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Austrian law distinguishes between composition proceedings [Ausgleichsverfahren] in accordance with the Ausgleichsordnung [Composition Code] (AO) and bankruptcy proceedings [Konkursverfahren] in accordance with the Konkursordnung [Bankruptcy Code] (KO).
The opening of bankruptcy proceedings presupposes that the debtor is unable to pay. Inability to pay must in particular be assumed if the debtor suspends payments. Inability to pay does not presuppose that creditors are pressing for payment. The fact that the debtor has fully or partially satisfied or is still able to satisfy the claims of individual debtors does not of itself justify the assumption that he is able to pay (section 66 KO). Bankruptcy proceedings are also opened in the event of overindebtedness in relation to commercial companies within which no personally liable partner is a natural person, in relation to the assets of legal entities and in relation to estates of deceased persons (section 67 KO).
If the criteria exist for the opening of bankruptcy proceedings or impending inability to pay, the debtor may make an application for composition proceedings to be opened in place of bankruptcy proceedings (section 1 AO).
The initial aim of bankruptcy proceedings is the equal satisfaction of all creditors. Each creditor receives an equal quota of their claim, based on the available assets. Where possible, the break-up of undertakings capable of reconstruction should be avoided and the debtor should be given the opportunity of financial reconstruction. This is a primary aim where what is termed compulsory composition proceedings [Zwangsausgleichsverfahren] are conducted within bankruptcy proceedings. Compulsory composition proceedings lead to exemption from residual debt provided the debtor in bankruptcy pays at least 20% of his debts within two years.
Special rules apply during the bankruptcy of natural persons, where the option of exemption from residual debt is generally available. The reasoning behind this is the social concern to allow for the possibility of a new start in a hopeless financial situation. Bankruptcy proceedings for natural persons who do not operate a business are described as debt settlement proceedings [Schuldenregulierungsverfahren] (section 25 KO).
Composition proceedings allow partial remission of debt based on a majority resolution of the creditors, in the interests of reconstruction of the debtor undertaking, provided the debtor pays at least 40% of the claims within two years.
The debtor may also attempt an out-of-court reconstruction alongside court insolvency proceedings. However, the disadvantage of this in comparison with court proceedings lies in the fact that an agreement must be reached with all creditors, and individual creditors who oppose the plan cannot be outvoted. Furthermore, the debtor is obliged, in accordance with section 69(2) KO, to make an insolvency application within 60 days, as soon as the criteria exist for opening bankruptcy proceedings.
In order to avert insolvencies via a legitimate reconstruction at an early stage, it is also possible to undertake a reorganisation procedure [Reorganisationsverfahren] under the Unternehmensreorganisationsgesetz [Corporate Reorganisation Act]. This may only take place where there is a need for reorganisation, but no insolvency. There is a need for reorganisation where the existence of an undertaking is threatened as a consequence of a negative commercial development, with the result that intervention is necessary in order to allow its sustained continuation.
- inability to pay or overindebtedness (see above) ;
- assets which fundamentally cover costs;
- application by the debtor or by a creditor.
- inability to pay, impending inability to pay or overindebtedness;
- application by the debtor accompanied by an admissible composition proposal.
- opens and conducts the proceedings;
- appoints and supervises the trustee in bankruptcy [Masseverwalter];
- protects the bankrupt estate;
- conducts creditors’ meetings, in particular votes on a compulsory composition or a payment plan;
- rules in an order on certain outstanding questions;
- terminates the bankruptcy proceedings.
- is responsible for the practical conduct of the bankruptcy proceedings;
- reviews the financial position of the debtor in bankruptcy;
- assesses whether the undertaking can be continued or whether an undertaking which has already been closed down can be reopened;
- reviews whether a compulsory composition is in the interests of creditors and whether this is likely to be achievable;
- establishes and disposes of the assets;
- administers and represents the bankrupt estate;
- exercises the right of challenge for the bankrupt estate;
- assists in establishing the debt position;
- distributes the proceeds of the estate.
