A Q&A guide to lending and taking security in Austria. The Q&A gives a high level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security, negative pledge, guarantees, and loan agreements. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and trust concepts; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.
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This article is part of the PLC multi-jurisdictional guide to finance. For a full list of contents visit www.practicallaw.com/finance-mjg.
As in previous years, the Austrian secured lending market has remained at a stable level, both in the number of deals and in lending value, over the last 12 months. Generally, banks require significantly higher equity from borrowers than before the financial crisis, and guarantees and collaterals are required more frequently.
Real estate comprises:
Land and things affixed to the land (unselbständige Bestandteile), such as buildings.
Accessory assets (Zubehör), such as:
vehicles;
raw materials;
stationary equipment.
Interests and rights in real property that can be registered in the land register (Grundbuch), such as:
mortgages;
easements;
real burdens;
construction rights;
leases.
A mortgage (Hypothek) is the only relevant form of security over real estate. The existence and validity of a mortgage depend on the existence of the obligations that it secures.
Creation of a mortgage requires a valid underlying contractual obligation, that is, a mortgage agreement.
Perfection of a mortgage requires its registration in schedule C (the Lastenblatt) of the relevant entry in the land register. Registration requires the mortgage agreement to provide for a specific amount of money to be secured by the mortgage (Festbetragshypothek). However, registration of a maximum amount mortgage (Höchstbetragshypothek), which secures all obligations arising from a specific contractual relationship up to a specified and registered maximum amount, is also permitted.
A mortgage (both for a fixed or a maximum amount) can be registered for more than one real property simultaneously (Simultanhypothek). It is also possible to register more than one mortgage in relation to the same property.
Tangible movable property comprises all physical objects that are not qualified as immovable property (see Question 2, Real estate). These include inventory, machines, commodities, goods, aircrafts, trains or containers.
The most common form of security granted over tangible movable property is a pledge (Pfandrecht).
Creation of a pledge requires a pledge agreement but there are no specific requirements in relation to the agreement. However, if the agreement is not in German, an Austrian court or another competent authority can request a certified translation of the pledge agreement (or other documents, such as the underlying facility agreement).
To perfect a pledge, the borrower (pledgor) must generally transfer possession of the pledged asset to the lender (pledgee) by physically delivering the asset. If physical delivery is not possible or suitable (for example, for heavy machinery, trading stock or an aircraft), a pledge can be perfected by a symbolic delivery. In that case, attaching plates, marks or other signs evidencing the pledge is required. In addition, a borrower's access to the pledged property must be restricted in certain circumstances (for example, to stored trading stock).
The most common types of financial instrument over which security is granted are:
Stocks.
Shares in a limited liability company.
Interests in a partnership.
The most common form of security granted over financial instruments is a pledge. Creation of a pledge over financial instruments, whether in a certificated or dematerialised form, requires a pledge agreement.
Certificated securities are perfected by physical delivery of the respective instrument to the lender.
Dematerialised securities (for example, shares in a limited liability company) are perfected by the borrower notifying the relevant third party (the company for a share pledge, the bank for a pledge over bank accounts). If the pledged securities are recorded in the borrower's books, a book entry (Buchvermerk) confirming the creation of a pledge is sufficient to perfect the pledge.
The most common types of claims and receivables over which security is granted are receivables under customer contracts and claims under insurance contracts.
The most common forms of security granted over claims and receivables are a:
Pledge.
Security assignment (Sicherungszession).
The creation and perfection of a pledge follows the rules as for pledges over dematerialised securities (see Question 4, Formalities).
A security assignment is created by execution of an assignment agreement. To perfect the security assignment over claims and receivables, the relevant third party debtors must be notified. If the assigned claims or receivables are recorded in the assignor's books, an assignment is perfected by making a book entry.
The most common form of security granted over cash deposits is the pledge. If the cash is deposited in a bank account when pledged, the creation and perfection of the pledge follows the rules for pledges over dematerialised securities (see Question 4, Formalities). If the cash itself is being pledged, the creation and perfection of the pledge requires physical delivery.
The most common types of intellectual property over which security is granted are patents, trade marks and designs.
The most common form of security over intellectual property is a pledge.
