The ‘Automatic Stay’ Provision in the Austrian Insolvency Act
By Raffaela Lödl and Mario Kapp, KAPP & PARTNER Rechtsanwälte GmbH
Increasing the amount of successful corporate reorganisations and enabling the continuation of business operations during the financial crisis were the main reasons for reforming the insolvency law back in 2010.
The root for the paradigm change can be found in light of the financial and economic crisis and should therefore serve as a stability factor for vulnerable firms. The law regulations Article 25a and Article 25b of the Austrian Insolvency Act (‘IO’) were created.
Article 25b IO essentially forbids clauses to terminate a contract in case of an insolvency of the contracting partner as well as structures to hide these clauses. Article 25a IO goes even beyond this: within six months after the initiation of insolvency proceedings, a contracting partner of an insolvent debtor shall not be enabled to terminate a contract if this act would endanger the continuation of the debtor's business operations. So there is in fact a temporal and factual boundary. Nevertheless, the norm is not applicable, if keeping hold of the contract would lead to massive personal and economic disadvantages for the contracting partner.
The Austrian legislator obeyed international paradigms while creating this norm: The main sources have been the legislative guide on Insolvency Law (UNCITRAL) and the American principle of ‘automatic stay’ based on chapter 11 of the US-American insolvency law. The German legislation is therefore following a similar approach but does – as well as the US legislation – not contain any temporal boundary.
Reports and research have shown that successful reorganisations without following the automatic stay principle are difficult to accomplish. Nevertheless, there are some unsolved problems raised by the current legislation. The Austrian legal norm at stake (article 25a IO) requires the debtor´s dependence regarding the specific contract, a possible endangerment is in fact not very simple to assess. Is this fostering a race to the bottom for the last legal termination?
- Considering the wording of article 25a IO, the necessity of the specific contract itself must be vital for the firm. The specific norm would allow one contracting partner to terminate his contract, if it would not endanger the whole business. Could the next partner also argue that his termination would probably in no way endanger the continuity of the business at stake? Who is in charge of assessing the red line where the terminated contracts in total are threatening the continuation of a firm? Until there is an appropriate court decision, the approach of assessing every contract on its own merits still seems legitimate.
- Due to a lack of judgement, the possible range and design of termination clauses touching article 25b IO also remain unclear.
Conclusion: Through termination of any contract, that is favourable for the insolvent company, vital values are lost and a restructuration will become more unlikely. Despite the changes made by the Austrian legislator to support more successful reorganisations being welcomed, the interpretations of the courts are still awaited. Until the courts decide some meaningful cases regarding this scenario, some legal uncertainty is inevitable.
Mario KappKAPP & PARTNER Rechtsanwälte GmbH, Graz, Austria
T: +43 316 22 59 55
KAPP & PARTNER Rechtsanwälte GmbH has four partners and five associates and has an outstanding reputation for bankruptcy law in Austria. The law firm is mainly focused on bankruptcy law, reorganisation law, company restructuring, commercial law, banking law, real estate law and international law.
Mario Kapp was the sole founder of the law firm in 2006. He is Managing Partner and specialises in bankruptcy law, corporate law and business restructuring.
Raffaela Lödl-KleinKAPP & PARTNER Rechtsanwälte GmbH, Graz, Austria
T: +43 316 22 59 55
Raffaela Lödl-Klein is Managing Partner of KAPP & PARTNER Rechtsanwälte GmbH situated in Graz, Austria, and specialises in real estate and corporate and insolvency law. She joined the firm in 2013.
Published: September 2017 l Photo: A. Karnholz - Fotolia.com