The Italian Insolvency Law reform project: a comprehensive overhaul, at long last?
June 2016 | EXPERT BRIEFING | BANKRUPTCY & RESTRUCTURING
In recent years, the Italian Insolvency Law has been the subject of several reforms, all of them purporting to encourage economic growth, simplify the procedure for each insolvency proceeding and facilitate investments in financially distressed companies.
Such reforms were passed as ‘urgent measures’, meaning law decrees were issued by the Cabinet to be converted into law by the Italian Parliament within a limited timeframe.
The adoption of law decrees undoubtedly caused the swift passing of several provisions which were immediately and widely applied by Italian companies (especially provisions relating to out-of-court restructuring agreements and petitions for compositions with creditors filed without a relevant restructuring plan). The downside of this, however, was that: (i) each reform focused on specific sections of the Italian Insolvency Law, creating some inconsistencies among the different proceedings; and (ii) certain companies exploited the protections granted to them by such reforms (e.g., automatic stay rules and safe harbour from bankruptcy crimes) by filing requests for compositions with creditors with the sole purposes of avoiding enforcement actions by creditors or delaying the declaration of bankruptcy.
In light of the above, several Italian scholars have long since called for a comprehensive overhaul of the Italian Insolvency Law, capable of reforming all proceedings set out therein and bringing forth a suitable balance between the interests of the debtor and those of the creditors.
Accordingly, the Italian Minister of Justice and the Minister of Economic Development submitted to the Italian Parliament a project of law essentially adhering to the above guidelines as well as taking into account the content of Recommendation no. 2014/135/UE of the EU Commission and UNCITRAL model law principles.
Should the Italian Parliament approve the reform, the Cabinet will issue a Legislative Decree detailing and developing the reform in accordance with the guidelines provided by the Italian Parliament. The process of finally approving the reform could be lengthy, and some of the principles set out in the project reform could be subject to extensive revisions; the guidelines set forth therein are, however, of significant interest to foreign investors and are worth analysing even before they are converted into binding provisions of law.
Still, the possibility that one or more of the principles set out in the project reform might individually be implemented by way of ‘urgent’ law decrees as with past practice cannot be ruled out; in fact, this has already happened in relation to the new forms of security interest provided by Law Decree no. 56/2016, the provisions of which are already effective.
Status of insolvency and status of financial distress
Currently, the Italian Insolvency Law provides solely for a definition of insolvency (i.e., the inability of a debtor to regularly fulfil its obligations) serving as the actual prerequisite for the commencement of a bankruptcy proceeding. No definition, in turn, is provided for situations of financial distress, which allow the debtor to commence an out-of-court restructuring or a composition with creditors proceeding.
Pursuant to the reform project – and in accordance with principles previously set out by Italian case law – the status of financial distress is to be defined as a situation of “probable future insolvency”.
Ascertaining the insolvency or financial distress of a company is to be made in the context of a unique proceeding, which should be short and provide for a simplified and coordinated regime of challenges. The aim of this unified proceeding is to avoid various conflicts among different proceedings, which in recent years could only be settled by case law.
Once the situation of financial distress or insolvency has been ascertained, different proceedings may apply, pursuant to criteria to be defined in the delegated decree to be issued by the Cabinet.
The so-called ‘warning proceeding’
Empirical studies have shown the reluctance of Italian companies to directly face a situation of financial distress and their tendency to delay the adoption of a pre-insolvency proceeding due to reputational issues. In several cases, such proceedings were commenced when the situation of financial distress was irreversible, jeopardising the purpose of the proceedings (i.e., ensuring recovery of the company’s financial soundness and the continuation of its business).
The reform project introduces a new warning proceeding aimed at anticipating the elements which may lead to a situation of financial distress or insolvency and facilitating negotiations with creditors.
A company’s statutory auditors and audit firms will be obliged to immediately inform the board of directors of any identified indications of financial distress and, if the board of directors fails to appropriately respond, directly inform the competent body for the settlement of the crisis (i.e., a special section of the settlement bodies introduced by Law no. 3 dated 27 January 2012).
The negotiations between creditors and the debtor are to occur under the supervision of the settlement bodies and, if appointed, with the aid of a third-party expert. The delegated decree should provide for protective measures for the debtor during negotiations, their duration, publicity, and revocation thereof in the event of abuse by the debtor.
Replacing the notion of ‘bankruptcy’ with ‘judicial liquidation’
The notion of bankruptcy in the Italian market is generally perceived as a negative and indelible stain against entrepreneurs. Hence, any reference to bankruptcy contained in the Italian Insolvency Law and any other Italian law (including criminal law provisions) should be replaced with ‘judicial liquidation’.
The new judicial liquidation proceeding should be similar to the current bankruptcy proceeding, however: (i) the proceeding should be simplified; (ii) a minimum outline of the liquidation plan should be provided; (iii) the powers of the judicial trustee should be increased; and (iv) the claw-back terms should start from the date the insolvency petition was filed.
