The Italian Code for Business Crisis and Insolvency: spotlight on the latest amendments

The Amendment applies to all proceedings pending as of its effective date, as well as to those initiated thereafter, with the sole exception of the provisions related to the new tax settlements, which apply only to proposals submitted after the Amendment’s effective date.

Below is an overview of the key changes introduced by the Amendment.

General principles, crisis detection

The Amendment:

• Extends the duty of fairness and good faith, already imposed on the debtor and creditors, to all “interested parties” involved in the restructuring;
• Imposes on the statutory auditors and/or auditors (revisore legale) the obligation to report the existence of conditions of crisis or insolvency that may trigger access to negotiated composition of the crisis (composizione negoziata della crisi) within 60 days from when they become aware of condition of crisis; and
• Grants innovative start-ups (other than small enterprises) the right to access crisis regulation tools.

The Amendment also clarifies that all claims arising after the petition for access to a crisis regulation tool are granted super-priority status (prededuzione) and retain such status in any subsequent proceedings.

Composizione negoziata della crisi (“CNC”)

The CNC—currently the key mechanism for resolving corporate crises at an early stage—has undergone several changes in the Amendment.

The most significant are as follows:

• Debtors (even those merely facing financial imbalance) can access the CNC even if a petition for judicial liquidation has been filed against them by third parties;
• The debtor may conduct negotiations without the expert’s presence, provided the expert is kept informed of their progress; and
• The debtor is allowed to propose a settlement agreement with tax authorities for partial or deferred payment of debts provided that: (i) the taxes are not EU own resources (so the agreement may also cover VAT); (ii) an independent professional certifies that the proposal is more convenient compared to the judicial liquidation scenario; and (iii) a revisore legale certifies the accuracy and completeness of the company’s financial data. The agreement must be filed with the Court and its execution is subject to judicial approval.

Judicial authorization is now required in the CNC for the recognition of super-priority (prededuzione) for any form of financing, including the issuance of guarantees. Financing can now also be granted in execution of the agreement reached following the CNC.

To address practical issues that have arisen in negotiations with banks, the Amendment clarifies that the commencement of the CNC and participation in negotiations do not justify the withdrawal of existing credit facilities by banks (and/or their assignees), nor the reclassification of financial credits. Banks will classify their credit based on the content of the proposed plan, in addition to prudential supervisory regulations (vigilanza prudenziale). Any reasons for withdrawal of credit lines must be clearly communicated to the debtor. Also, in case of issuance of protective measures, the concerned banks cannot suspend (or continue suspending) the use of the revolving credit facilities by the debtor, unless required under the applicable supervisory regulations.

In addition, the new provisions clarify that the continuation of the contractual relationship by the banks in the above circumstances shall not, per se, expose the latter to liabilities.

Certified reorganization plan

According to the Amendment, the plan must include, among other things, specific details regarding:

• The debtor’s assets and liabilities at the time of submission;
• The timeframe and actions required to restore the debtor’s financial and economic balance, to be monitored according to a detailed deployment plan, which shall include specific remediation actions in case of underperformance of the plan; and
• The expected costs and revenues, as well as the debtor’s financial needs, also taking into account the costs related to compliance with workplace safety and environmental protection regulations.

Debt restructuring agreements

The Amendment changes the rules for the cram-down of public creditors in case of non-adherence to (or refusal of) the tax or social security settlement (transazione fiscale) proposal made by the debtor.

The Court may proceed with the cram-down if:

• The restructuring agreement does not have a liquidation purpose;
• Creditors adhering to the agreement represent at least 25% of the total claims of the debtor;
• The no worse-off test is satisfied; and
• Public creditors are satisfied to at least 50% of their claims, excluding penalties and interest, which increases to 60% (with a maximum deferral period of ten years) if the claims of the adhering creditors are less than 25% of the total indebtedness or if there are no other adhering creditors.

