Data collected at the beginning of 2019 in Italy (source: Cerved) highlights a positive trend with respect to the number of bankruptcy proceedings (down 6.5% compared with the first quarter of 2018), in line with a longstanding trend on the national scale. The opposite, however, applies to certain regions, including Northeast Italy. There has been a 25% increase in the use of judicial composition with creditors (concordato preventivo) compared with the same period in 2018.
On an industry-by-industry basis, based on available data for the first quarter of 2019, the transportation and fashion industries are those showing a higher incidence of distressed companies, whereas there has been a slight improvement in the construction industry. There has also been a decrease in composition procedures in the services sector.
The average length of bankruptcy proceedings (fallimenti) is around seven years, whereas the length of the judicial composition with creditors is around five years. The average length of out-of-court restructuring proceedings is between three and five years.
One of the major changes to the Italian debt restructuring market is the increased use of complex distressed M&A/distressed investment structures. An increasing number of investors opt to buy bank debt relating to companies in distress to then restructure then debt (mainly through consensual debt restructuring arrangements).
Italian insolvency law has undergone extensive reform and change.
Historically, the statutory framework for insolvency related procedures was set out in Italian Royal Decree No 267 of 16 March 1942 (the Bankruptcy Law), as amended from time to time, and as supplemented by specific legislation introducing other specific procedures.
To date, the Bankruptcy Law includes five types of procedures/tools applicable to companies in distress:
Additional procedures set out in specific legislation include, in particular, the extraordinary administration procedure for large insolvent enterprises (procedura di amministrazione straordinaria per le grandi imprese in stato di insolvenza) under Italian Legislative Decree No 270 of 8 July 1999 (also known as the Prodi-bis Decree) and the “special” extraordinary administration procedure for materially significant distress under Italian Legislative Decree No 347 of 23 December 2003 (also known as Marzano’s Law).
Finally, with the enactment of law No 3 of 27 January 2012, the Italian legislature has closed a loophole in the legislation by introducing composition procedures applicable to persons excluded from the scope of the Bankruptcy Law (in particular, small businesses, farmers and consumers). Please note, however, that this article will not cover those procedures in great detail and will focus exclusively on the procedures available to medium to large commercial enterprises.
In recent years, Italian insolvency law has been subject to extensive reform, which has resulted in the enactment of a new insolvency code (Codice della Crisi d’Impresa e dell’Insolvenza) (Italian Legislative Decree No 14 of 12 January 2019, hereafter the Insolvency Code or the New Code). The provisions of the New Code (save for certain exceptions) will come into force on 15 August 2020. This article will briefly mention certain features of the New Code. Please note, however, that the Bankruptcy Law will continue to regulate insolvency proceedings already pending at the date of the coming into force of the New Code.
The above-mentioned national legislation is supplemented by certain supranational laws, such as Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings. The UNCITRAL Model law on cross-border insolvency has not been formally implemented in Italian law; however, it has influenced recent reforms and was expressly referred to by the legislature as an international legislative source to be taken into account in the drafting of the Insolvency Code. Finally, Directive (EU) 2019/1023 has been approved which aims, inter alia, to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt in EU member states, which are required to implement it by 17 July 2021.
Italian law provides for six main types of insolvency proceedings applicable to persons other than small enterprises (please see 2.1 Overview of Laws and Statutory Regimes):
In addition to those, the certified turnaround plans (piani attestati di risanamento), and related enforcement arrangements, are tools aimed at managing various situations of distress. However, certified turnaround plans are not classed as insolvency proceedings as they are private arrangements which do not necessarily involve all creditors and are not subject to judicial supervision.
Certain insolvency proceedings can only be commenced voluntarily by the entity in distress, including, in particular, the judicial composition with creditors (concordato preventivo), the debt restructuring agreement (accordo di ristrutturazione dei debiti), extraordinary administration under Marzano’s law (subject to one exception) and the certified turnaround plan (piano attestato di risanamento).
Other insolvency proceedings can be commenced by the debtor as well as by third parties (most commonly, the creditors but also by, for example, the public prosecutor or, ex officio, by a judge).
The provisions described above will not substantially be affected by the coming into force of the Insolvency Code.
Under Italian law, entrepreneurs acting through a company (and that company’s directors) have a duty to monitor and promptly identify company distress and a loss of business continuity. Furthermore, they have a duty to act promptly to employ the tools and procedures available under Italian law to address the distress and restore business continuity.
In addition to this general duty (as well as the duty of care binding on the management body of the company), under Italian law the directors of the company must promptly call a shareholders’ meeting if the share capital of the company is reduced by more than one third due to losses. Furthermore, in the event that this reduction breaches the minimum share capital requirements prescribed by Italian law, a shareholders’ meeting will be called to deliberate on the capital reduction, as well as, simultaneously a capital increase in an amount equal to at least the minimum prescribed by law, or the conversion of the company.
Non-compliance with the obligations mentioned above may give rise to civil or criminal liability. With regard to civil liability, the directors of the company may be liable, subject to certain conditions, for damage suffered by the company, its creditors or its shareholders.
The options available to a company in distress vary depending on the characteristics of the company itself and the materiality of the distress or insolvency affecting the same.
The enterprise in financial distress can decide whether to: (i) resort to a certified turnaround plan (piano attestato di risanamento) (3 Out-of-Court Restructurings and Consensual Workouts); (ii) ask for admission to the judicial composition with creditors procedure (6 Statutory Restructurings, Rehabilitations and Reorganisations); or (iii) ask for approval of a debt restructuring agreement (3 Out-of-Court Restructurings and Consensual Workouts).
In the case of an insolvency, the enterprise can ask for admission to a judicial composition with creditors procedure or make a voluntary filing for bankruptcy. Alternatively, if the company meets the required criteria, it can ask for admission to the extraordinary administration procedure (under the Prodi-bis Decree or Marzano’s law) (procedura di amministrazione straordinaria). Finally, the company may ask for admission to the forced administrative liquidation procedure (procedura di liquidazione coatta amministrativa), subject to the company being insolvent and falling within the scope of that procedure.
Upon the occurrence of certain circumstances, a company may be subject to insolvency proceedings commenced by third parties. Generally, this is only applicable when the company is insolvent and not when the company is merely distressed.
The third parties which are entitled to commence insolvency proceedings against the company vary depending on the type of insolvency proceeding:
In most cases, the commencement of insolvency proceedings is subject to the company being insolvent. Insolvency is a particularly serious and irreversible state of distress; characterised by the company no longer being able to meet its liabilities as they fall due, or by other external factors which show that the company is no longer able to regularly meet its obligations.
Certain “minor” insolvency proceedings, however, can be commenced voluntarily by the company when it is distressed but not yet insolvent.
The difference between insolvency and distress is not always straightforward. The Insolvency Code, for the first time, introduces a distinction between the two. Under the Insolvency Code: (i) insolvency (insolvenza) means, as already mentioned, the company’s inability to meet its obligations as they fall due; and (ii) distress (crisi) means financial distress which is likely to lead to insolvency (having regard to cash flows).
Under Italian law, certain companies of significant public interest are not subject to ordinary bankruptcy law. In the event that these companies become insolvent; they may be subject to the forced administrative liquidation procedure (procedura di liquidazione coatta amministrativa). This procedure is regulated by the Bankruptcy Law as well as provisions contained in specific laws. It applies to, inter alia: (i) banks; (ii) securities firms (società di intermediazione mobiliare (SIM)); (iii) asset management companies (società di gestione del risparmio (SGR)); (iv) certain open-ended collective investment schemes (società di investimento a capitale variabile (SICAV)); (v) insurance companies; (vi) co-operatives not engaged in commercial activities; and (vii) fiduciary companies and audit firms. This procedure also applies to the liquidation of a single fund or compartment managed by an asset management company.
