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The reform of the Bankruptcy Law
With Legislative Decree No. 14 of 12 January 2019 – implementing Law No. 155 of 19 October 2017, which contained a set of guidelines and principles aimed at reforming Italian insolvency law – the Council of Ministers approved the Code of Insolvency and Crisis (CIC). The CIC sets forth new organic legislation on the crisis and insolvency of enterprises, which aims to replace the Bankruptcy Law (Royal Decree No. 267 of 16 March 1942). The CIC will enter into force on 15 August 2020, with the exception of certain specific provisions that became effective on 16 March 2019.
Among the provisions that are effective, there are certain amendments to the Italian Civil Code. For example, the duty of companies to adopt organisational, administrative and accounting models that are adequate for the nature and size of the business, in order to facilitate the assessment of the crisis at its early stages; and the introduction of a presumption criterion – subject to proof to the contrary – to quantify directors’ liability towards the company’s creditors for breaches of their duties to preserve the corporate assets.
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 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).
However, one of the most important changes implemented by the CIC is the provision of 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, hence possibly avoiding insolvency. In this regard, the CIC provides for the establishment of special crisis-settlement bodies within 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.
Out-of-court restructuring procedures
The Bankruptcy Law recognises two main out-of-court restructuring procedures, namely: the ‘restructuring plan’ under article 67, paragraph 3(d) (article 56 according to the CIC) (with no court involvement); and the ‘debt restructuring agreement’ under article 182-bis (article 57 according to the CIC) (with limited court involvement).
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 this 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. For example, these 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, 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 this control has a negative outcome, the protection from clawback actions and criminal offences becomes ineffective. The CIC expressly excludes the protection from clawback actions in the event of gross negligence or wilful misconduct of the debtor or of the independent expert, if the creditor was aware of these conditions at the time the deed was concluded.
The CIC specifies the following in relation to the restructuring plan: (i) it must bear a definite date; (ii) it must include certain specific details (eg, information on the economic, patrimonial and financial situation of the company, the causes of the crisis, the strategies to be implemented and their timing, the creditors and their credit); and (iii) the unilateral acts and the agreements entered into in accordance with the plan must be proven in writing and bear a definite date.
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 credit pertaining to creditors that have not entered the agreement, by the following deadlines:
- 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 this date; or
- 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 limited intervention by the bankruptcy court, to which the agreement has to be submitted for approval. This approval has the same effects as the restructuring plan. The agreement is binding only on creditors that have entered into it.
Rules governing debt restructuring agreements provide for a statutory moratorium of 60 days commencing on the date of filing of the restructuring agreement with the competent Companies’ Register. However, the CIC provides that the moratorium does not automatically follow the filing of the agreement with the Companies’ Register, but is subject to a specific measure of the court.
The 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 the 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 the 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.
Article 182-septies of the Bankruptcy Law is 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, if the debtor enters into a debt restructuring agreement with financial creditors representing at least 75 per cent of the financial debts, the dissenting financial creditors are also bound by the agreement (cramdown), provided that they cannot be obliged to provide new financing, keep the possibility of using existing credit lines or grant new credit lines. The same provision is envisaged by the CIC; however, it also provides that the same cramdown mechanism applies to non-liquidation agreements if entered into with non-financial creditors, provided that: (i) the creditors have been informed of the negotiations and have been put in the position to take part in the negotiations; (ii) the adhering creditors represent at least 75 per cent of the total debt; and (iii) the non-adhering creditors are satisfied at least as much as they could have been satisfied in a judicial procedure and have been notified of the agreement and its annexes.
Moreover, the CIC also introduces a ‘facilitated’ debt restructuring agreement, which may be entered between the debtor and the creditors representing at least 30 per cent of the relevant debt, if the debtor: (i) does not require a moratorium for the payment of the non-adhering creditors; and (ii) has not required (and waives to require) the granting of temporary protective measures.
Italian law recognises the following insolvency procedures:
- pre-bankruptcy agreement;
- bankruptcy (judicial liquidation, according to the CIC);
- bankruptcy agreement (pre-bankruptcy agreement within the judicial liquidation, according to the CIC);
- 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 debt and the satisfaction of creditors in any form whatsoever (including liquidation, extraordinary transactions, undertaking of debt, issuance of shares, bonds or other financial instruments to be given to creditors);
- 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 credit, provided that secured creditors are satisfied at least 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; however, if the plan provides for the continuance of the business, it does not have to provide for minimum thresholds of payments. The continuance may be either direct (ie, continuance of the business activity under the same legal entity) or indirect (ie, the sale, usufruct, lease or conferral of the business).
After the filing of the petition to be admitted to the pre-bankruptcy agreement procedure, creditors are prevented from starting or pursuing any enforcement or interim actions against the debtor’s assets (automatic stay).
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 pending agreements (ie, the agreements that still have to be performed by both parties) remain effective, unless the court, upon the debtor’s request, authorises their suspension or termination.
The plan has to be approved by the majority of the creditors (when creditors are divided into classes, the approval of the creditors in the majority of classes is required).
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.
If the plan provides for satisfying the creditors with less than 30 per cent of their credit (or 40 per cent in a liquidation plan), each creditor representing 10 per cent of the credit against the debtor can file a competing proposal (ie, an alternative proposal 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 Bankruptcy Law allows 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 any action taken by its creditors. Upon this petition, the court can grant the debtor between 60 and 120 days (if the insolvency petition is pending, it is 60 days), which can be extended by 60 days if reasonable grounds are met, 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) can carry on its ordinary business; (ii) can 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.