Cram-down cannot be applied if the debtor (or its predecessor) has previously undergone a tax or social security settlement in restructuring agreements that was later resolved, or if the debt towards the relevant public entities and institutions exceeds 80% of the debtor’s total claims and arises from unpaid taxes, even partial, over at least five tax periods, or from violations detected through false documentation, non-existent operations, or fraudulent conduct for at least one-third of the total amount.

Restructuring plan subject to homologation (“PRO”)

The PRO is further enhanced by the provision that allows for tax and social security settlements (transazione fiscal e contributiva) before the filing of the homologation request. An independent professional must certify: (i) the accuracy of the company’s data; and (ii) that there is no worse-off treatment compared to judicial liquidation. Public creditors must adhere to the proposal within 90 days, subject to postponement in case of amendments of the proposal. Cram-down is not permitted.

The Amendment also provides that the debtor may be authorized by the Court, even before homologation, to transfer businesses or business units without the buyer’s joint liability (except for employee debts). Principles of competitiveness must be respected.

Composition with creditors

The Amendment introduces some changes also to the composition with creditors regime (concordato preventivo).

In particular, the Amendment clarifies the content of the plan providing that:

• In plan with a going concern, external resources can be freely distributed among creditors (no application of the Absolute/Relative Priority Rule);
• The liquidation value is defined as the amount that can be obtained by liquidating the assets during judicial liquidation. The liquidation value includes (i) the value obtainable from the transfer of the business as a going concern during judicial liquidation, and (ii) the value achievable from claw-back and liability actions, net of expenses; and
• The plan must provide for risk funds related to financing guaranteed by public support measures to cover the amount to be paid to public creditors (which rank senior) if the guarantee is enforced.

The Amendment introduces, inter alia, new rules for the cram-down of public creditors. The Court may proceed with the cram-down if the (favorable) vote of public creditors is decisive for the approval of the proposal and:

• In case of a liquidation plan, the proposal is more convenient compared to the judicial liquidation scenario (as certified by an independent professional); and
• In case of a plan with a going concern, the proposal is not worse than the alternative of judicial liquidation.

The Amendment modifies the rules of the cross-class cram-down for homologation providing that (in addition to the other conditions) in the absence of majority approval by the classes, the proposal is approved by at least one class of creditors: (i) to whom an amount less than the full claim is offered; (ii) who would be satisfied in whole or in part if the Absolute Priority Rule was applied also to the value exceeding the liquidation value.

The Amendment also reduces the thresholds for the filing of competing proposal for concordato by third parties. It is now sufficient to hold at least 5% of the overall claims of the debtor, whereas previously, the threshold was 10%. Also, when different proposals are submitted, the one that envisages the continuity of the business always prevails over a proposal that entails the liquidation of the same.

Special provisions are introduced with respect to corporate extraordinary transactions. The Amendment provides that:

• If the recovery plan includes merger, demerger or transformation transactions, any opposition must be filed by the creditors within the homologation procedure (“procedimento di omologazione”). Once the homologation has been sanctioned, the invalidity of the related resolutions cannot be declared and the effects of the relevant transactions become irreversible: the claimant may only obtain right to compensation which would rank as super-senior; and
• The homologation determines any modification of the corporate bylaws as provided in the recovering plan, delegating to the directors the adoption of any necessary implementation acts. In case of directors’ inertia, the Court may appoint a judicial administrator to complete the relevant tasks.

Finally, the Amendment clarifies how to calculate the “value attributed to the shareholders” that becomes relevant in the case of dissenting classes. Such value shall be determined in accordance with the applicable accounting principles for determining the value in use, based on the present value of future cash flows using the data resulting from the underlying plan and applying the projections for subsequent years.

Group companies

The Amendment introduces certain changes regarding the restructuring proceedings of groups of companies, including:

• The possibility for the companies within the same group to jointly submit a unique proposal for the settlement of taxes and social security debts in the different form provided for by each crisis regulation tools. The mandatory separation of assets and liabilities of each company within the group remains, however, unaffected;
• The possibility for the Court to dispose the separation of the proceedings whenever conflicts of interest arise between: (i) the companies among the group; or (ii) the interests of their respective creditors. Separation of the proceedings is mandatory if the receiver intends to pursue a liability action pursuant to Article 2497 of the Italian Civil Code; and
• The disapplication of the provisions relating to the subordination of intra-group financing granted by a borrower to its parent entity exercising management and coordination powers.

