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Insolvency as a consequence of COVID-19?

03/20/2020 - Reading time: 4 minutes


The present pandemic not only affects our health and currently forces us to put up with restrictions in many areas of life but also has far-reaching economic consequences for businesses and entrepreneurs, including even potential insolvency.

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). Currently, an application to include also the words “epidemic, pandemic” in section 69 (2a) IO has been submitted to the National Council. If adopted, the time limit for filing applications would be 120 days for the present situation.

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.

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 (the respective bundle of laws is currently under way): The government announced that all in all, i.e. inclusive of the amount of EUR 4 billion in immediate aid allocated to the crisis management fund established on 16 March 2020, up to EUR 38 billion in various forms of State aid (tax deferrals, guarantees and assumption of liability for loan collateralisations, as well as emergency aid for business sectors hit particularly hard) should be available.
  • Obtaining new funding from banks or shareholders, and, if applicable, rescheduling of existing financings.

Which facilitations are provided for in the Second COVID-19 Act?

 The Second COVID-19 Act which is currently subject to legislative procedure, amongst other things, provides for the following facilitations for businesses:

  • If an instalment under a recovery plan becomes due between the date of the Second COVID-19 Act entering into force and 30 April 2020, a reminder sent out during that period shall not give rise to default (Verzug) within the meaning of the Insolvency Act. This means that the reminder will not affect the effects of the recovery plan.
  • Businesses subject to a barring order imposed because of the COVID-19 pandemic shall be granted a respite regarding the social security contributions payable for calendar months February, March and April 2020 under the General Social Insurance Act (Allgemeines Sozialversicherungsgesetz, ASVG), without incurring default interest. This shall also apply to other businesses which demonstrate that, for reasons of the business’s liquidity, the contributions cannot be paid owing to the COVID-19 pandemic.
  • In the months March, April and May 2020, payment of amounts due under the ASVG shall not be enforced and insolvency applications based on non-payment of contributions already due shall not be filed.