This is an Insight article, written by a selected partner as part of GRR's co-published content. Read more on Insight
Over the past 10 years, the Bankruptcy Law has undergone several different reforms, which have contributed to giving insolvency procedures a new shape.
The result of these reforms is a jurisdiction that provides a comprehensive set of tools designed to efficiently handle the financial, economic and patrimonial crisis, maintaining a debtor-friendly approach and, at the same time, giving adequate consideration to the creditors’ interests.
Under Italian Law, distressed companies may pursue restructuring through (i) procedures aimed at favouring the restructuring of distressed companies outside formal procedure, or at least with a limited involvement of the bankruptcy court (out-of-court restructuring procedures); or (ii) insolvency procedures based on the involvement and supervision of the bankruptcy court.
Out-of-court restructuring procedures.
The Bankruptcy Law recognises two main out-of-court restructuring procedures, namely: (i) the ‘restructuring plan’ under article 67, paragraph 3(d) of the Bankruptcy Law, which allows the recovery the debtor; and (ii) the ‘debt restructuring agreement’ under article 182-bis of the Bankruptcy Law.
A restructuring plan is a procedure with no involvement by a bankruptcy court, having the main effect of avoiding the risk of clawback actions and excluding the application of certain bankruptcy crimes, with relation to acts and payments made in accordance with such plan.
The feasibility of the plan is certified by an independent expert who also certifies the truthfulness of the debtor’s financial statements.
The restructuring plan usually includes an agreement entered into by the debtor and its creditors, whose terms and conditions are freely negotiable (eg, such agreements usually provide for (i) a moratorium and postponement of claims; (ii) the partial or total waiver of claims; (iii) debt refinancing; and (iv) an undertaking from the creditors to refrain from requesting the beginning of any insolvency proceedings of the debtor).
It has to be borne in mind that the agreement is binding only on the relevant parties, with no effect on third parties.
As outlined above, the restructuring plan does not require any involvement by a bankruptcy court. However, it has to be noted that, according to the most recent case law, if the plan fails to perform and the debtor is declared bankrupt, the competent bankruptcy court has the power to investigate whether or not the plan was able, on an ex ante judgment, to grant the restructuring of the debtor and, in case such control has a negative outcome, the protection from clawback action and criminal offences (usually granted by the restructuring plan) becomes ineffective.
Debt restructuring agreements
A debt restructuring agreement is entered into between a debtor in a state of crisis and at least 60 per cent of its creditors. Even in this case, the feasibility of the restructuring agreement and the truthfulness of the debtor’s financial statements have to be certified by an independent expert. Moreover, the latter has to assess the viability of the agreement to ensure the payment of all the credits pertaining to creditors who have not entered the debt restructuring agreement within the following deadlines: (i) 120 days from the date of the approval of the agreement by the competent bankruptcy court in respect of any claims due and payable on such date; (ii) 120 days from the relevant maturity date, in respect of any receivable not yet matured on the date of the relevant approval.
The agreement, whose terms and conditions are freely negotiable (such agreements generally provide for conditions outlined in ‘Restructuring plan’ above), calls for a limited intervention by the bankruptcy court, to which the agreement has to be submitted for approval. The bankruptcy court has to approve the agreement and such approval avoids the risk of clawback actions and excludes the application of certain bankruptcy crimes, with relation to acts and payments made in accordance with such agreement.
The agreement is binding only on creditors who have entered into it (however, see below, the rules enacted in 2015 for the agreements entered into with financial creditors). The debtor must ensure the reimbursement in full of the creditors who have not entered into the agreement within the deadlines set forth above.
Rules governing debt restructuring agreements provide for a statutory moratorium of a 60-day period commencing on the date of filing of the restructuring agreement with the competent companies’ registrar. Such moratorium may also be requested if:
- During the negotiations of the debt restructuring agreement with its creditors, the debtor files with the competent bankruptcy court the same documentation to be provided in pre-bankruptcy agreement procedure, a proposal of debt restructuring agreement together with a statement of the debtor certifying that negotiations are under way with at least 60 per cent of its creditors, and a statement by an independent expert aimed at certifying that such proposal – if accepted – would be able to allow the restructuring of the debtor and the payment of the creditors not entering into the debt restructuring agreement within the deadlines set forth above.
