The Italian Government further integrated the rules applicable to debt restructuring agreements, allowing the debtor to cram down the agreement also to dissenting minority lenders, in two different frameworks: a) stand-still agreements for a “temporary moratorium” pending negotiations, and b) the actual agreements for the rescheduling and restructuring of the outstanding debt.
The scope of the new Art. 182-septies IBL
The new rules for debt restructuring agreements apply only:
- when the amount of claims by lenders and financial intermediaries (hereinafter referred to as “lenders”) is more than 50% of the total indebtedness;
- to claims of lenders (without prejudice therefore for the rights of other creditors).
The cram down of lenders with respect to a Debt Restructuring Agreement
The new regulation allows the debtor – in the context of the proceeding for confirmation of a debt restructuring agreement by the Court – to “compel” acceptance by individual lenders to the agreement entered into with a large majority of lenders, under the following conditions:
- dissenting lenders are included into one or more “classes” of lenders with the same legal status and “homogeneous” economic interests;
- lenders having accepted the agreement and included in the same “class” represent at least 75% of the claims of the “class”;
- the agreement identifies the different “classes”;
- dissenting lenders have been informed and have been allowed to participate in good faith to the negotiations;
- dissenting lenders have received comprehensive and updated information on the assets, the financial and economic conditions of the debtor, as well as on the terms of the agreement and its effects;
- negotiations have been conducted in good faith;
- the debtor has requested pursuant to Article 182-bis IBL that the effects of the agreement be extended to dissenting lenders.
The classes of lenders will be identified on the basis of the same criteria (the expression “homogeneous legal status and economic interests” is the same) which have presided over a decade the formation of classes in the concordato preventivo proceeding: case law on the subject can then be referred to.
In other respects, however, differences are notable from the concordato preventivo. First, not all lenders have to be included in a class, nor the different classes must be provided from the beginning of negotiations with the lenders: indeed, the division of creditors into classes can take place just before the petition for the ratification of the agreement by the court is filed. A class can then be identified ex post in relation to the specific needs to cram down the agreement to a certain lender (of course, it will have to be convincingly demonstrated that the inclusion in the same class is reasonable and complies with the legal criteria).
A further difference is that the provision of classes, being provided as a special condition of the agreement, must be agreed with the lenders having accepted the agreement and, therefore, does not fall within the sole discretion or initiative of the debtor. Accordingly, it is for the debtor and the lenders accepting the agreement to take the decision to cram down dissenting minority lenders: it is likely that this will occur at the final stage of negotiations, when deadlocks usually arise. Up to date such a situation forced the debtor to file a petition for concordato preventivo, with outcomes generally less favourable for both the debtor and the creditors generally.
The new framework is therefore likely to impact radically on to the leverage of dissenting minority lenders in the negotiations for the definition of a debt restructuring agreement and will give one more chance to the debtor to successfully restructure its overall indebtedness and/or reorganise its business avoiding a declaration of insolvency and the initiation of insolvency proceedings.
However, it will not be possible to cram down in any case the dissenting lenders: indeed, often the dissent is due to the very fact that the interests and legal position of some creditors sharply differ from those of the other lenders and it may therefore be very difficult to prove that there is a class whereby creditors representing 75% of claims accepted the agreement.
The cram down of the dissenting lender in each case will determine (derogating to the general principles of the law of contracts, namely Articles 1372 and 1411 ICC) the same effects as a voluntary agreement: in particular – as expressly provided by Article 182-septies, second paragraph, IBL – for the calculation of the 60% share which is a condition for the confirmation of the agreement by the Court pursuant to Article 182- bis IBL.
The debtor willing to cram down dissenting lenders shall notify to them the petition filed according to Article 182-bis IBL and the related documentation: indeed, only the service (and not the publication of the agreement in the Companies’ Register, which applies to all other creditors) does trigger the term for the crammed down lenders to challenge confirmation of the agreement by the Court.