Italian restructuring market operators do not usually resort to internationally recognised principles/frameworks such as the INSOL Principles. Generally, there is a widespread consensus in the Italian market that distress management procedures based on consensus are more effective in safeguarding business continuity and enterprise value.
Depending on the complexity and materiality of the distress/insolvency, however, the use of a judicial procedure may be preferable and provide greater protection to, inter alia, the company’s creditors (for example, to protect the company’s assets from enforcement actions). Generally, during the period of recovery from distress, financial creditors will need to have a clear understanding of the prospects of the company to fully evaluate any form of support and/or intervention to support the company.
The Bankruptcy Law does not require the company to negotiate or mediate with its creditors before commencing insolvency proceedings.
Under the Bankruptcy Law, an out-of-court consensual composition, may, inter alia, take the form of (i) an agreement to implement a certified turnaround plan (accordo in esecuzione di un piano attestato di risanamento) or (ii) a debt restructuring agreement (accordo di ristrutturazione dei debiti).
The time taken to reach such agreements varies depending on the complexity of the individual case, and it may also go on for months.
Before signing a debt restructuring agreement/an agreement to implement a certified turnaround plan, the company usually enters into a standstill and moratorium agreement with the company’s financial creditors. This gives the company time to finalise its restructuring proposal without exposing the company to the risk of actions commenced by the financial creditors. Often a standstill and moratorium agreement also includes a commitment by short-term creditors to keep their credit lines operational during negotiations. Normally, this agreement also contains stringent disclosure obligations and covenants binding the company (for example: a prohibition on incurring further indebtedness or carrying out transactions not in the ordinary course of business, and making distributions as well as information covenants), in order to allow creditors to fully monitor the situation. The establishment of steering committees or similar committees is not very frequent, and it usually applies to a restructuring process involving financial creditors from several jurisdictions.
Agreements to implement a certified turnaround plan are based on (i) a plan prepared by the company and (ii) a report by an independent third party certifying that the plan is achievable and that the data about the company is true. The aim of this plan is to allow the reorganisation of the company’s debt exposure and ensure the recovery of its financial situation. The Bankruptcy Law does not regulate this procedure exhaustively: it merely provides that acts carried out to execute the turnaround plan are not subject to claw-back provisions in the event of bankruptcy (see 13 Transfers/Transaction That May Be Set Aside) and that certain criminal liabilities do not apply.
The debt restructuring agreement (accordo di ristrutturazione dei debiti) is a distress management tool based on an agreement between the company and the creditors holding, in aggregate, at least 60% of the outstanding debt. This agreement, together with certain supporting documentation, including a report prepared by an independent third party, is subject to approval by the court. The expert must certify the truthfulness of the data contained in the agreement and whether the agreement is capable of achieving repayment in full of non-subscribing creditors within the deadline set forth under the Bankruptcy Law.
When half or more of the company’s indebtedness is owed to banks or financial intermediaries, the debt restructuring agreement may also bind non-subscribing creditors (see 5 Unsecured Creditor Rights, Remedies and Priorities).
With respect to the procedure for obtaining approval for a debt restructuring agreement (accordo di ristrutturazione dei debiti), the main steps under the current rules are as follows:
the agreement is published in the companies register in order to take effect;
New finance is usually granted by banks, financial institutions, other entities authorised to do so under applicable law or by one or more of the company's shareholders. Under certain circumstances, and if certain conditions are met as set out in the Bankruptcy Law, new loans granted to the company in the context of a debt restructuring agreement pursuant to Article 182-bis et seq (or in the context of a judicial composition with creditors (concordato preventivo) will have priority (ie, super-seniority) over other claims. Super-seniority can be limited to 80% of the loan amount in case of shareholders’ loans.
Subject to the above, the law does not give priority (ie, super-seniority) to any other loans. Creditors are free to prioritise and/or subordinate their claims contractually between themselves, giving rise to a quasi-contractual “super-seniority”. However, such contractual “super-seniority” may not be enforceable in the context of an insolvency proceeding (due to mandatory legal provisions).
Creditors will have to comply with the general principles and duties of good faith, fairness and transparency during the negotiation and finalisation of a restructuring process. Creditors should not compromise the company’s creditworthiness or infringe the general principle of par condicio creditorum (equal treatment of creditors). Any agreement or transaction which benefits only one, or only one class of, creditor could give rise to potential civil liability. If the company becomes bankrupt and the agreements/transactions violate the Bankruptcy Law, there is also potential criminal liability.
Italian law only provides for one mechanism for cram-down applicable to out-of-court/consensual insolvency proceedings as set out in Article 182- septies of the Bankruptcy Law. This mechanism requires approval by the court.
It applies to (i) debt restructuring agreements (accordo di ristrutturazione dei debiti) pursuant to Article 182-bis of the Bankruptcy Law (subject to certain criteria being met), or (ii) standstill agreements.
With respect to (i) above, pursuant to Article 182-septies of the Bankruptcy Law, if the company enters into a debt restructuring agreement pursuant to Article 182-bis of the Bankruptcy law and half or more of the company’s total indebtedness is owed to banks or financial intermediaries, then: (a) the debt restructuring agreement may identify one or more categories of financial creditors having a similar legal position and economic interests, and (b) the company may request that the debt restructuring agreement is extended to creditors falling within one of these categories but which have not entered into the debt restructuring agreement, provided that (inter alia) the creditors of the same category who are parties to the debt restructuring agreement hold in aggregate at least 75% of the debt then outstanding. This request needs to be reviewed and approved by the court and the “dragged-along” creditors have a right to object.
With respect to (ii) above (ie, the standstill agreement), under Article 182-septies of the Bankruptcy Law a temporary standstill agreement which has been entered into with banks or financial intermediaries may also bind, subject to certain conditions, creditors who have not entered into that agreement provided that, inter alia, (i) the standstill agreement has been approved by banks or financial intermediaries holding in aggregate at least 75% of the outstanding debt owed to that category of creditors and (ii) a special report by an independent third party expert has been produced. The dragged-along creditors have a right of objection.
Security interests that may be created in favour of a creditor vary depending on the type of underlying asset.
With regard to real estate and registered movable property (such as ships), the creditor may be secured by a mortgage on the asset owned by the debtor or by a third party. The mortgage gives the creditor, in the event of a default by the company, the right to enforce the mortgage, expropriate the mortgaged assets and realise such assets through a sale. Further, it should be noted that Article 48-bis of the Consolidated Banking Act (Testo Unico Bancario) provides that, under certain conditions, loans between a bank (or another authorised person) and an enterprise may be secured by transferring ownership of the enterprise’s or third party’s property or other property rights to the creditor (or to a company controlled by it).
Shares (whether listed or not) or units in companies may be pledged in favour of the creditor. The same applies to unregistered movable property, receivables or other rights of the debtor or of a third party, including industrial or intellectual property rights and current account balances and/or sums of money. A pledge is characterised by the so-called "dispossession" of the pledged asset and its delivery to the creditor (or to a custodian). A pledge gives the creditor the right to sell the assets and satisfy its claims from the proceeds of that sale in priority over other claims. It is worth noting that a “non-possessional pledge” has been recently introduced in Italian law which, indeed, does not entail the “dispossession” of the assets of the company. However, this pledge is only available if certain subjective and objective requirements are met.
Additional types of "voluntary" security include the special lien under Article 46 of the Consolidated Banking Act and the assignment of receivables by way of security. A lien under Article 46 of the Consolidated Banking Act may be taken on movable (unregistered) assets and is used to secure medium to long-term bank loans. An assignment of receivables by way of security is perfected by serving a notice of assignment to the assigned debtor (or by the delivery by the assigned debtor of the acknowledgment of assignment) with date certain (data certa).
Finally, it should be noted that, without prejudice to the security rights mentioned above, certain claims have preferential treatment under Italian law. These can be general or special (eg, claims of the tax authorities, claims from employees, legal expenses, etc).
