The reform of the Italian Bankruptcy Law
The Italian parliament enacted Law No. 155 of 19 October 2017 (Law 155), which entered into force on 14 November 2017, and contains a set of guidelines and principles that, by 14 November 2018, shall be transposed by the government in specific legislative provisions that will reform insolvency law.
The most important changes revolve around:
- crisis alert procedures, introduced to facilitate the prompt assessment of the early stages of a crisis, so that the most appropriate solution to ensure business continuity can also be promptly identified and implemented. In this regard, Law 155 provides for the establishment of special crisis-settlement bodies with the local chambers of commerce, to which a company in the early stage of a crisis may apply for assistance to overcome the crisis. Assistance is granted through a negotiated, out-of-court alert procedure and the provision of incentives and protection measures for the company in the early stage of a crisis;
- pre-bankruptcy agreements. As to the pre-bankruptcy agreements that ensure business continuity, the relevant plan may contain a moratorium of longer than one year for the payment of secured creditors. As for the pre-bankruptcy agreements that entail liquidation, they will be permitted only if satisfaction of creditors is expected to be markedly increased by third-party contributions, and if liquidation will ensure the satisfaction of at least 20 per cent of the unsecured claims;
- groups of companies. Companies within a group may jointly submit a single application for approval of a single debt restructuring agreement, for an arrangement with creditors or for judicial liquidation proceedings (each company’s pool of assets and liabilities remain separate from the others);
- bankruptcy (defined by Law 155 as ‘judicial liquidation’). In this regard, the changes concern:
- the exclusion of special enforcements and special privileges;
- the backdating of the hardening period for the clawback actions (such period will start on the date of the request for admission to judicial liquidation proceedings, rather than on the date the proceeding is opened); and
- the reduction of the duration and costs (achieved through:
- (i) greater management powers conferred on the official receiver;
- (ii) replacement of the creditors’ committee with remote consultations;
- (iii) simplified regulation on the assessments of claims; and
- (iv) reduction of the fees of experts and advisers involved in the proceedings); and
- restructuring agreements. The reform provides for:
- removal or reduction of the minimum threshold of adhering creditors; and
- extension of the rules on restructuring agreements with financial intermediaries to non-liquidation agreements and moratorium agreements entered into within a group of non-financial creditors.
Law 155 also provides that the above-mentioned specific legislative provisions shall reorganise and review the privileges’ system, aiming in particular at reducing the number of special and general privileges.
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 (insolvency procedures).
Out-of-court restructuring procedures
The Italian Bankruptcy Law recognises two main out-of-court restructuring procedures, namely: (i) the ‘restructuring plan’ under article 67, paragraph 3(d) of the Italian Bankruptcy Law; and (ii) the ‘debt restructuring agreement’ under article 182-bis of the Italian Bankruptcy Law.
A restructuring plan is a procedure with no involvement of 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.
The restructuring plan does not require any involvement of the bankruptcy court. However, it has to be noted that if the plan fails to perform and the debtor is declared bankrupt, the 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 actions and criminal offences 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.
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 full payment of all the credits pertaining to creditors who have not entered the 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; or (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, calls for a limited intervention by the bankruptcy court, to which the agreement has to be submitted for approval. Such approval has the same effects of the restructuring plan.
The agreement is binding only on creditors who have entered into it.
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’ register.
Such moratorium may also be requested if:
- during the negotiations of the debtor 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; or
- the debtor files an automatic stay with the competent bankruptcy court.
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 they cannot be obliged to: (i) provide new financing; (ii) keep the possibility of using 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 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 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, the plan does not have to provide for minimum thresholds of payments.
After the filing of the petition to be admitted to pre-bankruptcy agreement 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 has to be approved by the majority of the creditors (if creditors are divided into classes, such majority must be reached in the majority of the classes).
Priority debts to be paid in full do not carry voting rights, unless the relevant creditors waive, in full or in part, their pre-emption 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 competing 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 the creditors, then the court is called to grant final approval. Once the final approval is granted, the provisions of the pre-bankruptcy agreement are also binding on dissenting creditors.
The 2012 reform has allowed debtors to be protected from any possible actions 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 possible initiative of its creditors.
Upon such petition, the court can grant the debtor a period between 60 and 120 days (if the insolvency petition is pending, this period is 60 days), which can be extended by up to an 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.
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 periodical updates on its financial management.
A company can be declared bankrupt when it is insolvent (ie, it is not able to regularly fulfil its obligations) and any of the following thresholds is passed in any of the three financial years preceding bankruptcy declaration: (i) €300,000 of its annual assets; (ii) €200,000 of its annual revenues; or (iii) €500,000 of its debts (including no overdue debts).
Bankruptcy cannot be declared ex officio, but only upon petition of one or more creditors, or of the debtor, or of the public prosecutor. By means of the bankruptcy declaration, the court appoints the bankruptcy judge 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. 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).
To be admitted to the bankruptcy estate, creditors have to file a specific petition setting forth: (i) the amount of their claim; (ii) the facts and the evidence supporting their 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 after one year from the bankruptcy declaration) can submit a plan, which may provide for: (i) the restructuring of the debts and the satisfaction of creditors in any form whatsoever; (ii) the division of creditors into classes, according to their legal status and economic interests; and (iii) a different treatment of the 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; the proposal has to be approved by the majority of the creditors (if creditors are divided into classes, such majority must be reached in the majority of the classes).
After the approval of the creditors, 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 is: (i) insolvent; and (ii) a company that, under Italian law, may be placed in a compulsory administrative liquidation procedure (ie, banks, 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 the 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 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 request of the debtor, of one or more creditors or of 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.
The plan (which can be a liquidation plan or a plan based on the continuance and restructuring of the debtor’s business) then needs to be approved by the Ministry of Economic Development.
Creditors are paid pro rata and according to the rank of their credits on the basis of the proceeds deriving from the sale of the business (in case of a liquidation 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 with those 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 credits in insolvency proceedings
The ranking of creditors depends on the fact that the relevant proceeds arise from the sale of real estate assets or movable assets.
With regard to real estate assets, the order of priority is as follows:
- 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 assets);
- 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 assets 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 immovable assets;
- claims against the relevant promissory note for failure to perform a preliminary contract (if certain conditions, laid down by law, are met);
- 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 the priority provided by the law; and
- unsecured claims (paid pro rata in compliance with the principle of equal treatment of creditors (par condicio creditorum)).
With regard to movable assets, the order of priority is the following:
- claims and financing 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 Italian 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. 848/2015, the courts of the member state within the territory of which the centre of a debtor’s main interests is placed will have jurisdiction on insolvency proceedings. For a company, the place of its registered office will be presumed to be the centre of its main interests in the absence of proof of the contrary.
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 judgment handed down within those proceedings where the effects of the recognition or enforcement would be manifestly contrary to Italian public policy.