Important novelties to italian bankruptcy law

3 December 2015
Law Decree No. 83/2015 dated 27 June 2015 introduced some important novelties to Italian Bankruptcy Law (“IBL”).  It is only the last of several reforms that started in 2005 inspired by the same principle: shifting the focus of insolvency law from the liquidation of the insolvent enterprise to its recovery through a financial restructuring and/or turnaround of industrial operations.

Under this perspective, the main changes introduced by the new law are to the bankruptcy procedures known as “court settlements” (“concordati preventivi”, i.e. settlements approved by the creditors representing the majority of the claims – but binding on all creditors – and confirmed by the court) as well as debt restructuring agreements pursuant to Art. 182 bis IBL (i.e. agreements entered into by the debtor with creditors representing no less than 60% of the aggregate claims and binding only for those creditors).

1. Interim financing (Art. 182 quinquies IBL): This is the ability of the debtor to obtain from banks (or other third parties, including the shareholders) new financing (ranked senior to all other claims) at the time that the application for a court settlement is filed (but before the court approves the application).  Recourse to senior interim financing, previously authorized by the court, was already possible prior to the new law, provided that an expert would attest to the fact that interim financing was instrumental to the most effective satisfaction of the interest of the creditors.  With the new law, no attestation of an expert is required, as long as the debtor gives evidence that, pending the procedure for the approval of the application, interim financing is urgently needed to prevent serious and non-remediable harm to the company.  The court is required to grant (or deny) its authorization within ten days.  No such form of interim financing “as a matter of urgency” is possible after the actual court settlement procedure starts (i.e. after the court decides on the application for court settlement filed by the debtor).

2. Competitive bids from third parties (Art. 163 bis IBL):  Proposals for court settlements are frequently predicated on the prospective sale of some or all of the debtor’s assets to a third party, whereby all terms and conditions of the sale are already agreed and evidenced in an offer (which is usually attached to the application submitted to the court).  In such scenarios, the debtor proposes to pay off its creditors from the proceeds of the sale of assets in accordance with the terms of the offer attached to the application.  It was customary that, despite the existence of a binding offer for the purchase of the assets, the court would require the debtor to launch a call for tenders.  The reason for this was to stimulate competition and elicit better offers from other competitors.  The recent law translates this customary practice into law:  if an application for court settlement is filed and it provides that creditors are to be paid out of the proceeds of the sale of assets pursuant to a specific offer, the court is required to launch a competitive tender process.  The offers are disclosed at a hearing and, if needed, a competitive bid process takes place.

3. Competitive bids from creditors representing no less than 10% of the aggregate claims (Art. 163(4)-(7) IBL):  Before this new law, only the debtor had the right to initiate a court settlement proceeding.  The new law provides that, when a proceeding is initiated by a debtor, creditors may also present competing plans for court settlement, provided that they represent no less than 10% of the aggregate claims and that, according to the court settlement plan proposed by the debtor, unsecured creditors are paid less than 40% of the face value of their claims (or 30% in cases of court settlement providing for the continuity of the business).  This new tool balances the power of the debtor by giving the creditors a more proactive position in planning the solution to the insolvency of the debtor. Again, competition, not only of offers but also plans for court settlement, is seen as a way to reach a higher degree of satisfaction amongst creditors.

4. Pending agreements (Art. 169 bis IBL):  The debtor is given the right to ask the court to suspend, for no more than 60 days, or terminate altogether the agreements in force at the time the application is made.  Termination will be authorized in cases of agreements whose continuation is likely to worsen the economic conditions of the debtor.  The other party is only entitled to compensation for breach of contract.

5. Debt restructuring agreements with banks (Art. 182 septies IBL):  The overall discipline of the debt restructuring agreements (Art. 182 bis IBL) has been materially changed in all cases where the claims of the banks and other financial intermediaries account for more than 50% of the aggregate liabilities of the debtor.  In summary:

(a)    Cram-down: Creditors may be divided into classes based on homogenous interests: if the agreement is approved by creditors representing 75% of the claims in each class and all other creditors of the same classes have been informed of the proposed agreement and have been given the opportunity to take part in the negotiations, then the agreement, once signed, is binding for all creditors belonging to the same classes (even for those who did not sign it).

(b)   Cram-down of stand still agreements:  If a stand still agreement is reached with banks representing 75% of the claims of banks and all other banks have been informed of the proposed terms of the stand still, and have been given the opportunity to take part in the negotiations, then the agreement, once signed, is binding on all banks.

Among the various other changes brought into effect by Law Decree No. 83/2015, it is worth mentioning the last clause added to Art. 160 IBL.  According to this new clause, in cases of plans for court settlements where prosecution of the business activity is not contemplated, unsecured creditors are required to be paid no less than 20% of the face value of their claims.  This new clause is aimed at eliminating the misuse of court settlement plans that has often occurred in the past, where debtors sometimes would get away with paying unsecured creditors ridiculously small percentages of the claims (such as 2% or 3%), thereby shifting the largest part of the burden of the settlement onto the unsecured creditors.

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