Avoidance actions are a household staple for insolvency administrators to increase the insolvency estate in Austria. The current European Commission’s Proposal for a Directive (COM (2022)702) now aims to harmonise contestation rights in insolvency across all European member states. While Austria is well equipped to transpose this directive and the details are being awaited, the Commission’s proposal is expected to solidify the already harsh Austrian legal framework on contestation rights.
In accordance with the proposal, Austrian insolvency law provides for avoidance of legal acts that disadvantage the general body of creditors in case of preferences, undervalue or when the legal acts are intentionally detrimental to creditors.
In contrast to the current European proposal, the Austrian Insolvency Act follows different time limits within which legal acts are deemed voidable.
In many cases the period to assert contestation rights are longer than under the European proposal. Considering that the European proposal does not prevent EU member states from adopting or maintaining provisions that provide for better protection for the body of creditors compared to the proposal, the Austrian legislator may stay with the current legal framework of “long” contestation periods and may even further extend certain time limits as required by the European proposal.
Additional complexity may come through the required interpretation of domestic law in conformity with the directive. Austrian courts currently follow a case-by-case approach when it comes to contestation rights (e.g. what constitutes a legal act), the European Court of Justice may add a further piece of interpretation to this mosaic.
Three-year limitation period for avoidance claims
The European proposal foresees a limitation period for avoidance claims of three years from the opening of insolvency proceedings, which is significantly longer than the one-year period provided under Section 43 (2) Austrian Insolvency Act. This proposed three-year limitation period may lead to legal uncertainty for creditors who can only be assured three years after the opening of insolvency proceeding that their contracts with the debtor are not subject to avoidance. Establishing facts can also be challenging, particularly in conjunction with extensive contestation periods.
Legal acts intentionally detrimental to creditors (Actio Pauliana, Art 8 European Proposal)
Austrian law can be both more strict and less strict than the Commission proposal regarding intentionally disadvantageous acts. Under Section 28 (1) Austrian Insolvency Act, legal acts can be contested up to ten years before the opening of insolvency proceedings if the other party knew that the debtor was acting with the intention of disadvantaging its creditors. If the other party did not know of this intention, but should have known, the avoidance period is "only" two years before the opening of insolvency proceedings. If the Commission's proposal is incorporated into a directive in its present form, it will be necessary to revise Austrian law in this aspect.
Long contestation period for preference under Austrian Law
Under the proposal, a legal act is voidable for preference if it was perfected within three months prior to the submission of the request for the opening of insolvency proceedings or after the submission of the request for the opening of insolvency proceedings. In contrast, Austrian insolvency law foresees that the act must be perfected within the last year before the opening of insolvency but after illiquidity or over indebtedness has occurred (or 60 days before that date). The current time period is, hence, longer.
Legal acts against no or an inadequate consideration (Avoiding Transactions at an Undervalue, Art 7 European Proposal)
For transactions at an undervalue, the European proposal prescribes a period of one year prior to the submission of the request for the opening of insolvency proceedings. Austrian law allows for a period that is twice as long: the relevant time frame for the avoidance of gratuitous and equivalent legal acts is up to two years before the opening of insolvency proceedings.
A glance into the future
In summary, Austria already has similar and in part stricter standards for avoidance actions than envisaged in the proposed EU directive. While a far-reaching revision of the Austrian legal framework on avoidance actions will not be necessary, the proposal may lead to more nuanced adjustments and an even stricter avoidance regime, which creditors should be aware of, especially if Austria keeps the longer periods already existing while extending the currently shorter periods in line with the directive. The Austrian legislator, however, may even take the directive as an opportunity to shorten the time limits under the current Austrian insolvency act to match those foreseen in the proposal in order to secure creditors from burdensome avoidance actions for events long in the past.
For more information on the differences between the proposed directive and Austrian insolvency regulations, contact your CMS client partner or these CMS experts.