The latest reform to the Italian bankruptcy legislation
January 2016 | EXPERT BRIEFING | BANKRUPTCY & RESTRUCTURING
Law no. 132 of 6 August 2015, which converted Law Decree No. 83 of 27 June 2015 (the so-called ‘anti credit crunch decree’), and came into effect on 21 August 2015, brought urgent and significant reforms to several areas of the Italian legal and judicial framework with the main aim of enhancing economic growth and improving the efficiency of the Italian justice system. These reforms drew the attention of operators and investors abroad, partly as a result of the intense promotional campaign put in place by an Italian government that strongly desired and believed in the innovations.
Law 132 introduced amendments to both the Italian Code of Civil Procedure with the purpose of reducing the length of enforcement proceedings, and to the Italian Bankruptcy Law to provide enterprises and creditors with proper and suitable legal tools in case of financial distress.
In this regard, after the 2012 and 2013 reforms, the legislator once again intervened to further regulate those proceedings that are meant to help enterprises overcome their momentary state of economic and financial distress and preserve the business as a going concern or otherwise to personally direct the liquidation of their business, hence avoiding a bankruptcy declaration.
In particular, the Italian legislator intervened on the provisions regulating the composition with creditors proceedings (concordato preventivo) and the debt restructuring agreements pursuant to Article 182-bis of the Italian Bankruptcy Law (accordo di ristrutturazione) to exhort creditors to take an active role in restructuring proceedings and to increase their chance of success by allowing debtors to impose, under specific circumstances, their restructuring agreements to hostile creditors.
Competing proposals and offers in the concordato preventivo
With regard to the first point, Law 132 set forth that in concordato preventivo proceedings creditors are entitled to submit proposals for the restructuring of indebtedness as an alternative to the debtor’s proposal. By way of example, creditors can propose the liquidation of the company’s assets as opposed to the debtor’s proposal of continuing the business.
However, creditors can only file competing proposals if the debtor’s proposal ensures unsecured creditors a payment, as a percentage of the face value of their claim, that it is not deemed convenient (precisely, less than 40 percent in the case of a liquidation proposal and less than 30 percent in the case of a proposal providing for business continuity) and only if they hold at least 10 percent of the unsecured claims against the debtor.
The newly introduced mechanism could potentially have significant positive effects. By permitting creditors to file counterproposals, the legislator has at last set elements of competitiveness in the Italian restructuring system, which until now had been steered strictly by the debtor’s decisions.
As a consequence, and reflecting the legislator’s intentions, the degree of satisfaction of creditors’ claims should improve. Creditors will no longer be de facto obligated to approve proposals and plans filed by the debtor, irrespective of their content, just because the alternative is worse; indeed, if the composition with creditors scheme is not approved, the debtor will most likely be declared bankrupt and bankruptcy proceedings are usually disadvantageous for creditors (payments of claims usually take longer and are lower than in concordato proceedings).
Again, in the interests of creditors and from the perspective of encouraging constructive competitiveness between the parties involved in restructuring proceedings, Law 132 set forth a new regime for the purchase of the going concern or of one or more assets of the debtor in the context of a concordato preventivo. Specifically, when the proposal filed by the debtor provides for the sale of assets to a predetermined buyer, it is now mandatory for the competent court to start a competitive procedure in order to determine a purchaser among prospective bidders. The company then amends the proposal and plan accordingly. In this way, creditors are able to improve proposals that might otherwise be detrimental to them – which is the case for proposals that provide for the sale of the going concern to a designated third party at a knockdown price. In this respect, it is also worth noting that the new provision may help to avoid a situation where the designated purchaser is actually closely associated with the debtor, or even has the same shareholders and management. In addition, through this procedure a better preservation of the assets of the debtor can be achieved.
The new debt restructuring and standstill agreements with banks and other financial intermediaries
As anticipated, Law 132 also reformed debt restructuring agreements. Briefly, pursuant to the new Article 182-septies of the Italian Bankruptcy Law, in the event that at least 50 percent of the overall claims of the company are vis-à-vis banks or financial intermediaries, the debtor may request that the debt restructuring agreement be binding for the creditors belonging to the aforementioned categories even if they have not signed the agreement, as long as, among other conditions, the claims of the banks and financial intermediaries adhering to the restructuring agreement represent at least 75 percent of the claims of the relevant category. Likewise, if a standstill agreement has been executed, prior to the restructuring agreement by banks and financial intermediaries representing the 75 percent majority, its provisions also apply, under certain circumstances, to the creditors of the same categories which are not party to the standstill agreement.
It is clear that with the aforesaid provisions, the Italian legislator meant to facilitate the conclusion of restructuring agreements deemed convenient by a large majority of creditors through the automatic removal of impediments deriving from the dissent of a small number of creditors. This is a relevant innovation for the Italian legal system, especially with regard to the laws regulating contracts.
Notwithstanding procedures such as the concordato preventivo, in which agreements are reached on the basis of the majority principle, contracts can usually be concluded and are binding only for those who offer their consent, whereas this principle no longer applies with reference to the conclusion of an accordo di ristrutturazione.
The reform of the Italian restructuring system outlined, along with broader reforms to the Italian judicial system, have had a strong resonance outside Italy because of their undeniable appeal for intermediaries already operating or willing to operate with Italian companies, especially those working in the non-performing loan market and with distressed companies.
Even though it is too early to evaluate the outcome of these reforms, which at any rate cannot resolve all the inefficiencies of the current justice system, and albeit that some of the provisions that were introduced could be subject to criticism and improved in their implementation, we believe that the new direction embraced by the legislator should be greeted with optimism. Such reform shows a newfound interest in preserving debtors as a going concern. For a clearer picture we will have to wait for the forthcoming reform of the Italian Bankruptcy Law.
That said, the outcome of the reforms will, of course, largely depend on how creditors of Italian indebted companies, especially banks and other financial intermediaries, act given that the legal tools that have been introduced are certainly a novelty for the Italian legal system.
The provisions for filing competing proposals and offers in the context of a concordato preventivo point to a path that advises creditors to adopt a more proactive role in proceedings. In this respect, creditors outside of Italy that may have already encountered similar mechanisms in other jurisdictions, or are already equipped to actively participate in restructuring proceedings, might serve as drivers for Italian creditors in accepting and applying these new provisions. Such acceptance might be encouraged in light of other new provisions regarding debt restructuring and standstill agreements, which lower the risk that a minority uninterested in actively participating in the restructuring process might be able to unexpectedly compromise its success.
Further to the above considerations, additional improvements for creditors and investors should also come via other provisions under Law Decree 83 as amended by Law 132. These include shortened enforcement and foreclosure procedures and the right for banks and financial intermediaries to deduct losses incurred in case of the write-off of credit claims and receivables in a single year instead of five (as it was the case in the preceding Italian tax legal framework).
Paolo Pototschnig is a partner and Sara Colombera is an associate at Legance – Avvocati Associati. Mr Pototschnig can be contacted on +39 02 896 3071 or by email: firstname.lastname@example.org. Ms Colombera can be contacted on +39 02 896 3071 or by email: email@example.com.
© Financier Worldwide
Paolo Pototschnig and Sara Colombera
Legance – Avvocati Associati