Consequent to the recent COVID-19 Emergency Measures Ordinance, many enterprises are faced with another "hard" lockdown. Entrepreneurs are well advised to regularly examine their own economic situation and keep an eye on the credit standing of their business partners.

The COVID-19 crisis and the measures for its containment stipulated by the Austrian Federal Government have confronted numerous Austrian businesses – from one-person enterprises to major corporations – with serious economic challenges. For the time being, rental reductions, state grants, payment respites and the partial deferment of the obligation to file an insolvency petition are preventing a wave of insolvencies, yet these measures simply stave off problems and distort the actual economic situation, both within the company and for the entire economy. In addition to taking measures to fight own crisis-caused problems, entrepreneurs should endeavour to minimise the risk of losing outstanding receivables.

COVID-19 and the obligation to file an insolvency petition

When a business is in an economic situation that requires it to file a petition for insolvency – the so-called "material" insolvency – it must file it promptly without any culpable delay. This obligation applies to private individuals, individual businesses, partners in partnerships, statutory representatives of legal entities (such as manager of a GmbH) and controlling shareholders of incorporations which temporarily have no statutory representative (e.g. due to the manager's retirement).

When COVID-19 is the cause of the insolvency, the maximum period allowed for filing the petition is 120 days rather than the customary 60 days. It should, however, be noted that this is a maximum period and that the obligation to file the petition "without culpable delay" continues to apply. A delay is, i.a., not culpable when diligent efforts at reorganisation have been made during the period or when reorganisation proceedings without personal management have been instituted with due care.

Natural persons (private individuals or entrepreneurs) and partnerships are "materially insolvent" when they are illiquid ("Zahlungsunfähigkeit") and do not expect to obtain the requisite financial means to pay all their due debts in good time. Illiquidity thus means that the due debts are greater than the liquid means, unless there is reason to expect sufficient liquidity in the near future (e.g. when a customer has announced payment or there is a valid prospect of receiving a state grant). The state of illiquidity may be terminated (in addition to receipt of liquid funds) by the reduction of due debts, e.g. by a respite, which delays the due date. This is currently the case in the form of large-scale schemes of respites granted by the internal revenue authorities and social insurance institutions.

Legal entities (such as GmbH and stock companies ("AG")) and partnerships where none of the fully liable partners is a natural person (e.g. GmbH & Co KG) are not just a case of illiquidity, but are also materially insolvent when they are over-indebted. This is the case when they suffer from debt overload (negative equity) and there is no positive perspective of being able to continue operation. In this case it is irrelevant whether liabilities are or are not due.

The second COVID-19-Justice-Accompanying Act ("2. COVID-19-Justiz-Begleitgesetz") suspends the obligation to file a petition for insolvency on the grounds of debt overload, for a period from 1 March 2020 until 31 January 2021. During this period, no petitions for insolvency on the grounds of debt overload may be filed (except in the case of simultaneous illiquidity) even if a creditor files the petition. However, it is still possible for the debtor to file a petition for insolvency on the grounds of debt overload. It is an unsettled issue whether payments made during this period by a business partner who is in debt overload but not illiquid can be contested by the administrator in later insolvency proceedings, because there are no accompanying statutory regulations in avoidance law.

When debtors are (still) in debt overload after 31 January 2021, they need to file a petition for insolvency proceedings within 60 days after 31 January 2021, but not later than 120 days after having succumbed to debt overload.

The logical conclusion to this provision is that an unknown but continuously growing number of actually insolvent businesses will be active in Austria for a whole year. Added to these are enterprises which are not (yet) illiquid solely due to – inevitably temporary – measures such as payment respites. There are companies operating on the market which would, under normal circumstances, need to reorganise or disappear from the market due to bankruptcy. It is thus advisable to look twice before entering into a new business relationship and to take action as soon as a business partner shows signs of delaying payment.

Measures to guard against debt losses

So, what to do if you suspect a COVID-19 insolvency? Quick response is of the essence. Several options are available in the case of an ongoing business relationship:

  • change to sale against cash in advance;
  • ship only subject to retaining ownership until the debt has been fully paid;
  • solely contemporaneous performance.

Retention of ownership grants the entrepreneur the right to have the goods supplied segregated from the bankrupt's estate. Contemporaneous performance means that each party performs at the same time and, next to avoiding the risk of non-payment, has the added advantage that the legal transaction is secure against avoidance.

Moreover, the partners may agree on information obligations (by individual contracts or in the General Terms and Conditions), so that they are obliged to report on an ongoing basis or upon reaching specified business indices (e.g. regarding equity rate or fictitious debt repayment period), thus establishing a sort of "early warning system".

Similarly, speed is of the essence when it comes to collecting unsettled debts because the priority principle (first come first serve) rules outside insolvency proceedings. If no quick out-of-court settlement is possible, the creditor should sue at once and if necessary, foreclose, so as not to be left empty-handed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.