The CIC has introduced certain significant amendments. Some of the most important changes envisaged by the CIC are:
- the mandatory division of creditors into classes for: (i) creditors holding social security credit or tax credit, which will not be satisfied in full; (ii) creditors holding guarantees granted by third parties; (iii) creditors that will be satisfied through non-financial means; and (iv) creditors having filed the procedure proposal;
- the provision that, if a single creditor holds more than 50 per cent of the credit admitted to vote, the pre-bankruptcy agreement proposal shall be approved by the majority of the creditors admitted to vote, either by number or by percentage;
- the requirement that, if the plan provides for liquidation of the assets, it must ensure that the cash-funnelling by third parties increases the percentage of satisfaction of the unsecured creditors, at least of the 10 per cent with respect to the alternative of judicial liquidation;
- the provision that the plan can be considered as aimed at the indirect continuance of the business only if at least half of the average of the employees in the past two years before the filing of the pre-bankruptcy agreement petition are retained (or rehired) for the next year after homologation;
- the specification that, if the plan is aimed at the indirect continuance of the business, the transfer or the lease of the going concern must be made through competitive bid procedures, except if the court authorises not to, when reasons of urgency occur and the interest of the creditors to their best satisfaction may be compromised;
- the provision that, if the plan is aimed at the continuance of the business, it may envisage a moratorium of the payment of the secured creditors up to two years (rather than the current annual term) after the homologation of the pre-bankruptcy agreement. In this case, the secured creditors may vote for the difference between their credit plus accrued legal interests and the current value of the payments envisaged in the pre-bankruptcy agreement plan, as at the date of the filing of the pre-bankruptcy agreement petition;
- the requirement that, similarly to reformed debt restructuring agreements, the automatic stay be subject to a specific measure of the court;
- the abrogation of the creditors meeting and the provision of the electronic vote; and
- the amendment of the percentages of satisfaction of non-secured creditors preventing the filing of competing proposals, namely, at least 30 per cent of the non-secured credit or only 20 per cent if crisis alert procedures have been initiated by the debtor (instead of 30 per cent of the credit or 40 per cent for a liquidation plan).
Bankruptcy (judicial liquidation)
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: €300,000 of its annual assets; €200,000 of its annual revenues; or €500,000 of its debts (including no overdue debts). The CIC abolishes the use of the terms bankruptcy and bankrupt and introduces the concept of judicial liquidation. However, the procedure and the conditions for its activation remain almost the same as those currently regulating bankruptcy. The CIC provides for the backdating of the hardening period for the clawback actions (this 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.
Bankruptcy cannot be declared ex officio, but only upon petition of one or more creditors, the debtor or 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: the amount of their claim; the facts and the evidence supporting their claim; and the indication of any security. It is up to the bankruptcy judge to admit the creditor to the bankruptcy estate.
Bankruptcy agreement (pre-bankruptcy agreement within the judicial liquidation)
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:
- the restructuring of the debts and the satisfaction of creditors in any form whatsoever;
- the division of creditors into classes, according to their legal status and economic interests; and
- a different treatment of the creditors belonging to different classes.
Even the CIC provides that a petition for a composition with creditors may be filed within the judicial liquidation procedure, with almost the same rules as the current bankruptcy agreement. The CIC specifies that the proposal may be filed by: (i) one or more creditors or by a third party, even before the issuance of the statement of liabilities, provided that the debtor has kept the accounting books and the data allow the receiver to set a list of creditors to be approved by the delegated judge; or (ii) the debtor, not earlier than one year following the declaration of the opening of the judicial liquidation procedure and not later than two years after the issuance of the statement of liabilities, provided that the proposal envisages cash-funnelling by third parties, which will increase the value of the assets, at least of the 10 per cent.
The bankruptcy judge, after obtaining the favourable opinion of the receiver and 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 (when creditors are divided into classes, the approval of the creditors in the majority of classes is required).
After the approval of the creditors, the bankruptcy court has to approve and homologate the bankruptcy agreement and, after this, the bankruptcy judge, the official receiver and the creditors’ committee supervise the performance of the plan.
Compulsory administrative liquidation
Under Italian law, only certain types of companies, when declared insolvent, may be placed in a compulsory liquidation procedure (eg, 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 procedure to be opened (provided that the other conditions set forth by the law are met);
- this 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 Prodi’s extraordinary administration procedure when it has more than 200 employees and 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, 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.
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 credit on the basis of the proceeds deriving from the sale of the business (if a liquidation plan) or on the basis of the terms provided under the restructuring plan.
Marzano’s extraordinary administration procedure
A company may be placed in Marzano’s extraordinary administration procedure when it (alone or within a group) has more than 500 employees and a total indebtedness of more than €300 million.
This procedure aims at preserving the business of even larger companies than those for which Prodi’s extraordinary administration procedure is applicable.
The main characteristics of this procedure are generally the same as those of Prodi’s extraordinary administration procedure.
Ranking of credit in insolvency proceedings
The ranking of creditors depends on the relevant proceeds arising 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 borne in relation to the mortgaged assets);
- privileged claims arising in connection with the relevant real estate asset;
- judicial costs incurred to preserve the assets or to proceed with enforcement against the 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 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)).
Groups of companies
In order to implement an organic procedure for resolving the crisis, the CIC provides that the companies belonging to the same group may jointly: submit a single application for approval of a single pre-bankruptcy agreement; submit a single application for approval of a single debt restructuring agreement; set forth a single certified recovery plan; or submit a single application for judicial liquidation.
In any case, each company’s pool of assets and liabilities remains separate from the others.
Under the Bankruptcy Law, without prejudice to international conventions and EU legislation, a debtor that has its registered office abroad may also be declared bankrupt in Italy even if it has been declared bankrupt abroad.
As far as the jurisdiction is concerned, according to Regulation (EU) 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 in 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 to 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.