Group insolvency proceedings
Currently, the Italian Insolvency Law – with the sole exception of the extraordinary administration proceeding – contemplates procedures applying only to individual companies, ignoring the phenomenon of group companies, which often requires coordination among restructuring plans and proceedings.
Italian case law has already tried to treat simultaneously – to the extent possible – proceedings relating to companies belonging to the same group but, in the absence of specific provisions of law, each proceeding has been formally treated as independent from the others.
Pursuant to the reform project: (i) the notion of a group should be based on the one provided by the Italian Civil Code; (ii) companies belonging to the same group should be allowed to file a single group petition, without prejudice to the independence of each plan and the separate assets and creditors of each company; (iii) in the event the companies are subject to different proceedings, the relevant competent bodies should constantly cooperate and exchange information; and (iv) intercompany loans should be subordinated (unless they hold a super-senior ranking according to interim financing rules).
In the case of composition with creditors, the same judge should be appointed for each company belonging to the same group and the filing of a group restructuring plan should be allowed.
Amendments to out-of-court restructuring proceedings and composition with creditors
Several measures should be enacted in order to the remove the obstacles to the adoption of the out-of-court restructuring proceedings. In particular: (i) cram down in the context of out-of-court restructuring proceedings should apply not only to financial intermediaries and banks but also to other creditors holding at least 75 percent of the receivables; and (ii) the 60 percent majority of creditors will no longer be required for the execution of an out-of-court restructuring agreement pursuant to article 182-bis of the Italian Insolvency Law to the extent that no protective measures are requested by the debtor and the creditors which are not party to the agreement are immediately paid in full.
As far as the composition with creditor proceeding is concerned: (i) only petitions providing the continuation of business should be admissible (otherwise the procedure of judicial liquidation should be commenced); (ii) petitions may also be filed by third parties (with some protective provisions for the debtor); (iii) the court should be allowed to rule not only on compliance with the law of the petition and the plan, but also on the economic feasibility of the plan; (iv) the plan implementation steps should be detailed; and (v) the different interim financing provisions currently in existence should be simplified.
Special liens and new form of security interest over movable assets
Foreign investors have often stressed that the complexity, timing and costs of Italian enforcement proceedings are the main disincentives for investment in the Italian debt market.
Pursuant to the reform project, the system of general and special liens should be significantly simplified and reorganised, by deleting forms of special liens deemed no longer relevant in the Italian market.
In addition, a form of floating charge over movable assets, envisaged by the project reform – i.e., a security interest which will no longer require the delivery of the secured assets by the debtor to the secured creditor – has been already introduced by Law Decree no. 56/2016. This kind of security interest only applies to entities enrolled with the register of enterprises and only to movable assets pertaining to the exercise of the enterprise (even if identified only by category). The security document must provide for a maximum secured amount, and the relevant security interest must be enrolled with a special digital register for the purposes of its enforceability vis-à-vis third parties. The debtor will be allowed to utilise the secured assets, to transform or to sell it (in such a case, the security interest is transferred over to the transformed asset or to the proceeds of the sale).
The secured creditor will be allowed to have the secured assets assigned to it or directly sold – without a judicial proceeding – to satisfy secured obligations.
Although the provisions of Law Decree no. 56/2016 are already effective, certain provisions (e.g., the rules relating to the digital register) still need to be implemented by way of ministerial decree. In addition, the provisions of the decree may even be amended significantly as they are converted into law.
Once fully implemented, the above provisions would represent a huge change in the Italian legal system, since currently this kind of out-of-court enforcement is prohibited by virtue of a mandatory provision of law. The debtor would in any case be entitled to the restitution of any proceeds of the sale (or value of the assigned assets) exceeding the amount of the secured obligations. Finally, it is worth pointing out that Law Decree no. 56/2016 has also introduced a new form of security interest over real estate assets which allows the secured creditor, under certain terms and conditions, to take possession of the secured assets upon default by the debtor. The enforcement proceeding is less smooth than the one provided for the floating charge and implies, in any case, the appointment of a third party expert by the Court in order to assess the value of the secured assets. The debtor is entitled to the restitution of a sum equal to the difference between the value of the secured asset and the amount of the outstanding secured obligations.
A comprehensive reform of the Italian Insolvency Law is certainly very ambitious in scope and the relevant process of approval needs to be carefully monitored in order to verify how general principles are translated into binding provision of law (as has already happened in relation to the new forms of security interest introduced by Law Decree no. 56/2016).
The approval process may be lengthy and give rise to technical difficulties. However, the legislative effort may be able to restore a balance among the interests of Italian companies, their creditors and foreign investors and remove some of the obstacles to foreign investments in this field.
Luca Autuori and Paolo Pototschnig are partners, and Marco Iannò is counsel, at Legance – Avvocati Associati. Mr Autuori can be contacted by email: firstname.lastname@example.org. Mr Pototschnig can be contacted by email: email@example.com. Mr Iannò can be contacted by email: firstname.lastname@example.org.
© Financier Worldwide
Luca Autuori, Paolo Pototschnig and Marco Iannò
Legance – Avvocati Associati