Insolvency & Restructuring

New Initiatives for Pre-Insolvency Restructurings

In financial distressed situations, waiting until the last minute is not a smart idea. Still, insolvency laws do not provide for pre-insolvency restructurings.

Current legal framework for pre-insolvency restructurings

When a com­pa­ny is in finan­cial dis­tress, it is essen­tial that an order­ly restruc­tur­ing process be ini­ti­at­ed as soon as pos­si­ble. The longer the direc­tors of a com­pa­ny wait to address the issues and to start nego­ti­a­tions with the finan­cial cred­i­tors, the less like­ly is a suc­cess­ful turn-around.

In cas­es where there are sev­er­al finan­cial cred­i­tors involved, the cru­cial ques­tion is how to set up an effi­cient process for the nego­ti­a­tions between the com­pa­ny and the finan­cial cred­i­tors, and how to con­vince all finan­cial cred­i­tors to par­tic­i­pate in the process.

Aus­tri­an law does not pro­vide for a legal frame­work for pre-insol­ven­cy restruc­tur­ing nego­ti­a­tions. The pro­ceed­ings avail­able under the Aus­tri­an Insol­ven­cy Code (Insol­ven­zord­nung) may be ini­ti­at­ed only in case of insol­ven­cy or immi­nent illiq­uid­i­ty of the rel­e­vant com­pa­ny. The Aus­tri­an Com­pa­ny Reor­gan­i­sa­tion Act (Unternehmen­sre­or­gan­i­sa­tion­s­ge­setz), despite its promis­ing name, does not con­tain an ade­quate process, as it pro­vides nei­ther for the par­tic­i­pa­tion of the finan­cial cred­i­tors nor for a pre­lim­i­nary mora­to­ri­um or oth­er mea­sures grant­i­ng pro­tec­tion to the cred­i­tor.

Absent a statu­to­ry process, the cred­i­tor itself has to coor­di­nate the finan­cial cred­i­tors and set up a process to man­age the restruc­tur­ing. Instead of focus­ing on the oper­a­tional and finan­cial turn-around, the man­age­ment of the com­pa­ny is thus often pre­oc­cu­pied with man­ag­ing the restruc­tur­ing process.

The most cru­cial ques­tions in out-of-court restruc­tur­ings are usu­al­ly whether all finan­cial cred­i­tors can be per­suad­ed to par­tic­i­pate in the nego­ti­a­tions and abstain from enforce­ment actions, and whether the finan­cial cred­i­tors accept to be bound by a major­i­ty vote. Until all finan­cial cred­i­tors have agreed not to enforce against the assets of the com­pa­ny and to be bound by a major­i­ty deci­sion, each finan­cial cred­i­tor can obstruct the whole restruc­tur­ing.

These issues are not con­fined to Aus­tria. All through Europe debtors face sim­i­lar chal­lenges. Nation­al rules with­in the EU offer dif­fer­ent solu­tions.1 While some juris­dic­tions offer legal frame­works for pre-insol­ven­cy pro­ceed­ings, in oth­er juris­dic­tions major play­ers have issued non-bind­ing guide­lines for restruc­tur­ing process­es. Exam­ples include the “Prin­ci­ples for Debt Restruc­tur­ing” issued by the Sloven­ian nation­al bank and the “Restruc­tur­ing Guide­lines” issued by major Aus­tri­an banks in coop­er­a­tion with Schoen­herr. So far, these ini­tia­tives have been lim­it­ed to sin­gle coun­tries, leav­ing the region with a mul­ti­tude of dif­fer­ent legal and non-legal frame­works.

How­ev­er, two recent devel­op­ments may address dif­fer­ent chal­lenges com­pa­nies face in pre-insol­ven­cy restruc­tur­ings.

At a work­shop of the EBRD-sup­port­ed Vien­na 2 Ini­tia­tive that took place in Vien­na on 23 Sep­tem­ber 2014, major banks active in the CESEE region called for guide­lines for out-of-court restruc­tur­ings for the whole region. They agreed to team up and imple­ment non-bind­ing guide­lines to make cross-bor­der restruc­tur­ings more man­age­able. This may be the first step towards a long-over­due, coher­ent, non-bind­ing frame­work for restruc­tur­ings in the region.

