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Capital Maintenance Rules in Austria – Investors Beware

05/14/2018 - Reading time: 3 minutes


Markus Fellner


Whereas in other European countries such as Germany less strict rules apply, Austrian capital maintenance law is characterized by very strict capital retention rules. The severity of these rules carries serious implications for investors including those from abroad who may not be familiar with these rules. Investors need to be particularly aware of Austria’s stringent capital maintenance rules when implementing group financing structures in Austria as well as when acquiring and financing the acquisition of targets in Austria. Failure to adhere to the capital retention rules can result in contractual arrangements between parties being void.

Capital Formation Principle

Under Austrian corporate law, creditors can only look to a company’s assets to satisfy their claims, and it is not sufficient to simply comply on a one-off basis with funding the company at the company formation stage or when a capital increase takes place. On the contrary, the company’s capital must be protected on an on-going basis against both hidden and disclosed forbidden repayments to shareholders (Einlagenrückgewähr).

Section 82 of the Austrian Limited Liability Company Act (“LLCA”) and Section 52 of the Austrian Stock Corporation Act (“SCA”) are the central provisions of capital maintenance law that prohibit unlawful repayments. These rules are mandatory; any clauses in a company’s articles of association or agreements calling for performance by the company that is not compensated and is independent of the balance sheet and which violate the prohibition on unlawful repayments are null and void. The shareholders only have a right to receive profits established in the financial statements. Interest payments can neither be agreed nor paid. The purpose of Section 82 of the LLCA and Section 52 of the SCA goes far beyond supporting capital formation rules and prescribes an all-encompassing asset protection for companies. This means that any usage of a company’s capital for the benefit of shareholders is prohibited, unless one of the following can be met:

  • payment from the company occurs in the course of an orderly distribution of profits based on the company’s financial statements;
  • payment from the company occurs within the scope of a properly authorized capital reduction;
  • payment from or other performance of the company is made based on an agreement between the company and its shareholders that satisfies the third party arm’s length principle.

The capital retention requirements must also be fulfilled when dealing with grandparent, great-grandparent and sister companies. The business relationship has to be set up in a manner as if the business relationship would have been concluded with an external third party (“dealing at arm’s length”) or there has to be a special business justification for doing so. In a business relationship that is not concluded in accordance with the arm’s length principle, where the company effects payments or other benefits to shareholders going beyond the arm’s length principle, a forbidden re-payment may be the result, meaning that such payments or other benefits become partially void. This third party comparison is therefore a fundamental principle. The question one has to ask from an ex ante perspective is whether the specific business transaction would have been effected in the same manner between a diligent director of a company and an outside third party.

A forbidden repayment by a company to a shareholder (or a comparable person) results when the shareholder receives more than what otherwise would be appropriate, therefore creating a disproportionate relationship between the value of the consideration received and value of the consideration granted by such shareholder. For example, when a company supplies sureties in connection with debts of its shareholders, regardless of whether through a guarantee, a pledge in movable or immovable assets, a mortgage, an assignment, a set-off declaration or other sureties, or where the company co-signs a loan agreement, a conflict with the capital maintenance requirement may occur. Generally, sureties represent assets and therefore a company’s assets are decreased when sureties are granted. The assumption of risk positions by a company has to be treated equally given that such risks, which otherwise would be borne by the shareholder, are then to be borne by the company, with the result that the shareholder is free from such liability (transfer of risk).

In assessing whether a breach of the forbidden repayment principle has occurred, focus is not to be had on separate individual facts; rather a holistic view needs to be taken both from a timing and economic perspective, which in a recent decision was described as the “overall plan” approach. One fact pattern that frequently occurs in daily business is the deductibility of third party interest payments.