- The debtor files an automatic stay petition with the competent bankruptcy court (see ‘Marzano’s extraordinary administration procedure’ below).
The 2015 Bankruptcy Law reform (Law Decree No. 83/2015, then Law No. 132/2015) introduced a new legislative provision (ie, article 182-septies of the Bankruptcy Law) specifically aimed at favouring the restructuring of debtors, whose financial indebtedness is at least 50 per cent of the debtor’s total indebtedness. In this case, under a debt restructuring agreement, if the debtor enters into a debt restructuring agreement with financial creditors representing at least 75 per cent of the financial debts, even the dissenting financial creditors are also bound by the agreement, provided that the dissenting creditors cannot be obliged to: (i) provide new financing; (ii) keep the possibility to use existing credit lines; or (iii) grant new credit lines.
The Bankruptcy Law recognises the following insolvency procedures:
- pre-bankruptcy agreement;
- bankruptcy agreement;
- compulsory administrative liquidation;
- Prodi’s extraordinary administration procedure; and
- Marzano’s extraordinary administration procedure.
A debtor is admitted by the court to this procedure when it is in a state of crisis or insolvency, and it puts forward a plan to its creditors, which may provide for:
- the restructuring of the debts and the satisfaction of creditors in any form whatsoever (including liquidation, extraordinary transactions, undertaking of debts, issuance of shares, bonds or other financial instruments to be given to creditors, etc);
- the division of creditors into classes according to their legal status and economic interests;
- a different treatment of the creditors belonging to different classes (without affecting priority of payment of secured debts); and
- the partial payment of secured credits, provided that secured creditors are satisfied in the same way they could be satisfied in an insolvency procedure.
The plan must be supported by an independent expert’s report attesting the feasibility of the pre-bankruptcy agreement and the truthfulness of the debtor’s financial statements.
If the plan provides for the liquidation of the assets, the plan itself must ensure the payment of at least 20 per cent of the unsecured creditors. If the plan provides for the continuance of the business (including the sale and transfer of the business to a third party), the plan does not have to provide for minimum thresholds of payments and, on the contrary, can, among others, provide for a moratorium in the payment of secured creditors for a period of one year after the approval of the plan and, in addition, the expert’s report must confirm that the continuance of the business is the best way to ensure the greatest satisfaction to the creditors.
After the filing of the petition to be admitted to pre-bankruptcy procedure, creditors are prevented from starting or pursuing any enforcement or interim actions against the debtor’s assets.
As far as the management of the company is concerned, until the court approves the pre-bankruptcy agreement, operations exceeding the ordinary course of business must be authorised by the court, while operations within the ordinary course of business can be carried out by the debtor.
The plan must be submitted to the creditors and has to be approved by the majority of the creditors (if creditors are divided into classes, even the majority of the classes has to approve the plan). Priority debts to be paid in full do not carry voting rights. It has to be borne in mind that, if the plan provides for a satisfaction of the creditors of about 30 per cent of their credits (or 40 per cent in case of a liquidation plan), each creditor representing 10 per cent of the credits against the debtor can file a competitive proposal, ie, a proposal alternative to that filed by the debtor, on which creditors will be called to express their vote.
If the plan is approved by creditors, then the court is called to grant final approval, verifying that the plan is feasible from a legal point of view. Once the pre-bankruptcy agreement proposal is approved by the court, its provisions are also binding on dissenting creditors.
The 2012 reform has allowed debtors to be protected from any possible action of their creditors while they are preparing a pre-bankruptcy plan, through the filing of a blank pre-bankruptcy petition, in which the debtor can simply limit itself to specify that it meets the conditions to be admitted to the pre-bankruptcy procedure and that it needs a period of time in order to prepare the plan without being exposed to the possible initiatives of its creditors.
Upon such petition, the court can grant the debtor a period between 60 and 120 days (if insolvency petition is pending, this period is of 60 days), which can be extended up to additional 60 days if reasonable grounds are met, in order to file its definitive pre-bankruptcy plan or, as an alternative, a debt restructuring agreement (see ‘Debt restructuring agreement’ above).
After the filing of this petition, creditors are prevented from starting or pursuing any enforcement or interim actions against the debtor’s assets and the debtor: (i) may carry on its ordinary business; (ii) may carry out activities that fall outside the ordinary course of business only if urgent and approved by the court; and (iii) is required to provide the court with periodical updates on its financial management.