The Recommendation by the European Commission

In addi­tion, the Euro­pean Com­mis­sion has pub­lished a rec­om­men­da­tion (Rec­om­men­da­tion) call­ing for the imple­men­ta­tion of a legal frame­work for effi­cient pre-insol­ven­cy restruc­tur­ings.2 Accord­ing to the Rec­om­men­da­tion, nation­al leg­is­la­tors should pro­vide for out-of-court restruc­tur­ing pro­ceed­ings avail­able to debtors who are like­ly to become insol­vent. The objec­tive of such pro­ceed­ings should be avoid­ing insol­ven­cy rather than just deal­ing with an exist­ing insol­ven­cy. The pro­ceed­ings should be bind­ing for all cred­i­tors, pro­vide for major­i­ty deci­sions of the cred­i­tors and con­tain an option for a tem­po­rary stay of enforce­ment actions.

To facil­i­tate the grant­i­ng of addi­tion­al financ­ing, the Rec­om­men­da­tion asks for such financ­ing to be exempt from pos­si­ble void­ance or sim­i­lar claims. The pro­ceed­ings should be con­duct­ed main­ly out-of-court, keep­ing cost and admin­is­tra­tive bur­den at a min­i­mum. Where nec­es­sary, the court should be allowed to appoint a medi­a­tor or super­vi­sor to ensure suc­cess­ful nego­ti­a­tions and to safe­guard the legit­i­mate inter­ests of cred­i­tors and oth­er inter­est­ed par­ties.

The pre-insol­ven­cy restruc­tur­ing frame­work out­lined in the Rec­om­men­da­tion address­es the most press­ing issues in each out-of-court restruc­tur­ing. Imple­ment­ing such a frame­work into nation­al law could be a valu­able con­tri­bu­tion towards more suc­cess­ful pre-insol­ven­cy restruc­tur­ings.

Pre-Insolvency proceedings as a way to prepare large-scale insolvencies?

The time­ly involve­ment of a court-appoint­ed super­vi­sor could have anoth­er sub­stan­tial advan­tage as it could be used to pre­pare large-scale insol­ven­cies before insol­ven­cy pro­ceed­ings open. Recent exam­ples have shown that such a tool is sore­ly need­ed.

Cur­rent­ly there is no pos­si­bil­i­ty under Aus­tri­an law to coor­di­nate the prepa­ra­tion of insol­ven­cy pro­ceed­ings with the court or the insol­ven­cy admin­is­tra­tor before such pro­ceed­ings open. Thus, at the begin­ning of insol­ven­cy pro­ceed­ings, valu­able time is lost while the insol­ven­cy admin­is­tra­tor is famil­iaris­ing him­self with the busi­ness of the debtor. This delay can be quite cost­ly for the cred­i­tors as it may ruin a poten­tial­ly viable busi­ness of the debtor.

Conclusion

Even though the Rec­om­men­da­tion is not legal­ly bind­ing, there are plen­ty of rea­sons why the Aus­tri­an leg­is­la­tor should seize the oppor­tu­ni­ty to review the cur­rent leg­is­la­tion and imple­ment an effi­cient and prac­ti­ca­ble legal frame­work for pre-insol­ven­cy restruc­tur­ing pro­ceed­ings. The new law should be accom­pa­nied by a com­mon under­stand­ing of the major banks on how to han­dle out-of-court restruc­tur­ings to make such process­es more effi­cient and more suc­cess­ful.

Even though the Recommendation is not legally binding, there are plenty of reasons why the Austrian legislator should seize the opportunity to review the current legislation and implement an efficient and practicable legal framework for pre-insolvency restructuring proceedings.

1
Com­mis­sion Rec­om­men­da­tion 12.3.2014, C(2014) 1500 final.
2
Com­mis­sion Rec­om­men­da­tion 12.3.2014, C(2014) 1500 final.