Subordination agreements can be used in a variety of circumstances, including complex corporate debt structures. The Supreme Court overturned the Court of Appeal`s decision and found that the qualified subordination clause is a constitutive feature of the specific type of contract and is therefore not subject to a judicial review of the content in accordance with Article 879, paragraph 3, of the Civil Code. The Supreme Court based its decision on the following assessment: (5) There is a regulatory context for this requirement. The Federal Law on Alternative Forms of Financing creates a legal framework for alternative financing of companies outside the jurisdiction of the Austrian Financial Markets Supervisory Authority. In order to ensure that the loan subordinated to other financial instruments is not contrary to regulated banking activities, Parliament has decided to delineate subordinated loans negatively, in accordance with the banking law (within the meaning of Schedule 1 of the 2013/36/EU Directive) for which an unconditional right of repayment is inherent in regulated standard deposits or transactions. Until now, the Supreme Court had not taken a clear position to resolve the consequences of innovation, particularly with regard to third-party security instruments. However, the Supreme Court appears to have shown some sympathy for limiting the concept of participation in cases where the third party`s position is not deteriorated. Future Supreme Court guidance will be welcome, as this decision has shifted banking practices from the relative security of the concept of “treaty change” to the unexplored waters of the effects of innovation. In a recent decision (1), the Supreme Court upheld the admissibility and validity of qualified subordination agreements contained in terms and conditions and transactions with consumers. In addition, the Supreme Court found that qualified subordination agreements – particularly those involving loan contracts – created a certain type of contract.

On the ground that a subordination clause is a constitutive feature of a subordinated loan, the Supreme Court also confirmed, in reference to scientific publications to that effect, that the subsequent inclusion of a qualified subordination clause in an existing loan contract was characterized as “innovation” within the meaning of Section 1376 of the Civil Code. Under Austrian law, a renewal – against a simple amendment to the treaty of the main obligation (9) – means that the previous principal obligation expires and the new obligation begins at the same time. If participants (10) (i.e. parties to the underlying agreement and potential third-party security providers) did not expressly agree otherwise, a new agreement also expires all ancillary rights related to the old main obligation, including security instruments (e.g. B guarantees, guarantees, security assignments, guarantees and comfort letters), as well as interest, contractual penalties and arbitration clauses. The signed agreement must be recognized by a notary and recorded in the county`s official records in order to be enforceable. This article was first published by the International Law Office, a premium online law update service for large companies and law firms around the world. Sign up for a free subscription. On the other hand, “qualified subordination agreements” within the meaning of Article 67, paragraph 3 of the Insolvency Act ensure that liability subject to such a qualified subordination agreement can be ignored when assessing a debtor`s debt level. Qualified subordination agreements therefore provide a very effective instrument to restore a debtor`s financial strength.