The proposed in-depth reform of Italian insolvency and enforcement procedures

The draft law proposed by the parliamentary commission chaired by Renato Rordorf (the "Rordorf Commission") for the "in-depth reform of the legal framework concerning distressed companies and bankruptcy proceedings" (the "Reform") has been recently approved by the Chamber of Deputies (Camera dei Deputati) and is currently under discussion before the Senate (Senato). 

The Reform aims to create a comprehensive and consolidated act for insolvency and pre-insolvency procedures – with the only exception to this being the extraordinary administration procedure, which is treated under a separate draft reform dated May 2016 – and to modernise the rules set forth in the Royal Decree No. 267 of 16 March 1942 (the "Bankruptcy Law"). 

Status of crisis and insolvency test

The Reform proposes the introduction of a clear definition of the status of a crisis also based on the likelihood of future insolvency, which should be measurable using an "insolvency test" tailored on specific industry standards.

Easier access for creditors to insolvency procedures 

The Reform envisages new tools for creditors to enable them to attend meetings during the insolvency proceedings, in order to facilitate the participation by foreign players and investors and therefore to ensure a higher attendance. 

Identification of specialised insolvency courts 

The Reform aims to increase the efficiency and specialisation of the courts handling insolvency proceedings, promoting, in particular:

• That the courts already specialised in corporate matters – Tribunali delle imprese - (i.e. Bari, Bologna, Catania, Firenze, Genova, Milano, Napoli, Palermo, Roma, Torino, Trieste and Venezia) should have exclusive competence on proceedings related to a group of companies of significant size or company undergoing extraordinary administration procedures;and
• The identification of courts specifically allowed to handle insolvency matters (other than those referred to above), to be selected based on specific criteria, including the number of relevant judges and the number and duration of the insolvency proceedings filed in the last five years in order to ensure appropriate specialisation and staffing level.

Insolvency of a group of companies

The Reform proposes the introduction of specific provisions concerning the insolvency of a group of companies in compliance with the EU Regulation No. 2015/848:

• Introducing a definition of "group" in line with the definition of "group" contained in the Italian Civil Code under the management and coordination activities doctrine (articles 2497 and followings)¹;
• Allowing a group of companies to file a petition for a single insolvency procedure regarding the whole group; and
• Extending the equitable subordination of shareholders' loans set out in article 2467 of the Italian Civil Code to intercompany loans.

Safeguard procedure

In order to foster a more efficient use of the restructuring tools offered to Italian enterprises and allow a better preservation of the business in the interest of all stakeholders, the Reform sets out a safeguard procedure aimed at anticipating the emersion of the crisis and promoting the adoption of out-of-court pre-insolvency procedures at an early stage. The debtor should have the right to request the assistance of a specialised department of the local competent court in order to identify the most viable solution to the crisis.

The envisaged procedure provides for the obligation of the supervisory body of the debtor company to promptly notify the management body about the evidence of the actual crisis; in case of inaction, the supervisory body should then notify the local competent court thereof. 

In addition to the above, certain public institutional creditors (e.g. the Italian Revenue Agency and pension entities), should have the duty to report to the supervisory body and, in any case, to the local competent court any continued non-fulfilment by the debtor of obligations of a certain relevance. 

Within the safeguard procedure, the debtor should be allowed to seek adequate protection (stay) from the court in order to complete its restructuring process. Nature and duration of such protection should be discretionally decided by the court.

The Reform finally promotes the introduction of specific incentives for debtors who timely access the safeguard procedure or other pre-insolvency procedures. 

Debt restructuring agreements and scheme of arrangement

The Reform also proposes some amendments to the procedure under article 182-bis of the Bankruptcy Law in order to encourage and facilitate the execution of debt restructuring agreements between debtors and their creditors and, in particular:

• It is proposed to extend the application of the "scheme of arrangement" set forth in article 182-septies of the Bankruptcy Law, which provides that under certain circumstances and conditions the debtor may enter into a debt restructuring agreement with financial creditors representing at least 75 per cent of the claims that have homogenous economic interests and legal positions, asking the court to extend the effects of such restructuring agreement to the other dissenting financial creditors as well as to non-financial creditors; and
• It is proposed to eliminate the minimum threshold currently set out in article 182-bis of the Bankruptcy Act, which requires that the debt restructuring agreement shall be entered into with creditors representing at least 60 per cent of the overall debts of the debtor.

Concordato preventivo procedures and continuity of the operations

The Reform also proposes some adjustments to the concordato preventivo discipline (the "Concordato Preventivo") and, in particular:

• It proposes to limit the use of the Concordato Preventivo only to procedures with ongoing concern to secure the continuity of the operations, while the use of concordato procedures for liquidation purposes should be limited to the sole case in which third parties are able to provide new financial resources ensuring a better satisfaction of creditors (provided that unsecured creditors cannot be paid less than 20 per cent of their outstanding claims); 
• Third parties should be entitled to file for a Concordato Preventivo petition relating to their debtor upon the occurrence of the relevant conditions;
• Creditors should be able to participate in the procedure via electronic systems;
• For Concordato Preventivo with an ongoing concern, the reorganisation plan may provide for a moratorium of more than one year for secured creditors, who should consequently have the right to vote on the concordato proposal; and
• The procedures for DIP financing should be streamlined and simplified with the aim to ensure sufficient protection in case of subsequent liquidation or extraordinary administration. 

Floating charges and swifter enforcement procedures

The Reform proposes a general review and simplification of the order of priorities set out in the law and a confirmation of the pledges without possession (floating charges) recently introduced into the Italian legal system.

Most importantly, the Reform promotes easier and swifter out-of-court procedures for the enforcement of pledges when the value of the pledged assets is clearly determined and assessed, provided that the secured creditor shall return to the debtor any positive difference between such asset value and the secured claims.

Conclusions

The Reform represents a significant step forward in the creation of a more efficient, modern and investor friendly legal environment. 

In line with the recent recommendations of the European Commission, the Reform aims to foster the access to and use of the available pre-insolvency procedures, equally prompting a timely rise and management of the crisis in the interest of all the stakeholders.²   

Finally, the Reform seeks to increase the efficiency in terms of timing and costs of security enforcements, in order to ensure more transparency and certainty for the benefit of foreign investors.

It must be noted that the Reform only contains general principles to be used by lawmakers as guidelines for the drafting of the proposed law. The Rordorf Commission has set the goal to enact the underlying law by the end of the current year, provided that, in light of the Italian political instability and the fact that the current government is provisional such timing is not certain. 

Authors: Paolo Manganelli, Partner, and Maddalena Catello, Dottoressa.

^{1.  Under article 2497-sexies of the Italian Civil Code, an entity is presumed to exercise direction and co-ordination activities on another company when it consolidates the relevant financial statements or controls the latter pursuant to article 2359 of the Italian Civil Code (i.e., it owns the majority of the votes to be exercised at the shareholders' meeting – or, in any case, a number of votes sufficient to determine the relevant resolution -, or influences such company according to specific contractual provisions).}

^{2.  Commission Recommendation of 12.3.2014 on a New Approach to Business Failure and Insolvency: http://ec.europa.eu/justice/civil/files/c_2014_1500_en.pdf.}