Loan agreements and the new Austrian Restructuring Code: how to protect against the unknown

As of 17 July 2021 the EU restructuring directive¹ was implemented in Austria by the new Austrian Restructuring Code (ReC). The ReC allows debtors to enter formal restructuring proceedings before actually becoming insolvent. To minimise the disruption to debtor's operations, the proceedings are not public, a ban on enforcement of collateral can be implemented and the rights of counterparts to amend or terminate existing contracts are significantly curtailed.

The ReC does not foresee a substantial mandatory involvement of creditors. It is up to the debtor which creditors to involve early in the process. Given that the proceedings are not public, there is no way for a creditor to find out whether proceedings have been opened with respect to a debtor. As proceedings may also be opened pre-insolvency, the debtor may not even be under an obligation to report to its creditors that the conditions for opening restructuring proceedings are met. And once proceedings are opened, the creditor may be subject to an enforcement ban and to severe restrictions of any termination rights.

The ReC aims to give debtors a lot of flexibility to restructure their business while protecting their operations. Given the legal framework, there are only limited ways for creditors to protect themselves from proceedings under the ReC.

"The ReC aims to give debtors a lot of flexibility to restructure their business while protecting their operations. Given the legal framework, there are only limited ways for creditors to protect themselves from proceedings under the ReC."

Ensure you do not have to pay out anymore

Despite the extensive prohibition of ipso facto clauses, there is an explicit exception for contractual clauses allowing the creditor to refuse any additional utilisations under a loan.

While in many instances the creditor would have a right to withhold payment under Austrian mandatory law (plea of uncertainty, Unsicherheitseinrede), this may not always be the case.

! Creditors, make sure you have the right to refuse any additional utilisation if restructuring proceedings are opened or if the conditions for the opening of restructuring proceedings are met.

Get as much information as early as possible

Creditors will not be informed about the opening of restructuring proceedings. They will only be informed if they are subject to an enforcement ban. Creditors will receive the restructuring plan at least two weeks prior to the vote. This may not leave creditors enough time to fully assess the plan. The ReC does not provide for any feedback loop or negotiation of the restructuring plan.

! Creditors, make sure you receive any draft of a restructuring plan as early as possible. Also ensure that the debtor must inform you about any planned application for restructuring proceedings.

! These clauses may not always be enforceable and should therefore be carefully worded.

Thou shalt not have other creditors: a "no financial indebtedness undertaking" 

Under the ReC, creditors will vote to approve or disapprove the restructuring plan in classes. If not all classes agree, the ReC allows for a cross-class cram down. Thus, no majority of the creditors as a whole is needed to approve a plan. By incurring (intra-group) debt, the debtor could influence which classes have to be formed and the majority in such classes.

! Creditors, make sure you have a strong "no financial indebtedness undertaking" that also covers intragroup debt.

Waiver of obligations under banking secrecy

As proceedings under the ReC are not public, creditors may not be exempt from banking secrecy and therefore may not be allowed to coordinate with other affected creditors.

! Make sure that there is an explicit waiver of any obligations under banking secrecy if restructuring proceedings are opened.

¹ Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency).

author: Miriam Simsa