With Decree-Law 83/2015 on urgent measures concerning private law provisions, rules of civil procedure and the organisation and functioning of judicial administration in insolvency matters, Parliament has introduced major changes to the statutory provisions that govern insolvency procedures under the Insolvency Act (Royal Decree 267/1942). The changes aim to foster economic growth. In particular, they relate to bankruptcy, pre-bankruptcy agreements and debt restructuring arrangements pursuant to Article 182-bis of the Insolvency Act.
This update reviews the amendments to the rules that govern pre-bankruptcy agreements, which are arguably the principal tool that Parliament has made available to entrepreneurs to avoid being declared bankrupt. A pre-bankruptcy agreement allows a debtor in financial distress to submit a proposal to the majority of its creditors for approval based on a plan setting out the procedures and timing needed to satisfy its debts and reschedule creditors' claims under a judicial procedure supervised by the court of competent jurisdiction and a court-appointed commissioner.
Previously, a pre-bankruptcy agreement could typically be used at the sole discretion of the distressed enterprise as the only party authorised to file a petition containing the proposed agreement to be submitted to the creditors for approval. In this respect, the decree law aims to open up the pre-bankruptcy agreement to competition. This aim has been achieved through two distinct statutory tools:
- the filing of competitive proposals by entities other than the debtor; and
- the newly introduced mechanism of competitive bids, which is intended to maximise the value of the debtor's assets to be disposed of under the pre-bankruptcy agreement.
The first tool is governed by the newly introduced Paragraph 4 and subsequent paragraphs of Article 163 of the Insolvency Act, pursuant to which creditors are permitted to submit proposals for a pre-bankruptcy agreement along with the proposal previously filed by the debtor – an opportunity already provided in the statutory framework governing composition in bankruptcy (Article 124 of the Insolvency Act). The following points should be considered when filing competitive proposals:
- A competitive or alternative proposal may be submitted by one or several creditors that have become creditors following the purchase of claims arising after the petition for a pre-bankruptcy agreement has been filed by the debtor.
- The competitive or alternative proposal must be submitted by creditors representing "at least 10% of the debts reported on the balance sheet" to be appended to the petition for pre-bankruptcy agreement filed by the debtor.
- In calculating the figure of 10%, "any amounts claimed by any companies controlling, controlled by, or under common control with the debtor company shall not be considered".
- The competitive or alternative proposal must include a plan that contains a detailed description of the implementation procedures and timing and must be filed in the 30 days prior to the date of the creditors' meeting.
- The report verifying the plan on which the competitive or alternative proposal is based "can be limited to the feasibility of the plan for any aspects not yet determined by the court-appointed commissioner, and can be omitted when no such aspect remains undetermined".
- The competitive or alternative proposal may provide for an increase in the debtor company's capital, but first refusal rights must be excluded or limited if the debtor company is a public or private limited company.
- Creditors submitting competitive or alternative proposals are entitled to vote for or against a proposal only when they are put in an ad hoc class.
However, the creditors' right to submit competitive or alternative proposals can be exercised only if:
- a pre-bankruptcy agreement procedure is already in progress (initiated by the debtor, which is the only entity authorised to apply to open the procedure); and
- the proposal for agreement submitted by the debtor proposes payment, possibly in instalments, of less than 40% of total unsecured debts.
Therefore, if the debtor wants to avoid the risk that third parties file competitive proposals for a pre-bankruptcy agreement, it must keep the settlement of unsecured debts below 60% of the aggregate amount payable.
The procedural mechanism for submitting competitive proposals introduced by the provisions has some similarities with the mechanism that applies to composition with creditors in bankruptcy. However, composition with creditors in bankruptcy can take place only after bankruptcy is declared in an existing dispossession of the debtor's assets. Instead, dispossession is mitigated in a pre-bankruptcy agreement, as the debtor retains the disposition of its assets and the management of its business. Thus, the consistency of the new statutory provisions with the principles laid down in the Constitution must be assessed to uncover whether some form of dispossession of assets or deprivation of the freedom of individual enterprise could arise.
