While waiting for the new crisis and insolvency code (the “Bankruptcy Code”) to come into force, in August 2021 the Italian government released yet another installment in the saga of the reform of Italian bankruptcy law. Law Decree 118/2021 (the “August Decree”) amends a few sections of the Italian bankruptcy law (Law 267/1942: “Italian Bankruptcy Law”) and with immediate effect implements certain tools of the Bankruptcy Code that the government deemed urgently needed in the post–Covid-19 economy.
The current status of the legal framework for insolvency
Before addressing the August Decree, it is helpful to summarize the current legal framework for insolvency in Italy.
Currently, insolvency in Italy is still governed by the Italian Bankruptcy Law, in force since 1942. Over the last 15 years, the Italian Bankruptcy Law has been amended radically to favor restructuring insolvent companies over liquidation.
In early January 2019, the Bankruptcy Code was enacted to repeal the Italian Bankruptcy Law and provide a new, modern, and comprehensive set of rules governing the subject of insolvency and financial crises among commercial businesses. The Bankruptcy Code was due to come into force in July 2020. As a consequence of the Covid-19 pandemic and its severe impact on the economy, the Code’s entry into force was postponed first to September 1, 2021 and then, with the August Decree, to May 16, 2022 (with the exception of the provisions on early restructuring, which will take effect on December 31, 2023).
The August Decree: An overview
To understand the impact of the August Decree on the Italian Bankruptcy Law (currently in force) and on the Bankruptcy Code (to come into force in 2022–2023), a quick glance at the following may be helpful:
- under the current Italian Bankruptcy Law, distressed businesses have access to four procedures: reorganization plans (“piani di risanamento”); debt restructuring agreements (“accordi di ristrutturazione”) sanctioned by bankruptcy court; in-court scheme of arrangements with creditors (“concordato preventivo,” also sanctioned by bankruptcy court), which may result in the recovery of the business or its liquidation; and bankruptcy (“fallimento”), which necessarily results in the liquidation of the business;
- in addition to substantially amending and modernizing extant measures, the Bankruptcy Code implements a fifth procedure, which logically and chronologically falls before those available under the Italian Bankruptcy Law: early restructuring (“composizione assistita della crisi”), which incorporates the provisions of the “early warning system” (“sistemi di allerta”).
Essentially, the August Decree works in two directions: first, it moves to December 2023 the entry into force of the set of rules on early restructuring (articles 11 through 25 of the Bankruptcy Code) and replaces those with an early restructuring system due to be in force until the Bankruptcy Code becomes effective (December 31, 2023); second, it amends the Italian Bankruptcy Law by introducing, with immediate effect, certain tools set forth in the Bankruptcy Code (namely, those relating to debt restructuring agreements) — those, too, are due to stay in force until December 31, 2023. In other words, the August Decree complements the Italian Bankruptcy Law with a set of interim rules on early restructuring and amends the Italian Bankruptcy Law insofar as debt restructuring agreements are concerned.
A distressed debtor that fears its economic or financial conditions may escalate into financial crisis or full-blown insolvency but whose business has a reasonable likelihood of recovery may file an application with the local Chamber of Commerce asking an expert to be appointed. The task of the expert is to assist the debtor in recovering from distress while staying in business. In particular, the expert will be asked to facilitate negotiations between the debtor and its creditors in order to reach an amicable settlement and allow early recovery of the business. A viable restructuring plan must be in place within 180 days of the expert’s appointment (but this deadline may be extended under certain circumstances).
Interim protective measures are also available to the debtor (stay of any foreclosure action or bankruptcy declaration) for a maximum period of 120 days (this period, too, may be extended under certain circumstances).
The debtor maintains responsibility to run its business in the ordinary and extraordinary course of business (with a duty to inform the expert about transactions falling under the extraordinary course of business). Prior approval of the bankruptcy court is required only for certain actions — namely those that may have a material impact on the debtor’s ability to pay pre-filing creditors (such as taking on super-senior debts) or on the business in general (such as selling the business or parts thereof).
A company may apply for early restructuring as a standalone or as part of a group of companies.
If successful, the early restructuring procedure may end with any of the following: a reorganization plan, a standstill, or one or more debt restructuring agreements with the creditors. If it is not successful, the debtor may undertake any of the already existing insolvency proceedings or the “simplified” scheme of arrangement provided by the August Decree.
If early restructuring is not successful and the debtor becomes insolvent, safe harbor is provided for all transactions entered into by the debtor during early restructuring or previously authorized by the bankruptcy court. As a consequence, all such transactions are valid and enforceable and exempt from clawback (except those about which the expert expressed a negative opinion) and do not give rise to any criminal liability.
Recourse to early restructuring is incentivized by giving the debtor certain benefits in relation to tax debts, such as waiving interest and the right to apply for repayment plans on more favorable terms.
While the early restructuring of the Bankruptcy Code includes what is known as the “early warning system” (designed to alert the debtor that its economic and financial conditions are deteriorating), that of the August Decree does not. The rationale for that is that under the exceptional circumstances created by Covid-19 a system of early warnings would force a huge number of businesses to apply for insolvency protection.
Amendments to certain provisions of the Italian Bankruptcy Law governing standstill agreements, debt restructuring agreements, and schemes of arrangement
As mentioned, the August Decree amended certain provisions of the Italian Bankruptcy Law to reflect (and give immediate effect to) certain new features introduced by the Bankruptcy Code. These amendments are:
- cram-down of creditors: while debt restructuring agreements so far have been binding only on the creditors party to the agreements (except for banks, which already had access to cram-down), article 182 septies of the Italian Bankruptcy Law provides that its effects are extended to creditors that are not party to the agreements and belong to the same class, provided that their claims in the aggregate represent no more than 25% of the claims of the creditors belonging to the same class (with that threshold increased to 40% for debt restructuring agreements following early restructuring);
- the same cram-down applies to standstill agreements;
- lower quorum: when certain requirements are met (such as that the creditors have not applied for interim measures, like a stay of proceedings), the quorum to approve debt restructuring agreements goes down from 60% to 30% of the aggregate claims of creditors;
- term for the payment of secured creditors in a scheme of arrangement is extended from one to two years, since the system is sanctioned by the bankruptcy court.