While creation of a pledge requires a pledge agreement, the perfection requirements depend on whether the intellectual property rights are registered or not:
A pledge over unregistered intellectual property rights is perfected by notification of the third party debtors.
A pledge over registered intellectual property rights is perfected by registration in the respective register, for example, the:
patent register (Patentregister);
trade mark register (Markenregister);
design register (Musterregister).
The Patent Office (Patentamt) keeps all of these registers.
Security over future assets can be created, if the legal existence and ownership of the future asset can be ascertained in advance, following the principle of certainty (Bestimmtheitsgrundsatz).
Security over future assets cannot be perfected before the asset has come into existence, under the basic principle of transferring possession over the pledged or assigned asset for perfection (see Question 3, Formalities).
Valid security cannot be created over fungible assets under the principle of certainty.
There are no other types of assets over which security cannot be granted or it is difficult to grant.
Due to their accessory nature (Akzessorietät), the pledge and the security assignment automatically cease to exist on full and complete satisfaction of the secured obligations. Therefore, no formalities are required for the release of a pledge or security assignment. In cases where a pledge was registered, for example in the trade mark register, an agreement on the release signed by both parties must be submitted to cancel the pledge's registration. Assets that were physically transferred for perfection of the pledge must be returned.
A mortgage exists for as long as it is registered in the land register, despite fulfilment of the secured obligations. On fulfilment of the secured obligations the lender must issue a cancellation receipt, which the owner of the mortgaged property must file with the land register to cancel the mortgage.
Commonly, shares over an SPV are taken as security in addition to taking security directly over the assets held by the SPV.
Security is deemed to be equity-replacing under the Substitute Equity Act (Eigenkapitalersatz-Gesetz) if:
The SPV itself is the borrower.
The shareholder of the SPV grants security over its shares.
Security is granted during a "crisis" of the subsidiary.
In such a case the beneficiaries of the security are deemed to be shareholders and are entitled (or even required) in certain circumstances to request the realisation of the shareholder's security before demanding repayment of the secured loan from the SPV.
Sale and leaseback, factoring and hire purchase are all quasi-security structures that are commonly used in Austria. They are not recharacterised as security.
See above, Sale and leaseback.
See above, Sale and leaseback.
Retention of title is one of the most popular forms of commercial security for the performance of financial obligations. The advantage of retention of title over a pledge or a security assignment is that there are no strict publicity or notification requirements (see Question 4, Formalities). Retention of title must be agreed before the property is delivered to the buyer.
Under an extended retention of title the buyer assigns to the seller all receivables from the future resale of the property. However, an extended retention of title is subject to notification requirements.
No other quasi-security structures are used.
Guarantees are common instruments under Austrian law. Guarantees are created under an agreement between the guarantor and the beneficiary and may either be given as:
A personal guarantee or suretyship (Bürgschaft). Where the guarantor undertakes to settle certain obligations of a debtor in the event of default. It is an accessory security and therefore conditional on:
the debtor's default; and
a valid and existing underlying obligation of the debtor.
An abstract guarantee. In this case, the guarantor undertakes to pay a certain amount of money on the formal request by the beneficiary under the guarantee regardless of the merits of that request. The guarantor's obligation is abstract and, therefore (unlike a personal guarantee), independent from any underlying legal relationship between the beneficiary as creditor and his debtor.
It is unlawful for a company to provide security on debt that was acquired to purchase shares in that company or its parent.
A subsidiary granting a security for the parent's obligations under a loan agreement, if not granted at arm's length, may violate capital maintenance rules (Grundsatz der Kapitalerhaltung) (see below, Loans to directors).
A parent can guarantee the obligations of its subsidiary under a third party loan without violating any corporate benefit rules.
Security granted by a company in favour of a shareholder may breach the capital maintenance and corporate benefit rules, if it is not executed at arm's length. This is because no repayments of capital contributions can be made to shareholders as they are only entitled to a portion of the annual profit (as shown in the annual financial statements) and liquidation proceeds under the principle of capital maintenance. This prohibition also covers hidden repayments in the form of transactions between the company and its shareholders. A company can only enter into transactions with a shareholder, or persons related to him (for example, a company under that shareholder's control), at arm's length.
