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Criminal law risks in Covid-19 funding applications

Criminal law risks in Covid-19 funding applications

The generous state subsidies offered to companies during the coronavirus crisis must, of course, not be used for other purposes. COVID legislators have attempted to prevent the misuse of subsidies by means of special laws, including criminal law.

Applicants would do well to sufficiently verify and document the existence of the conditions for the grant to be awarded before it is claimed. This is certainly the best way to protect against the unjustified accusation of abuse. When the measures necessary to contain the spread of the coronavirus (in this context, we are talking, in particular, of the lockdown restrictions and entry bans, as well as the company closures that were ‘forced’ into play by the circumstances) became clear to the federal government, state financial aid was made available to companies.

Against the backdrop of the now-confusing scope of these subsidies and the conditions for their allocation, legislators sensed an increased need for the retrospective monitoring of such funding. This was achieved within the framework of the legislative package adopted on 28 April 2020, specifically through the resolution of the Federal Act on the Review of Federal Subsidies due to the COVlD-19 Pandemic (‘COVID 19 Subsidy Review Act or COVID-19-Förderungsprüfungsgesetz – CFPG’) in Article 8 of the 18th COVID-19 Act (Blg NR 440/A, XXVII. GP of 22 April 2020). 

Accordingly, the award of grants under the ABBAG Act (e.g. direct grants, guarantees and direct loans from the coronavirus relief fund), liabilities assumed by Austria Wirtschaftsservice Gesellschaft mit beschränkter Haftung or the Österreichische Hotel- und Tourismusbank Gesellschaft m.b.H., as well as grants from the hardship fund and reduced working hours allowances, are being reviewed by the tax authorities for both accuracy and plausibility. It is true that the CFPG itself does not regulate the consequences of the misuse of this funding. However, the law stipulates a notification obligation for the tax authorities, namely, when they have doubts about the correctness of an application that lead to a criminal offence being suspected. The tax offices must report these instances to the public prosecutor’s office.

This requirement can have significant criminal law implications for a company’s managing director, board of directors or other employees who were involved in applying for funding, as they can easily be suspected of fraud (§ 146 Penal Code). The suspicion would arise if the funding provider had been misled as to the company’s eligibility for funding by the submission of incorrect information or data, or by the submission of incorrect documents by the representative of a company, when the provider was deciding whether to grant the fund. The actual use of the funding would lead to financial losses for its provider. Of course, this would require the person in question to have done so with specific intent.

Such a provision is not to be taken lightly: the person who has acted in breach of the law could even be sentenced to up to ten years’ imprisonment, depending on the seriousness of the offence and the amount of funds gained fraudulently. If funding applied for in good faith is used for purposes other than those for which it was granted (e.g. to restore liquidity or to support the economic situation of the company concerned), the criminal offence of funding misuse (§ 153b Penal Code) would also come into consideration. In this case, however, only the managers of a company would be liable for punishment, with the maximum sentence being up to five years’ imprisonment.

Therefore, it must always be ensured that truthful information is provided and correct documents are submitted when applications for this kind of funding are made. Cases where an accidental error was made when the application was submitted do not pose a problem. Nevertheless, it should be borne in mind that providing relevant evidence of this in criminal proceedings is a complex issue.

What to do about insufficient liquidity

If not even state subsidies can help ensure a company’s liquidity, then a closer look at the company’s financial situation is critically necessary, preferably with the involvement of a tax advisor. The situation that poses the greatest risk from a criminal law perspective is the failure to file for insolvency in a timely manner. According to the Austrian Insolvency Code (Insolvenzordnung, IO), a petition for insolvency must be filed for if the company is over-indebted and, in any case, if it is already suffering from an inability to pay.

The coronavirus crisis, and the legal innovations made to the IO in this context, have brought about only two simplifications for insolvency proceedings:

  • In the event of over-indebtedness occurring in the period from 1 March 2020 to 30 June 2020, no petition needs to be filed for the opening of insolvency proceedings due to over-indebtedness. However, this relief shall not apply to a request to open insolvency proceedings due to an inability to pay (§ 9 of the 2nd COVID-19 Accompanying Act (article 37 of the 4th COVID-19 Act)).
  • If a petition is filed due to an inability to pay, the period of 60 days is extended to 120 days; however, this is only the case if the inability to pay was caused by the coronavirus crisis (§ 69 (2a) IO).

This means that those companies for which there was already a risk of over-indebtedness or inability to pay before the coronavirus crisis, in particular, must carefully examine whether or when the period for filing for insolvency ends and act accordingly.

If this deadline for a request to open insolvency proceedings is not met, the representatives of a company’s governing bodies (its managing directors or board of directors) face the risk of (personal) criminal consequences in addition to consequences under civil and corporate law: 

The person in question could be accused of two criminal offences:

  • They have committed a malicious act (e.g. concealed, disposed of or damaged the assets of the company, or feigned or acknowledged a non-existent liability). This act has led to the frustration or diminution of the satisfaction of at least one creditor (§ 156 Criminal Code).
  • The person has caused the company to be unable to pay as a result of gross negligence through malicious acts or has caused the frustration or diminution of the satisfaction of creditors through malicious acts while the company was unable to pay as a result of gross negligence.

The main difference between the two offences is that the first can be committed intentionally, but the second can also be committed by ‘just’ gross negligence.

A criminal offence can not only be of relevance for the corporate representatives: it can also apply to the company itself. If the managing director or the board of directors commit a criminal offence, this can lead to the company being fined under the Law on the Responsibility of Associations if the misconduct was either committed for the benefit of the company (e.g. if the company gained an economic advantage or even enrichment, which will be the case regardless if funding has been misused, for example) or if obligations have been violated as a result of the offence, with these obligations affecting the company itself.

Conclusion

It would be advisable to counteract the risks, including those under criminal law, of making use of coronavirus-related funding by undertaking careful preparation when applying for funding and ensuring that meticulous documentation is kept (e.g. correspondence with tax consultants and lawyers). 

Author:

Mag. Andreea Muresan, Associate at LANSKY, GANZGER + partner

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