The second tool is governed by Article 163-bis of the Insolvency Act, which was introduced by Article 2 of Decree-Law 83/2015. It is intended to govern 'pre-packaged agreements', that is, pre-bankruptcy agreements in which the proposal for the agreement already acknowledges the existence of a prior bid submitted by a specifically identified third party for the purchase (often following leasing) of the debtor's business and/or one or more of its assets. Specifically, the new statutory provision requires that if the agreement's preparatory plan "includes a bid from a third party already identified for the transfer to it, for full monetary consideration, of the debtor's entire business, one or more going concerns or specific assets", the court-appointed commissioner must assess the bid's suitability and the bidder's qualifications. If the commissioner finds – in light of intervening bids from other entities – that the bid included in the plan might not match the creditors' best interests, he or she may ask the court to initiate a competitive bid process to attract prospective investors capable of submitting a higher bid than that filed by the financially distressed debtor.
If the court-appointed commissioner believes that a competitive bid process should be initiated, he or she will file a petition for the court to take action with regard to the value of the business or the assets, which may attract prospective third-party investors and result in greater creditor satisfaction than under the proposal for agreement submitted by the debtor.
Through the decree ordering that a competitive bidding procedure be opened, the court will:
"set the modes of submission of irrevocable bids, specify that comparability must be ensured, and determine the requirements for the bidders' eligibility to participate in the process, the forms and times of access to, and possible limits to the use of, the relevant information, the manner in which the commissioner must convey such information to those applying therefor, the date of the hearing for an examination of the bids, the manner in which the competitive procedure must be conducted, the guarantees to be given by the bidders, and the forms of publicity of the decree."
Once the competitive procedure has been initiated, the submitted bids will become binding if modified in accordance with the court's decree and if the requisite guarantees have been provided. In order to streamline the competitive process, the new provisions require that competitive bids be submitted under seal and state that they cannot be deemed effective unless they comply with the contents of the decree and are not subject to conditions.
Further, the new Paragraph 3 of Article 163-bis of the Insolvency Act requires that all submitted bids be publicly disclosed at the court hearing for examination, which both the bidders and any interested parties may attend. The competitive bid process will be opened only if several better bids have been duly submitted in compliance with the court decree to initiate the procedure. Although the process may involve several hearings, it must be completed prior to the creditors' meeting, when the creditors will be called upon to vote on the proposal for a pre-bankruptcy agreement submitted by the debtor. Prior completion is mandatory, even where the debtor's plan proposes that one or more business units or specific assets be assigned following the court's homologation of the pre-bankruptcy agreement.
Finally, Parliament has provided for compensation for the third party that is identified as the entity interested in purchasing one or several going concerns or specific assets in the plan filed by the debtor, in case the party is not awarded the agreement. In this case, the court-appointed commissioner will decide that the party concerned be reimbursed for the costs and expenses it incurred in submitting its competitive bid, but only up to 3% of the bid price. Further, after the asset involved is sold to others, the affected party will be released from any obligations it might have assumed to the debtor. If the agreement is awarded to a party other than that originally identified by the debtor, the debtor must modify its proposal and plan according to the outcome of the competitive process, and therefore in compliance with the terms of the superior bid submitted by the third-party awardee.
Parliament's decision to open up the pre-bankruptcy agreement procedure to competition – in case a plan provides for one or several going concerns or specific assets to be transferred to pre-identified entities – is a wise choice based on judicial precedents from cases involving pre-bankruptcy agreements that were of interest to large enterprises. An equally sensible provision is the possibility for creditors to submit competitive proposals for pre-bankruptcy agreements. This is expected to avert the risk of unsuitable pre-bankruptcy agreements being proposed and could result in significant rates of debt satisfaction, even in the face of existing valuable assets. It remains to be seen whether the new statutory framework is capable of attracting investors and bids.
For further information on this topic please contact PierDanilo Beltrami or Giacomo Bertone at Lombardi Molinari Segni by telephone (+39 02 896 221) or email (firstname.lastname@example.org or email@example.com). The Lombardi Molinari Segni website can be accessed at www.lmlaw.it.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.