The appointment of a trustee in bankruptcy is not mandatory in the case of bankruptcy proceedings involving natural persons who do not operate a business (debt settlement proceedings). If the bankruptcy court does not appoint a trustee in bankruptcy, then it must itself deal with the matters entrusted to the trustee in bankruptcy under the Konkursordnung.
- is entitled to apply for bankruptcy and to appeal against the opening of bankruptcy proceedings;
- loses power of disposal in relation to the assets belonging to the estate when bankruptcy proceedings are opened;
- is entitled to attend meetings of creditors and of the creditors’ committee;
- is entitled to make an application for conclusion of a compulsory composition.
- The creditors’ meeting
- has certain rights of application (e.g. for the establishment of a creditors’ committee, for removal from office of the trustee in bankruptcy) ;
- votes on a compulsory composition proposal.
- A creditors’ committee, which may be appointed by the court
- supports and supervises the trustee in bankruptcy;
- expresses its opinion in advance on significant arrangements taken by the trustee in bankruptcy;
- has rights of approval in certain circumstances.
- opens and conducts the proceedings;
- appoints and supervises the composition trustee [Ausgleichsverwalter] and the other bodies;
- rules in an order on certain outstanding questions;
- terminates the composition proceedings.
- supervises the debtor and his management;
- ascertains the financial position of the debtor and produces a provisional written report;
- reviews the claims filed;
- certain legal transactions require his approval.
- makes the application for opening composition proceedings, which contains an admissible composition proposal;
- retains in principle his right of disposal and continues to administer its own assets;
- is supervised by the composition trustee.
- the creditors’ meeting votes on the composition proposal;
- a creditors’ advisory board, which may be appointed by the court, supports and supervises the composition trustee.
The opening of bankruptcy proceedings is published in an edict on the website. The legal effects of the opening of bankruptcy proceedings take effect at the start of the day following publication of the edict. The opening of bankruptcy proceedings is also recorded in public registers (Land Register [Grundbuch], Commercial Register [Firmenbuch] etc.).
The opening of bankruptcy proceedings has the effect of withdrawing from the debtor in bankruptcy the right of free disposal over all the assets subject to enforcement, which belong to him at this time or which he acquires during the bankruptcy (bankrupt estate). The bankrupt estate is to be taken into custody and administration, and used for the joint satisfaction of the bankruptcy creditors (section 1 KO).
Legal acts by the debtor in bankruptcy which relate to the bankrupt estate, following the opening of bankruptcy proceedings, have no validity towards the bankruptcy creditors (section 3(1) KO).
Legal disputes whose aim is to assert or secure claims on the assets within the bankrupt estate may not be instituted or pursued against the debtor in bankruptcy after bankruptcy proceedings are opened. Legal disputes relating to preferential claims of secured creditors and claims for separation and recovery of items not belonging to the bankrupt estate may also be instituted and pursued after bankruptcy proceedings are opened, albeit only against the trustee in bankruptcy (section 6(1) and section 6(1) KO).
With the exception of legal disputes concerning claims not related to assets within the bankrupt estate, all pending legal disputes, under which the debtor in bankruptcy is the plaintiff or the defendant, are interrupted when bankruptcy proceedings are opened (section 7(1) KO).
The opening of composition proceedings is also published in the edict file. The legal effects of the opening of composition proceedings commence at the start of the day following publication of the content of the edict (section 7(1) AO). The opening of composition proceedings is also recorded in public registers (Land Register, Commercial Register etc.).
From the date of filing of his application up to opening of the proceedings, the debtor is no longer permitted to sell or encumber properties, create preferential rights to his assets, give guarantees and make transfers without charge. Such legal acts have no validity towards the creditors. From the point at which proceedings are opened, the debtor requires the approval of the composition court in order to close or reopen his business. He also requires the approval of the composition trustee for certain other legal transactions and legal acts. During the composition proceedings, the debtor may use the available funds for himself only inasmuch this is essential for a modest lifestyle for himself and his family (section 8 AO).