If the company is not subject to insolvency proceedings, the security is enforceable by a secured creditor in the event of non-performance of the company’s obligations and upon the occurrence of certain contractual conditions. The creditor may then sell the assets and satisfy its claims from the proceeds of that sale in priority over other claims. However, the exercise of these rights may be subject to the provisions of an intercreditor agreement.
If the company is subject to insolvency proceedings, the rules vary and are more complex. Subject to limited exceptions, creditors will not be able to commence or continue enforcement or safeguarding procedures in respect of the company’s assets in accordance with the general principle of par condition creditorum (equal treatment of all creditors). Exceptions to such general "stay of action" principle include, inter alia: (i) the enforcement of security over "financial assets" under Italian Legislative Decree No 170 of 2004; and (ii) the enforcement of mortgages securing loans under Article 38 et seq of the Consolidated Banking Act. Moreover, a partial exception applies with respect to claims secured by pledge and certain claims secured by special liens over chattels in the context of a bankruptcy proceeding (fallimento). With respect to the latter, once the claims have been recognised as preferred liabilities, and with express court authorisation, the assets can be sold during bankruptcy proceedings prior to allocation as between the creditors.
The treatment of preferred creditors (creditori privilegiati) in a judicial composition with creditors (concordato preventivo) will be described briefly. The "stay of action" mentioned above will apply. Further, it should be added that preferred creditors do not have a right to vote with respect to the judicial composition with creditors, unless they waive (in whole or in part) their priority of payment or the proposal provides for their claims to be downgraded to unsecured due to lack of an underlying asset. In this case, the preferred creditors will have the right to vote with respect to their unsecured claim/s only.
Please see 4.2 Rights and Remedies.
Under Italian law, there are no special provisions applicable to foreign creditors.
Please see 4.2 Rights and Remedies.
Claims are classified according to their priority of payment as “super-senior” claims (those having priority over all other claims) (crediti prededucibili), preferred claims (crediti privilegiati), unsecured claims (crediti chirografari) and subordinated claims (crediti postergati). The general rule is that until creditors with a higher priority of payment are paid in full, other creditors cannot be paid. Repayment of claims from the proceeds of the liquidation of the company assets will be made in the following order:
Unsecured trade claims are unlikely to be fully paid during an insolvency proceeding, except for strategic suppliers. On the other hand, in the context of an out-of-court/contractual restructuring, it is possible to reach rescheduling agreements that allow the full satisfaction of these claims within a longer time frame.
The rights conferred on unsecured creditors depend on the type of insolvency proceedings and/or distress resolution instrument to which they are parties.
In the context of bankruptcy proceedings (fallimento), they have a right to request that their claims be recognised as a liability of the company and to participate in the distribution of the proceeds of the liquidation of the debtor's assets.
In a judicial composition with creditors (concordato preventivo), unsecured creditors have a right to vote on the proposal. The right to vote conferred on unsecured creditors gives them a “say” in the judicial composition with creditors. This is without prejudice to the right of the unsecured creditor to file a petition for bankruptcy in accordance with applicable law.
As to pre-judgment attachments, please note that the Bankruptcy Law contains a general prohibition on creditors commencing or continuing enforcement or safeguarding procedures in respect of a company’s assets.
If the company does not comply with its obligations, the unsecured creditor must first serve a written notice of default indicating a date for payment. If the company fails to pay and the claim is with respect to a sum of money (such sum being evidenced in writing), the creditor may file with the court an application for an injunction. The injunction may be granted by the judge as already provisionally enforceable (provvisoriamente esecutivo). This is without prejudice to the right of the company to object to the injunction. The creditor benefitting from this injunction can seize the company’s assets. This is without prejudice to the right of the unsecured creditor (creditore chirografario) to file a petition for bankruptcy in accordance with applicable law.
Landlords have the benefit of a specific enforcement procedure (the so-called eviction) (procedimento per convalida di sfratto) to compel tenants to leave the property following termination of the contract or non-payment of rent. Landlords also have the benefit of a special lien over rents, profits in respect of the current or preceding year, any furniture, or items used to cultivate the land.
Under Italian law, there are no special provisions or treatment applicable to foreign creditors.
Please see 5.1 Differing Rights and Priorities.
As already mentioned, during insolvency proceedings “super-senior” claims (crediti prededucibili) are paid first, then preferred claims (crediti privilegiati) and, finally, the unsecured claims (crediti chirografari). Claims arising from, or in connection with, insolvency proceedings, or so defined by law, are “super-senior” (prededucibili) (See 5.1 Differing Rights and Properties).
As to preferred claims, those can be given priority by law, for instance, legal expenses (which are always paid in priority over any other claim, even in priority to claims secured by a pledge or mortgage), tax claims, social security claims and claims in respect of employees’ wages. Such claims can be either generally preferred with respect to a general lien (privilegio generale) over the whole pool of movable assets of the company; or be preferred with respect to movable assets subject to a specific lien only (privilegio speciale). The following general principles also apply under Italian law: (i) creditors secured by a pledge rank senior to creditors secured by a special lien over movable assets; and (ii) creditors secured by a special lien over real estate assets rank senior to creditors secured by a mortgage unless otherwise provided by law.
The main insolvency proceeding aimed at the restructuring, recovery or reorganisation of a company in distress is the judicial composition with creditors (concordato preventivo). The judicial composition with creditors takes place entirely under the control of the court and under the supervision of the judicial commissioner. The debtor is not dispossessed of its assets and is only required to obtain prior authorisation to perform transactions that are not in the ordinary course of business.
This procedure is available to commercial companies that are distressed or insolvent and which meet the requirements for bankruptcy (fallimento).
The composition procedure can only be commenced by the debtor company by filing an application with the competent court. The application shall attach a number of documents specifically indicated by the Bankruptcy Law, including a certification by a third-party expert. The concordato preventivo application is published on the Companies’ Register.
The application must be based on a workout plan which can provide for either (i) the direct or indirect continuation of the company’s business activity (so called concordato con continuità aziendale); or (ii) the liquidation of the company’s assets (concordato liquidatorio). Moreover, the application must also include a detailed description of the proposal to creditors and can also provide for the classification of creditors in different categories receiving different treatment depending on their legal position and economic interests. Such classification of creditors must not affect the priority of payments set out under the applicable law.
Partial payment of preferred creditors (creditori privilegiati) is permitted, provided that the plan provides that such claims must be paid in an amount not lower than the payment the preferred creditors would have received, by virtue of their priority ranking, in the event of a liquidation, having had regard to the market value of the preferred assets and rights. Tax and social security settlements are also permitted. In the event of a liquidation composition procedure (concordato liquidatorio), moreover, at least 20% of the debt owed to unsecured creditors (creditori chirografari) must be repaid.
Before outlining the main steps and timing of the judicial composition with creditors (concordato preventivo), it shall be noted that before filing the “full application” for concordato preventivo (including workout plan and proposal to creditors), the debtor may decide to file an “interim application” under Article 161, paragraph 6 of the Bankruptcy Law, requesting the court to set a time (between 60 and 120 days, subject to a further 60-day extension) by which the company must file with the court either: (i) the “full” application for judicial composition with creditors (together with the proposal and additional documentation required by law); or (ii) a debt restructuring agreement (accordo di ristrutturazione dei debiti”). During the “interim phase”, the company is subject to the supervision of a judicial commissioners and shall be authorised by the court to carry out extraordinary transactions, provided that they are urgent. Stay of action applies during the “interim phase”. Bearing that in mind, please find below the main steps of the judicial composition with creditors:
Filing of the “Full” Application for Judicial Composition with Creditors
If the debtor has filed an “interim application”, the filing of the full application shall be carried out by the date set forth by the Courts following the filing of the interim application.
Following receipt of the “full” application, the court may admit the company to the procedure. If so, the court will, inter alia, appoint one or more judicial commissioners and schedule a creditors’ meeting. Admission tends to take place three/four weeks after the filing of the full application but there is no specific term by operation of law. The Creditors’ meeting is scheduled for 120 days after the date of admission (240 days in case the company has issued notes).
