The long-awaited draft implementation of the EU Directive 2019/1023 on restructuring and insolvency has been published these days and is now subject to evaluation. A Restructuring Code shall join the existing Austrian Insolvency Code and meet the EU requirements. The Code shall enter into force on 17 July 2021 and therefore exactly on time with the expiry of the implementation period set by the EU.
What does the Code aim for?
The new law gives all companies and entrepreneurs access to preventive restructuring proceedings prior to becoming insolvent. This follows the general consideration that chances for a successful recovery are the higher the earlier restructuring measures are initiated.
To qualify for such proceedings at least a likelihood of insolvency (e.g. linked to the figures under the Business Reorganisation Act) is required. In that case, the debtor can use instruments such as a protective shield in the form of a stay of enforcement actions and a restructuring plan as a recovery tool. In practice, such proceedings may especially be used for debt haircuts or adjustments of payment terms. The monopoly to initiate restructuring proceedings is on the debtor, creditors are not entitled to do so.
Restructuring for everyone?
The Restructuring Code is in general open for all types of companies (including SMEs), one-person businesses and entrepreneurs; exceptions exist for the financial sector. In many cases the court may or has to appoint a restructuring expert.
The proceeding partly requires comprehensive preparations e.g. in connection with the content of the restructuring plan, the necessary documentation, the calculations etc. The new instruments may therefore in practice only be attractive and realistic for companies of a certain size after all.
Private or public, what ever serves the purpose
The restructuring proceeding is not a collective, but a selective one. The debtor can limit the procedural instruments to individual creditors and classes of creditors (with the exception of employee claims in particular, which must not be included).
Accordingly, the proceeding and its effects shall also be limited to the group of creditors affected by it and shall therefore possibly remain private, i.e. non-disclosed. It is published only if the debtor so requests.
The restructuring plan allows for the implementation of restructuring measures such as debt haircuts or adjustments against the will of a dissenting minority. If a 75% majority in value and a simple majority in numbers per class votes in favour of the plan, the plan is binding on all affected creditors. This cram-down possibility shall finally remove the disruptive potential of hold-out creditors outside of insolvency proceedings. In the best case this opportunity may also reduce this disruptive potential during negotiations on a private workout, as hold-out creditors must otherwise expect to be crammed-down in a restructuring proceeding.
However, it must be ensured that the creditors who voted against the plan are not placed in a worse position than in the case of the next best alternative to the restructuring plan.
Creditors must be separated into classes of secured and unsecured creditors, bondholders, creditors requiring specific protection and subordinated creditors (this does not apply to SME debtors). If the required majorities are not achieved in each class, a cross-class cram-down still allows the court to sanction the restructuring plan if it has been approved by at least a (i) majority of the classes including the secured creditors or (ii) a majority of all the in-the-money classes (i.e. classes which would also receive a quota in case of a business continuation within insolvency proceedings).
Shareholders remain in the game
Shareholders are subject to a general obligation not to unreasonably prevent restructuring measures. However, as currently provided by the draft law, shareholders cannot be included in the restructuring plan as a separate class (and therefore not be outvoted in a cross-class cram-down). It is therefore not possible to affect the shareholders’ legal or economic position against their will. The restructuring plan cannot force shareholders to support the restructuring and no debt-to-equity swap against their will is possible. The Austrian draft therefore falls short in comparison to the repertoire allowed by the Directive and available in other countries.
To prevent creditors from torpedoing the restructuring, debtors can apply for a stay on individual enforcement actions for a period of three to no more than six months, which can cover all types of claims.
Contracts of the debtor necessary for the continuation of the daily business operation may not be terminated or amended just because of outstanding payments or because of the restructuring and outstanding services or deliveries may not be refused. The restructuring shall not be jeopardised by losing such contracts or services/deliveries. Special termination rights of the debtor are not provided.
Fresh money and going concern protected
New or interim financing as well as other transactions closely related to the restructuring (especially those necessary for the continuation of the business) shall only be subject to limited avoidance actions in a possible subsequent insolvency proceeding.
Fast-track proceeding for financial restructurings
If only financial creditors are involved in the restructuring, a simplified restructuring proceeding is available. A court vote can be replaced by submission of an agreement signed by a sufficient majority of creditors (75% majority in value per class, no head majority required). Express proceedings do not provide for a stay of enforcement actions.
It is not entirely clear whether the fast-track proceeding also allows for a cross-class cram-down (in a “regular” proceeding, such would require the mandatory appointment of a restructuring expert).
The evaluation process for the draft law runs until April 6. In our view, the time should still be used for some fine-tuning.
The draft law uses a rather broad definition of restructuring including all kinds of financial as well as operational restructuring measures. The legislative materials still emphasise that the restructuring plan shall facilitate debt reductions but shall especially not allow for the termination or amendment of agreements against the will of the other party. As even in purely financial restructurings, restructuring measures usually lead to amendments of existing (financial) agreements (e.g. in terms of maturities, interest, covenants, security etc), the legislator should clarify that this the restructuring plan under the new law allows for such measures.
The distinction between a fast-track proceeding for financial restructurings and a “regular” proceeding is in our view helpful. However, the possibility of a (simplified) cross-class cram-down should also be available in the fast-track route. The involvement of a restructuring expert is not necessary here due to a lower need for protection. The draft law is not entirely clear in this point and should therefore be clarified.
Finally, in terms of including shareholders in the restructuring plan and enabling a debt-to-equity swap against their will, the legislator could provide more options. There are several international role-models, e.g. also including Germany.
It is to be hoped that some of the points addressed above will still find their way into the adopted law and that the new proceedings will be accepted by practitioners as practicable and valuable alternative to conventional insolvency proceedings.
Gottfried Gassner and Emanuel Welten are partners in Binder Grösswang Rechtsanwälte GmbH. Georg Wabl is attorney at law in Binder Grösswang Rechtsanwälte GmbH