The cram down of minority dissenting lenders with respect to stand-still agreements
The new law also supplemented the rules governing the phase of negotiations between the debtor and the lenders, providing an appropriate remedy to extend also to minority dissenting lenders the effects of “an agreement intended to provisionally regulate the effects of the distress through a temporary moratorium of claims by one or more lenders” (see Article 182-septies, fourth paragraph IBL).
The cram down or extension of the effects of the stand still agreement does not require the intervention of the Court and occurs provided the following conditions are met:
- dissenting lenders have been informed of the negotiations and have been enabled to participate in good faith (it is to be assumed that this involves – although not expressly provided – that dissenting lenders have received comprehensive and updated information of the assets, the economic and financial conditions of the debtor as well as on the terms of the moratorium and its effects);
- lenders approving the stand still represent at least 75% of claims held by lenders affected by the moratorium;
- an independent expert appointed by the debtor certifies that the legal position and economic interests of lenders affected by the stand still are indeed homogeneous.
This wording gives rise to some uncertainty. There is no requirement that dissenting lenders should be included in one or more “class”: this seems confirmed by the fact that the certification by the independent expert concerns “the creditors affected by the moratorium”, being therefore considered as a whole, without any distinction. However, should it be so, it would seem very difficult to meet in practice the requirement of an homogeneous position and interests of lenders because, every time lenders hold a mortgage or a lien, the expert could never issue the required certification. An alternative interpretation might therefore be envisaged according to which, the requirement could be assessed considering different “classes” of lenders.
The effects of the cram down are subject only to the issuance of the statement of the independent expert, certifying that the conditions required by law are met. However, as the stand still will affect the legal position of third parties, it seems reasonable to assume that, in order to make it enforceable against crammed down lenders, a notice to them should be sent by registered letter or certified e-mail, considering that such a notice is provided by Article 182-septies, fifth paragraph, IBL in order to allow the lenders to oppose confirmation.
The opposition must be filed with the Court within 30 days from the aforesaid notice. The judicial authority is therefore involved only in this case. The Court decides on the oppositions, if any, verifying whether the conditions required by law are met: the wording of the provision leaves room to some uncertainty, whether the Court can examine in the merits the contents of the certification issued by the exert, but it seems reasonable to say that it is so. The decree of the Court may be appealed with the Court of Appeals within 15 days from the date it is served on the other party. It is uncertain if the decision of the Court of Appeals can be further appealed before the Supreme Court for violation of law pursuant to Article 111, seventh paragraph of the Constitution: on the one hand, an individual right is certainly at stake, but the temporary effects of the stand still could exclude that there is a “decision” with final effects, subject as such to this appeal.
The extent of the effects of the moratorium gives rise to a situation quite different from those governed by Article 182-bis, sixth paragraph, IBL, or Article 161, sixth paragraph, IBL, which allow the debtor to obtain a stay of enforcement actions by creditors generally, and additional protection, upon a pre-filing for a concordato preventivo or for a debt restructuring agreement confirmation procedure. Article 182-septies, fourth paragraph et seq. IBL affords only certain effects limited to crammed down lenders, based on the terms of the actual stand still agreement.
It should be mentioned, finally, that according to Article 182-septies, last paragraph, IBL the following could no be imposed through a cram down of a stand still agreement:
- the performance of new obligations and in particular the granting of new loans;
- the granting of revolving credit lines or maintaining the possibility of using those already committed. It can instead be imposed to allow the debtor to continue using leased assets.
Entry into force
The new rules are immediately applicable to:
- requests for confirmation of debt restructuring agreements pursuant to Article 182-bis IBL, filed with the Court and entered in the Companies’ Register;
- statements by the expert pursuant to Article 182-septies, fourth paragraph IBL with respect to stand still agreements;
occurred after 27 June 2015 (date of publication in the Official Gazette of Law Decree No. 83/2015).