Introduction
On 4 September 2017, Her Honour Hazel Marshall Q.C., Lieutenant Bailiff, handed down judgment in the case of Carlyle Capital Corporation Limited (in Liquidation) and others v. Conway and others [2017] Civil Action No. 1510, one of the most anticipated judgments in recent Guernsey jurisprudence, and the first time that a Guernsey court has memorialised certain fundamental legal principles affecting directors and the companies they serve.
Following the opening of insolvency proceedings, the insolvency receiver typically tries to enlarge the insolvency estate by asserting voidance claims. Legal acts that occurred within certain suspect periods prior to the opening of insolvency proceedings might be declared void. Creditors may mitigate certain avoidance risks by investigating the debtor's financial situation when conducting legal transactions.
Responsibility to investigate
Director’s liability is a recurring issue in both the Austrian and German courts. One reason is that, when a company goes into bankruptcy, its receivers and creditors tend to look for alternative sources of funds, especially when the directors are covered by D&O Insurance.
When disputes between shareholders escalate, one of the shareholders may be tempted to transfer the business to a new entity. Can the shareholder be stopped if he succeeds in obtaining a majority vote?
THE FACTS:
Summary
In a very recent avoidance law decision the Austrian Supreme Court held that shareholders of Austrian limited liability companies, even if they are only small minority shareholders, can under certain circumstances be under a specific duty to investigate the company’s financial situation because of their statutory information and book inspection rights. If they fail to do so, they may have to return received payments if challenged by the insolvency administrator (Supreme Court file no. 3 Ob 117/18d).
Legal framework
Before the most recent update to the online FAQ section by the responsible authority, the answer to this question was unknown. Due to the tight timeframes for complying with the Beneficial Ownership Register Act (BORA) and a range of practical problems arising from it, the question has caused headaches among insolvency law practitioners in Austria. In order to explain the issue, a brief summary of BORA is necessary.
The Austrian Insolvency Code provides for the possibility to challenge certain disadvantageous transactions carried out by the debtor after material insolvency has occurred, especially if the creditor knew or should have known of its debtor's material insolvency. This risk of legal actions being contested is of particularly high relevance for shareholders who are also creditors of the debtor company, as the Austrian Supreme Court recently decided that shareholders' information rights would result in an increased level of due diligence.
On 28 June 2017 the Austrian Parliament passed the government's legislative proposal on insolvency law (Insolvenzrechtsänderungsesetz 2017). After lengthy negotiations, the government finally agreed to shorten personal insolvency proceedings to a maximum five years and to abolish the minimum insolvency quota of 10 % under certain conditions. The amendments will be applicable as of 1 November 2017.
Personal bankruptcy in Austria
On 10 July 2017, the Commission announced the public consultation on the development of secondary markets for non-performing loans (NPLs) and distressed assets. Following the commencement of this public consultation, the Council introduced its Action Plan for NPLs.