Lawmakers made a few changes to the concordato rules with the foreseeable result of restricting significantly the access by debtors to the procedure, shifting the main focus from liquidation plans to schemes allowing to preserve the business as a going concern
New rules introduced upon conversion of Art. 4 of law decree No. 83/2015
Various amendments, all provided by Art. 4 of the law decree, marked a different attitude by lawmakers as compared to the clear support for concordato preventivo workouts, shown since 2005. Two key aspects (see at a and b below) suggest that there may have been a sort of “counter-reform”:
- the voting rule “no vote = yes vote” has been overturned, thereby coming back to the traditional rule providing that the concordato proposal is approved if expressly voted in favour by the majority of creditors admitted to vote;
- a minimum threshold has been reinstated (except when the concordato provides that the business can be preserved as a going concern, according to Art. 186-bis IBL) for dividends to be offered to creditors on their claims, now at 20 percent.
These were distinctive features of pre-reform concordato regime, which are restored and which will likely impact as a matter of fact, on one side, on the feasibility of a proposal and, on the other side, on the positive outcome of the concordato procedure.
It is not being suggested here that lawmakers made a U-turn on the way followed with the last decade of reforms: the concordato structure is there to stay and the last amendments seem instead to confirm a clear favour for rules allowing the business to be preserved as a going concern, but the aim of lawmakers seems at curbing a regime of indiscriminate favour for any concordato initiative and for a system which was perceived as too much debtor-oriented.
a) Art. 178 IBL – voting rule “no vote = yes vote” overturned
Art. 178 IBL last para. has been amended, repealing the second sentence which stated that creditors not casting their vote were considered as approving the proposal.
The voting rule “no vote = yes vote” was introduced only three years ago and caused very often largest majorities approving concordato proposals. The impression was widespread that this made very difficult for creditors to prevent a concordato to be approved and left the debtor with too wide a leverage, which could be used also for abusive proposals taking resources away from creditors.
This concern can be shared, but it must also be considered that the same law decree No. 85/2015 has simultaneously introduced significant new rules allowing purchase offers and concordato proposals competing with that of the debtor (see at the links for more details) and these seemed to provide already a sufficient relief in such respect.
b) Art. 160 IBL – minimum 20 percent threshold for dividends, except when the concordato preserves the business as a going concern
Art. 160 IBL has been amended with a new fourth para. providing a new condition for the concordato proposal to be admissible, and as such also a condition for the proposal to be confirmed by the Court. The new rule states that the proposal “shall ensure” payment of at least a 20 percent dividend to unsecured creditors: therefore, this is an element whose feasibility shall be certified by the expert in his report accompanying the concordato proposal according to Art. 161 IBL.
Lawmakers use the term “payment”, but it should be considered that it refers also to any other means of discharging the debtor’s indebtedness, as Art. 160 IBL still allows the debtor to make such a proposal and also that the new rule introduced at Art. 161 IBL (see at c below) provides that the proposal shall indicate the “benefit” (therefore, also different from cash, but still “economically valuable”) that the debtor is obliged to provide to the creditors.
It is common experience that – after the rule providing for a minimum threshold for dividends was repealed since 2005 – in the majority of cases concordato proposals fared lower than the new 20 percent limit. Lawmakers therefore knowingly introduced a rule having a strong shrinking effect on concordato procedures.
It is not, however, a rule applicable in all circumstances. An exemption is set, when the concordato provides that the business is preserved as a going concern: as a consequence, this kind of proposal is headed for being the one most resorted to by debtors in the future, and the precise definition of the conditions for exemption is key. In this respect, Art. 160 IBL recalls the definition set forth in Art. 186-bis IBL which in turn refers to the contents of the concordato plan, which shall provide alternatively that:
- the debtor will continue trading, or
- the business will be sold as a going concern.
The definition expressly includes, therefore, cases when the resources to pay dividends to the creditors will come from cash flows of future operations, without a liquidation (so-called “direct” preservation of business), and cases when, to the contrary, the business as a going concern will be sold as a whole within a liquidation plan of all the assets of the debtor (so-called “indirect” preservation). A concordato proposal preserving the business is therefore perfectly compatible (in its “indirect” form) with a liquidation plan: what is relevant is that the business be preserved as a matter of fact and not as a matter of the debtor continuing to be the owner.
