On 15 June 2022 the Italian government introduced further amendments to the new Business Crisis and Insolvency Code ( Legislative Decree No. 14 of 12 January 2019, the “Insolvency Code” or “BCIC”), implementing EU Directive 2019/1023 on Preventive Restructuring Frameworks, on Discharge of Debt and Disqualifications, and on Measures to Increase the Efficiency of Procedures Concerning Restructuring, Insolvency and Discharge of Debt (the “Insolvency Directive”) amending EU Directive 2017/1132.
The Insolvency Code was originally scheduled to enter into force on 15 August 2020, but due to the COVID-19 pandemic, its entry into force was postponed several times also so as to incorporate the principles of the Insolvency Directive. Effective from 15 July 2022, the new law supersedes and replaces Italy’s former Bankruptcy Law (Legge Fallimentare, Royal Decree no. 267 of 16 March 1942, "IBL").
Adequate arrangements to prevent business distress
In order to prevent business distress and encourage its early detection, the alert system introduced in previous versions was superseded by a set of rules included in the Insolvency Code (Art. 3) and in the Italian Civil Code (“ICC”) (Art. 2086) focusing on corporate duties consisting in setting up adequate organizational, administrative and accounting structures according to the nature and size of a business, with different levels of compliance for individual entrepreneurs (imprenditori individuali) and companies.
Under this new scenario, budgeting and industrial planning become key factors, in a context where the mentioned safeguards are designed to allow businesses to detect financial instability and to assess actual sustainability of their indebtedness and prospects of going concern at least in the forthcoming year.
In addition, Art. 3 BCIC identifies specific warning signals for the timely activation of corporate bodies to overcome a financial crisis, namely: (a) payroll liabilities overdue for at least 30 days amounting to more than half of the total monthly payroll liabilities; (b) liabilities vis-à-vis suppliers overdue for at least 90 days in an amount exceeding the amount of non-overdue liabilities; (c) exposures vis-à-vis banks and intermediaries overdue for more than 60 days amounting to at least 5% of exposures and (d) payment delays that trigger the reporting obligations of so-called “qualified public creditors”.
In light of such rules, in case of prospective distress, any entrepreneur or business - no matter the size or nature - may seek online access to the local Chamber of Commerce to pursue a Negotiated Settlement (see next paragraph below). Basically, entrepreneurs and company directors are required to prioritize the interests of creditors instead of those of the entrepreneur or of the shareholders.
Negotiated Settlement and Reporting Obligations
Negotiated Settlement (composizione negoziata) (Arts. 12-25-quinquies BCIC) is a voluntary, confidential and out-of-court settlement that can be accessed through an online platform by any company experiencing financial or economic instability, where distress or insolvency are likely, but where recovery is still feasible. Negotiated Settlement is carried out under the supervision of an independent expert supporting in the negotiations to recover economic and financial stability. Appointing the expert does not entail opening a proper restructuring process, nor results in any divestment of the assets of the company, whose directors continue to deal with the ordinary and extraordinary course of business (and may, for instance, also make payments or seek super-priority loans upon court application). Company management is to be carried out so as not to jeopardise the economic and financial sustainability of the business and "in the overriding interest of creditors" in the event of emerging insolvency.
Several measures make it possible to preserve the company’s position and encourage the use of this tool, including: (a) a stay of recapitalisation obligations and of the causes of dissolution in the event of reduction or loss of share capital and (b) the possibility for the company, when appointing the expert or at a later stage, to seek asset protection orders from the court. All these measures must be published in the Company Registry, thus partly surrendering the confidential feature of the Negotiated Settlement. Another focal aspect is the encouraged active role of financial institutions, who by law are invited to “actively” participate in the negotiation process.
Negotiations may lead to the implementation of agreements and resolution instruments suitable to overcome distress; otherwise, the company may seek access to the creditor arrangement tools provided by the Insolvency Code as further discussed below – i.e. composition with creditors, new ‘simplified’ composition with creditors, and debt restructuring agreement.
To facilitate a timely crisis resolution, reporting obligations have been introduced for company supervisory bodies, now required to report to the company administrative bodies on the existence of the conditions to access Negotiated Settlement.
In addition, so-called "qualified public creditors" must report to the company administrative bodies when the company exceeds certain thresholds of exposure – as set forth in Art. 25-nonies BCIC – and invite the company to enter into a Negotiated Settlement if the relevant conditions are met.
