Distressed M&A in Austria: acquiring a business in crisis and insolvency

Distressed M&A covers several stages. At the beginning stands the out-of-court crisis: the company is economically impaired but has not yet filed for insolvency. The sale is conducted by the owner, often with the involvement of the principal bank and critical creditors. Even here every quarter counts because a worsening of the situation narrows the negotiating room.

The statutory procedural framework governs assets belonging to the estate upon the opening of insolvency proceedings. Control of the estate is exercised by the insolvency administrator in bankruptcy and restructuring proceedings lacking debtor-in-possession status. In restructuring proceedings featuring debtor-in-possession status, section 171 IO generally permits the debtor to act itself. Approval by the restructuring administrator is required for acts outside the ordinary course of business, and the administrator may also object to acts within the ordinary course. Certain transactions are reserved to the administrator by section 172 IO. The mere filing of an insolvency petition does not yet produce these effects.

Which type of proceeding is at hand shapes the entire acquisition: who is the negotiating partner, which consents are needed, which deadlines apply and how quickly can the acquisition be completed? A fundamental classification of transaction forms is provided by our topic page on share deal and asset deal.

One of the largest risks of a pre-insolvency acquisition lies in a later avoidance. If an insolvency proceeding follows the acquisition within a certain period, legal acts of the debtor can under certain conditions be unwound. The decisive aspects are above all the insolvency avoidance situations, such as creditor disadvantage or the special knowledge of the parties. The precise situations and deadlines must be assessed case by case.

In an out-of-court acquisition before proceedings open, the continuation of an acquired business may be governed by section 38 UGB, and the acquisition of assets or a business by section 1409 ABGB. Subject to its requirements, certain business taxes and tax withholding amounts of the predecessor also fall within the scope of section 14 BAO. A financial crisis alone does not trigger the statutory insolvency exceptions. Consequently, the form of acquisition and the time of transfer require a combined assessment. The concept of acquiring individual assets is explored in the glossary entry on asset deal.

A pitfall in its own right is the rapid loss of value. Key employees, customers and suppliers hesitate in the crisis and may leave the company before the transaction is completed. Anyone who does not stabilise these bonds early often takes over a hollowed-out shell. An initial assessment of the risks is provided by our M&A transaction risk profile.

For a sale during opened proceedings, authority to contract must be determined according to the type of proceedings. Under section 117 IO, the selling of the business, all movable fixed and current assets or a part necessary for business operations, or real estate requires approval by the creditors committee and the insolvency court. Even where the debtor remains in possession, section 172 IO reserves the conclusion of these transactions to the restructuring administrator. Additionally, the administrator needs the consent of the debtor to realise assets. An offer or approval by management alone does not replace these requirements.

The acquisition of selected assets is permitted by an asset deal out of the estate. Each liability exception possesses its own scope: the business transfer rules of that provision are excluded by section 38(5) UGB for acquisitions through insolvency proceedings. Such acquisitions are exempted from liability under section 1409(1) and (2) ABGB by section 1409a ABGB. Purchaser liability under subsection (1) is excluded by section 14(2) BAO, in particular for acquisitions from an insolvency estate within section 2(2) IO. General immunity from liability is not conferred by these exceptions. Separate examination is required for contractually assumed obligations and other legal grounds. The importance of independent due diligence is increased by restricted seller warranties. How a review is structured is shown by the post on the due diligence checklist.

Regarding a transfer of business, section 3(2) AVRAG distinguishes the types of proceedings: in bankruptcy and restructuring proceedings without debtor-in-possession status, automatic succession to existing employment relationships under subsection (1) does not apply. Restructuring proceedings with debtor-in-possession status fall outside this exception; where a transfer of business occurs, succession under subsection (1) generally applies. Separate examination is required for key contracts, permits and third-party rights, such as retention of title or security rights. The sale agreement alone transfers neither all contracts nor every administrative permit. Required consents and the transferability of permits must be checked before completion. A deeper view on the transition of employees is offered by the post on the transfer of business under AVRAG.

Valuing a crisis-stricken company is particularly delicate. Classical multipliers often do not mirror the actual situation because results are distorted by special factors and the going-concern outlook is uncertain. Common approaches are scenario based, a separate liquidity plan from the buyer and a valuation of individual business parts rather than the whole company.

The financing of the acquisition is also more demanding. Banks tend to be reserved in crisis situations; often a mix of equity, vendor financing and, where appropriate, a contribution of the existing creditors to a restructuring package is needed. The structuring of these building blocks often shapes the achievable purchase price.

In practice it pays off to involve the lender perspective early in the structural decision. How the purchase price can be reflected in the contract is explained in the post on the purchase price adjustment via net debt and working capital. The concept of vendor financing is explored in the glossary entry on vendor loan.