The COVID-19 pandemic has caused a serious economic crisis in Austria. Large corporations as well as individual businesses have been affected – especially in the areas of gastronomy, accommodation, entertainment, transport, and trade.
This development causes decision-makers existential concerns. Economic survival is central. However, one must not lose sight of the danger of criminal consequences. In fact, many corporate crises and insolvencies end in criminal proceedings: disappointed creditors file criminal charges and the insolvency courts must also inform the public prosecutor's office of any suspicion that the debtor has committed a criminal offence. Criminal proceedings can turn an economic crisis into a personal catastrophe.
However, if you abide by a few basic rules, this need not be the case:
- Do not "protect" your assets from creditors!
- Particularly in times of crisis, manage carefully!
- Provide correct information when applying for funding!
- Use subsidies for their intended purpose!
- Do not use entrusted funds to "plug holes"!
- Exercise special care when making business decisions!
- Pay employee social security contributions!
Do not "protect" your assets from creditors!
In a crisis, one must not intentionally "protect one's assets" from creditors. The offence of fraudulent conveyance (Section 156 of the Criminal Code (StGB)) is committed by anyone who, as a debtor to at least two creditors, for instance:
- sells business assets below their value,
- gives goods away,
- moves cash abroad,
- uses a non-company bank account for incoming customer payments,
- grants a prohibition of encumbrance and alienation,
- repays equity-substituting loans to the shareholders, or
- raises funds from the company account against bogus invoices from subcontractors.
It only has to be considered genuinely possible that at least one creditor will not be satisfied by the actual or apparent reduction of the debtor's assets. It is also a criminal offence to act as an executive employee of the debtor or to provide advice and assistance to the debtor or the executive employee – such as an "initiated" accountant.
Note: Executive employees include managing directors, members of the board of directors, members of the supervisory board, authorised signatories and employees with significant influence on the management.
Fraudulent criminal activity is punishable by a prison sentence of up to five years – by a prison sentence of up to ten years if the damages exceed 300,000 euros.
Particularly in times of crisis, manage carefully!
In a crisis, genuine mismanagement is also a crime. Grossly negligent impairment of creditors' interests (Section 159 StGB) is committed by a debtor or its manager who, through gross negligence, for example:
- sells goods far below their market value,
- provides services without receiving anything near adequate value in return,
- commissions an extremely expensive advertising campaign that the company cannot afford,
- carries out extremely risky stock market transactions of a speculative nature,
- in the case of loss-making business operations, makes private withdrawals that exceed what is necessary for the most modest lifestyle,
- fails to keep or keeps inadequate business records,
- fails to prepare annual financial statements or prepares them inadequately or late.
Note: The late filing of insolvency ("Insolvenzverschleppung") has not been a punishable offence since 2000.
Only those who, through mismanagement, cause their company’s insolvency, impair their creditors’ satisfaction in the event of insolvency, or bring about a concrete danger of insolvency that can only be averted by state intervention are liable to prosecution.
According to the law, gross negligence occurs when one acts in such an unusual and conspicuously careless manner that insolvency or failure to satisfy creditors is likely. If one acts with intent, one may be liable to prosecution for fraudulent misrepresentation (Section 156 StGB). Grossly negligent impairment of creditors' interests is punishable by a fine or imprisonment of up to one year – by imprisonment of up to two years for particularly serious damages.
Advice: In order to prevent later accusations of mismanagement, managers should attempt to keep careful accounts, document business decisions precisely, and assess the company’s solvency and indebtedness particularly conscientiously, especially during a crisis. If in doubt, seek expert advice (e.g., in the form of legal or tax advice).
Provide correct information when applying for subsidies!
The federal government and individual state governments have launched extensive support programmes to assist the economy during the Corona crisis. These include Corona short-time working, the hardship fund, the Corona aid fund, state guarantees, the fixed cost subsidy, the lockdown turnover replacement, the loss replacement, the special framework loan for OeKB large enterprises, the compensation for loss of earnings due to having to keep people separated, the AWS investment premium, as well as the Vienna Business Agency support packages, for instance for one-person enterprises, the creative industries, and the hotel industry.
These subsidies have one thing in common: businesses (or individuals) must apply for them. Applications must be filled out correctly. One commits fraud (Section 146 StGB) if one obtains the subsidy by providing false or incomplete information or if, at the time of application, one is not prepared to perform any action agreed upon with the subsidy provider (e.g., not paying bonuses to managing directors in the case of a state guarantee or maintaining the number of employees in the company during short-time working). In practice, the criminal prosecution authorities like to deduce the intent to harm and enrich from the external circumstances of the application (“Anyone who makes obviously false statements must have the corresponding intent.”). Fraud is punishable by a fine or imprisonment of up to six months. The threat of punishment increases dramatically to up to ten years imprisonment if one uses false documents (e.g., forging an employee signature), falsified documents (e.g., subsequently changing data in a certificate), or documents with incorrect content (e.g., false turnover or wage confirmations) when making an application, or if one causes serious damages.