In any case, no report can make it mandatory for a company to enter into Negotiated Settlement, which remains an exclusively voluntary tool.
Debt Restructuring Agreements And Turnaround Plans
The most relevant innovations regarding Debt Restructuring Agreements had already been implemented by the latest amendments to the IBL, with the introduction of ‘Simplified’ Restructuring Agreements (accordo di ristrutturazione agevolato), now regulated under Art. 57 BCIC, and Restructuring Agreements with Cram Down on Certain Creditors (accordo di ristrutturazione a efficacia estesa), now regulated under Art. 61 BCIC. Namely:
- a ‘Simplified’ Restructuring Agreement has the benefit of reducing the quorum for creditor consent: the agreement must be approved by creditors representing 30% of indebtedness (as opposed to 60% in ordinary Debt Restructuring Agreements) as long as the company (i) has not submitted a ‘blank’ petition for composition with creditors or applied for other temporary safeguard measures; and (ii) creditors not adhering to the agreement are paid without delay;
- a Restructuring Agreement with Cram Down on Certain Creditors allows to extend the main provisions of the agreement to ‘dissenting’ creditors.
In addition, also so-called ‘non-commercial’ entrepreneurs (imprenditore non commerciale) are allowed under certain conditions to restructure their indebtedness by implementing a debt restructuring agreement.
The rules governing Turnaround Plans (piani attestati di risanamento) largely replicate those set forth by the former IBL, except for few minor amendments. One main innovation is the opportunity for a distressed entrepreneur or company to seek for a Turnaround Plan as long as the financial distress is recoverable.
Restructuring Plan Subject to Court Certification
The Insolvency Code offers a new tool: the Restructuring Plan Subject to Court Certification (piano di ristrutturazione soggetto a omologazione) at Art. 64-bis and ff. BCIC.
In the context of this tool, characterised by increased flexibility while safeguarding creditors’ interests, the general rules on payments/distribution to creditors are not applicable and
- the restructuring plan need not abide to Art. 2740 ICC providing for the allocation of the entire present and future assets to satisfy creditors, nor to Art. 2741 ICC providing for the equal treatment of creditors principle (par condicio creditorum);
- the plan must contemplate different classes of creditors, taking into account their legal position and respective economic interests; and
- employees’ claims are to be satisfied within 30 days from court certification.
In the process, ordinary and extraordinary management is dealt with by the company directors, provided that management shall be conducted in the predominant interest of the creditors and under the supervision of a judicial commissioner (commissario giudiziale). On the other hand, the plan is subject to in-depth court scrutiny. Notably, plan approval entails either a favourable vote by all classes of creditors by absolute majority, or by two thirds of the voting members, provided that creditors representing the value of at least half of the claims of the same class took part to the vote (an innovative voting mechanism newly introduced by the BCIC).
Composition with Creditors
The structure of the Composition with Creditors tool (Arts. 84-120 BCIC) largely reflects the one formerly established by the IBL, allowing financially distressed or insolvent companies to propose a plan requiring creditors’ approval. If protective measures are explicitly requested to and granted by the court, enforcement/recovery actions by prepetition creditors are barred since filing the petition. Also, to ensure supply continuation, prepetition creditors cannot unilaterally refuse to perform pending contracts or terminate them merely because of unpaid previous claims (Art. 18 BCIC).
The process entails that the plan is to be voted and approved by the majority of creditors, certified by the court and implemented. In the meantime, company management is handled by the directors under the supervision of a judicial commissioner, and acts of extraordinary administration require court approval.
The new Insolvency Law gives greater emphasis to business continuation and going concern as opposed to asset liquidation, although providing for two types of Composition with Creditors:
- Composition with Creditors with business continuity on a going concern basis (either directly or indirectly) – In this case, the creditor arrangement plan must be certified by an independent expert assessing how the business going concern can best satisfy the interests of creditors. The plan must contemplate different classes of creditors, based on their legal position and respective economic interests. Satisfaction of creditors’ claims may not necessarily derive, first and foremost, from the proceeds of the business going concern;
- Composition with Creditors with asset liquidation purposes (residual solution) – In order to promote business continuation, this is permitted only if the company’s available assets increased (by means of external resources) by at least 10% with respect to a judicial liquidation scenario, and in any case amount to not less than the 20% of the outstanding indebtedness. The external resources can be allocated without observing the absolute priority rule.