Registration of a claim in the composition proceedings has the effect of interrupting the period of limitation applicable to it (section 9 AO).
From the point at which proceedings are opened, no judicial lien or right of payment may be acquired in relation to the items belonging to the debtor (section 10 AO).
The right of separation and recovery relates to items which are at the debtor’s premises, but which do not belong to him (section 44 KO). Since the bankrupt estate only includes the assets of the debtor in bankruptcy, the opening of bankruptcy proceedings does not in principle affect rights of separation and recovery.
Preferential rights are bankruptcy-proof claims to preferential satisfaction out of certain items belonging to the debtor in bankruptcy. The preferential creditors take precedence over the bankruptcy creditors, inasmuch as their claim is covered by the property serving as security (e.g. collateral). Any surplus resulting from the proceeds of disposal is incorporated into the joint bankrupt estate (section 48 KO). The preferential rights are in principle not affected by the opening of bankruptcy proceedings.
Claims in bankruptcy are claims of creditors who have financial claims against the creditor in bankruptcy when the bankruptcy proceedings are opened (section 51 KO). However, interest on claims in bankruptcy since opening of the bankruptcy proceedings, the costs of participation in the bankruptcy proceedings, fines for criminal acts of any kind and claims related to gifts, are not claims in bankruptcy (section 58 KO).
The principle of equal treatment applies in principle to claims in bankruptcy. Neither public authorities nor employees are given preference in the bankruptcy proceedings. However, claims of a shareholder for repayment of a shareholder loan which replaces equity are subordinate claims.
Post-adjudication claims are claims against the bankrupt estate which are to be satisfied out of the bankrupt estate on a preferential basis, i.e. before the bankruptcy creditors (section 47(1) KO). The most important post-adjudication claims (section 46(1) KO) are:
- the costs of the bankruptcy proceedings;
- the disbursements associated with preservation, administration and management of the bankrupt estate;
- all public charges relating to the estate, if and inasmuch as the circumstances triggering the charge materialise after the bankruptcy proceedings are opened.
- claims by employees for regular remuneration for periods after the bankruptcy proceedings are opened;
- claims for fulfilment of bilateral contracts entered into by the trustee in bankruptcy;
- claims arising out of legal acts by the trustee in bankruptcy;
- claims arising out of enrichment of the bankrupt estate without cause;
- claims arising out of the termination of an employment relationship, if this were entered into by the trustee in bankruptcy during the bankruptcy proceedings.
Post-adjudication claims need not be registered in the bankruptcy. If the trustee in bankruptcy refuses to satisfy due post-adjudication claims, then the creditor in question may assert his claims through the courts.
Composition claims are non-preferential claims which only give rise to satisfaction on a pro rata basis. The debtor must acknowledge or contest the registered composition claims within a specific period. Registration of the claims has relevance for the voting right of creditors during the officially designated composition meeting (dealing with the composition proposal). If the composition proposal is accepted and is confirmed by the court, then the composition claims are reduced on a pro rata basis, provided the debtor fulfils the composition. The same applies for unregistered claims.
As in the case of bankruptcy, the composition does not in principle affect either rights of separation and recovery or preferential rights. However, there may be mandatory deferral of the assertion of such rights.
The provisions (section 19, section 20 AO) are the same as those relating to bankruptcy.
Claims arising out of bilateral contracts, under which neither contracting party has fulfilled the contract in its entirety when the composition proceedings are opened, are not initially affected by the composition proceedings. However, the debtor may elect either to demand fulfilment by the other party or else to withdraw from the contract (section 20b AO). Withdrawal requires the approval of the composition trustee. The composition trustee may only approve if fulfilment or continued fulfilment of the contract could jeopardise the materialisation or possibility of fulfilment of the composition or continuation of the undertaking (section 20b AO). Special conditions apply for leases and employment contracts.
