COVID-19 Update: Obligation to file for insolvency
10/23/2020 - Reading time: 4 minutes
Attorney at Law
Already at the beginning of the Corona crisis in March 2020, the legislator decided on various insolvency law measures to mitigate the consequences of the Corona pandemic for the Austrian economy. Since the Corona Pandemic still has far-reaching economic consequences for businesses and entrepreneurs, including even potential insolvency, the legislator has now adopted further measures in the area of insolvency law.
When does insolvency occur and what is to be done?
The question arises whether short-term liquidity problems owing to missing revenue will result – to an extent relevant under insolvency law – in a debtor’s inability to pay (Zahlungsunfähigkeit) or over-indebtedness (Überschuldung), thus obliging debtor’s managing staff to promptly, i.e. within a period of not more than 60 days, file an insolvency application as set out in section 69 (2) of the Austrian Insolvency Act (Insolvenzordnung, IO). Pursuant to section 69 Abs 2a IO the period to file for insolvency is extended to 120 days, if the debt-or’s inability to pay has occurred due to a natural disaster. Already at the beginning of the Corona crisis the legislator made clear that an epidemic or pandemic is a natural disaster in the sense of section 69 Abs 2a IO. As a result, the deadline for filing for insolvency is 120 days if the inability to pay was caused by the Corona pandemic.
It is primarily inability to pay as defined in section 66 IO that may be impending or occur in the current circumstances. Inability to pay means that a debtor is unable, due to a lack of readily available funds, to pay its debts when due and also cannot be expected to be able to procure the necessary funds soon. This is the case if the entrepreneur’s inability to pay affects more than 5% of its debts due.
There is no obligation to file an insolvency application in case of a mere payment delay. A payment delay is deemed to exist if it is highly likely that the debtor will be able to soon procure the funds needed to settle its debts. The maximum time frame for doing so is three months.
Over-indebtedness under insolvency law occurs if there is on the one hand a negative asset status at liquidation values (arithmetical over-indebtedness) and on the other hand a negative going concern prognosis. To prevent an avalanche of corporate insolvencies, the Austrian legislator has suspended the obligation to file for insolvency due to over-indebtedness until 31 January 2021:
During the period from 1 March 2020 to 31 January 2021, a debtor is not obliged to file an application for insolvency due to existing over-indebtedness, provided that he is solvent. If the over-indebtedness persists beyond 31 January 2021, the debtor must apply for the opening of insolvency proceedings without undue delay, at the latest, however, within 60 days after expiry of 31 January 2021 or 120 days after the occurrence of the over-indebtedness, whichever period ends later.
Which ways and means are available?
Each insolvency proceeding is different. There is also the possibility to apply for reorganisation proceedings with or without management by the debtor. The key prerequisite is that the debtor is able to offer its creditors payment of at least 20% of their receivables within 2 years and that the offered recovery plan is accepted by the creditors.
To avert insolvency proceedings in the first place, it is necessary to know and assess the ways and means. As a first step, one ought to assess whether inability to pay has actually arisen already; if necessary, an attorney-at-law and tax adviser should be called in to help with that assessment.
The following measures are the most important ones for remedying any existing inability to pay:
- Entering into written deferment agreements with creditors (only debts due are relevant for determining inability to pay); in particular, with banks, suppliers and other important (major) creditors.
- Checking what kind of State aid can be utilised: Due to the Corona crisis, the government has provided state support in various forms (tax deferrals, guarantees and assumption of liability for loan collateralisations, and emergency aid for business sectors hit particularly hard). In September 2020, for example, the second phase of the fixed cost subsidy started, in which fixed costs can be applied for as early as a 30 % decline in sales.
- Obtaining new funding from banks or shareholders, and, if applicable, rescheduling of existing financings.
Attorney at Law