First decision on the ReO published, but has the restructuring proceeding thus (finally) arrived in practice?
More than two years after its entry into force (see here), it has in the meantime become quiet around the Austrian Restructuring Code (ReO). So far, still no restructuring proceedings have been successfully initiated. A recently published decision of the Vienna Higher Regional Court (OLG) 6 R 200/22h (ZIK 2023, 128 – available in German here) might at least bring some dynamic back into the discourse on the still young law.
Facts
As a consequence of a lost court dispute and a resulting payment obligation, a self-employed accountant applied for the opening of restructuring proceedings including the granting of a stay of enforcement actions. The applicant submitted a comprehensive set of documents, including a restructuring plan with a restructuring concept, a business valuation and a financial plan, annual financial statements for the last four years, a liquidity plan over the following 90 days and a forecast on the continued existence of the business. The restructuring plan offered a distribution quota of 41% payable over 30 months. According to the application, the affected creditors would be better off than in insolvency proceedings because as a result of such alternative, the applicant would no longer be allowed to exercise her profession which would result in a considerable reduction in (distributable) income. The court of first instance dismissed the application to open restructuring proceedings as inadmissible on the grounds of the applicant's illiquidity. The OLG Vienna confirmed this decision.
Reasons for judgement
The dismissal was mainly justified by the fact that restructuring proceedings under the ReO shall not be available for illiquid (zahlungsunfähige) debtors. According to the OLG, this already follows from Section 1 (1) ReO as well as from the related legislative materials. When proceedings are initiated, the court is generally not yet obliged to comprehensively examine a possible illiquidity. According to Section 7 (3) ReO, an application is only inadmissible in the case of obvious illiquidity evidenced by pending enforcement proceedings. If an application for a stay of enforcement actions is filed together with the application to open restructuring proceedings, the comprehensive obligation to examine illiquidity linked to a stay (Section 19 (2) n3 ReO) still also applies to the application to open restructuring proceedings. In this case, illiquidity shall not only lead to the rejection of the application for a stay, but also to the dismissal of the application to open restructuring proceedings. According to the court, only the provisions for insolvency proceedings are tailored to illiquid debtors. In summary, the debtor's liquidity (Zahlungsfähigkeit)is a material and mandatory precondition for the initiation of restructuring proceedings.
According to the OLG Vienna, the applicant's illiquidity results both from data on pending enforcement proceedings as well as the fact that the claim related to the court dispute had been due for a long time. Since the liquidity plan submitted by the applicant did not include claims of affected creditors, it was also no proof of liquidity.
The court finally states that the general interest of creditors is explicitly not yet relevant in the stage of initiating the proceedings and does therefore also not affect the admissibility of the application to initiate restructuring proceedings as such. The general interest of the creditors shall only be relevant during the ongoing proceedings and in connection with a stay of enforcement actions especially if illiquidity occurs during such stay (in this case, according to Section 24 (3) ReO, illiquidity does not lead to the opening of insolvency proceedings if such opening was not in the general interest of the creditors).
Relevance for practice
Since the regular restructuring proceeding under the ReO is designed as a real "proceeding" (with all the formalisms attached to it), the discussed decision and the emphasis on the liquidity as a material and mandatory precondition for the initiation of proceedings do not come as a surprise.
Whether the examination of illiquidity is already to be made at the time of the application to initiate proceedings is in our view, however, not the primarily relevant question as the initiation of restructuring proceedings does not yet affect creditor rights. Looking at Directive (EU) 2019/1023, which led to the implementation of the ReO, and the preventive restructuring framework promoted in the Directive, the initiation of “proceedings” (or rather a modular “framework”) may also be more flexible than under the ReO (in countries such as Germany or the Netherlands, as a first step e.g. “only” an opening notice is submitted to the competent court).
The much more important question is when and in which form creditors’ rights may be affected. Under the ReO, this usually first occurs with the application for the granting of a stay of enforcement actions. It is not only comprehensible but also necessary that upon the application for a stay, a strict(er) examination on a potential illiquidity and other aspects must take place. If the application for a stay of enforcement actions is combined with the application to initiate restructuring proceedings, it is further also somewhat sensible that this strict(er) examination is also relevant for both applications.
What is in our eyes really interesting about the decision is still something else:
The pretty clear statement of the court that the general interest of the creditors is not yet to be examined when deciding on the initiation of restructuring proceedings seems – detached from the discussed case – to be at least questionable. As a general principle this would mean that even perfectly prepared restructuring proceedings which are evidently in the interest of the creditors could not be implemented from the outset if the applicant is illiquid when applying for such proceedings. Whereas if the illiquidity only occurs a few weeks after the opening of proceedings and the granting of a stay of enforcement actions, the proceedings could nevertheless be continued and implemented “in the general interest of the creditors” pursuant to Section 24 (3) ReO.
In both cases, the illiquidity may be caused by claims of affected creditors which are exactly those to be restructured through the submitted restructuring plan. From the perspective of creditor protection, there is arguably no real difference between claims of affected creditors falling due before the initiation of restructuring proceedings or during such proceedings. A priori dismissing restructuring proceedings because of the maturity – regardless of when such maturity occurs – of those claims which shall actually be restructured through such proceedings seems in fact counterintuitive. Because of the other comprehensive creditor protection mechanisms provided by the ReO, it is in our eyes also not absolutely necessary to ensure protection of affected creditors. At the same time, it should still be noted that the primary purpose of preventive proceedings such as the ReO should always be to timely prevent a situation of insolvency and not to subsequently overcome such a situation.
In summary, the decision of the OLG Vienna confirms the preference also observed in Austrian practice for the established and well-functioning out-of-court processes and proceedings under the Insolvency Code. While the number of such is constantly increasing, the ReO has not really become more attractive as a result of the decision. Restructuring proceedings therefore have still not arrived in practice.
Please note: This blog is for general information purposes only and in no way constitutes legal advice from Binder Grösswang Rechtsanwälte GmbH. The blog cannot replace individual legal advice. Binder Grösswang Rechtsanwälte GmbH accepts no liability of any kind for the content and accuracy of the blog.