Legal acts which have been undertaken before the bankruptcy proceedings were opened and which relate to the assets of the debtor in bankruptcy, may be challenged on the ground of intention to discriminate and squandering of assets (section 28 KO) , of preferential treatment (section 30 KO) or of knowledge of inability to pay (section 31 KO). Disposals without charge and equivalent disposals (section 29 KO) may also be challenged. The detailed criteria for challenge are laid down in the text of the statute, which may be viewed at the Bundeskanzleramt website
See the response to question 5.
Compulsory composition is not a separate insolvency procedure, but a "composition within bankruptcy”. Here too, conclusion and performance of the compulsory composition results in exemption from residual debt. The debtor in bankruptcy pays the compulsory composition quota and is consequently exempted from the claims in bankruptcy.
Compulsory composition proceedings may only be opened in response to an application by an honest debtor in bankruptcy (i.e. one who has not been convicted of fraudulent bankruptcy, overt intention to delay proceedings etc.). The debtor in bankruptcy must at the same time make a proposal as to how the creditors can be satisfied or protected (section 140(1) KO). The application is inadmissible if the bankruptcy creditors are not offered the statutory minimum quota of 20% of the claims in bankruptcy, payable within two years. Natural persons who do not operate a business may be granted a payment term of up to five years. If the payment term is longer than two years, then the quota must however be at least 30% (section 141 No 3 KO). For the rest, the claims of creditors with rights of separation and recovery and with preferential rights may not be affected, post-adjudication creditors are to be satisfied in full and bankruptcy creditors must in principle be treated equally (section 149 et seq. KO). In addition, the rights of the bankruptcy creditors against guarantors or joint debtors of the debtor in bankruptcy or against parties liable under recourse may not be restricted without the explicit approval of the party entitled (section 151 KO). The majority of the bankruptcy creditors with voting rights who are present at the officially designated compulsory composition meeting must approve the compulsory composition. In addition, the total of the claims of the approving creditors must amount to at least three quarters of the total of the creditors present at the officially designated meeting (section 147(1) KO).
If the compulsory composition is subsequently confirmed by the court, then the debtor in bankruptcy is exempted towards the bankruptcy creditors from the remainder of his debts over and above the quota (section 156 KO).
If no compulsory composition is achieved during the debt settlement proceedings, then the debtor’s assets are disposed of. A payment plan or alternatively a siphoning-off procedure provide a further debt relief option. The payment plan represents a special form of compulsory composition. The principal differences relate to the absence of a statutory minimum quota and to the extension of the maximum admissible payment term to seven years. The same creditor majorities as during compulsory composition and composition are required for acceptance of the payment plan.
If the creditors do not approve the payment plan, then the court must rule on the debtor's application to conduct a siphoning-off procedure with residual debt exemption (section 200(1) KO). The approval of the creditors is not necessary in this case. The attachable proportion of the income is first siphoned off. The debtor must assign corresponding (salary) claims for seven years to a trustee of the creditors. The procedure is successful if the debtor is able to satisfy at least 50% of creditors’ claims in three years or at least 10% in seven years, out of the proceeds of the disposal of the bankrupt estate and through a siphoning-off procedure. If this is the case, then the court declares the cessation of the siphoning-off procedure and pronounces exemption from the residual debt (section 213 KO). If the payment objective is not achieved after seven years, then the court may nevertheless pronounce exemption from the residual debt, suspend a ruling or extend the siphoning-off procedure for a maximum of three years, based on the principle of equity.
If the debtor is unable to pay or is overindebted (see question 1 above) or if inability to pay is impending, he may apply for composition proceedings to be opened. He must attach a number of documents (schedule of assets, list of creditors and debtors, financial statements for the past three years, composition proposal etc.) to his composition application. In addition to the debtor’s honesty, a further criterion for the admissibility of the composition is a proposal for payment of the statutory minimum quota, namely 40% of the creditors’ claims, within two years following acceptance of the composition.
Generally speaking, a composition must be accepted within 90 days after the proceedings open (section 67(1) No 2 AO). The majority requirements are the same as those for compulsory composition (see above). The composition must be the subject of conformation by the court. The confirmatory ruling is published in the insolvency file (section 49(3) AO).