When determining if the transaction was concluded at arm's length, the two essential criteria are whether:
The security is objectively disproportionate to the consideration provided by the shareholder in return (for example, the premium paid to the company was inadequate).
The company's management has considered the facts of the transaction with the diligence of a prudent businessman.
Lenders are restricted as to the amount of interest they can charge under the general principle of good morals (bonos mores) (gute Sitten), which prohibits excessive interest, and by the prohibition of accrued interest exceeding the principal debt. Where there is excessive interest, the contractually agreed interest rate would be deemed void.
A lender that is granted control rights over the borrower in a loan agreement or any related security document, which exceed control and influence rights usually granted over the borrower's business, can be deemed a shareholder of the borrower (Substitute Equity Act).
A loan granted by such lender may be deemed equity-replacing and would therefore be subordinated to the claims of all secured and unsecured creditors of the borrower if, at the time of the loan, the borrower:
Is insolvent.
Is over-indebted.
Has a debt-to-equity ratio of less than 8% and a debt redemption period exceeding 15 years.
Only the actual polluter and the owner of land can be liable under environmental laws. Making a loan, holding or enforcing security over land, or enforcing a guarantee, does not trigger a lender's liability, unless it becomes the owner of land, in which case it may be liable for pollution.
Contractual subordination of debt is common and can be achieved through an inter-creditor agreement concluded between senior and subordinated lenders.
A creditor can achieve structural subordination by lending separately to entities at different levels within the same corporate group.
Creditors of the parent company are subordinated to the subsidiary's creditors in relation to the subsidiary's assets.
Secured debt is often traded in the course of syndicated loan transactions. As most common forms of security have an accessory nature (particularly pledges over assets or shares and security assignments of receivables), the security can only be transferred with the underlying debt. Therefore, the publicity requirements regarding the granted security also apply when the debt is assigned.
This contrasts with common law facility agreements, under which creditor rights are transferred by novation and a security trustee holds the security for the lenders' benefit. The security trustee is not a creditor (or is only one of the creditors) and is therefore not entitled to the entire secured claim. The parties to the facility agreement can change this by introducing an independent and separate parallel debt to the security trustee. This means that the security trustee is granted an independent right to demand payment of the entire outstanding amount as a creditor in its own right and not as a representative of the other secured parties. Security held by the trustee can secure all lenders' claims.
This structure helps to minimise the financial and administrative efforts of having to grant new accessory security to new lenders or syndicate members and facilitates syndication.
The parallel debt structure has not yet been tested in proceedings before an Austrian court. However, the practising legal profession and Austrian legal academics agree that it would be upheld if tested.
The concept of facility agents is recognised under Austrian law. Depending on the provisions of the respective facility and inter-creditor agreements the facility agreement can enforce rights on behalf of the members of the syndicate.
A trust created under the common law of another country is not recognised in Austria for the purposes of creation and perfection of in rem security. A valid and enforceable security interest can only be created in favour of the creditor of the obligation to be secured. Therefore, a security trustee under a common law trust cannot enforce its rights in the Austrian courts.
However, the lenders and debtors often appoint a security trustee in the financing documentation by introducing an independent and separate parallel debt to the security trustee. This parallel debt enables the security trustee to enforce its rights granted under the financing documents in the Austrian courts.
The relevant security agreement normally provides that a secured creditor can enforce its security at any time after an event of default (as defined in the security document) occurs, unless it is remedied within a specified grace period. Typical events of default include:
Non- or late payment.
Breach of covenants.
Misrepresentation.
Cross-default.
Insolvency.
Cessation of business.
A security can only be enforced if the secured obligation is due. Any surplus proceeds from the enforcement must be transferred to the debtor. The same rules also apply to loans and, in principle, to guarantees.
A mortgage is usually enforced by a court through a public auction (Zwangsversteigerung). Alternatively, the parties can agree (in the relevant security document) on an out-of-court enforcement (OOCE), either through a public auction or a private sale. However, the validity of an OOCE clause is subject to the following:
Prior to enforcement, the lender must:
request, in writing, that the borrower settles its outstanding obligations;
inform the borrower (in the request) that a public auction or a private sale will take place, if the obligations are not settled in full within a period of at least seven days.
The mortgaged property must be valued by an independent expert, and must not be sold at a price below that value.