Creditors’ Meeting - Voting
Creditors who are entitled to vote on the proposal may vote at the creditors’ meeting and for 20 days following that meeting. The proposal is approved if it obtains the favourable vote of the creditors representing the majority of claims eligible to vote; and, if there are different categories of creditors, if it obtains a favourable vote from a majority of categories.
Validation (Omologazione) of the Judicial Composition with Creditors:
Following completion of the voting process, if the judicial composition with creditors is approved, the court will set a date for the validation hearing. Dissenting creditors and, generally, interested third parties may object to the validation. If a creditor belonging to a dissenting category of creditors, or, in the absence of categories of creditors, if dissenting creditors representing at least 20% of the claims eligible to vote, object(s) to the proposal, the court may nonetheless validate the judicial composition with creditors if it finds that the creditors would not have received better treatment under the alternative bankruptcy proceedings (fallimento). The validation decree can be appealed within 30 days of the date of its publication. The judicial composition with creditors procedure ends with the issue of the validation decree. Validation should occur within nine months (subject to one further extension of 60 days) from the date of the filing of an application for judicial composition with creditors. However, this term is not mandatory.
Enforcement of the Judicial Composition with Creditors:
Following final validation, the judicial composition with creditors becomes binding on all creditors (including dissenting and unidentified creditors) whose claims pre-date the publication of the application in the companies register.
Excluded creditors can commence an independent action to ascertain their claim (since the judicial composition with creditors does not provide for a verification of claims). The company, under supervision of the judicial commissioner, shall implement the judicial composition with creditors and make payments to the creditors. Any creditor can request that the composition is terminated in the event of a breach, other than a minor breach. The composition can be revoked by the judicial commissioner upon the occurrence of a fraudulent act.
It is worth noting that the timing indicated above is indicative only and it may vary depending on the complexity of the procedure (which may include further steps) and the competent court.
The judicial composition with creditors will be partially amended by the entry into force of the Insolvency Code.
From the date of publication of the application for judicial composition with creditors (concordato preventivo) (including interim application) in the companies register and until the final validation, stay of actions will apply in relation to claims that have arisen prior to that publication.
Please see 6.1 Statutory Process for a Financial Restructuring/Reorganisation for provisions relating to business continuity and company management.
During the concordato preventivo proceeding, the company can borrow money provided that certain conditions and circumstances, as specifically set out under the Bankruptcy Law (including, inter alia, authorisation by the Courts), are met. Duly authorised new financings will rank super-senior. Super-seniority can be limited to 80% of the loan amount in case of shareholders’ loans.
The concordato preventivo proposal can provide for the classification of creditors in categories depending on their legal position and economic interests. The plan can provide for differential treatment between categories with respect to conditions and term for repayment. The debtor must provide reasons as to the differential treatment.
In the context of a concordato preventivo, a representative body of the creditors is not required, other than (possibly) during a liquidation in the event of a liquidation composition procedure (concordato liquidatorio). Normally, the court in its admission decree will set out the powers and obligations of such creditors’ committee. Such activities are not usually remunerated.
During the concordato preventivo proceeding, creditors can: (i) consult those documents which must be public by operation of law, including application for concordato preventivo and monthly reports about the financial situation of the company; (ii) have access to certain other documents through the judicial commissioner(s). Third parties, however, do not have access to all documents relating to the composition, and the debtor may file a request with the courts to withhold disclosure material and sensitive information.
Please see 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
Claims with respect to a company subject to a composition procedure may be transferred without limitation and without the need for approval by the company, the judicial commissioner or the court. In some cases, however, the assignment of claims may be subject to certain limitations concerning set-off of claims and voting.
The Bankruptcy Law does not provide for specific rules with respect to group-insolvency. In the absence of specific provisions, in some cases, case-law has permitted “co-ordination” between composition procedures commenced by different companies belonging to the same group, provided that each company files a separate composition application and commences separate proceedings. The company shall keep its assets and liabilities separate from those of other companies belonging to the group. The concept of “group insolvency” will be introduced by the Insolvency Code.
During the composition procedure, the company can still manage its assets in a manner which will not be prejudicial to the creditors’ interests. A sale of assets, to the extent it qualifies as a transaction not in the ordinary course of business, is subject to prior court approval and must be carried out through a competitive sale process (see 6.8 Asset Disposition and Related Procedures).
The company may indicate in the composition plan if an individual has made an irrevocable offer to acquire assets of the company or the company’s business unit(s)/business branch(es). There are no limitations as to the ability of the creditors to make offers for the purchase of assets/business branch(es) of the company, including where that purchase will be set-off against the claim of that creditor.
In any case (including when the company has already received purchase offer(s) and/or the transaction has been pre-negotiated before commencement of the concordato preventivo) the sale must be carried out through a competitive process: terms and conditions of the competitive sale process/bid process shall be set out by the courts.
In the event of a sale of the company’s assets (including as a result of the tender process described in 6.8 Asset Disposition and Related Procedures) and payment of the purchase price, those assets may be released from all encumbrances upon a request to the court.
Please see 6.2 Position of the Company with respect to the granting of loans having priority over all other claims.
The court may also allow the company to secure such loans by way of pledge, mortgage or assignment of receivables.
The judicial composition with creditors (concordato preventivo), in contrast with bankruptcy (fallimento), does not provide for the verification of claims. It only provides that the debtor shall attach to its application for judicial composition with creditors a list of its creditors. That list shall be verified by the judicial commissioner on the basis of the company’s accounting records.
During the creditors’ meeting, the presiding judge shall also rule on the admissibility to voting of the contested claims but only for the purpose of calculating the majorities without any ruling as to the verification of the claim. The verification of the existence and nature of the claims can only be obtained by commencing separate legal proceedings.
In the context of concordato preventivo proceeding, the court, basically, must verify the compliance of the application with the applicable provisions of law and its “legal feasibility”. The economic feasibility and “fairness” of the composition are assessed by creditors (through the voting process).
Transactions implying the release from liabilities of a non-debtor party are generally assessed as extraordinary transactions and are, therefore, subject to prior approval by the court.
In the context of concordato preventivo: (i) claims that have arisen prior to the start of the proceeding may be set-off against other reciprocal claims that have arisen prior to that date; and (ii) claims arising after the start of the proceeding may be set-off against other reciprocal claims arising after that date. It is not possible to set-off a claim that has arisen prior to the proceeding with a reciprocal claim arising after the start of the proceeding (and vice versa).
Usually, the set-off between claims that have arisen prior to the date of the composition procedure is made during enforcement of the composition when the company is making payments to its creditors. Set-off between claims arising after the date of the composition procedure is made in the ordinary course of business of the company.
If the company is in breach of the obligations contained in the composition plan and proposal, each creditor has the right to request termination of that composition (and, consequently, it may also file for a declaration of the company’s bankruptcy). Termination may not be requested when the breach is minor.
In the event of a liquidation composition procedure (concordato liquidatorio), the assets of the company, including shares held in other companies, are sold and the proceeds of that sale are distributed to the creditors. In contrast, in the event of a business continuation composition (concordato con continuità aziendale) or a combination of the two, different provisions may apply to the company’s assets.
The main judicial insolvency proceeding providing for liquidation of the insolvent company’s assets, under Italian law, is bankruptcy (fallimento). Other proceedings providing for liquidation processes are forced administrative liquidation (liquidazione coatta amministrativa), the extraordinary administration procedure for large insolvent enterprises and the liquidation composition procedure (concordato liquidatorio – see 6.1 Statutory Process for a Financial Restructuring/Reorganisation). The present section will focus only on bankruptcy.
Bankruptcy proceedings can be commenced by an insolvent company that meets at least one of the following thresholds:
Furthermore, bankruptcy cannot be declared if the amount of overdue and unpaid liabilities is less than EUR30,000.