Partially derogating from the absolute priority rule, the value deriving from asset liquidation must be allocated to creditors according to the absolute priority rule, whereas the surplus stemming from the business going concern may be allocated to creditors according to the relative priority rule. The applicability of the relative priority rule means that it is sufficient to satisfy the claims included in a class with a treatment at least equal to that of the classes of the same rank and more favourable than that of the classes of a lower rank.
A ‘blank’ petition for Composition with Creditors (concordato ‘in bianco’ o prenotativo) may also be submitted, through a petition undertaking to put forward a full composition proposal and plan within a 30/60-day period as set by the court, which can be extended by an additional 60 days for justified reasons. If protective measures are explicitly requested to and granted by the court, the petitioner is protected from enforcement/recovery actions by prepetition creditors since filing the petition and prepetition creditors cannot unilaterally refuse to perform pending contracts or terminate them.
The Insolvency Code also introduced ‘minor’ composition with creditors (concordato minore), a simplified procedure for the composition of small businesses.
Judicial Liquidation (bankruptcy)
Under the Insolvency Code, Judicial Liquidation (liquidazione giudiziale) replaces the "old" bankruptcy procedure (fallimento) as established under the IBL, a procedure fully aimed at liquidating the assets of an insolvent entrepreneur or company (Arts. 121-283 BCIC).
The main novelty lies with the change of terminology: following a change already made in several European countries, the Italian legislator has chosen to title the process with more neutral qualifications by no longer employing the term ‘bankruptcy’, historically oozing a besmirching connotation. Beyond this, the idea behind the reform is to shift from a distress regulation system centred upon asset liquidation – a role held unchallenged for more than sixty years, and already partially mitigated with the 2005 and 2006 bankruptcy law reforms – by promoting crisis regulation procedures encouraging business continuation and recovery where feasible, and are based on an increased autonomy of the market players. The ‘residual’ role of judicial liquidation can be inferred both from Art. 7 BCIC – prioritizing restructuring tool applications as opposed to judicial liquidation – and from the choice to place the provisions on judicial liquidation after those governing restructuring tools in the new Insolvency Law.
The innovations to the ‘old’ bankruptcy are designed to simplify and speed up the process, with the following remarkable features:
- a greater centrality of the role of the receiver, who has the capacity to bring liability actions autonomously, without the need to wait for creditors’ committee advice and for court authorization; moreover, new disclosure requirements have been introduced for the receiver, who must now keep and regularly update a registry that can be accessed by the court and by creditors' committee;
- the anticipation of the look-back period (periodo sospetto) for claw back actions to the time of submission of the bankruptcy petition (no longer from the opening of the bankruptcy);
- amendments of the role of the creditors' committee, which is no longer necessary in minor procedures and simplified in the judicial liquidation;
- the extension of the scope of application of the insolvent’s discharge, in accordance with the so-called "fresh start" rule.
The Insolvency Code encompasses significant innovations on financial crisis management in corporate groups (Arts. 284-292 BCIC), with a view to addressing distress affecting all or some companies belonging to the same group from a unified perspective.
A group is identified through the concept of ‘direction and coordination’ per Art. 2497 ICC, and defined as a set of companies, enterprises and entities subject to the direction and coordination of one company, entity or person.
As to group access to restructuring tools, distressed companies belonging to a group shall submit:
- a single request (a) for the admission to a joint composition with creditors or (b) for the approval of a debt restructuring agreement; and
- stand-alone requests concerning each group entity but with disclosure requirements for the various other entities involved, so as to ensure cooperation among the various proceedings.
In situations where several companies belonging to the same group become insolvent, a unitary judicial liquidation process can be opened.
As provided by Art. 390 BCIC, the Insolvency Code applies from 15 July 2022 onwards, whereas any insolvency/restructuring proceeding initiated before (and still pending on) 15 July 2022 keeps on being regulated by the IBL.
Several Insolvency Code provisions need still be properly implemented by the adoption of executive measures. Stay tuned for updates on the next steps of the “revolution”!
Authored by Pierantonio Musso, Filippo Chiaves, Giulia Vettori, and Federico Pappalettera.