Three options are available for the final phase of the proceeding: cancellation of the proceedings without debtor supervision, cancellation with supervision by an administrator or continuation of the composition proceedings with supervision by the composition trustee.
The trustee in bankruptcy is in principle required to dispose of the items belonging to the bankrupt estate out of court, in particular via sale on the open market. Auction by the court in accordance with the Exekutionsordnung [Enforcement Code] only takes place in exceptional instances, where this is resolved by the bankruptcy court in response to an application by the trustee in bankruptcy.
In the case of significant arrangements, the trustee in bankruptcy must first obtain a statement from the creditors’ committee (section 114(1) KO). Furthermore, the trustee in bankruptcy must declare certain legal transactions, whose value is in excess of EUR 100,000. --, to the bankruptcy court at least eight days in advance. The court may prohibit completion of such transactions (section 116 KO: conclusion of compositions, acknowledgement of litigious separation and recovery claims, claims for preferential rights and litigious post-adjudication claims, filing of challenge suits etc.). Certain legal transactions must be the subject of approval by the creditors’ committee and the bankruptcy court, irrespective of their value (section 117 KO).
With the approval of the bankruptcy court, the creditors’ committee may resolve that claims whose enforcement is unlikely to adequately succeed, and items of minor value, should be surrendered to the debtor in bankruptcy for his free disposal (section 119(5) KO).
The post-adjudication creditors are to be satisfied as soon as their claims are fixed and due, without regard to the status of the proceedings (section 124(1) KO). If the size of the bankrupt estate is insufficient to meet the bankrupt claims, then the trustee in bankruptcy must immediately declare this to the bankruptcy court and refrain from satisfying the post-adjudication creditors. A “bankruptcy within the bankruptcy” (section 124a KO) then takes place.
Satisfaction of the bankruptcy creditors may not commence until after the general officially designated examination meeting. The trustee in bankruptcy must in principle effect distribution following consultation with the creditors’ committee and based on the approval of the bankruptcy court to the distribution plan (sections 128-130 KO). Special rules apply for the treatment of disputed claims (section 131 KO) and claims registered late (section 134 KO) , and for bankruptcy creditors who are simultaneously preferential creditors (section 132 KO).
The proceeding must be closed once evidence of completion of the final distribution has been provided to the bankruptcy court, and in the case of a compulsory composition (section 139(1) KO) , once this has been finally confirmed and the claims of separation and recovery creditors, preferential creditors and post-adjudication creditors have been satisfied or secured (section 157(1) KO). The proceeding must also be closed once a payment plan has been finally confirmed (section 196(1) KO) or a siphoning-off procedure has been finally instituted (section 200(4) KO).
The proceeding must also be closed if all the post-adjudication and bankruptcy creditors approve the cancellation (section 167(1) KO) , or if it should prove during the course of the bankruptcy proceeding that the assets are insufficient to cover the costs of the bankruptcy proceeding (section 166 KO).
Final closure of the proceeding has the following specific effects:
- The former debtor in bankruptcy once again acquires full power of disposal with respect to his assets (section 59 KO) and the powers of the trustee in bankruptcy cease.
- The former debtor in bankruptcy once again acquires unrestricted capacity to sue and be sued. There is a statutory change of party, in pending court cases, from the estate to the former debtor in bankruptcy.
- The bankruptcy creditors may then once again take unrestricted enforcement proceedings against the former creditor in bankruptcy, in order to obtain that proportion of their claim which exceeds the bankruptcy quota.
In certain sectors, the debtor in bankruptcy may only operate a business again subject to administrative restrictions (e.g. under the Gewerbeordnung [Industrial Code] or professional restrictions (e.g. under the Rechtsanwaltsordnung [Lawyers’ Code]. Intentional prejudice to creditors carries the possibility of criminal penalties.
If this proceeding ends, this causes the restriction to the debtor’s freedom of disposal under composition law to cease.
Last update: 28-04-2005