Bankruptcy (fallimento) can be declared by the court upon petition by one or more creditors, the company or the public prosecutor. Bankruptcy leads to the disposal of the company’s assets and cessation of all activities of the company.
The administrative receiver (curatore fallimentare) will take over the management of the company and the company’s assets to liquidate the same and distribute the proceeds between the creditors. When declaring bankruptcy, the court may order that business operations be continued on an interim basis if cessation could cause material damage, provided that this shall not be prejudicial to the interest of the creditors as a whole. The administrative receiver acts in conjunction with the creditors’ committee formed by a small number of creditors, which can authorise actions taken by the administrative receiver and supervises the bankruptcy procedure.
Subject to a few limited exceptions, from the date of declaration of bankruptcy, stay of actions will apply.
Creditors are required to submit their proofs of claims at least 30 days prior to the date of the verification hearing of the claims. If proofs of claims are submitted after this term, but within 12 months of the date on which the judge issues the statement of liabilities, they are considered “late claims” (domande tardive). “Super-later claims” (domande super tardive), outside the above-mentioned time period, are admitted as long as proceeds arising from the sale of the assets of the company are still available for distribution.
The administrative receiver shall verify those proofs of claims and prepare a preliminary list of liabilities. A hearing is then held whereby the judge either admits or rejects the claims. Once the examination of the claims has been completed, the presiding judge issues the list of liabilities which becomes enforceable once the decree is deposited with the registry office.
The creditors have certain information rights. The administrative receiver files periodic reports containing details, inter alia, of the status of enforcement of the liquidation and actions taken in the best interest of the creditors. Confidential information may, upon request, be withheld from the public.
Once the verification of claims is completed, the next step in the bankruptcy proceedings consists in the liquidation of the company’s assets and the distribution of the proceeds. The proceeds are then applied pursuant to the statutory waterfall of claims. Creditors who have been excluded in whole or in part from the list of liabilities can object and commence separate legal proceedings to have their claim/s verified. Please see 7.2 Distressed Disposals with respect to the termination of bankruptcy proceedings when there is a composition procedure.
Creditors can set-off their claims against sums they owe the debtor, even if such claims are not yet due and payable upon declaration of bankruptcy. Set-off does not apply when the creditor has purchased a claim (which is not yet due and payable) after the declaration of bankruptcy or in the 12 months preceding that declaration. The Bankruptcy Law does not prescribe the methods and terms for exercising such right to set-off. In any case, it should be noted that set off is allowed only between reciprocal claims arising (i) both prior to the bankruptcy declaration; or (ii) both after the bankruptcy declaration.
Upon a declaration of bankruptcy, contracts which have not yet been performed, in full or in part, are usually suspended until the administrative receiver decides whether to step in or to terminate them. The automatic suspension of an on-going contract does not apply when the court or the presiding judge orders that business operations be continued on an interim basis. In this case, the contracts will continue, subject to a decision of the administrative receiver to suspend or terminate them. The Bankruptcy Law provides, however, for different provisions in relation to specific agreements/contracts.
Generally, there are no restrictions applicable to the assignment of receivables during bankruptcy proceedings. However, if such assignment takes place after the admission of the claim, the parties shall promptly notify the administrative receiver of the assignment and provide evidence of it to allow the administrative receiver to allocate the relevant distributions to the assignee directly.
Bankruptcy proceedings will be subject to significant changes following the entry into force of the new Insolvency Code. In particular, the concept of bankruptcy (fallimento) will be replaced by judicial liquidation (liquidazione giudiziale) and the procedure will be simplified.
During bankruptcy proceedings, the liquidation of the assets of the company is performed by the administrative receiver in accordance with a liquidation programme approved by the creditors’ committee.
Sale of assets and other actions taken in connection with the liquidation must take place by way of competitive tender.
Assets sold during the liquidation process are transferred free from any security interest. Furthermore, in case of a transfer of the business, unless otherwise specified, the purchaser is not liable for any debts relating to the operation of the transferred business arising before the transfer.
There are no restrictions on the ability of creditors to make offers to purchase the assets of the company in bankruptcy. Furthermore, the creditors, as well as the company and third parties, may submit a proposal for an in-bankruptcy composition procedure (concordato fallimentare) consisting of a plan prepared to satisfy, in full or in part, the creditors, subject to available resources, and to allow a quick resolution of the bankruptcy procedure. This proposal must be approved by the administrative receiver and the creditors’ committee before being voted on by the creditors and subsequently validated (omologato) by the court.
The liquidation of the company’s assets in accordance with the liquidation procedures set out in 7.1 Types of Voluntary/Involuntary Proceedings must be undertaken by persons appointed by the court.
Please see 6.15 Failure to Observe the Terms of Agreements with respect to a failure to comply with a composition procedure (concordato preventivo).
Generally, new financings are not usually granted during a bankruptcy proceeding. However, if that was the case, and the receiver was authorised to incur such new indebtedness, the claims would rank super-senior.
There are no provisions in the insolvency rules that govern insolvency of groups of companies. Certain provisions are set out in the rules governing extraordinary administration proceedings. In particular, the Prodi-bis Decree provides that, inter alia, if extraordinary administration proceedings are commenced against the parent company of a group, the insolvent companies belonging to that group may take part in the extraordinary administration proceedings regardless of whether they meet the admissibility criteria. Specific rules apply to claw-back of intra-group transactions (see 13.2 Look-Back Period).
The Insolvency Code will introduce for the first time the concept of group insolvency in the context of a judicial liquidation (liquidazione giudiziale) –ie, the proceeding which will replace bankruptcy (fallimento).
During bankruptcy proceedings, the presiding judge will appoint a creditors’ committee formed of three or five members representing the creditors.
The creditors’ committee (i) supervises the administrative receiver, (ii) authorises the acts of the administrative receiver, and (iii) gives its opinion when required by law, by the court or by the delegated judge. The creditors’ committee and its members may inspect accounting records and procedural documents and they may ask the company and the administrative receiver for additional information or explanations.
Members of the creditors’ committee are entitled to reimbursement for expenses incurred in connection with their services.
The sale of any real estate assets of the bankrupt company is carried out on the basis of the liquidation programme prepared and approved by both the creditors’ committee and the delegated judge. Assets of the company must be sold by way of competitive tender.
Moreover, all extraordinary transactions shall be authorised by the creditors’ committee.
The legislation governing cross-border insolvency varies significantly depending on whether the debtor has its centre of main interests (COMI) in one of the EU member states bound by EU Regulation 2015/848 (ie, all EU member states except Denmark).
In fact, in the first case, the Regulation provides that the decision to commence an insolvency procedure produces, in every other member state, the effects provided for by the law of the member state where the procedure is commenced. The certified turnaround plan (piano attestato di risanamento) under Article 67 (3) (d), of the Bankruptcy Law does not amount to an “insolvency procedure” under the Regulation.
Outside the scope of the Regulation, Italian law does not regulate cross-border insolvency and the relevant general rules of private international law will apply to the recognition of the foreign procedures. Article 9 of the Bankruptcy Law provides that, if an enterprise has its headquarters abroad, it is still possible to declare bankruptcy in Italy (even following a foreign bankruptcy declaration).
As a general rule, except as set out in EU Regulation 2015/848, Italian law does not regulate the potential co-operation between Italian and foreign judges during cross-border insolvency proceedings.
EU Regulation 2015/848 contains certain provisions aimed at co-ordinating insolvency procedures commenced against the same debtor in different member states.
EU Regulation 2015/848 and Article 9 of the Bankruptcy Law contain specific provisions with respect to competent jurisdiction. The Regulation provides that the courts of the member state, within the territory of which the centre of the debtor's main interests is situated, shall have jurisdiction to commence insolvency proceedings. The Regulation also allows for the commencement of secondary proceedings in another member state where the company has an establishment. Article 9 of the Bankruptcy Law provides, inter alia, that the bankruptcy of an enterprise headquartered abroad may also be declared in Italy if that enterprise has already been declared bankrupt abroad.
