Investments funds and access to debt restructuring agreements: a revolutionary order issued by the Court of Milan



On 10 November 2016, the court of Milan, Insolvency Sector, ratified a debt restructuring agreement concluded, pursuant to Article 182-bis of the Italian Bankruptcy Law, between a closed-end real estate fund and its creditors.

The peculiarity of this decree lies in the fact that under the current Italian legal framework, investment funds should not autonomously have access to restructuring proceedings because such funds are not considered as legal entities but as a separate estate without legal personality, constituted of a pool of assets belonging to investors.

To better explain, on the one hand, the Italian consolidated financial act sets forth that investment funds are managed by a company, the so-called SGR (società di gestione del rischio), which is the legal representative by means of which the fund can fully operate in the market and enter into legal relationships. On the other hand, the Italian Bankruptcy Law sets forth that only legal entities carrying out business activities are subject to the provisions therein contained.

Moreover, Article 57, paragraph 6-bis of the Italian consolidated financial act set forth an ad hoc judicial liquidation proceeding that the SGR should undertake on behalf of the investment fund when its assets are no longer capable of satisfying the obligations assumed toward creditors. Nothing else is provided with regard to the possibility of accessing the main instruments set forth by the Italian Bankruptcy Law for the composition of a business crisis by means of an agreement with creditors.

In light of the above, it is easy to see why the decree issued by the court of Milan came as a welcome surprise.

The reasoning of the court

To be fair, the November 2016 decree at issue was not the first time that the court of Milan has intervened on this matter. On 3 December 2015, the court made an interlocutory statement in the context of another judicial order that seemed oriented toward opening the doors to the acknowledgment of the status of crisis of a closed-end real estate fund, in accordance with the provisions of the Bankruptcy Law.

This time, though, the court of Milan did not just make a tentative observation, but offered a clear explanation of the motives grounding its decision.

In light of the uncertainties surrounding the legal issue under discussion, the petition to the court was filed by the SGR on behalf of one of its managed closed-end real estate funds pleading the ratification of a debt restructuring agreement pursuant to Article 182-bis of the Bankruptcy Law that was reached exclusively by the fund and its creditors. In the alternative, the SGR pleaded the ratification of an agreement, pursuant to Article 182-bis of the Italian Bankruptcy Law, concluded by the same SGR (and its managed funds) with all of its creditors.

As a consequence, the court, first, evaluated whether financial intermediaries such as SGRs and real estate funds could enter into debt restructuring agreements. Thereafter, the court weighed the possibility that said legal instrument provided by the Bankruptcy Law could be used by the sole real estate fund without the involvement of the SGR.

With regard to the first issue, the court argued that even though Article 57, paragraph 3 of the consolidated financial act prescribes that SGRs are strictly subject to the liquidation proceeding therein regulated and not to other insolvency procedures regulated within the Bankruptcy Law – debt restructuring agreements pursuant to Article 182-bis of the Law do not fall within the definition of ‘insolvency procedures’, therefore the provision should not apply.

Concerning the entitlement of the real estate fund to enter into a debt restructuring agreement, irrespective of the fact that the SGR does not simultaneously reach such an agreement with its creditors, the court took into consideration two elements.

The first is that as of late, driven by the more recent doctrinal direction, the Italian legislator has introduced different provisions that seem to move toward the implicit acknowledgement of an autonomous legal personality of investments funds, separate from that of the SGR. For example, Article 36, paragraph 4, of the consolidated financial act now sets forth that the SGR shall satisfy the contractual obligations assumed on behalf of the real estate fund only with the assets belonging to the fund itself. By recognising that the assets are owned by the fund and not by the SGR it appears reasonable to state that the legislator does not exclude that funds can be entitled owners of legal relationships.

The second element considered by the court is that the previously mentioned Article 57, paragraph 6-bis, of the consolidated financial act already envisages the possibility for investment funds going through a state of crisis to be autonomously subject to the judicial liquidation proceeding therein regulated. The court further argued that denying this possibility would create a shortcoming of the relevant legal framework, because this would mean that funds could be able to turn their business crisis only and exclusively when the SGR is itself in a status of crisis, when it is obvious that the two things do not necessarily go together.

In conclusion, the court reasoned that investment funds can be treated as independent legal entities when it comes to evaluating the existence of a state of distress or of insolvency irrespective of the SGR and that there are no impediments regarding the application of the provisions of the bankruptcy law, considering that funds carry out business activities.

Conclusive reflections

The decree of the court of Milan represents an unicum in Italian case law and it is strictly referred to insolvency and bankruptcy matters. However, should the legislator decide to pursue this same road, there would be significant consequences with regard to both substantial and judicial legal matters.

Just to give one example, should new legal provisions be introduced that acknowledge investment funds as independent legal entities with full legal personality tort liabilities, these could be attributed directly to the funds instead of the SGR, and it will be the funds, and not the SGR, which will have to be summoned in the proceedings for their misconduct and for the compensation of damages. In other words, real estate funds could no longer benefit from their status of mere separate estates of the SGR, while taking advantage of this corporate veil to protect their assets from claims by third parties.

Of course, these observations are a bit of a stretch, considering the current legal scenario that definitely prevents civil courts from issuing decisions, such as the one of the bankruptcy section of the court of Milan in lack of a legislative reform.


Paolo Pototschnig is a partner and Sara Colombera is an associate at Legance. Mr Pototschnig can be contacted on +39 02 896 3071 or by email: Ms Colombera can be contacted on +39 02 896 3071 or by email:

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