The available enforcement mechanisms for a pledge over movable assets differ, depending on whether a pledge is over tangible or intangible movable assets.
A pledge over tangible movable assets can be enforced:
through a private sale, provided for in the OOCE clause (see above, Mortgage), if the assets have an exchange-quoted price (Börsenpreis) or a market price (Marktpreis);
by a court through a public auction.
A pledge over certificated securities can be enforced through a private sale, but not a public auction.
A pledge over intangible movable assets can be enforced through a public auction or a private sale.
The validity of an OOCE clause is subject to the following:
Prior to enforcement, the lender:
requests, in writing, that the borrower settles its outstanding obligations;
informs the borrower (in the request) that a public auction (or a private sale) will take place if the obligations are not settled in full within a period of not less than seven days.
The asset is valued by an independent expert and sold at a price above that value, unless the pledged asset has an exchange-quoted price or a market price (see above).
A security assignment can be enforced through:
The collection of the assigned receivables.
The exercise of the assigned contractual rights.
Special court proceedings (Unternehmensreorganisationsverfahren) are available to companies under the risk of insolvency (Austrian Company Reorganisation Act (Unternehmensreorganisationsgesetz)). The company's management can apply to initiate reorganisation proceedings if:
The debt-to-equity ratio is less than 8%.
The debt redemption period exceeds 15 years.
An application must be accompanied by a reorganisation plan that both:
Explains the reasons for the business crisis.
Proposes countermeasures and contains a description of the reorganised business.
A court-appointed reorganisation auditor monitors the implementation of the reorganisation plan.
The benefit of reorganisation proceedings (under the Austrian Company Reorganisation Act) is that certain reorganisation measures are not subject to the restrictions of the Austrian Substitute Equity Act and are therefore not deemed equity-replacing (see Question 13, Others). However, reorganisation proceedings are not common among market participants in practice.
A secured creditor is barred from exercising its rights to enforce its security for a maximum period of six months after the opening of bankruptcy proceedings, provided that:
The exercise of its rights would endanger the operation of the debtor's business by the administrator (Insolvenzverwalter).
The bar does not cause severe personal or economic damage to the secured creditor.
The administrator can challenge the validity of certain transactions (including granting security, making loans or making guarantees) that the insolvent debtor has entered into to the detriment of the creditors. The following transactions can be challenged:
Transactions concluded in the ten years before the start of the insolvency proceedings with the intention of disadvantaging the creditors, provided the other party knew of the debtor's intention.
Transactions entered into during the two years before the start of the insolvency proceedings with the intention of disadvantaging the creditors, provided the other party should have been aware of the debtor's intention.
Transactions with the debtor's close relatives (within the meaning of the Austrian Insolvency Act (Insolvenzordnung)) concluded during the two years before the start of the insolvency proceedings with the intention of disadvantaging the creditors, provided the close relative was aware of the debtor's intention.
Transactions entered into during the two years before the opening of the insolvency proceedings where no consideration was given.
Transactions unduly favouring one creditor, entered into:
during the year before the start of the insolvency proceedings;
after, or up to 60 days before, the debtor becoming unable to pay its debts or filing insolvency proceedings;
provided that the creditor was aware of the debtor's intention.
Transactions between the creditor and the debtor, where the creditor, in the circumstances or at that time, was not entitled to receive the benefits of the transaction, and which took place:
during one year before the start of the insolvency proceedings;
after, or up to 60 days before, the debtor becoming unable to pay its debts or filing insolvency proceedings.
Transactions entered into during the six months before the debtor's insolvency or prior filing of the insolvency proceedings, provided the other party was aware or should have been aware of the debtor's insolvency or of the filing of the insolvency proceedings.
After realisation of all the debtor's assets, the liquidation proceeds are distributed in the following order:
Secured creditors, such as assignees under security assignment agreements, pledges and mortgagees. They are entitled to a separate and preferential satisfaction (Absonderungsgläubiger) from the proceeds of the assets granted to these creditors as security. Any surplus becomes part of the debtor's estate (Insolvenzmasse) and is used to satisfy all other creditors' claims. However, if the proceeds are insufficient to cover all secured creditors' claims, the secured creditors must file to settle the outstanding balance in the bankruptcy proceedings. Secured creditors are treated like unsecured creditors in that case (see below).
