Legal development

New Changes to the Italian Bankruptcy Act

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    On 24 August 2021, the Italian Cabinet issued law decree no. 118 (the "Decree"), which addresses three different topics:

    • Postponement of the entry into force of the new Bankruptcy Code  to 16 May 2022 (except for the section relating to safeguarding procedures, which will enter into force on 31 December 2023);
    • Introduction of a new out-of-court restructuring procedure (composizione negoziata per la soluzione della crisi di impresa); and
    • Introduction of further amendments to the Italian bankruptcy act ("IBA") that anticipate certain provisions already contained in the not-yet-in force Bankruptcy Code.

    Please note that the Decree, as for any Italian emergency law decree, shall be converted into law within two months, and the law of conversion may bring additional tweaks and amendments.

    NEW OUT-OF-COURT RESTRUCTURING PROCEDURE

    One important novelty envisaged by the Decree is the introduction of a new out-of-court restructuring procedure with a view to fostering an early approach to the financial difficulties of an enterprise (the "New Procedure").

    Requirement for accessing the New Procedure

    Any debtor that is in a situation of financial or economic imbalance which is likely to escalate into crisis or insolvency to the extent that reorganization and restructuring of the business becomes a reasonable possibility.

    A special section of the website of the Chamber of Commerce will be dedicated to the New Procedure. It will also contain a model for debtors to run a test to determine if the New Procedure will enable them to overcome the situation of distress.

    The role of the Expert

    The debtor requests the Chamber of Commerce where the debtor's office is registered to arrange the appointment of an independent expert (the "Expert"), who shall facilitate negotiations between the debtor and its creditors with a view to reaching a consensual restructuring. The Expert shall be appointed by a commission within the Chamber of Commerce composed of: (i) a judge; (ii) a member appointed by the President of the local Chamber of Commerce; and (iii) a member appointed by the local Prefect. The Expert will benefit from legal privilege and cannot be called as a witness with respect to its activities.

    Within 2 working days of his/her appointment, the Expert may accept or refuse the task. In case of acceptance he/she shall promptly convene with the debtor to discuss the matter, and then:

    • if the Expert believes that the restructuring is possible, he/she will open discussions with the parties involved and provide guidelines for the completion of the procedure;
    • if the Expert believes that the debtor has no chance of recovery, he/she may ask for the early termination of the procedure.

    A viable restructuring solution shall be agreed within 180 days from the appointment of the Expert. The term can be postpone upon request of all parties and with the favourable opinion of the Expert, or if necessary to complete the procedure if the debtor requested the application of the protective measures (see below).

    Protective measures

    Along with the petition for the appointment of the Expert (or in a subsequent and separate petition) to be published in the Chamber of Commerce, the debtor may apply for the application of protective measures in the form of a stay of any foreclosure action or bankruptcy declaration. On the same day, the debtor shall also file such petition with the competent tribunal requesting the confirmation or amendments of the protective measures. Such protective measures may also be tailored and referred to specific situations/creditors.

    Voluntary payments by the debtor, however, are not stayed.

    The duration of the protective measures can be no less than 30 days and no more than 120 days. Upon specific requests of the parties and with the favourable opinion of the Expert such measures can be extended up to a maximum of 240 days.

    The measures can be revoked at any time by the judge if they are not strictly necessary to ensure a good outcome of the negotiations, or if they are disproportionate with respect to the prejudice the creditors will suffer in connection therewith.

    The debtor may apply for the provisional disapplication of the provisions of the civil code on mandatory recapitalization of the company.

    Management of the Business

    During the entire procedure the debtor shall maintain the day-to-day management of the business. Extraordinary transactions, as well as any payments not compatible or aligned with the ongoing negotiations, shall be notified in advance to the Expert.

    If the Expert maintains that the proposed transaction/payment may prejudice the creditors, he shall inform the debtor and the supervisory board in writing. If the debtor executes the concerned transaction or makes the relevant payment nonetheless, the Expert will publish his negative opinion in the Chamber of Commerce.

    Upon specific request by the debtor, the competent tribunal may authorize the debtor to obtain super-senior financing (finanziamenti prededucibili), including shareholder loans as well as dispose of one or more going concerns.

    In case of any supervened economic imbalance of the pending contracts due to the Covid-19 pandemic, the Expert may suggest and the tribunal may impose, provisional contractual amendments to mitigate such imbalance.

    Group of companies

    A group of companies, or more companies of a same group (provided that they are registered in Italy), may request the opening of a New Procedure for the group with the appointment of one Expert only.

    Intragroup loans made in the context of the New Procedure are not subject to equitable subordination.

    Conclusion of the procedure

    The New Procedure may end up as follows:

    • a restructuring agreement entered into by and between the debtor and its creditors, provided that the Expert declares that such agreement is able to allow the debtor to regain economic and financial balance and preserve the operations for at least 2 years;
    • a moratorium under the new Art. 182-octies of the IBA;
    • a restructuring agreement entered into by and between the debtor, the Expert and the creditors, which will benefit from the same protections prescribed for reorganization plans under Art. 67, paragraph 3, letter d) of the IBA;
    • a simplified debt restructuring agreement under Art. 182-bis of the IBA, where the 60% threshold is reduced to 30% if the Expert indicates in his report that such agreement was reached in the context of the New Procedure.

