The coronavirus crisis

prelude to a lived practice of restructuring?

The coronavirus crisis

Even if there is not currently a significant increase in the number of registered insolvencies compared to previous years, the coronavirus crisis will not remain without consequences. It is likely that a number of companies suffering from economic woes will not be able to stop themselves from falling into insolvency.

At present, a realistic comparison is obscured by the aid measures adopted by the Austrian parliament (deferrals, short-time working, loans, etc.), which partly alleviate the financial burden or spread it over a longer period of time. This does not, however, completely lift the burden of debt. This can be a heavy burden, and these measures merely prevent insolvency, at best. A company is obliged to file for insolvency if they are unable to make payments or are over-indebted. In this case, a request to open insolvency proceedings should be filed without delay, at the latest within 60 days after the insolvency has occurred. These maximum periods were extended to 120 days, if the insolvency or over-indebtedness was due to the coronavirus crisis. In the event of over-indebtedness, the obligation to file an application was suspended for over-indebtedness occurring up to 31 January 2021, whereby the end of the period was determined as either 60 days after 31 January 2021 or 120 days after the over-indebtedness occurred, whichever was later. 

Irrespective whether reason for insolvency arises, a managing director would do well to consider reorganizing or restructuring their company if there is a threat of insolvency or over-indebtedness. Under certain circumstances, insolvency can still be avoided. Corporate restructuring is, basically, only possible if a company in difficulties can be returned to a position where it could generate independent profits after the planned measures have been implemented and if the restructuring appears to make more economic sense than the path to insolvency to the parties involved. To tackle a corporate restructuring or reorganisation, it is first necessary to analyse and question the strategic parameters of the company at hand. This is because the company’s lack of economic success and its resulting liquidity problems are inevitably the result of an incorrect strategic orientation. If it is possible in good time, for example to strengthen customer relations, exploit further potential, offer new products, switch production cost-effectively or optimise advertising, it may still be possible to set the course straight before earnings or liquidity problems occur. 

If earnings decline and liquidity is problematic, appropriate countermeasures must be taken quickly to safeguard liquidity and enable a positive outlook for the company’s continued existence. The earlier the response, the greater the chances of successful restructuring. A planned reorganisation or restructuring often fails due to the fact that one waited too long and the insolvency is supposed to be averted only in the last second. The preparation of a holistic concept, specifying the measures to be taken, is time-critical, especially with regard to the application deadlines at hand. In order to convince investors of the usefulness of the restructuring proposal, a corresponding restructuring report (to be prepared first) is often useful – which takes further time. With a reasonable concept of the measures to be taken, it is possible to right the ship under certain circumstances. In the short term, this will depend on creating liquidity, for example through the sale of company assets (sale & lease back, patents, etc.), but in the long term, too, this will depend on strategically restructuring the business model in such a way that more income can be generated at lower costs, say, in the production area by reducing unit costs. The acquisition of investors or other outside capital can also represent a significant factor or the basis for a possible restructuring. 

In principle, these reorganisations and restructurings are not bound by a legal corset, although a reorganisation often depends on the participation (or standstill) of creditors, which might be easier to achieve within a formal framework. Even though the Austrian Enterprise Reorganisation Act (Unternehmensreorganisationsgesetz, URG) provides this kind of (out-of-court) framework for restructuring, the procedure under the URG has not become established in practice. In particular, this is because the costs for the reorganisation auditor envisaged in the context of these proceedings are very high and, as a rule, people fear that launching reorganisation proceedings will damage the company’s reputation. In European culture, which – unlike American culture – barely forgives entrepreneurs for insolvencies, the necessity of a reorganisation is already tainted with the aura of professional failure. It is possible that a shift in thinking could occur in connection with the coronavirus crisis, with the chance of undertaking restructuring and reorganisation without losing face. 

The implementation of the restructuring directive (Directive (EU) 2019/1023), which has to be transposed into national law by July 2021, essentially, may well see Austrian legislators succeed in creating an attractive legal situation which might stem the threatening tide of insolvencies through sensible restructuring. The directive is intended to apply to companies which are not yet insolvent and which are normally continued under their own management, and with the assistance of an administrator, depending on the restructuring plan that is to be drawn up. In principle, a (temporary) ban on enforcement and insolvency is provided for, as is a ban on contractual terminations, which protects the company’s continued existence. Reorganisation via this formal procedure, which reduces time pressure, could, if done well, create incentives to avert insolvency by means of a reasonable restructuring. 

It is to be hoped that the transposition of the Directive in Austria will be successful in such a way that it will be accepted in practice, in contrast to previous attempts at regulation. 

Author:

Mag. VALENTIN NEUSER, Managing Partner, Head of German Desk and Mediator at LANSKY, GANZGER + partner

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