A company can be declared bankrupt when it is insolvent (ie, it is not able to regularly fulfill its obligations) and any of the following thresholds is passed in any of the last three financial years preceding bankruptcy declaration: (i) €300,000 of its annual assets; (ii) €200,000 of annual revenues; or (iii) €500,000 of debts (including no overdue debts).
Bankruptcy cannot be declared ex officio, but only upon petition of a creditor, or of the debtor, or of the Public Prosecutor. After the declaration of bankruptcy, the bankruptcy court appoints the judge in charge of the procedure and the official receiver. The bankruptcy judge supervises the whole procedure, authorises the extraordinary administration acts and appoints the creditors’ committee (which supervises the official receiver’s activity, and authorises and expresses its opinion on the official receiver’s operations, when required by law). The official receiver is in charge of the bankrupt company’s management and has to prepare the liquidation plan (ie, the plan containing all the acts, transactions and operations necessary to liquidate the assets of the debtor and satisfy its creditors) in accordance with the ranking of their credits.
To be admitted to the bankruptcy estate, creditors have to file a specific petition setting forth: (i) the amount of the claim; (ii) the facts and the evidence supporting the claim; and (iii) the indication of any security. It is up to the bankruptcy judge to admit the creditor to the bankruptcy estate.
When the debtor is placed in bankruptcy proceedings, one or more creditors or a third party (or even the debtor one year after the bankruptcy declaration) can propose a plan, which may provide for: (i) the restructuring of debts and the reimbursement of creditors by any possible means; (ii) the subdivision of the creditors into different classes based on their legal status and economic interests; and (iii) the different treatment of creditors belonging to different classes.
The bankruptcy judge – after obtaining the favourable opinion of the creditors’ committee – has to submit the proposal to the approval of the creditors and it is deemed approved if the majority of the creditors (and, if the proposal proposes for classes of creditors, even the majority of the classes) votes in favour of the proposal.
After the approval, the bankruptcy court has to approve the bankruptcy agreement, and after this the bankruptcy judge, the official receiver and the creditors’ committee supervise the execution of the plan.
Compulsory administrative liquidation
A company is placed in this procedure when it: (i) is insolvent; and (ii) is a company that, under Italian law, may be placed in a compulsory administrative liquidation procedure (ie, banks and insurance companies).
This procedure is quite similar to bankruptcy, except that:
- even the authority entrusted by the law to monitor the activity of the debtor can ask for the opening of this procedure (provided that the other conditions set forth by the law are met);
- such authority has to direct the whole procedure and to authorise the extraordinary administration deeds proposed by the commissioner. The commissioner is in charge of the company’s management; and
- a commissioner is appointed in lieu of an official receiver.
Prodi’s extraordinary administration procedure
A company is placed in this procedure when it has (i) more than 200 employees; and (ii) a total indebtedness of no less than two-thirds of the aggregate of the total assets and the revenues of the preceding financial year.
The proceedings start with a first phase, in which the court, either upon the request of the debtor, one or more creditors or the Public Ministry, or ex officio, declares the insolvency of the company and appoints the judge and either one or three judicial commissioners who have to supervise the company’s management and express their opinion on the existence of the conditions for the approval of the extraordinary administrative procedure.
During the second phase, the Ministry of Economic Development appoints either one or three extraordinary commissioners in charge of the company’s management and administration to be responsible for the preparation and implementation of the plan, and a surveillance committee (which includes creditors’ representatives).
The plan then needs to be approved by the Ministry of Economic Development and can be a liquidation plan or a plan based on the continuance and restructuring of the debtor’s business.
Creditors are paid pro rata and in accordance with the rank of their credits on the basis of the proceeds deriving from the sale of the business (in the case of a dismissal plan) or on the basis of the terms provided under the restructuring plan (in the case of a restructuring plan).
Marzano’s extraordinary administration procedure
A company may be placed in this procedure when it (alone, or within a group) has (i) more than 500 employees; and (ii) a total indebtedness of more than €300 million.
This procedure aims at preserving the business of even larger companies compared to the ones concerned by the Prodi’s extraordinary administration procedure.
The main characteristics of this procedure are roughly equivalent to those of the Prodi’s extraordinary administration procedure.