There are no specific provisions or differential treatment applicable to foreign creditors.
The following statutory officers may be appointed (which will vary depending on the type of procedure involved) in the context of insolvency proceedings under Italian law:
The role and powers of the statutory officers differ between insolvency proceedings. In the judicial composition with creditors (concordato preventivo), the judicial commissioner monitors and supervises the actions taken by the debtor. The judicial commissioner reports to the court and therefore has no management and/or representative powers vis-à-vis the debtor. In the context of the judicial composition with creditors, the court may also appoint a judicial liquidator to perform the disposals envisaged by the composition with creditors. The judicial liquidator also reports to the court.
In bankruptcy proceedings, the company loses the ability to manage and dispose of its assets and the management of the company is taken over by an administrative receiver, whose powers are, therefore, much wider. The administrative receiver is also responsible for managing the liquidation of the debtor’s assets and their distribution to creditors. In an extraordinary administration (amministrazione straordinaria), a situation similar to that described in the context of bankruptcy occurs: the company is dispossessed, and the extraordinary administrator takes over the management of the company. Moreover, an additional supervisory role is performed by the Ministry for Economic Development (Ministero dello Sviluppo Economico). In the context of a compulsory administrative liquidation (liquidazione coatta amministrativa), instead, similarly to bankruptcy and extraordinary administration, the debtor is dispossessed, and the judicial liquidator takes over the management of the company.
The administrative receiver is appointed by the court with the bankruptcy judgment. The Bankruptcy Law provides that only certain professionals may be appointed, such as lawyers, chartered accountants, accountants or persons who have performed functions of administration, management and control of joint stock companies – provided that they meet certain independence requirements. The court may, at any time, remove the administrative receiver with cause upon request by the creditors’ committee or ex officio. Once the creditors’ meeting for the verification of the claims has been concluded, the creditors may file a petition with the court to replace the administrative receiver for cause and propose a new candidate.
The judicial receiver is appointed with the decree declaring the commencement of the composition with creditors. The rules mentioned above with respect to the administrative receiver also apply to the judicial receiver.
The extraordinary administrator is appointed by a decree of the Ministry of Economic Development, based on the procedures and requirements set by that Ministry.
Finally, the judicial liquidator is appointed with the order commencing the compulsory administrative liquidation and may be dismissed or replaced at any time by supervisory body responsible for the liquidation.
Restructuring transactions usually involve lawyers, chartered accountants, financial and business advisors, surveyors (periti) and, where applicable, independent third-party professionals appointed as assessors (attestatori) for the purposes of the law (for example, in the context of a certified turnaround plan (piano attestato di risanamento)), or debt restructuring agreements (accordo di ristrutturazione dei debiti) under Article 182-bis of the Bankruptcy Law, or a composition with creditors.
The advisory and legal services performed will vary depending on the procedure involved. The debtor will, in most cases, regardless of the type of insolvency proceeding involved, appoint a financial and business advisor to advise in the preparation of the business plan and related financial transactions. The advice of chartered accountants and surveyors (expert valuers) is more common in judicial compositions with creditors (concordato preventivo), where it is important to provide the court with a complete overview of all of a company’s assets and liabilities.
Professional consultants are engaged by the debtor who is responsible for payment of their fees. The same generally applies to consultants' fees payable in the context of extra-judicial restructuring transactions.
In certain circumstances (for example, while a judicial composition with creditors (concordato preventivo) is pending), prior authorisation by the court may be required to appoint professional advisors. When a composition with creditors is on-going, prior authorisation by the court may be required to pay consultants to the extent that such payments are deemed to be outside the ordinary course of business.
Generally, consultants appointed to advise the debtor owe a duty of care to it and are liable for breaches. The assessor (attestatore) may incur criminal liability if it presents false information or it omits relevant information.
Lawyers usually advise the company in drafting and reviewing the contractual documentation and/or the documentation to be filed with the court (depending on the chosen restructuring proceeding), as well as in liaising with the creditors. The financial and business advisers support the company in preparing the business plan and the related financial transactions as well as the proposal to the creditors. The chartered accountants advise the debtor in accurately accounting for the company assets and liabilities and, if necessary, they employ third-party valuers. The assessor issues the sworn statements required by the law in the context of a certified turnaround plan, a judicial composition with creditors or a debt restructuring agreement under Article 182-bis, as the case may be.
The use of arbitration, mediation or of other ADR procedures during the execution of insolvency procedures is not usually permitted. Such tools are also not generally used in the context of informal processes.
Please see 11.1 Utilisation of Mediation/Arbitration.
With respect to bankruptcy, the law expressly provides that if the contract containing the arbitration clause is terminated under the Bankruptcy Law, the pending arbitral proceeding cannot be continued. Termination of the contract, therefore, causes the termination of the arbitration clause, and according to the majority view, also of any agreement to refer an existing dispute to arbitration.
On the contrary, in a judicial composition with creditors, termination of the contract does not extend to the arbitration clause contained therein (nor to any agreement to refer an existing dispute to arbitration).
Arbitration proceedings are governed by the Italian Civil Procedure Code (Codice di Procedura Civile). Moreover, Italy is also a party to certain international conventions on the subject, for example, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, signed in New York in 1958.
Mediation is governed by Italian Legislative Decree No 28 of 4 March 2010 (as subsequently amended). Italian Legislative Decree No 132 of 2014 also provides for assisted negotiations (negoziazione assistita) as an additional alternative dispute resolution tool.
Arbitrators are appointed in accordance with the relevant provisions contained in the contract and in the conventions. The parties may appoint an arbitrator themselves or request the court or a third party to appoint one.
The law states only that an arbitrator must have the capacity to act and must possess certain other requirements as to impartiality. The parties may agree on further requirements.
With respect to mediators, the law provides that the mediator is appointed by the competent mediation body to which a mediation request is submitted. The mediator is selected from among the mediators included on a special list. Mediators must have had, inter alia, specific training and comply with certain requirements as to integrity.
Generally, company directors are liable to the company and to its shareholders for damages arising from a breach of duty imposed by law or by the articles of association. In addition to this general liability, there are specific types of liability towards creditors arising from non-compliance with their obligations to preserve corporate assets. This breach is only actionable if the assets of the company are not sufficient to satisfy the claims of all creditors. This is without prejudice to the right of third parties to sue the directors for damages (caused by negligent or fraudulent acts of the directors).
Consequently, directors who are faced with a situation of distress will have to monitor, with the utmost diligence and attention, the assets of the company and take appropriate actions to safeguard the assets and the business continuity having regard to the best interest of all stakeholders. In particular, the directors will have to evaluate if there is a material prospect of overcoming the distress and recovering business continuity. Failing this, the directors will have to act promptly to adopt or implement one of the recovery tools provided by law. If there are no material prospects of recovery the directors will have to file for voluntary bankruptcy.
To perform their assessment, the directors will monitor and project cash flows, monitor any overdue payments from suppliers and/or third-party creditors, commence any legal and/or executive actions and start discussions with financial creditors.
Omissions by the directors may give rise to civil liability as mentioned above, and in material cases, also criminal liability.
Creditors may generally sue the directors subject to the conditions set out in 12.1 Duties of Directors. However, if a bankruptcy (fallimento), a compulsory administrative liquidation (liquidazione coatta amministrativa) or an extraordinary administration (amministrazione straordinaria) are ongoing, legal actions against the directors will be taken by the administrative receiver (curatore fallimentare), the judicial administrator (liquidatore giudiziale) or the extraordinary administrator (commissario straordinario), respectively.
Despite not being specifically mentioned in Italian law, a “chief restructuring officer” is usually appointed in the context of debt restructuring transactions especially when these are out-of-court. Usually (even though this is not mandatory) the role is performed by an independent director vested with specific powers.