If the funding recipient is a company (e.g., AG, GmbH, OG, KG), the company may also be criminally liable. If the false application was submitted by a decision-maker (e.g. managing director, authorised signatory) in favour of the company, the latter must also expect criminal proceedings. In the end, in addition to the penalty for the decision-maker, the company may also be subject to a heavy fine.
Use subsidies for their intended purpose!
The subsequent misappropriation of funding is also a criminal act. If, as a recipient of a grant or as its executive employee, one misuses a grant for purposes other than those for which it was granted, one is liable to prosecution for misuse of a grant (Section 153b StGB). This is punishable by a fine or imprisonment of up to six months. If the misused amount of funding exceeds 5,000 euros, a custodial sentence of up to two years may be imposed; amounts exceeding 300,000 euros may even result in a custodial sentence of up to five years.
Advice: To avoid later accusations of misappropriation, one must strictly adhere to the respective funding conditions. The use of the funding should also be carefully documented.
Do not use entrusted funds to "plug holes"!
Money that one is obliged to return, pass on, or use for a specific purpose under an agreement may not be used to avert one's own insolvency. This applies, for example, to persons who collect money for others (e.g., petrol pump attendants, collection agents, sales commission agents) or who are to use entrusted money for specific purposes (e.g., purchasing commission agents, trustees). Anyone who uses entrusted money for their own purposes contrary to the agreement commits embezzlement (Section 133 StGB). Criminal liability requires that the perpetrator acts with the intent to unlawfully increase his/her own assets or the assets of another (e.g., the company). This intent to enrich is not applicable only if the offender has or believes he/she has an offsettable counterclaim or wants to compensate the entitled person and is also able to do so due to immediately available funds. Embezzlement is punishable by a fine or imprisonment of up to six months. In the case of major damage (more than 300,000 euros), the threat of punishment increases to up to ten years' imprisonment.
Note: The selective satisfaction of individual creditors according to the "open hole, close hole" method does not prevent the assumption of insolvency; it also leads to criminal liability for embezzlement if one uses money entrusted to one for specific purposes for this purpose.
Exercise special care when making business decisions!
In a crisis, corporate officers (e.g., GmbH managing director, AG board member) must exercise particular care when making business decisions. To act with the diligence of a prudent businessperson, one must not be guided by extraneous interests when making business decisions and must be able to assume, on the basis of adequate information, that one is acting in the best interests of the company (Business Judgement Rule). This rule is the starting point for criminal liability for breach of trust (Section 153 StGB). An abuse of the power of representation is criminal only if the person in power unjustifiably violates rules that serve to protect the assets of the beneficial owner (cf. Business Judgement Rule). Breach of trust is punishable by a fine or imprisonment of up to six months – by imprisonment of up to 10 years if the damages are high.
Advice: Entrepreneurial decisions (e.g., new investments, takeovers, recognition bonuses for employees who were particularly committed during the Corona crisis) should be especially well prepared and documented at this time. In case of doubt, trustworthy legal advice can help.
Pay employee social security contributions!
According to the social security laws (especially the ASVG), the employer must retain the employee contributions to health, pension and unemployment insurance when paying salaries and then transfer them to the social security institutions (e.g., to the Austrian Health Insurance Fund or PVA). If the employer or a senior employee entrusted with this task retains the employee contributions and then does not forward them to the social insurance institution, he/she commits the offence of withholding employee contributions to social insurance (Section 153c StGB). The offence is punishable by a fine or imprisonment of up to one year.
Advice: In Austria, the subsequent "rehabilitation" of property offences is possible. By means of active repentance (Section 167 StGB), punishability under Sections 146, 153, 153b, 156, 158 and 159 StGB, among others, is waived if, before the prosecuting authorities are aware of the offence, one makes good the entire damage resulting from the offence or contractually undertakes to do so. In the case of section 153c of the Criminal Code, one even has until the conclusion of the main hearing in the criminal proceedings to pay the outstanding contributions to become exempt from punishment (Section 153c, paragraph 3 StGB).
The economic crisis poses great challenges for companies and their decision-makers. The struggle for economic survival also involves risks under criminal law. However, there is no "crisis bonus" in criminal law. In contrast to insolvency law – where, for example, the obligation to file for insolvency in the case of over-indebtedness has been suspended until 30 June 2021 – the COVID-19 laws have not brought about a suspension of criminal liability or a change in the conditions for criminal liability. Criminal law is enforced as it was before the crisis.
Therefore, please heed our urgent advice: companies must evaluate their criminal law risks in the crisis and develop strategies to avoid criminal liability. If you have questions about this analysis and about appropriate precautionary and compliance measures, the contact persons in this article will be happy to assist you.