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08 February 2011
On October 20 2010 insolvency proceedings were opened against A-TEC Industries AG, the Austrian holding company of industrial group A-TEC. With outstanding debt of around €650 million (including contingent claims), this insolvency is set to be the third-largest insolvency in Austria to date. Claims included around €300 million of bond debt (two convertible bonds and a corporate bond) issued by the company.
Few of the bondholders would have imagined that they would be unable to pursue their rights in the course of these proceedings. On the day that the insolvency proceedings were opened, the insolvency court appointed three trustees to represent the bondholders and their collective interests against the company. This restraint of bondholders' rights caused uproar among the mainly international institutional investor base.
Some 137 years ago, when Austria was still a monarchy, the legislature passed the Act on Trustees. According to this law, a competent court must appoint a trustee if, among other things, the rights of bondholders are endangered due to a lack of joint representation. In particular, such trustee is to be appointed in the event of an issuer entering insolvency proceedings.
The law does not distinguish between bondholders that are factually unknown to the issuer or the insolvency court and those that have, as the case may be, already filed or intend to file their own petitions with the court. Neither does it distinguish between retail investors (ie, mainly consumers that may arguably require some level of protection) and institutional or professional investors that do not.
If a trustee is appointed, a bondholder is no longer entitled to pursue individually any rights that are considered 'collective rights' (ie, rights affecting all bondholders equally as the issuer's creditors). While such restraint might seem problematic under Austrian constitutional and general human rights law, the act has not (at least not successfully) been challenged before the Constitutional Court.
The main uncertainty in connection with the act is the precise definition of what constitutes a bondholder's 'individual right' versus a bondholder's 'collective rights'. As a guideline, a bondholder's individual right is considered to be any right other than a right that affects all bondholders equally as the issuer's creditors. Hence, the exercise of such right is permitted even in cases where a trustee is appointed.
Unfortunately, neither the act nor case law provides clear guidance in this respect. In particular, the precise scope of the individual rights that a bondholder may have in the event of insolvency proceedings is unclear.
As was the case in the insolvency proceedings against A-TEC, court practice seems to interpret the act and the concept of collective rights rather broadly, thereby significantly limiting bondholders' individual rights. Not only did the trustees file claims in their own name on account of the bondholders represented by them, but they also represented the bondholders in all court hearings in connection with the company's insolvency. The insolvency judge even had individual bondholders removed from court hearings.
As a result of the trustee's power of representation, bondholders may not even challenge decisions made by the insolvency judge. They may only challenge, to a certain extent, decisions by the court approving particular actions to be taken by a trustee (and then only where court approval is required).
It also appears that there is no uniform practice as to how the trustee's voting rights are determined. However, voting rights are essential in any insolvency (eg, for accepting or dismissing a restructuring plan proposed by the debtor). Essentially, two alternatives seem to exist: the trustee may have either one voting right for the entire bond (ie, a total of three votes in the A-TEC case) or multiple votes, calculated on the basis of total claims of other creditors in relation to total claims of outstanding bond debt. In the case of A-TEC, the court finally decided on granting multiple pro rata voting rights to the three trustees. However, in past insolvency proceedings trustees have been granted only one voting right.
When the Act on Trustees was introduced in 1874, the world was very different to how it is now. In the current environment such a law not only causes concern among affected bondholders, but may also adversely affect the Austrian economy. Investors that until now were unaware of the act's practical implications may think twice before investing in Austrian bonds - particularly if issuers are facing economic difficulties. With a coupon of 8.75%, the last of the three convertible bonds issued by A-TEC in 2009 suggests that A-TEC was in need of rapid liquidity at the time of issue. It remains to be seen whether Austrian companies in comparable situations will be able to place their bonds in future. Having to rely on the abilities of a court-appointed trustee in the issuer's restructuring may not be a desirable outcome for international investors.
Consequently, the legislature should consider repealing or amending the act to reflect international capital markets standards. Consumer protection considerations arguably speak in favour of revising the act rather than repealing it. For instance, its scope of application could be limited to unknown bondholders. Additionally or alternatively, the law could distinguish between retail investors and professional investors.
In the aftermath of the A-TEC insolvency, it is rumoured that certain affected investors have approached the legislature, which purportedly had already contacted experts and involved parties to consult on potential legislative amendments. It remains to be seen whether changes are indeed underway.
For further information on this topic please contact Ursula Rath or Stefan Paulmayer at Schönherr Rechtsanwälte GmbH by telephone (+43 1 53 43 70), fax (+43 1 53 43 76100) or email (firstname.lastname@example.org or email@example.com).
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