The figure of the de facto director is not expressly recognised by Italian law, but it has been recognised in case-law. De facto directors are persons who are, de facto, part of the management of the company, other than on an occasional basis, although they have not been formally appointed by the shareholders (they are usually shareholders or directors of other group companies or affiliates). A de facto director has the same duties and responsibilities as legally appointed directors. In theory, upon meeting the above-mentioned requirements, even a creditor could be recognised as a de facto director.
In a limited liability company (società a responsabilità limitata), shareholders who have intentionally resolved upon or authorised actions which are harmful to the company, other shareholders or third parties are jointly liable with the directors.
Moreover, if a company is declared bankrupt, the shareholders with unlimited liability are concurrently declared bankrupt (the so called, “bankruptcy by extension”).
In addition to the above, in the context of a group of companies; companies or entities which unlawfully exercise the management and co-ordination of other companies, are liable (i) to the shareholders of those companies for any damages to the profitability and the value of their shareholdings and (ii) to creditors for damages caused to the company assets. However, liability is excluded where the damage is deemed to be compensated in the light of the overall results of the management and co-ordination activities or following specific related transactions.
The transactions which may be set aside during bankruptcy proceedings (azione revocatoria fallimentare) (pursuant to Article 67 of the Bankruptcy Law) can be divided into two distinct categories.
The first category includes certain transactions which are voidable “unless the other party proves that it was not aware of the insolvency of the debtor” and, in particular: (i) transactions for valuable consideration performed in the year preceding bankruptcy (fallimento), in which the services performed or obligations assumed by the bankrupt company exceeded by more than a quarter what was given or promised to it in return; (ii) the payment of a liability (which had become due and payable) by means other than money or other common methods of payment in the year preceding the declaration of bankruptcy (dichiarazione di fallimento); (iii) pledges, certain security interests in real estate (anticresi) and mortgages created in the year preceding bankruptcy to secure pre-existing debts not yet overdue; and (iv) pledges, certain security interests in real estate (anticresi), and judicial or voluntary mortgages created in the six months preceding the bankruptcy declaration to secure overdue debts.
The second category, on the other hand, includes transactions which are voidable “if the administrative receiver proves that the other party was aware of the insolvency of the debtor”, in particular: payments of overdue cash debts, actions for valuable consideration and those giving a creditor priority over other claims which had been created at the same time, if performed in the six months preceding the bankruptcy declaration.
In addition to the foregoing, it should also be noted that: (i) transactions for no consideration, performed during the two years preceding the declaration of insolvency, are unenforceable vis-à-vis the creditors; and (ii) prepayments made by the debtor during the two years preceding the declaration of insolvency are unenforceable vis-à-vis the creditors.
Finally, the administrative receiver (curatore fallimentare) has a general power to set-aside transactions which are prejudicial to the creditors in accordance with the Italian Civil Code (azione revocatoria ordinaria).
Please see 13.1 Historical Transactions above. It should also be noted that in the context of an extraordinary administration (amministrazione straordinaria) particularly strict provisions applies to intra-group transactions (three or five years depending on the type of transaction).
In the context of bankruptcy, extraordinary administration or forced administrative liquidation (liquidazione coatta amministrativa), only the administrative receiver, the extraordinary administrator or the judicial liquidator have the power to set-aside transactions. This power cannot be exercised by individual creditors.
Valuations (perizie)/estimates of value (stime di valore) play a key role in restructuring transactions and insolvency proceedings.
In voluntary/out-of-court debt restructuring transactions, specific valuations are performed to prepare the business and financial plan and to assess existing/ proposed guarantees in favour of financial creditors. Valuations are also important to determine the potential market value of an asset to be sold in the context of contractual restructuring transactions.
In the judicial composition with creditors (concordato preventivo), valuations are fundamental to put the company in a position to estimate correctly, and in a timely manner, the value of its assets. At the same time, the sworn valuation (perizia giurata) is important, according to law, to present effective grounds to downgrade claims which originally had preferred status (passività privilegiate) to unsecured status (passività chirografarie).
Valuations are equally important in bankruptcy, since these are at the basis of the liquidation/sale procedure for which the administrative receiver is responsible.
Usually valuations are requested by the debtor (or, in bankruptcy, by the administrative receiver).
Case-law gives great importance to the valuation of the company in financial distress and, if there are prospects for business continuity, to the valuation of cash flows, as these are key to the assessment of creditor outcome (including in relation to alternative bankruptcy proceedings).
Each court publishes a list of expert valuers (periti) who may be appointed during insolvency proceedings to carry out any valuation that may be required.
With respect to methods of valuation, case-law does not seem to indicate a preference for any given method. All methods generally accepted for such purposes by corporate best practice are deemed adequate.
It is necessary to take into account the purpose of the valuation when choosing the method to use (ie, if the valuation is performed in the context of an insolvency or of a business continuity scenario). Secondly, it is necessary to take into consideration the characteristics of the business subject to valuation (for a holding company, for example, an equity valuation (valutazione di tipo patrimoniale) may be preferable, while for other companies a method which factors in future cash flows and goodwill may be more adequate).
In some contexts, the liquidation value (valore di liquidazione) becomes significant, as the law often uses this figure as a benchmark for assessing alternative procedures.
M&A transactions may in some cases be necessary to achieve the objectives of a restructuring agreement or a judicial composition with creditors.
Alert and Prevention Measures in the New Italian Crisis Code
The New Legal Framework and Its Philosophy
On 12 January 2019, Legislative Decree No 14, the new Crisis and Insolvency Code (the Code), was introduced into the Italian legal system. The Code consists of a multifaceted regulatory framework, intended to replace the 1942 Bankruptcy Act, which was unanimously considered outdated and, therefore, devoid of the tools needed to manage today’s business crises.
The new rules aim to promptly detect an incoming crisis, to provide adequate tools to turn around businesses which show promise of survival, and – prospectively – to build a new entrepreneurial culture.
An overall examination of the new provisions highlights the legislators’ ambition to push forward a real cultural change in the management of crises and insolvencies, which will hopefully end up spreading to contiguous areas of the law.
The new law intends to:
In pursuance of the above, among the general principles at the beginning of the Code, some obligations have been set out. These obligations include:
In addition, the Code requires that the corporate bodies of the debtor and certain categories of creditors, called “qualified creditors”, report the crisis in order for it to be promptly detected and dealt with. Rewards or penalties are respectively applied in the event of compliance or non-compliance with such obligations.
It is noteworthy that an “early warning” procedure has also been set up by EU Directive No 1023/2019 on preventative restructuring frameworks. This directive aims to strengthen, by means of soon-to-be-enforced national legislation, the culture of crisis prevention and recovery in the European Union.
One essential clarification needs to be made: although the Code will come into force within 18 months from its publication in the official journal (Gazzetta Ufficiale), therefore on 20 August 2020, some of its provisions – including those affecting corporate governance – already came into force on 16 March 2019 because of their function, which is “somehow preparatory to the entry into force of alert tools” (see the government’s Explanatory Report to the Code).
Alert Procedures and Crisis Composition: General Notes
The Code deals with alert procedures immediately after the general provisions. This location has been strategically selected, since these procedures are functional in both the detection and the management of a crisis, hopefully at such an early stage as to exclude the need for the adoption of jurisdictional remedies.
The Code defines crisis in a new way (Article 2, letter “a”), clearly describing it as "a state of economic and/or financial difficulty that makes the debtor likely to become insolvent, and which, for companies, consists of the inadequacy of prospective cash flow to regularly meet obligations". Crisis is therefore codified in terms of prospective – and not current – insolvency.