Creditors whose claims arose after the opening of the bankruptcy proceedings (Massegläubiger). They are entitled to preferential satisfaction of their claims from the liquidation proceeds, including the:
costs of the bankruptcy proceedings;
costs of maintaining and administering the debtor's estate; and
claims of employees that originate after the opening of the bankruptcy proceedings.
All other creditors (Insolvenzgläubiger). Their claims are satisfied from the remaining liquidation proceeds. Unsecured creditors rank above subordinated creditors (nachrangige Gläubiger). For example, a claim for the repayment of a loan may be deemed subordinated, if that loan is regarded as equity-replacing (see Question 11, Other structures).
Tax claims can qualify as bankruptcy claims (Insolvenzforderungen) or as privileged claims (Masseforderungen) (that is, benefiting from a privileged settlement of the claim during the bankruptcy proceedings).
A tax claim qualifies as a privileged claim, and ranks equally (pari passu) with those creditors' claims that arose after the opening of the bankruptcy proceedings, if:
It concerns the insolvent taxpayer's assets.
The taxable event occurs after the opening of the bankruptcy proceedings.
A tax claim qualifies as a bankruptcy claim, and is satisfied from the remaining liquidation proceeds (see above, All other creditors), if the taxable event occurred before the opening of the bankruptcy proceedings.
Creditors whose assets are separated from the bankrupt's estate (Aussonderungsgläubiger) (for example, through a retention of title clause) do not participate in the distribution of the liquidation proceeds but can realise their debts through the particular property.
Priority of security interests is determined in accordance with the principle of priority (Prioritätsgrundsatz), which differs depending on the nature of the security interest, but usually depends on the date of perfection.
In relation to mortgages, priority depends on the order of receipt of the applications for the mortgage registration by a competent court (see Question 2, Formalities). The first received application ranks above the second, and so on. However, creditors who have a mortgage over the same land can amend that priority principle by an express agreement (Vorrangseinräumung).
In relation to pledges, the priority depends on the order of perfection (see Question 3, Formalities).
If a security interest has not been validly created and perfected, it does not exist and the security holder is treated as an ordinary insolvency creditor.
There are no restrictions on granting security interests or guarantees, described in Questions 2 to 10, to foreign lenders, or on foreign lenders making loans.
There are no exchange controls.
Stamp duty applies to a number of legal transactions (for example, assignments or personal guarantees), if a written instrument is drawn up (Austrian Stamp Duty Act) (Gebührengesetz).
An instrument is drawn up if:
It is signed by both parties.
One party makes a written offer, which the other party accepts in writing.
An offer is made orally but the acceptance is in writing.
The parties to an agreement exchange two or more separate documents which, when combined, contain the agreement.
Transactions that are not drawn up are not subject to stamp duty. However, transactions that were concluded virtually (for example, by e-mail) are also subject to stamp duty, even if the parties did not print the e-mail (which would provide a document evidencing the transaction within the meaning of the statute) (Austrian Stamp Duty Guidelines).
Mortgage agreements are subject to stamp duty of 1% of the secured amount.
The fee for the registration of a mortgage in the land register amounts to 1.2% of the secured obligation. Registration of pledges over patents, trade marks and designs trigger a nominal registration fee.
Mortgage agreements must be notarised for registration.
Pledge agreements are exempt from stamp duty. However, a pledge over registered trade marks or patents must be notarised and registered with the respective register to be perfected (see Question 7).
Assignment agreements are subject to stamp duty at 0.8% of the value of the assigned claim. Assignment agreements do not need to be notarised or registered in a public register (see Question 5).
If a document is drawn up and kept outside of Austria, stamp duty can be avoided in some cases. Stamp duty can also be avoided if the written offer is accepted in a non-written form, for example, by payment of an acceptance fee.
Generally, the avoidance of stamp duty and structuring the transaction must be thoroughly considered in each case.
There are currently no significant proposals for reform.
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Professional qualifications. Austria, 2006
Areas of practice. Banking; finance; corporate, M&A; private equity.
Languages. German, English, French.
Professional associations/memberships. Austrian Bar Association; International Bar Association.
