(Bloomberg) -- Beleaguered bondholders of Signa Development Selection AG are looking to prevent a law enacted 150 years ago by the authorities of the Austro-Hungarian Empire from limiting their ability to pursue claims against the insolvent firm.

Lawyers for the property unit of the Signa group recommended that a court-appointed kurator represent collectively the holders of the €300 million ($329 million) defaulted notes during the self-administration process, according to insolvency filings seen by Bloomberg News. 

While neither the court nor the administrator has confirmed any appointment, bondholders have filed a submission objecting to that appointment via their trustee Deloitte LLP, according to people familiar with the matter, who spoke to Bloomberg on the condition of anonymity. 

Spokespeople for Signa Development’s insolvency administrator and Deloitte didn’t immediately respond to requests for comment.

Under the country’s Curator Law — introduced under Kaiser Franz Joseph in 1874 — the appointment of the kurator means that individual bondholders will not have a direct seat at the table during restructuring negotiations. Rather, the kurator will listen to their opinions and act to ensure that all bondholders are treated equally. 

It would be yet another complication for investors in Signa Development, who are still smarting from the unit’s decision to transfer hundreds of millions of euros from the unit to other parts of the Signa group that were running out of money. The move prompted a precipitous drop in the bonds. 

“The Austrian law was designed with the objective of protecting private individual investors, so they have a voice in the whole procedure,” said Susanne Kalss, a law professor at the Vienna University of Economics and Business. “It is not really suited for a situation where there are big institutional funds, with the ability to manage their own claims.”

While it is possible for single bondholders to file their own claims to the administrator, they would have to “carve out their individual situation” and prove that their issue is unique, she added. 

Internationally, distressed debt investors often buy into bonds issued by failing companies with the hope of achieving windfall returns by maximizing recoveries. In Austria, the kurator‘s role may limit their tactical toolbox.

Among the largest investors in Signa Development notes is Arini, a credit fund run by Hamza Lemssouguer, Bloomberg News previously reported. 

A representative for Arini declined to comment when contacted by Bloomberg News. 

The bonds are currently indicated at around 5.6 cents on the euro, according to data compiled by Bloomberg. Signa’s main units are coming up with a restructuring arrangement that will offer creditors 30%, the legal minimum under Austrian insolvency rules, of what they are owed within two years of agreeing a plan.

Signa Development creditors are due to meet next week. 

According to an insolvency filing dated Dec. 29 seen by Bloomberg News, Signa Development is owed some €665 million from companies outside the unit. 

Kaiser Law 

The curator law was introduced in the aftermath of the Vienna stock exchange crash of 1873, with the aim of ensuring faster and more equitable solutions for investors, who were typically wealthy individuals rather than institutions. 

More recently, the kurator has only cropped up in insolvencies occasionally, given the rarity of corporate bond issuers ending up in the procedure. Nevertheless, it has featured in some of the largest cases in the country over the last few decades, such as the insolvency of industrial company A-Tec Industries AG in 2010. 

The risks for creditors posed by the kurator law often appear in Austrian issuers’ bond prospectuses. The documents accompanying brickmaker Wienerberger AG’s recent bond issuance, for example, note the appointment may “conflict with or otherwise adversely affect the interests of individual or all Bondholders.” 

However, while Signa Development’s bond prospectus describes elements of the Austrian insolvency regulation, there is no mention of the possibility of a kurator appointment.  

Potential Challenges

While there have been instances of successful negotiations on the part of the kurator, creditors haven’t always been satisfied by collective representation. 

In the case of A-Tec, one bondholder attempted to recover damages by arguing her decision to invest came from trusting information from one of the board members, according to a decision from Austria’s Supreme Court, adding a degree of individuality on top of the claims shared with other owners of the bonds. 

The lower courts initially dismissed the case on the basis that only the kurator could assert claims, and that on behalf of all bondholders. 

However, the Austrian Supreme Court subsequently overruled this decision, saying that the individual nature of the case had not properly been assessed and referred it for further examination — offering some precedent for creditors looking to pursue claims individually. 

“The kurator will not act against their interests, but he is obliged to treat all bondholders equally,” said Kalss. “It is not first come, first served or the strongest bondholders get more.”

--With assistance from Boris Groendahl, Marton Eder and Irene García Pérez.

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