Liability For Violation Of Capital Maintenance Rules

• Published date: 19 May 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy, Shareholders
• Law Firm: KNOETZL HAUGENEDER NETAL Rechtsanwaelte GmbH
• Author: Ms Katrin Hanschitz

Executive Summary:

Austrian capital maintenance rules are strict and comprehensive. Under recent case law, even outside legal counsel can be held liable by the client (or a later insolvency receiver) if they fail to prevent the violation of Austrian capital maintenance rules by their client. Where the sole shareholder is also the sole managing director, this can put both client and counsel in a difficult position.

Austrian capital maintenance rules provide comprehensive protection of all company assets

Austrian capital maintenance rules for corporations (stock corporations or Aktiengesellschaften and companies with limited liability or GmbHs) are among the strictest in Europe. Unlike German corporate law, which only protects specified, statutory, capital (Stammkapital or Grundkapital), Austrian capital maintenance rules protect all assets of the corporation. An Austrian corporation may not make any payments, or in any way use company assets, for the benefit of shareholders at the expense of the corporation, except:

1. in the form due dividends, i.e dividends based on duly determined profits whose distribution has been duly resolved or otherwise decided on as provided in the corporations' statutes;
2. where expressly provided for by law e.g., in the course of a capital decrease;
3. based on arms-length transactions, i.e transactions that would have been entered into in the same way if the shareholder or related party would not have benefited from the transaction (Sec 82 of the Limited Liability Company Act and Sec 52 or the Stock Corporation Act)

Austrian case law on capital maintenance rules is extensive and strict. These rules also apply to 'one-person corporations', i.e., where the sole shareholder is also the managing director.

Transactions that violate the capital maintenance rules are null and void. Even third parties - i.e., other than shareholders and managing directors - can become liable for repayment/restitution if they colluded or if a violation of the capital maintenance rules was evident, i.e., that third person was acting with gross negligence. This is often a concern for financing institutions who receive collateral on assets of related companies, particularly from subsidiaries and 'sister' companies.

Obligations of Outside Legal Counsel of Corporations

The Supreme Court has, in the past ruled that outside legal counsel is obligated to warn the corporation if, while drafting and negotiating a contact, they perceive or should have perceived a...