The Business Crisis and Insolvency Code (Legislative Decree No. 14/2019, the “Crisis Code”) issued within the framework of Law No. 155/2017 should come into force on September 1, 2021. The original entry into force was scheduled for mid-August of 2020; due to the epidemiological emergency caused by Covid-19, the deadline was postponed to September 1, 2021 by Art. 5 of Decree-Law No. 23/2020.
In the meantime, the legislature, with Legislative Decree No. 147/2020, issued corrective and supplementary provisions to the Crisis Code. Moreover, on April 22, 2021, the Ministry of Justice issued an order setting up a commission of experts, who are currently reviewing the Crisis Code (their work should be concluded by June 30) in light of the urgent problems posed by the current economic and financial situation; this may lead to partial postponement of the abovementioned date for the code’s entry into force.
Recently, a debate started regarding the critical issues that could arise, on the one hand, from the immediate applicability of certain provisions of the Crisis Code in the economic and social context resulting from the ongoing health crisis in Italy and, on the other, due to the lack of clarity and apparent contradictions between the Crisis Code and EU Directive 1023/2019 on preventive restructuring frameworks (“Directive”). The latter was issued on June 26, 2019 and must be adopted by Member States by July 17, 2021. The Directive introduces the obligation for each Member State to provide a mechanism to facilitate the preventive restructuring of a company when there is a likelihood of insolvency. These issues should be remedied by the commission of experts appointed by the Ministry of Justice, which has been entrusted first and foremost with the task of drawing up and assessing, on a technical level, proposals for intervention in the Crisis Code. Such proposals may amend some of the provisions related to the ongoing health emergency and improve coordination between the regulations dictated by the Crisis Code and Directive 1023/2019 with temporary effectiveness, limited to the current timeframe.
The Directive aims to facilitate preventive restructuring of a company potentially exposed to a state of insolvency by providing what are known as “early warning tools.” In order to achieve this, a goal clearly outlined in the original text of the proposal for the Directive dated November 22, 2016, the Crisis Code introduced an alert into the Italian legal system. The regulations governing the alert take as their premise the obligation for all entrepreneurs to organize their companies in such a way as to enable timely detection of a state of crisis so that appropriate steps may be taken.
However, such preventive alert mechanisms are not compatible with the current economic situation, as many companies face financial situations that may require them to resort to preventive restructuring. Recital 24 of the Directive stresses that the restructuring scheme should be available before a debtor becomes insolvent under national law—the point when insolvency normally involves the appointment of a liquidator and the total discharge of debt. A mere likelihood of insolvency existing is therefore enough to serve as an objective prerequisite for access. The Crisis Code is aligned with this clarification from the European legislature, because it establishes a “state of crisis” as a condition for entry into the preliminary arrangement. That is defined as a state of economic and financial difficulty that makes insolvency “likely” (Art. 2, letter a). Furthermore, Art. 15 of the Crisis Code provides what is known as an “external alert.” The external alert imposes reporting obligations upon the Fiscal Authority, the INPS, and the debt recovery agent when a company’s debt standing exceeds certain thresholds. Failure to report may lead to sanctions related to loss of debt privilege. The report must be filed first with the business and then with the OCRI, which will convene a hearing for the debtor.
Because the moment of economic crisis that we are experiencing finds so many businesses in distress, the commission appointed by the Ministry of Justice should also take into account the current historical context and evaluate measures that mitigate the immediate surpassing of thresholds beyond which external alert mechanisms are triggered.
Which businesses may access the preventive restructuring procedure?
The Directive does not offer a basic definition of the “debtor” who, pursuant to Article 4, is entitled to employ the preventive restructuring procedure. However, Art. 1, paragraph 2, letter h) specifies that the Directive does not apply to certain types of companies (for example, banks, insurance companies, collective investment companies), nor does it apply to natural persons who are not business owners.
Since, according to the Crisis Code, the preliminary arrangement is applied to commercial businesses exceeding the threshold and the restructuring agreements follow the same rules—though there is still uncertainty about applicability to agricultural businesses—it follows that, in order to verify that the regulations dictated by the Crisis Code comply fully with the Directive, it is also advisable to observe the procedures for composition of crisis and insolvency provided for commercial businesses below the threshold and for agricultural businesses. In practice, this is the minor arrangement governed by Articles 74 and following of the Crisis Code.
One discrepancy arises from the failure to form classes for the minor composition arrangement, and although it is true that the Directive allows Member States to exclude SMEs from the obligation to form classes, this exception addresses the issue of the minor composition arrangement’s compatibility with the Directive in the case of businesses below the threshold, but not in the case of agricultural enterprises, which can be rather large and for which the Italian legislature does not establish rules linked to size.
Regardless of any possible contradiction of the Directive, the new regulations covering the preliminary arrangement present some critical issues for debtors who would like to access it. Pursuant to Article 39, a debtor must file a report summarizing the extraordinary administration operations referenced in Article 94, paragraph 2 that were carried out in the five years prior to the start of the proceeding.
