Main amendments to the Italian Bankruptcy Code
In one of its latest legal decrees, the Italian government has significantly amended the Italian Bankruptcy Code (legge fallimentare) along with a number of other measures aimed at encouraging economic growth.
The main changes concern procedures related to the execution of restructuring agreements (i.e. the concordato preventivo and the accordo di ristrutturazione dei debiti). The differences between the captioned procedures can be summarized by the fact that (i) the first provides for more intensive intervention and control by the bankruptcy court, and that the relevant agreement is valid and binding for all creditors of the distressed company (even those dissenting), while (ii) the latter is instead characterized by the fact that the agreement binds the distressed company and only those creditors entering into the restructuring agreement.
The main objectives of the aforementioned reform are: (i) to encourage rapid detection of corporate crises, and (ii) to remedy some problems of interpretation and application posed by the former text of the Bankruptcy Code with respect to restructuring procedures.
These procedures had indeed some cons given by the original provisions of the applicable law, such as the lack of specific regulation covering reorganization plan and conflicts of interest amongst the auditors hired for the drafting of the restructuring plan, and the inadequate protection of a distressed company entering into a restructuring procedure in the period from the beginning of its economic/financial crisis to the admission to the restructuring procedure by the competent bodies.
Specifically, with respect to the concordato preventivo, the main changes are as follows:
- In view of facilitating access to this kind of procedure, it is now permitted to submit a claim of admission to this restructuring procedure without filing at the same moment the restructuring plan and other documents required by the law (the filing will be postponed to a later date). This innovation was inspired by Chapter 11 of the US Bankruptcy Code.
- In order to facilitate a regular flow of supplies and financing after the filing of the above claim of admission to this restructuring procedure, the law now states that relevant payments and refunds cannot be challenged by an “action to set aside” by the trustee in case of following bankruptcy of the distressed company to be restructured.
- In order to protect the debtor from lawsuits brought by creditors during the restructuring procedure, interim actions are now prohibited (whereas, before the introduction of the reform, only enforcement actions were forbidden).
- For the first time, the outstanding contracts entered into between the distressed company and third parties are now subject to specific regulation in the concordato preventivo. The debtor is allowed to terminate these contracts in case of specific authorization given by the bankruptcy court. In this case the debtor must only pay compensation to the opposite party. This measure is aimed at eliminating those agreements which, due to their non-profitability or excessive burden, might jeopardize the aims of the restructuring process itself.
- With a view to encouraging reorganization rather than liquidation plans, the concordati regarding business continuity are now specifically regulated. In this regard the main innovations concern the opportunity to participate in tenders aimed at entering into contracts with public bodies, the inapplicability of clauses involving the termination of a contract following a corporate crisis and the possibility to postpone for a year the payment of privileged creditors.
Concerning the accordo di ristrutturazione dei debiti, the most remarkable development is the provision that the more convenient tax treatment of the concordato preventivo is also now applicable to alternative restructuring agreements.
Furthermore, the reform introduced some positive developments regarding both the concordato preventivo and the accordo di ristrutturazione dei debiti:
- New and stronger independence requirements are now necessary for auditors engaged in attesting the feasibility of the restructuring plan. This innovation is designed to prevent cases of conflict of interest between auditors and the debtor. For the same reason criminal sanctions are available for use against auditors issuing false statements or omitting important information while attesting the feasibility of restructuring plans.
- During the aforementioned restructuring procedures, laws concerning the restoration of corporate capital in the case of losses are not applicable. This innovation was designed to give distressed companies time to prepare a restructuring plan without the pressure of compliance with the deadlines set by the rules and, above all, to eliminate the requirement to spend the money necessary to increase corporate capital after losses (which might immediately jeopardize any re-launch or restructuring).
Thanks to the corrective changes outlined in this article we can reasonably argue that the way of restructuring will increase in the next years, aligning Italy with those countries where such procedures originated and have long worked efficiently. This is certainly a positive sign considering the severity of the global economic crisis and the pressing need to avoid a proliferation of bankruptcies, which would seriously damage the economic fabric of Italy.
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