Austrian Supreme Court clarifies guarantee coverage after avoidance actions

Background

In a recent ruling the Austrian Supreme Court clarified the relationship between (shareholder) guarantees and claims for avoidance. 

A bank had granted a loan secured by a shareholder guarantee. After the loan had been repaid, the debtor became insolvent. The insolvency administrator successfully brought an avoidance action against the bank regarding the repayment of the loan. Afterwards, the bank requested the guarantor pay both the outstanding loan (again) as well as the bank's costs for legal representation during the avoidance action.

Decision

The Austrian Supreme Court held:

• the claim (ie the principal amount of the loan as well as the interest) secured by the guarantee is reinstated by virtue of the successful avoidance action 
• in lieu of any express agreements to the contrary, the guarantee also secures the reinstated claim
• the bank's cost for legal representation in the avoidance proceedings (which were roughly 10% of the loan) were not secured by the guarantee.

Key takeaway 

This case further emphasises the importance of taking insolvency scenarios (and a potential subsequent avoidance action) into account when drafting guarantees.

Find out more

To discuss the best approach for those scenarios, please contact a member of our Restructuring & Insolvency team.

To find out more about avoidance actions in other jurisdictions, take a look at our new European Restructuring & Insolvency online tool which compares the restructuring and insolvency regimes across 23 countries in Europe.