A safe harbor for insolvency buy-outs

Distressed situations in Italy are often resolved by selling the business as a going concern (“cessione di azienda”) to third party investors (whether strategic investors or sponsors specializing in special situations) as part of insolvency proceedings (often a concordato preventivo, or creditors’ voluntary arrangement). Usually these transactions are done in two steps: pending the insolvency proceedings, investors first lease the business to ensure the continuity of operations; once the insolvency proceedings are concluded, the lease automatically terminates and the business is purchased under the protection of insolvency law (no claw back action, pre-filing debts are cleared, etc.).  The selling company, insolvent, is then liquidated with the proceeds from the sale of the business.

This is so in spite of the fact that the insolvency law is more “creditors’ friendly” than “investors’ friendly”, in that it is more careful in protecting the interests of the creditors than the interests of special situation investors to carry out a quick purchase and a quick turnaround of the business. The Italian Bankruptcy Law currently in force and the new Code on Corporate Insolvency (due to come into effect in August 2020) require that any sale of a business in insolvency proceedings takes place through a system of competitive bids. The assumption is that the interest of the creditors is better served by placing the distressed business on the market and allowing investors to place competing bids that ensure the business is sold at the highest price (pursuant to a “sale auction mechanism”: Article 163 bis of Italian Bankruptcy Law).  Although this may be true in theory, in practice it makes the sale of an insolvent business more difficult due to a number of reasons. For example, launching a competitive bidding process takes time, which often frustrates the possibility of making a quick sale (and consequent turnaround) of the business. In addition, investors who invest time and resources into keeping the business alive by leasing it pending the completion of the proceedings may see last-minute bidders step in and take away the business from them, thereby frustrating their expectation to eventually buy the business.

Some relatively recent case law, however, offered a new perspective for insolvency buy outs. Judgments issued by the Court of Milan (13 June 2017 and 13 December 2018), the Court of Monza (31 October 2018) and the Court of Forlì (25 February 2019) created a sort of “safe harbor” that may make the life of special situation investors easier, quicker and safer. The Courts held that no competitive process is required in the case where the investor acquires the business by “assuming” all assets and all liabilities of the distressed company (“concordato con assuntore”).  As opposed to a “sale and purchase deal” (“concordato con cessione dei beni”), where the investor essentially buys the business assets (and associated contracts) for a consideration (the price of which is then used by the insolvent company to pay off its creditors), in a concordato con assuntore the investor accepts all of the assets and all of the liabilities and undertakes to pay the creditors up to a certain amount (equivalent to the purchase price) based on certain percentages of the face value of the claims.

The Courts held that a proposal of concordato con assuntore cannot form the basis on which a Court may elicit competing proposals because of the inherently different nature of a concordato con assuntore as opposed to a concordato con cessione dei beni.  Essentially, launching a competitive bidding procedure on a concordato con assuntore would be equivalent to launching a new proposal of concordato altogether, something which is allowed by law in very limited cases and, in any event, only on the initiative of creditors holding no less than 10%  of the claims (Article 163(4) of the Italian Bankruptcy Law).

So, drawing upon these judgments, the safest way to acquire a distressed business from a concordato is to submit an offer of concordatore con assuntore.  There is just one caveat: once an investor accepts all assets and liabilities of the distressed business, it also becomes liable for debts that are not known at the time of the purchase.  In other words, the risk of pre-filing contingent liabilities rests entirely on the buyer.

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