Ranking of creditors in insolvency proceedings
The ranking of creditors depends on the fact that the relevant proceeds arise from the sale of (i) real estate assets or (ii) moveable assets.
As to point (i), the order of priority is the following:
- claims that are pre-deducted with regard to all other claims (except for claims secured by a mortgage, unless the pre-deductible claim is connected with expenses suffered in relation to the mortgaged asset);
- privileged claims arising in connection with the relevant real estate asset:
- judicial costs incurred to preserve the asset or to proceed with enforcement against such asset in favour of all mortgaged creditors;
- sums due in respect of various claims for taxes on real estate assets, contributions, water concessions, indirect taxes, local taxes or the increment of immoveable assets;
- claims against the relevant promissory note for failure to perform a preliminary contract (if certain conditions, laid down by law, are met); and
- all other privileged claims the priority of which is not set by law;
- claims secured by the mortgage rank;
- other privileged claims, in the order of priority provided by law; and
- unsecured claims (paid pro rata in compliance with the principle of equal treatment of creditors (par condicio creditorum)).
As to point (ii) above, the order of priority is the following:
- claims and financings that are pre-deducted with regard to all other claims (except for claims secured by a pledge, unless the pre-deductible claim is connected with expenses suffered in relation to the pledged asset);
- other privileged claims, in the order of priority provided by law; and
- unsecured claims (paid pro rata in compliance with the principle of equal treatment of creditors (par condicio creditorum)).
Under the Bankruptcy Law, without prejudice to international conventions and EU legislation, a debtor that has its registered office abroad may be declared bankrupt in Italy even if it has been declared bankrupt abroad.
As far as the jurisdiction is concerned, according to EU Regulation No. 1346/2000, the courts of the member state within the territory of which the centre of a debtor’s main interests (known as the COMI) is placed will have jurisdiction on insolvency proceedings. For a company, the place of its registered office will be presumed to be the COMI in the absence of proof of the contrary.
The concept of COMI has been used many times in the restructuring of groups of companies to attract foreign companies to Italian insolvency proceedings. Some of the numerous cases include many foreign companies (Dutch, German and Irish) of the Parmalat Group, Mariella Burani, Cirio, Giacomelli and others.
The same EU Regulation provides that insolvency proceedings commenced in an EU member state will be recognised in all other member states. The Italian courts may refuse to recognise insolvency proceedings commenced in another member state or to enforce a judgment1 handed down within those proceedings where the effects of the recognition or enforcement would be manifestly contrary to Italian public policy.
As of June 2017, EU Regulation 1346/2000 will be replaced by EU Regulation No. 848/2015. The new regulation confirms the key principles outlined in the previous regulation, with some specifications to: (i) avoid cases of ‘forum shopping’; (ii) allow a better coordination between insolvency proceedings commenced in different member states regarding the same company or group; and (iii) ensure transparency to insolvency proceedings started in member states.
The Bankruptcy Law does not set out specific provisions concerning groups of companies. However, special provisions are set out in the laws concerning Prodi’s and Marzano’s extraordinary administration proceedings, particularly with reference to:
- the criteria to enter into the proceedings – once the parent company is subject to the proceedings, the insolvent subsidiaries may also enter into the proceedings even if the thresholds for admission to the proceedings are not met;
- the appointment of the same individuals as the parent company’s proceedings officer and subsidiary proceedings officer;
- the drafting, by the subsidiary’s extraordinary commissioner, of a programme for the proceedings that is supplementary to the programme for the parent company’s proceedings; and
- clawback actions.
- According to Italian Law No. 218/1995, article 64, a foreign judgment can be declared enforceable provided that: (i) the foreign court was competent to issue the judgment under Italian law or jurisdiction; (ii) the defendant received adequate notice and was afforded sufficient time to appear in accordance with the law of the foreign court; (iii) the parties in the foreign action appeared or the absence of either party was properly taken into account in accordance with the law of the foreign court; (iv) the foreign judgment was not subject to appeal; (v) the foreign judgment is not in conflict with a final judgment handed down by an Italian court; (vi) the parties are not disputing the same matter before an Italian court in proceedings started before the foreign proceedings were commenced; and (vii) the foreign judgment is not contrary to the Italian rules of public policy and public order.