General information
Insolvency offenses comprise a group of criminal acts that are related to the (imminent) insolvency or the insolvency proceedings of a natural or legal person. They criminalize fraudulent or negligent conduct that may harm creditors.
In the Austrian Criminal Code (StGB), these offenses can be found in Sec 156 to Sec 163d StGB. Criminal insolvency law includes offenses such as fraudulent insolvency (Sec 156 StGB), detriment to other creditors (Sec 157 StGB), undue advantaging of a creditor (Sec 158 StGB), grossly negligent interference with creditor demands (Sec 159 StGB) and other punishable acts. These offenses typically occur before or during insolvency proceedings. The aim of the criminal insolvency law provisions is to protect confidence in the integrity of economic life and to ensure that creditors are treated fairly.
Fraudulent insolvency (Sec 156 StGB)
Any person who conceals, hides, sells, or damages a part of the person’s assets, pretends the existence or honours a non-existing liability, or who otherwise reduces his assets in a bogus manner thus thwarting or discounting the satisfaction of one or more of the person’s creditors, is liable to prosecution for fraudulent insolvency.
The offense of fraudulent insolvency can only be committed as a so-called special offense by a debtor of several – i.e. at least two – creditors.
Criminal act of fraudulent insolvency
The criminal act is the actual or apparent reduction of the assets of the perpetrator, or the company managed by the perpetrator.
Property within the meaning of Sec 156 StGB is everything that is subject to access by creditors through enforcement, e.g. physical objects, claims and rights.
A real reduction in assets occurs if the assets are reduced without a corresponding equivalent value or the liabilities are increased without an equivalent increase in the assets. Accordingly, the offense of fraudulent insolvency is not fulfilled if the assets remain undiminished in their entirety, for example if existing liabilities are paid. Typical cases of a real reduction in assets include the following:
- Disposal of an asset is defined as the legal disposal of an asset without receiving a corresponding economic equivalent, for example by waiving, giving away or selling below value.
- An asset is damaged if its usefulness for a specific purpose is impaired by a not insignificant change in its substance, resulting in a reduction in value.
An apparent reduction of assets, which is also punishable, is to be assumed if at least one creditor’s chances of obtaining satisfaction are presented as being reduced in a way that is untruthful, e.g. if assets are concealed or set aside.
- Concealment means removing the asset from the creditor’s knowledge.
- Setting aside is the de facto or legal prevention of creditor access.
Criminal liability is not limited to the aforementioned criminal acts (e.g. putting aside, disposing of, damaging). Rather, any real or apparent diminution of assets is punishable as long as it frustrates or diminishes the satisfaction of at least one creditor.
Threat of punishment
The basic penalty for fraudulent insolvency is a prison sentence of six months to five years.
However, anyone who causes damage in excess of EUR 300,000 through the offense is liable to a prison sentence of one to ten years.
Examples of fraudulent insolvency
- Any managing director who withdraws cash from the assets of a limited liability company (GmbH) for private purposes and thereby reduces or frustrates the satisfaction of at least one creditor may be liable to prosecution for fraudulent crida if the intent to do so is shown.
- The managing director of a credit-unworthy limited liability company (GmbH) may be liable to prosecution under Sec 156 StGB if he repays equity-replacing loans to shareholders.
- A member of the management board of a group company transfers a sum of money to a subsidiary because the subsidiary is experiencing liquidity bottlenecks. If the board member prevents or reduces the parent company’s liquidity by satisfying at least one of the parent company’s creditors, the board member commits fraudulent insolvency.
Detriment to other creditors (Sec 157 StGB)
In contrast to Section 156 StGB, anyone who is not a debtor and does not participate in fraudulent criminal activity can be a perpetrator of the offense of harming other creditors.
The structure of the offense essentially corresponds to that of fraudulent insolvency. The main difference, however, is that the disposition of the debtor’s assets takes place without the debtor’s consent.
The threat of punishment corresponds to the threat of punishment for fraudulent insolvency according to Sec 156 StGB.
Example of damage to other creditors
- An entrepreneur demands immediate payment of a fictitious claim from a new employee in the accounting department, who does not question this process in detail, with reference to fictitious invoices that have allegedly been due for several months. By asserting this non-existent right, he commits a criminal offense under Sec 157 StGB by thwarting or impairing at least one of the company’s creditors. In addition, he may be liable to prosecution for fraud (Sec 146 StGB).
Undue advantaging of a creditor (Sec 158 StGB)
The offense of advantaging a creditor is committed by any person who, after entering into insolvency, favours one creditor thus disadvantaging one or more other creditors.
The creditor who misleads the debtor into securing or paying a claim to which he is entitled or accepts the security or payment is not, however, to be punished under Sec 158 StGB.
The offense of Sec 158 StGB serves the criminal insolvency law requirement of equal treatment of creditors. Once insolvency has occurred, no creditors should be given preferential treatment at the expense of other creditors.