Uncertainties remain for cases when (as very often happens) a lease of business arrangement is put in place within the concordato plan, in particular when the lease takes effect before the concordato filing: in such a case, indeed, there is no continuing operation of the business by the debtor during the procedure, but a sale is still provided of the business as a going concern, although the business is being run by a third party and not by the debtor (case law is split on this issue: see Trib. Roma 24 March 2015, Trib. Bolzano 10 March 2015, Trib. Vercelli 13 August 2014 and Trib. Mantova 19 September 2013, holding this as a concordato preserving the business; for the opposite conclusion, see Trib. Ravenna 22 October 2014, Trib. Busto Arsizio 1 October 2014 and Trib. Patti 12 November 2013).
Art. 186-bis IBL, which sets forth the rules applicable to the concordato scheme preserving the business, seemed to imply a condition that the debtor continued trading during the procedure: however, today the conclusion may differ, because the overall legal environment has changed. The “value” of preserving the business as a going concern seems to be the key reason for a lower protection of creditors’ interests, as they are not guaranteed a minimum dividend: this rule should therefore apply also to a concordato with a lease of business taking effect before the initial filing.
Although preserving the business, a concordato proposal offering a percentage lower than 20 percent might still be not admissible due to a lack of the condition (which is specific to this kind of concordato) that it be more favourable to creditors, if the mere liquidation alternative (without a sale of the business as a going concern) could yield a better return to creditors: however, this does not seem will happen very frequently, because in a bankruptcy liquidation, as it is well known, assets are sold at highly depressed prices.
c) Art. 161 IBL – specific indication of dividend offered to creditors
Art. 161 IBL has been amended clarifying, at second para., lett. e) that “in any case, the proposal shall indicate the benefit specifically indicated and economically valuable that the party making the proposal undertakes to provide to each creditor.” The rule has been interpreted by the first commentators in the sense – which is not immediately evident if one does not refer to prior case law – that the percentage being offered to creditors shall always be indicated, be it lower (when this is allowed) or higher than 20 percent.
The “benefit” – that the debtor “undertakes to provide” – would be therefore the minimum threshold of dividends, which case law had already ruled shall be “specifically indicated” in the concordato proposal, when this provided for the liquidation of the entire debtor’s estate. As it is well known, indeed, in such a kind of concordato proposal, the final outcome of the liquidation could only be estimated at the outset, but the risk that it could actually be realized remained as a risk to creditors: hence the need, which seems to come up now as a fix rule of law, that a minimum dividend be set by the debtor, so that, if not paid, creditors can be allowed to ask the concordato to be terminated for breach.
There is no real news, therefore, for concordato proposals different from cessio bonorum, as for them the dividend being offered already had to be indicated (according to case law, also in concordato proposals “directly” preserving the business: see Trib. Lecco 10 July 2015, Trib. Monza 13 February 2015).
d) Articles 160 and 165 IBL - involvement of the Public Prosecutor
A few additional amendments can be noted – against possible abusive exploits by debtors of the concordato procedure – as regards punishment of bankruptcy crimes. It is well known that in this respect there is no difference at law between bankruptcy liquidation and concordato preventivo, but is also well known that Public Prosecutors as a matter of fact seem less inclined to take action in concordato, when it is approved and confirmed by the Court. Recently, Judges and Public Prosecutors called for more attention to in-depth investigation also in agreed-to insolvency workouts.
The new rules follow in this direction and provide:
- at Art. 160 IBL, the need for the concordato proposal and documentation (including the Judicial Commissioner’s report) to be transmitted to the Public Prosecutor (which indeed seems to happen already quite frequently as a matter of fact);
- at Art. 165 IBL, the obligation of the Judicial Commissioner to timely inform the Public Prosecutor of facts which can be relevant for criminal investigations, and which the Judicial Commissioner becomes aware of in performing his office.
e) Art. 172 IBL - Judicial Commissioner report
At Art. 172 IBL it is now specified the Judicial Commissioner report shall indicate the “benefit” which could accrue to creditors, in a possible bankruptcy liquidation as an alternative to concordato, from claims for damages or claw-back actions (as a matter of fact, often Judicial Commissioners already do so).
Entry into force
Amendments to Articles 160, 161, 165, 172 and 178 IBL, introduced by Art. 4 of law decree No. 83/2015, as amended and supplemented following conversion into law, shall apply (according to Art. 23, first para., of the law decree) to concordato preventivo procedures commenced following filings made after entry into force of the conversion law 6 August 2015, No. 132, which is (according to Art. 1, third para. of the law) the day following publication in the Official Gazette and, therefore, on 21 August 2015.