Austria is currently experiencing its longest recession since World War II. Both external factors, meaning volatile energy prices, geopolitical tensions, as well as trade uncertainties, and internal causes, primarily the absence of a federalism reform, high part-time employment, early retirement, and a significant part of the population being net beneficiaries of the welfare system, have led to this structural decline. A significant concern is the deindustrialization of Austria’s economy, which has resulted in a major increase in insolvencies and restructurings.
Legal Triggers for Crisis Recognition
While business crises can be broadly defined, legal crises are governed by specific criteria under Austrian law.
These include: (a) the loss of half the share capital; (b) an equity ratio below 8%; (c) a fictitious debt repayment period exceeding 15 years; (d) over-indebtedness; and (e) the inability to pay due debts.
Various legal consequences are derived from these criteria – e.g., if half of the share or nominal capital is lost, the managing directors/the management board are obliged to convene a general meeting. The purpose of the law is to ensure that shareholders are informed at an early stage and can take countermeasures. A highly critical situation cannot (yet) be said to exist if there is positive equity, but such a “light” crisis can worsen in a very short period if the causes are not remedied.
Another legal trigger for action is the threshold values for the equity ratio and fictitious debt repayment period, where key legal consequences are attached to the cumulative excess/shortfall of the two criteria, namely a crisis within the meaning of the Equity Substitution Act and the concept of likely insolvency within the meaning of the Restructuring Ordinance, and a duty of the auditor to speak.
The most important concepts in terms of their legal consequences are over-indebtedness under insolvency law and the inability to pay. Over-indebtedness is relevant under insolvency law if the assets valued at liquidation value are insufficient to meet creditor claims and the going concern prognosis is negative. If inability to pay and/or over-indebtedness have occurred, the debtor must file for insolvency immediately, but within 60 days at the latest.
Accordingly, it is of utmost importance that the early detection of crises by the management works. This is part of corporate management and requires appropriate support from operational and strategic early warning systems and the involvement of external consultants, including legal advisors, to examine the legal feasibility of possible restructuring measures, particularly due to the frequent need to act quickly.
Early Detection and Management Responsibilities
Therefore, early detection is essential. Management must implement strategic and operational early warning systems to identify financial distress promptly.
Effective crisis management often requires external advisors, including legal experts, to assess the feasibility of restructuring measures. Directors face increased liability during insolvency, including civil, tax, social security, and criminal consequences.
Proactive Communication with Stakeholders
One of the most important actions is early and proactive communication, especially with lenders. Delayed notification can trigger defaults under financing agreements, worsening the situation. A well-prepared crisis team and transparent communication can help resolve issues in an out-of-court restructuring, avoiding formal insolvency proceedings.
Legal Complexities in Restructuring
Restructuring often involves complex legal questions, particularly regarding rescue financing. For example, when companies receive loans to maintain operations during restructuring, it’s crucial to determine whether these funds are treated as debt or equity, whether they are protected from clawback, and under what conditions they can be repaid. These issues become critical if the restructuring fails and leads to a subsequent insolvency.
EU-Level Developments and Harmonization Needs
At the European level, efforts are underway to further harmonize restructuring and insolvency laws in certain aspects. However, progress is limited and fragmented. Currently, there is no unified insolvency law for corporate groups, meaning each entity within a group must undergo separate proceedings. A group-wide insolvency framework would streamline processes and reduce complexity.
The EU’s latest reform proposal includes harmonization in seven areas, such as clawback rules, asset tracing, and pre-packaged sales procedures. However, the concept of group insolvency is notably absent from the proposal, despite its potential to significantly improve cross-border insolvency handling.
Conclusion: What Management Should Do
Management must act early, professionally, and transparently when facing financial distress. Legal obligations kick in before insolvency occurs, and failure to comply can result in severe consequences. The key is to recognize warning signs, seek expert advice, and communicate proactively with stakeholders, especially financial institutions.
By Jasna Zwitter-Tehovnik, Partner, DLA Piper
This article was originally published in Issue 12.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