The prerequisite for criminal liability under Sec 158 StGB is insolvency. This is the case if the debtor is no longer in a position to settle all of his liabilities within a reasonable period of time and in good business practice due to a lack of liquid funds. Pending insolvency proceedings are irrelevant.
The favouring of a creditor as a criminal act consists in summary in the shifting of the satisfaction pool, for example by payment in excess of the pro rata satisfaction provided for under criminal insolvency law.
The result of the offense is the disadvantage of at least one other creditor, whose satisfaction must either be thwarted or at least diminished.
The penalty is imprisonment for up to two years.
Example
- A sole trader gets into payment difficulties. Although he knows that he has been making losses for a year and is no longer able to pay his outstanding invoices, he pays the outstanding invoice of a supplier who is also his private friend. He does this deliberately before filing for insolvency in order to at least guarantee his friend full payment and knows that the other creditors will suffer an even greater loss in the insolvency proceedings as a result. He commits the offense of favoring a creditor.
Grossly negligent interference with creditor demands (Sec 159 StGB)
Offense structure
Any person who grossly negligently brings about the person’s own insolvency by acting in a way that is liable to creditors commits the offense of grossly negligent interference of creditor demands pursuant to Sec 159 StGB.
Any person who, with knowledge or negligent ignorance of the person’s own insolvency, grossly negligently thwarts or reduces the satisfaction of at least one of his creditor’s dues by acting in a manner that is liable to prosecution is also liable to prosecution under Sec 159 StGB (Sec 159 para 2 StGB).
Likewise, pursuant to Sec 159 StGB, any person who grossly negligently affects his economic situation by acting in such a way that insolvency would have occurred if one or more municipalities with no obligation to do so had not directly or indirectly provided allowances, taken comparable measures or arranged for contributions or comparable measures to be made without any obligation to do so (Sec 159 para 3 StGB) is to be punished.
Any person who acts against the principles of proper economics
- destroys, damages, renders useless, wastes, or gives away a significant proportion of the person’s assets;
- spends excessive amounts on unusually speculative business deals that are not part of the person’s usual business activities, or on gaming or betting;
- expends excessively in a manner that contradicts the person’s financial situation or capacity;
- fails to keep accounts or other records or other records of the person’s business activity or keeps them in a way that a present overview of the true assets, financial situations, and revenue is rendered extremely difficult or if the persons fails to take other appropriate and necessary control measures to gain such an overview; or
- fails to compile annual reports which the person is required to provide or if the person compiles these reports in a manner or with such delay that a present overview of the true assets, financial situations, and revenue is rendered extremely difficult.
Gross negligence is present if the perpetrator acts in an unusual and conspicuously careless manner, so that the occurrence of a situation corresponding to the statutory offense was foreseeable as almost probable (Sec 6 para 3 StGB).
Threats of punishment (Sec 159 StGB)
The offense of grossly negligent interference with creditor demands is punishable by a basic penalty of up to one year’s imprisonment or a fine of up to 720 daily rates. On the other hand, a custodial sentence of up to two years is to be imposed on anyone who
- in the case of para 1 causes a loss of satisfaction of its creditors or at least one of them exceeding EUR 1,000,000,
- in the case of para. 2 causes an additional loss of satisfaction of its creditors or at least one of them exceeding EUR 1,000,000 or
- damages the economic existence of many people through one of the acts punishable under subsections 1 and 2 or, in the case of subsection 3, has damaged it.
Example of grossly negligent interference with creditor demands (Sec 159 StGB)
- An entrepreneur recognizes that his business is becoming insolvent, but nevertheless decides to finance a risky expansion that is not part of his normal business operations (crida-like action according to para 5). As a result, he becomes insolvent and can no longer satisfy several creditors. At the same time, he sells some of his assets for less than their value in order to create liquidity, which further harms his creditors. If he can only be accused of gross negligence (and not intent) and his conduct is classified as criminal, he can be punished in accordance with Sec 159 para 1 and para 2 StGB.
Compliance as a preventive measure
Preventive measures to avoid criminal insolvency offenses are of great importance in order to avoid legal and financial consequences for companies and their managers. Early and regular monitoring of the company’s financial situation through sound financial and liquidity management can be a major step in the right direction. In addition, an internal control system should be set up, which should be continuously modernized and regularly revised. Compliance measures such as an internal control system should uncover irregularities in cash inflows or accounting at an early stage. In addition, regular training courses and workshops should be offered to employees to highlight the risk of possible missteps.
Criminal defence by a lawyer for allegations of criminal offenses
If there is an allegation of a criminal offense such as fraudulent insolvency or grossly negligent impairment of creditor interests, a criminal defence lawyer specializing in white-collar criminal law should be called in quickly to represent the interests of the accused in the best possible way. Criminal offenses often raise complex legal issues that require a comprehensive legal analysis. An experienced criminal defence lawyer can identify legal risks that may result from incorrect conduct at an early stage. If criminal investigations have already been initiated, the defence by a specialist lawyer is of crucial importance in order to prevent or minimize possible penalties and avoid any reputational damage.
