austrian credit institutions to grant un-bureaucratic and not so strictly tested restructuring loans, which the economy urgently needs in the current crisis.

4. Conclusion:

By improving the obligation to file applications by suspending it in the event of over-indebtedness until 30 June 2020, the legislator has created a welcome new regulation which offers considerably more clarity than the previously agreed deadline extension. It makes just as much sense to postpone the validity of the regulation to the beginning of the COVID 19 crisis, i.e. from 1 March 2020, although questions will arise in individual cases. The bridging loan scheme falls far short of expectations and will not be able to provide much-needed rapid financing to ailing companies.


Authors: Georg Rupprecht, Bernhard Schatz

Practice Group:
Insolvency and Restructuring

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