Judicial liquidation

The judicial liquidation has undergone several changes in the Amendment.

The most significant are as follows:

• The opinion of the creditors’ committee is deemed favorable if it is not provided within the timeframe requested by the receiver; creditors’ committees can suggest changes to the liquidation program;
• Transactions, payments and guarantees under the simplified composition with creditors (concordato semplificato per la liquidazione del patrimonio) are exempt from claw-back actions; and
• The receiver is authorized to transfer not only claw-back actions but also claims for damages and recovery actions, speeding up the liquidation process.

The provisions governing registered preliminary real estate sale agreements entered by the debtor before the opening of the judicial liquidation have been amended as follows:

• The mortgage creditor can challenge the adequacy of the agreed price if the property’s market value was at least 25% higher than the agreed price. The sale contract is terminated unless the buyer pays the difference before the Court’s decision;
• Advance payments made before the opening of the judicial liquidation using traceable methods are valid and enforceable against the insolvency estate (opponibili alla massa). The judge will cancel mortgages and liens once the transfer is finalized.

Streamlining of judicial liquidation proceedings (timing)

Some interesting tweaks are brought to judicial liquidation proceedings in order to ensure a swifter procedure:

• When appointed, the receiver shall declare to have sufficient time, skills and resources in order to efficiently manage the relevant proceedings;
• Within eight months from the opening of the judicial liquidation, the first tender process for the sale of the goods of the insolvent debtor shall be launched. Otherwise, the receiver may be revoked;
• For real estate assets, the receiver shall make at least a tentative sale in the first year and two sales for the subsequent years; and
• The maximum term for the completion of the judicial liquidation is five years from the opening of the proceedings (which can be extended by the designated judge in case of special circumstances).

Composition with creditors in the judicial liquidation (concordato nella liquidazione giudiziale)

Here are some of the main changes introduced by the Amendment to the composition with creditors in the judicial liquidation (the “Judicial Liquidation Composition”):

• The Court has the authority to approve a Judicial Liquidation Composition even without the consent of public creditors (cram-down), provided their vote is crucial for reaching the required majority. The Court may homologate the Judicial Liquidation Composition plan if an independent professional certifies that the proposal offers a better outcome for creditors compared to continuing judicial liquidation;
• In cases involving the liquidation of companies within the same group, a single or coordinated application can be submitted, thereby streamlining the process;
• All Judicial Liquidation Composition proposals are now being put to a vote. The proposal with the highest creditor support will prevail, or if there is a tie, the first proposal submitted will be chosen; and
• All acts legally executed under the Judicial Liquidation Composition will remain valid even if the homologation is overturned or annulled.

Conclusions

The new provisions are clearly aimed at fostering the use of early restructuring tools once more, preserving the continuity of the business and decongesting tribunals, leaving judicial liquidation as a last resort.

The most important area of intervention can be summarized as follows:

• A significant strengthening of the CNC through, inter alia, the introduction of settlement options with tax authorities (transazione fiscale) and a stricter definition of the role (and boundaries) of the banks involved;
• More stringent conditions for the cram-down of the public creditors in order to minimize the impact on the State’s balance sheets; and
• Adjustment of certain other provisions and principles applicable to the other restructuring tools to clarify the relevant interpretation and eliminate possible inconsistencies.

Since the enactment of the CCII, we have seen a continuously increasing use of the new and lighter tool represented by CNC. However, it encountered some barriers due to the impossibility of making settlement proposals to tax authorities and the risk of further deteriorating the situation in case of (frequent) revocation or suspension of revolving credit facilities by the banks involved.

Now that most these obstacles have been removed or mitigated, we expect to see a significantly higher number of successful CNCs going forward.

At the same time, in cases where no restructuring tools proves to be viable, and judicial liquidation proceedings open, we expect to see more expedited realization of the debtor’s assets in the preponderant interest of creditors and bidders.

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