Insolvency in Austria

The Austrian Insolvency Act states that the directors of a company are obliged to apply for the opening of insolvency proceedings in cases of illiquidity or over-indebtedness.

Illiquidity is not only assumed in case the debtor suspends its payments altogether but also if the debtor is unable to pay already due payments within a reasonable timeframe. Illiquidity is also to be assumed if the company defaults on more than 5% of its due debts; in other words: in cases where a company is in a position to settle at least 95% of its debts in time, it is not illiquid.

Over-indebtedness is to be assumed if the company’s liabilities exceed the assets at liquidation value, which is determined by actual or potential selling opportunities under normal circumstances, and there is no positive forecast on the continued existence of the company.

The "new" Austrian Insolvency Act ("IO"), which came into force on 1 July 2010, favours the going- concern principle of an insolvent company.

In case of insolvency patent portfolios are often held by parent companies while they are used by affiliates by way of licences. What happens in insolvency of the licensor or the licensee?

The Austrian Insolvency Act (IO) does not provide a special regulation for licence contracts. Usually the particular provisions laid down in the IO (§§ 23, 24) concerning tenancy agreements (e.g. lease) are applied. Various constellations are possible, which can be essential to the continued existence of an enterprise:

In general, the licence contract continues to exist, if the licensee is insolvent. However, if the liquidator or the licensor want to terminate the licence contract according to § 23 IO, they need to apply the legal deadline (benefiting termination). The short cancellation period of 24 hours (§ 1116 of the Austrian Civil Code "ABGB") de facto results in an immediate termination of the contract.

If the licence is necessary for the continuation or disposal of the insolvent enterprise, a "forward-thinking" licensee can safeguard it’s rights by paying the royalty for a determined period in advance. Thus a termination does not come into effect until that period has expired.

While the licensor is entitled to claim damages in case of a premature termination by the liquidator, he has to lodge this claim in the insolvency proceedings and often may expect only the dividend in insolvency.

Very often licensors try to stipulate in the licence agreement that in case of insolvency of the licensee the licensor is entitled for immediate termination of the contract. According to a recent ruling of the Austrian Supreme Court, those agreements are contrary to "ordre public" if the licensor does not (partially) pay back the already paid license fee.

Only a claim in the insolvency proceedings

contractIf the licensor is insolvent, the liquidator has to fulfil the contract according to § 24 IO, without having an articulated right of pre-termination. Therefore he is bound to the contractual regulations concerning the termination. If the licensee has prepaid royalties, he can counter these to the liquidator only for the period, during which the contract would run within the contractual term of notice. For all payments beyond that time the licensee is enabled to raise claims solely against the licensor’s bankrupt estate.

Caution is called, if the liquidator exploits the licensed patent or the trademark as part of the assets involved in the insolvency proceedings. In this case, the transferee of the patent or brand is entitled to terminate the contract within the legal period of 24 hours, without being bound to contractual time limits or dates. The licensee can protect himself against this unpleasant surprise only by registering the licence right into the patent or trademark register.

In case of registered licences, the transferee is bound to the periods of time and dates agreed in the licence contract. A registration is also recommended in order to avoid that claims of licensees are limited to the dividend in case of insolvency.

Any licensee is well advised to register the license in the official records on time. In times of crisis enterprises should check their licences in order to be prepared for cases of insolvency.

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