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Coronavirus - The liability of managing directors - Austria

  • Austria
  • Coronavirus - Business resilience
  • Coronavirus - Country overview

27-05-2020

The coronavirus crisis has left companies and their managing directors facing tremendous challenges. Managing directors currently have to maintain business operations and ensure the viability of their company. However, it is essential for managing directors to keep their legal obligations in mind to avoid a personal liability.

The following article will provide you with a brief overview of the duties of managing directors of a limited liability company in times of the crisis. Please note that these explanations are specifically targeted to limited liability companies, but the general statements can also be applied to different types of enterprises.

1. General obligations of the managing directors of a limited liability company

In general, managing directors are obliged to manage their company in a legally and economically irreproachable manner measured by the standard of care of a proper management body. In times of crisis, the managing directors are particularly challenged and must keep themselves informed about the current business development and legal frameworks with a particular focus on the legal COVID-19 measures. This is the only way they can identify problems that arise and take appropriate remedial measures. The law requires managing directors to maintain operational accounting and implement an adequate internal control system.

Based on those mechanisms, planning calculations such as profitability or liquidity forecasts must be prepared or adapted in the case of recognizable deviations.

If the company has a supervisory board, the board must be informed immediately if circumstances arise that could significantly impact the profitability and liquidity of the company. During a crisis, the supervisory board must carry out increased supervisory and cooperation obligations and, under certain circumstances, actively demand special reports.

In addition, a general meeting of shareholders may also have to be convened (e.g. if half of the share capital is lost).

2. Obligation to file for insolvency

There are two possible reasons for the insolvency of a corporation: illiquidity or over-indebtedness. If one of these two reasons occur, the managing directors are generally obliged, while otherwise being personally liable, to file for insolvency without culpable delay, but at the latest within 60 days (or 120 days as a result of a natural disaster). With the second COVID-19 Act, the legislator has now explicitly extended this 120-day period to pandemics and epidemics. However, this only applies to the extent that the reason for insolvency was partly caused by this exceptional situation.

The culpable violation of this obligation to apply for insolvency can not only lead to civil law obligations to pay damages, but also to criminal liability of the managing directors.

The insolvency is not precisely defined by the law. According to the case law of the Austrian Supreme Court (OGH), insolvency is deemed to exist if the debtor is not only temporarily unable to regularly meet monetary claims due to a lack of liquid assets. This can be assumed if the debtor is unable to pay more than five percent of their debts.

Within the framework of the fourth COVID-19 Act, the legislator has temporarily suspended the second reason for filing an insolvency petition for over-indebtedness (namely, when over-indebtedness occurs in the period between March 1 and June 30, 2020). For companies where the over-indebtedness under insolvency law occurred prior to 1 March 2020, the obligation to file for insolvency continues to apply even if the company is over-indebted.

If, however, the company is still over-indebted after June 30, 2020, an insolvency petition must be filed within (i) 60 days after June 30, 2020 or (ii) 120 days after the occurrence of over-indebtedness; whichever period ends later.

Please note that illiquidity as a reason for insolvency continues to exist. In addition, the company may only be continued in the 60/120 day period to the extent that reorganization attempts are made and a successful reorganization can be seriously expected within the 60/120 day period.

3. Ban on payment at the time of insolvency

From the moment when managing directors are obliged to file for insolvency, the managing directors are generally no longer allowed to make payments. Only payments that are compatible with the diligence of a proper managing director remain permissible. This includes, for example, payments which treat all creditors equally, i.e. which allow a quota-based satisfaction of all creditors (this also applies to taxes and social security contributions). If companies have therefore taken advantage of the possibility of tax or duty deferral, they must ensure that they are in a position to pay these claims to the same extent.

Furthermore, as described above, payments for the maintenance of operations and for the implementation of reorganization measures are also permitted by a very limited extent.

4. Other obligations and restrictions

URG: A liability of managing directors can also arise from the Company Reorganization Act (URG). Accordingly, managing directors are exposed to potential liability if the company is in crisis and they have not applied for reorganization proceedings.

EKEG: A loan granted by a shareholder of the company when the company is in a crisis for a period exceeding 60 days (if granted within the period of 5 April 2020 to 30 June 2020, extended to 120 days) may not be repaid for the duration of the crisis. Violation of this provision may also result in the liability of the managing director.

Clarification of business partners: In the event of illiquidity or over-indebtedness, the company must inform potential business partners that it may not be possible to satisfy their claims at all or only partially.

5. Recommendations for managing directors

  • Accurately document (through transcripts, letters, copies of (video) phone calls, financial forecasts, (external) advice the measures you have taken to overcome the crisis and what factors you have based your decisions on
  • Hold regular meetings with your staff and the supervisory board regarding the coronavirus crisis
  • Continually review your crisis management plans and adjust them if necessary
  • Consider what internal or external resources may need to be brought in to understand the economic, technical and legal issues
  • Review all relevant contracts and, if necessary, seek legal advice on the terms and conditions and how to proceed
  • Establish a clear communication with your lenders, customers and suppliers regarding COVID-19
  • When talking to suppliers or customers who are affected by COVID-19, make sure that they do not modify or renounce rights under a contract, either through your actions or through what appears to be informally negotiated settlements, unless you have fully considered the consequences. Many contracts require that all changes or renunciations must be in writing to be valid. Caution is required in this area in any case

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