In a nutshell, the set of rules in question aims to ensure that the entrepreneur promptly becomes aware of the crisis, and is induced to deal with it in a confidential and professionally qualified out-of-court context that should allow for an assessment of the opposing, but not necessarily divergent, interests of the debtor (and any corporate control bodies) as well as the creditors. This discipline allows for the crisis to be managed in a more efficient way.
In general, the rules governing alert and crisis composition procedures are divided into two essential phases:
The framework is completed by the so-called “bonus measures” (Articles 24–25 of the Code) which the legislators intend should encourage companies to use assisted composition procedures.
In such a system, the formulation of the indicators or indexes of the crisis is very important (Article 13 of the Code): the identification of such indicators has therefore been delegated to the National Council of Chartered Accountants (CNDCEC).
These indicators are legal means which allow the entrepreneur to promptly become aware of the crisis in the company, allowing them to adopt the necessary measures: thus, straight after the promulgation of the Code, a lively debate arose on the identification of such indicators, which eventually led to the diffusion, by the CNDCEC, of extremely detailed operative guidelines.
A fundamental prerequisite for the reliable functioning of the warning system designed by the Code is the adoption, by the entrepreneur, of adequate organisational structures aimed at promptly recognising the crisis.
Having outlined the general picture, we can now analyse the alert phase, which precedes the activation of the OCRI procedure.
The Alert Phase
General rules and scope of application
The alert phase is a complex structural mechanism aimed at making the internal organisation of the business aware of the existence of a crisis, thereby activating a series of steps which, even if the company or the entrepreneur is inactive, will still trigger the alert procedure before the OCRI.
Article 12 of the Code, paragraphs 4 and 7, identifies all debtors who carry out entrepreneurial activities, along with agricultural enterprises and minor enterprises (Article 2, paragraph 1, letter “d” of the Code), as the subjects to whom the discipline is applicable.
At the same time, however, the same Article 12, paragraph 4, excludes from the list of companies subject to the alert: large companies (Article 2, paragraph 1, letter “g” of the Code), groups of companies of significant size (Article 2, paragraph 1, letter “i” of the Code), companies with shares in regulated markets and those with shares held to a significant extent by the general public, according to the criteria established by the Companies and Exchange Commission (Commissione Nazionale per le Società e la Borsa or the Consob).
Finally, paragraph 5 contains a long list of excluded companies: large companies operating in the banking, finance, insurance and trust sector, usually subject to compulsory administrative liquidation (liquidazione coatta amministrativa).
The crisis indicators
The activation of the alert depends on the occurrence of certain indicators, which the legislators have assumed to be highly relevant alarm signals to detect the existence of a crisis: therefore, such indicators are the keystone to the whole prevention system.
Such indicators are income, equity or financial imbalances which – in relation to the characteristics of the company and of its area of activity, and based on the date of its incorporation – show "the sustainability of the debts for at least the following six months, and the prospects of continuity for the current financial year or, when the residual duration of the financial year at the time of the evaluation is less than six months, for the following six months" (Article 13, paragraph 1 of the Code).
There are two kinds of indicators: those using the cash flow that the company can generate to measure the sustainability of debt charges; and those that measure the adequacy of the company’s funds with respect to those of third parties.
According to the same Article 13, paragraph 1, crisis indicators also include repeated and significant payment delays (eg, salary debts and supplier non-payments).
The norm is completed by one more provision, stating that:
The alert system is aimed at providing not only the entrepreneur with all the tools needed for a more accurate forecast of the performance of the company, but also for the internal control bodies of the company to report the onset of a crisis, in the first instance, to the entrepreneur and then, if required, to third parties.
The Italian legislators have, therefore, also built in a system of reporting obligations that aim to make this instrument effective.
The structure of the system is very simple:
The paths through which the internal and external reporting are reached are inevitably different, even if their rationale is the same.
The control bodies:
Pursuant to Article 14 of the Code, the corporate control bodies, the auditor and the auditing company must take certain actions when the existence of crisis indicators is detected.
Despite the fact that the wording of the law seems to place the above-mentioned three bodies in the same position, their functions and duties are, in fact, extremely different. The activities of the auditor are limited to the delivery of a professional opinion on the correctness of the financial statements; therefore, they are in no way similar to the supervisory duties entrusted to the corporate control bodies by the Italian Civil Code. In particular, the auditor does not take part in the board of directors’ meetings, does not supervise either the management or the adequacy of organisational structures, and cannot express opinions on the interim financial statements. In other words, the auditor carries out an ex-post control on the final documents drawn up by the company, which is very different from the ex-ante supervision carried out, from a prospective and forward-looking perspective, by the statutory auditors.
In any case, as to the report by the internal corporate bodies:
The provision according to which, timely reporting to the management body results in an exemption of the reporting body from liability for events subsequent to the date of the report that do not arise from prior behaviours (provided, however, that the possible inactivity of the management body is also followed by the report to the OCRI) is of primary importance, due to the dynamics it can activate between corporate bodies.
The reporting discipline is completed by provisions that somehow further strengthen and make the supervisory body responsible, since:
It is well known that, in the Italian economic system, an entrepreneur in crisis often finances themselves through indebtedness with the Tax Authority and social security institutions, which are generally much slower to protect their claims and to commence recovery actions. An increase in debt exposure in relation to these subjects is, therefore, quite a significant indicator that an illiquidity issue exists, at the very least.
With that being said, from the perspective of a systemic empowerment of all subjects dealing with the entrepreneur in crisis, the Code provides that so-called qualified public creditors (the Tax Authority, INPS and the Tax Collection Agent) are also required to activate a reporting mechanism.
Therefore, upon certain debt thresholds being exceeded, as indicated in Article 15, paragraph 2 of the Code (clearly differentiated for each qualified creditor):
As for the control body, failure to comply with the requirement to activate the alert mechanism bears adverse consequences; more precisely, failure to report to the debtor and/or the OCRI (as the case may be) will result in: the loss of the preferential nature of the claims held by the Italian Tax Authority and INPS; and the unenforceability of the claim for collection costs and charges of the Collection Agent.
In terms of critical assessments, there is clearly little to note about the reporting obligation of public entities: in relation to this obligation and its functionality there is a problem of adequacy of reporting thresholds, which can probably only be tested and verified with practical experience. There is indeed an actual risk, as noted by several commentators, that the introduction of these thresholds may lead to a massive phenomenon of reports, with a consequent foreseeable impasse of the alert system and the achievement of entirely different results from those pursued by the law.
The implications relating to the reporting obligations of internal corporate bodies may appear more complex and burdensome.
First of all, in the future, the internal and audit bodies will have a far more widespread distribution than they currently have, given the modification of the mandatory thresholds for the appointment of the internal control and audit bodies in limited liability companies, which will be implemented (before the Code as a whole comes into force) with the amendment of Article 2477 of the Italian Civil Code, set forth in Article 339 of the Code. There is a wide debate around this subject. Only a few months after the Code came into force, with the introduction by Law No 55/2019 of Article 2-bis in Legislative Decree No 32/2019, it is quite significant that the legislator has already completely amended, and increased, the dimensional thresholds that need to be overcome by the appointment of control bodies (today the control body is mandatory if at least one of the following parameters is exceeded for two consecutive financial years: assets in the balance sheet equal to EUR4 million; revenues in the income statement equal to EUR4 million; average employees equal to 20 units).
Secondly, and most importantly, the reporting obligation (with the related liability exemption of the reporting body) could create a real rush to report, in a context in which the indicators referred to in Article 14 of the Code can always be assessed with margins of discretion. As a result, in the long run, this could cause a functional deadlock concerning the relationships between management bodies and control and auditing bodies, on the one hand, and, on the other hand, the risk of reporting based on excessively prudent assessments which could perhaps cause greater damage than a failure to report in the presence of a crisis.
The legislative innovation is certainly of epochal importance: it is up to the sensitivity of all operators (entrepreneurs, stakeholders and professionals), in their respective operational fields, to do their best to produce the desired results and not – as many fear – a stalemate in the Italian economic system.