    The debtor may, alternatively: (i) adopt a reorganization plan under Art. 67, paragraph 3, letter d) of the IBA; (ii) file for the new simplified concordato for liquidation purposes; or (iii) file for ordinary bankruptcy proceedings or extraordinary administration as the case may be.

    Creditors' duties and responsibilities

    Creditors shall actively take part in the negotiations in an informed manner and in good faith during the New Procedure. In case of failure of the procedure, the creditors' behaviour will be subject to heightened scrutiny by the courts.

    Effects and protections

    • All transactions, deeds, payments and security interests made or granted in the context of the New Procedure are exempted from claw-back risks in case of subsequent insolvency of the debtor. The same protections are granted to all transactions, deeds, payments and security interests made or granted in the ordinary course of business after the appointment of the Expert as well as extraordinary transactions authorized by the tribunal.
    • Any transaction, deed, payment or security interest made or granted by the debtor with the negative opinion of the Expert published in the Chamber of Commerce and lacking the tribunal's authorization is clawed-back in case of subsequent insolvency of the debtor.
    • Contractual clauses that provide for the "ipso facto" termination of the agreement in case the debtor has obtained the protective measures in the context of the New Procedure are null and void and counterparty creditors cannot refuse to perform the underlying contracts or impose different conditions.
    • Debtor access to the New Procedure does not allow, per se, the withdrawal by banks of the outstanding revolving credit facilities.

    Simplified concordato for liquidation purposes

    In case of failure to reach a viable solution at the end of the New Procedure, the debtor may file with the competent tribunal a proposal for concordato for the disposal of all assets together with a liquidation plan.

    The proposal for concordato is published in the Chamber of Commerce and communicated to each creditor together with the opinion of the Expert along with the one prepared by an additional expert appointed by the tribunal. No vote is required on the proposal, but any creditor or interested party may oppose the homologation of the concordato.

    Reward tax measures

    Depending on the outcome of the New Procedure and upon certain conditions:

    • the debtor may obtain a reduction of the tax interest and penalties down to 50 per cent on interest and penalties which arose prior to the filing of the petition for the appointment of the Expert;
    • the reduction of the debtor's debt would not result in a taxable event and any capital losses would be treated as tax deductible for such debtor;
    • the debtor may request the repayment with up to 72 monthly instalments of certain tax liabilities such as for income tax, withholding tax, VAT or regional tax on productive activities (IRAP).

    Additional benefits are contemplated for pending tax claims and accrued interest for late payment.

    FURTHER AMENDMENTS TO THE IBA IN ANTICIPATION OF THE NEW BANKRUPTCY CODE

    The amortizing plan of loans secured by instrumental assets necessary for the business can also continue in case of concordato preventivo or pre-concordato with going concern (continuità aziendale) provided that: (i) the debtor has complied with all of its obligations under the loan; or (ii) the tribunal authorizes it; and (iii) an independent expert certifies that such continuation does not impair other creditors' rights.

    Under certain circumstances and conditions, the effects of debt restructuring agreements under Art. 182-bis of the IBA can be extended to non-adhering creditors belonging to the same class (determined by reference to such creditors having the same legal rights and economic interests) provided that such non-adhering creditors represent no more than 25 per cent – 40 per cent in case of a debt restructuring agreement reached at the conclusion of a New Procedure – of the claims of that class (cram down), irrespective of the nature of their claims (according to current laws, the cram down mechanism is applicable only in respect of financial creditors). The same rules apply to moratorium agreements (convenzioni di moratoria).

    A new Art. 182-octies is added to the IBA to regulate the moratorium with creditors, with cram down mechanisms similar to those applicable to Art 182-bis debt restructuring agreements.

    For debt restructuring agreements under Art. 182-bis of the IBA, in the event that (i) there is no moratorium in the payment of non-adhering creditors, and (ii) the debtor has not requested and has waived the application for any protective measures (stay), including the so-called pre-concordato, the debt restructuring agreement is valid if supported by creditors representing no less than 30 per cent of the overall debts of the debtor (the standard threshold is 60 per cent).

    In case of concordato preventivo with going concern (continuità aziendale), the plan may provide for a moratorium for the payment of secured creditors up to 2 years from the homologation of the concordato.

    The term to be assigned by the tribunal in case of a petition for pre-concordato ranges between 60 days and 120 days (with a possible extension of up to an additional 60 days) irrespective of whether a bankruptcy petition has being filed.

    Finally, the Decree provides that any proceeding for the revocation of a concordato preventivo and any bankruptcy petition are stayed until 31 December 2021 with respect to any debtor whose concordato preventivo has been homologated after 1 January 2019.

    Authors: Paolo Manganelli and Mario Orsenigo

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