The appointment of a judicial administrator
The appointment of a judicial administrator is mandatory in the case of an application for preliminary arrangement with creditors and may also take place in the case of restructuring agreements where the application for approval has been preceded by a request from creditors to open judicial liquidation.
Article 5, paragraph 2 of the Directive states, “Where necessary, the appointment by the judicial or administrative authority of a professional in the field of restructuring shall be decided on a case-by-case basis, except in certain situations where Member States may always require the mandatory appointment of such a professional.” Accordingly, the appointment of a professional to carry out supervisory functions or to assume partial control of current operations should be decided on a case-by-case basis according to the specific circumstances or needs of the debtor. However, Article 5 and the recital deem that Member States may require the appointment of a professional in the following scenarios: when the debtor benefits from a general stay of individual enforcement actions; when the restructuring plan must be approved by means of transversal debt restructuring; when the appointment is requested by the debtor or by a majority of the creditors, provided that the creditors cover the costs and fees of the professional.
In summary, the rules dictated by the Directive are in conflict with those provided by the Crisis Code in the case of a preliminary arrangement, because there the appointment of a commissioner is always compulsory, and in the case of a restructuring agreement the appointment is compulsory when there are pending petitions for judicial liquidation.
The Directive allows an exception to the criterion of appointment on a case-by-case basis when “a general stay of individual enforcement actions is granted by a judicial or administrative authority and that authority decides that such a professional is necessary to protect the interests of the parties” (Art. 5, para. 3).
In the event of a preliminary arrangement governed by the Crisis Code, the general stay of enforcement actions automatically follows the submission of the application for an arrangement, provided that the debtor has made a request (Art. 54, par. 2) and, in accordance with Art. 55, the judge, after reviewing summary information, if necessary, confirms or revokes the protective measures with a decree, establishing their length within thirty days of the entry of the application in the Company Register. Although this is similar to the scenario envisioned by the Directive, there is a significant difference: the appointment of the administrator, compared to what is foreseen by the Directive, is not linked to the granting of a stay of enforcement actions and does not require a case-by-case assessment of the need for the expert to protect the interests of the parties. The appointment remains automatic. The judge can only confirm or deny the stay of enforcement actions.
Thus, automatic appointment as part of the application for approval of restructuring agreements, where judicial liquidation applications are pending, also falls outside the system provided by the Directive, since the Directive says that such an appointment must be made only in certain specific scenarios, where the protection of the interests of the parties requires it, while the Italian legislature decided to expand the appointment of the administrator by providing it additionally in cases where there is only an application for an arrangement with reserve.
Approval of the restructuring plan
Generally speaking, the Directive provides two mechanisms for approval of an alternative restructuring plan: pursuant to Art. 9, the restructuring plan is adopted by the parties concerned without the need for judicial approval (except in the cases expressly listed), as long as a majority of the credit or interest amount is reached in each class, without prejudice to the possibility for Member States also to require a majority by head count (Art. 9). The majority required may not exceed 75% of the amount of credits or interest in each class or, where applicable, the number of parties involved.
Alternatively, Art. 11 regulates a cross-class cram down, which, since it does not provide the need for approval by all classes, requires the approval of the plan by the judge when there is a proposal submitted by the debtor or with the debtor’s consent. Approval may then also be binding on dissenting voting classes if the plan has been approved (i) by a majority of the voting classes of interested parties, provided that at least one of them is a class of secured creditors or ranks higher than the class of unsecured creditors, or (ii) “by at least one of the voting classes of interested parties or, if provided for by national law, parties suffering prejudice, other than a class of equity holders or other class that, according to an assessment of the debtor as an ongoing company, would not receive any payment or retain any interest.”
Moving on to the Crisis Code, Art. 109 establishes that the preliminary arrangement must be approved by a majority of the credits admitted. The majority by value is added to the majority by number in the event that a single creditor holds credits in excess of the majority of the credits admitted to vote. In the event that there are several classes of creditors, it is also necessary that the majority of the credits admitted to vote is reached in the greatest number of classes.
The contrast with the Crisis Code is clear. The Crisis Code does not provide the establishment of compulsory classes, except in certain specific circumstances set out in Art. 85, para. 5. The Directive provides that the classes are compulsory, at least by way of distinguishing secured and unsecured creditors. On this point, refer to recital 44, according to which “secured and unsecured creditors should always be treated in separate classes. Member States, however, should be able to require that more than two classes of creditors be constituted, comprising different classes of unsecured or secured creditors and classes of creditors with secondary credits.”
The Crisis Code will have to be amended—otherwise Art. 85, para. 5 will be implicitly repealed due to its inconsistency with the Directive.
Accordingly, the new Crisis Code deserves careful review in order to make the new provisions consistent with the rules laid down by the Directive. In addition, some improvements to the current Crisis Code may be worthwhile. For instance, those might include an explicit set of rules for recognition in Italy of insolvency proceedings undertaken outside the EU.