In one decision the Austrian Supreme Court had to rule on a transaction, in which an entrepreneur first acquired a target company using an acquisition vehicle and then after roughly a year, merged the target up-stream into the acquisition vehicle. The acquisition vehicle at the time of the acquisition had financed the purchase through a bank loan. By doing so, the bank loan liability was merged with the assets of the target company. The Austrian Supreme Court has ruled that the forbidden repayment rule is also breached under Section 82 of the LLCA when a target company not only secures another party’s liabilities, but also where it for example takes out a loan on its own behalf in order to provide the purchaser with the means to undertake the transaction. The mere fact that a target company formally satisfies its own liability when granting a benefit to its shareholder, does not automatically mean that there is no breach of the forbidden repayment rule. The main factor determining whether a repayment to a shareholder is forbidden is whether the transaction is in line with the third party arm’s length principle and would have been concluded in the same manner if no shareholder (or any person related to such shareholder) had benefitted from the transaction.

To Whom does the Forbidden Repayment Rule apply?

The forbidden repayment rule is aimed at the company, its representatives and shareholders. Genuine third parties are not addressees of this prohibition and generally are not subject to claims being made with respect thereto. The only exception to this rule occurs where a third party is deemed to have the status of a shareholder by way of analogy. With respect to former shareholders, the forbidden repayment rule is applicable where consideration is granted with respect to the third party’s status as a former shareholder. A genuine third party however is affected by the forbidden repayment prohibition when it participates in a transfer of company assets to a shareholder in bad faith. The rationale behind this is the doctrine of abuse of power in connection with a transaction featuring a third party.
The leading decision regarding the breach of creditor protection provisions is the case Fehringer, in which an impermissible surety was provided in order to facilitate a prospective shareholder’s financed purchase of shares. The Austrian Supreme Court confirmed a “third party effect” towards the bank financing the share purchase under abuse of power considerations. Collusion may be held against the third party, by way of collaboration with a representative of the shareholder with intent to cause damage, or at least where the third party is grossly negligent in lacking information on the abuse of power (awareness of damage) of the representative. Moreover, the principles regarding forbidden repayment and not having knowledge in a grossly negligent manner, which were derived from the Fehringer case, are sufficient to trigger a violation of Section 52 of the SCA.

Duty to Enquire

The general duty of a third party, such as a bank granting a loan, to enquire and investigate does not apply in a blanket fashion to all possible forbidden repayment scenarios, but rather is only required where suspicions arise to such an extent that they almost equal certainty. Cases that raise suspicions from the very outset trigger these duties to enquire. When suspicions arise, the financing bank has to enquire about the consideration as between the parties involved. In this instance, it is entitled to rely upon information that is not obviously false. Since its 2005 decision (6 Ob 271/05 d), the Austrian Supreme Court explicitly rejects that there exists “a bank’s general duty to enquire and investigate due to the sheer complexity of the arm’s length topic” and only demands such enquiry “where the suspicions regarding a breach of the forbidden repayment rule is so blatantly obvious” that it is “almost equal to certainty”.

Legal Implications

The Austrian Supreme Court has ruled multiple times that for the undoing of (contractual) performance in connection with unjust enrichment resulting from the invalidity of a transaction pursuant to Section § 879 of the Austrian General Civil Code, the intent of the breached rule which causes the transaction to be void is what matters. The Austrian Supreme Court has ruled in accordance with this principle that the unwinding of loan agreements that are null and void because of the forbidden repayment rule does not fulfill the purpose of the forbidden repayment rule. Where the repayment of a loan is impermissible due to the forbidden repayment rule, the claim to such repayment cannot be based on unjust enrichment or any other title. This statement rendered by the Austrian Supreme Court, according to which unjust enrichment claims of the bank were categorically denied, has been revised in a later judgment in obiter dictum. According to this later decision, the nullity of loan agreements does not mean that the company does not have to repay its debt to the loan granting party. The company rather has to repay principal in the light of the nullity of the loan agreement corresponding to the amount that if paid would not cause damage to the company. In order to do so the company has to actively seek regress against the shareholder. According to the Austrian Supreme Court’s reasoning, the purpose of the nullity sanction towards third parties cannot lead to the shareholder being allowed to keep the benefits of the transaction that were unjustly obtained.


In conclusion, in both two-party relationships between a company and its shareholders as well as in tripartite relationships where the third party acts in “bad faith”, violations of arm’s length principles can at least lead to partial nullity of the agreement.


Markus Fellner