The Court of Milan (19 February 2016) adopts a restrictive approach and rules out that the special rules provided for concordato “preserving the business” (“concordato con continuità aziendale”) can apply where the plan includes a lease of business arrangement

The case

A company assisted by Nctm filed a concordato preventivo proposal based on a plan providing for competitive bid procedures for the sale of all the company’s assets – including the ice cream manufacturing business unit which was leased to a new investor pursuant to a lease agreement entered into before the concordato filing – which could reasonably ensure payment to unsecured creditors of a share of at least 23% of their claims (the company’s proposal was to pay a share of 20% of unsecured claims).

The issues

The Court addressed a very debated issue whether the special rules designed for concordato “preserving the business” (“concordato con continuità aziendale”) can apply where the plan does not provide for the debtor to continue trading directly during the procedure, due to an arrangement with a new investor for the lease of the business, become effective before the concordato filing.

The decision of the Court

The Court of Milan (Judge Ms. Mammone) admitted the company to the procedure, excluding that the concordato could be qualified as “preserving the business”: according to the Court, a lease of the business effective before the concordato filing is not included in the definition set forth by Art. 186-­‐bis IBL, which is focused on the debtor continuing to trade, while the lease of business works as a temporary measure in order to preserve the business as a going concern aiming to the subsequent sale of the business unit in a liquidation.

In the view of the Court, this conclusion is confirmed (i) by the special rule requiring that the concordato plan “preserving the business” set forth costs and revenues as well as the financial resources available to the  debtor to  continue  trading, and  (ii) by  the  consideration that  the  trading risk  is  shifted to  the lessee and there is no reason therefore to allow the debtor to enjoy the “benefits” provided by Articles 186-­‐bis and 182-­‐quinquies IBL in cases where the business is being run by a third party.

Commentary

The qualification of the concordato “preserving the business” where the plan includes a lease of business arrangement continues to be a highly debated issue.

In this respect, the definition set forth in Art. 186-­‐bis IBL 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 where:

  • the so-­‐called “direct” preservation of business, where the resources to pay dividends to the creditors will come from cash flows of future operations, without a liquidation
  • the so-­‐called “indirect” preservation of business where, to the contrary, the business is preserved as a going concern by selling it as a whole to a third party within a liquidation plan of all the assets of the debtor.

The uncertainty relating to the lease of business (in particular when it is effective before the concordato filing) lies in the fact that a sale of the business as a going concern is indeed provided by the concordato plan (which meets expressly one of the two alternative conditions set forth in Art. 186-­‐bis IBL), but the business is being maintained as a going concern not by the debtor, but rather by a third party and, therefore, the debtor is not trading during the procedure (which should not prevent the concordato to be qualified as “preserving the business”, as this is only one of the two alternative conditions required by Art. 186-­‐bis IBL).

Those who concentrate on the aim of the law to favour from an “objective” point of view the preservation of the  business as a  going concern, conclude  that a concordatcan be qualified  as “preserving the business” even where a lease of business is provided (see Trib. Alessandria 18 January 2016 in the “Borsalino” case, Trib. Rovereto 16 July 2015, Trib. Roma 24 March 2015, Trib. Bolzano 10

March 2015, Trib. Vercelli 13 August 2014 and Trib. Mantova 19 September 2013). On the contrary, those who concentrate on the debtor continuing to trade, take the opposite view whenever this is not provided by the concordato plan (Trib. Rimini 1st October 2015 Trib. Ravenna 22 October 2014, Trib. Busto Arsizio 1sr October 2014 and Trib. Patti 12 November 2013).

The Court of Milan is following this latter and more restrictive view, pointing out that the set of rules applicable to concordato “preserving the business” is more consistent with an interpretation considering only a “direct” preservation of the business, also in light of the “benefits” granted by the law to the debtor.

It is certainly true that certain provisions are consistent with a situation where it is the debtor itself to continue trading (the authorization to pay vital suppliers for past claims – the stay of termination clauses related to the opening of the procedure – the possibility to continue performing public contracts – the one-­‐year delay in paying secured claims according to the concordato proposal – the requirement that the concordato plan set forth costs and revenues as well as the financial resources available). However, this does not seem that a concordato can still qualify as “preserving the business” where a lease of business is in place, because the latest 2015 amendments made applicable some additional special rules: in particular, some new provisions (the exemption from the mandatory 20% minimum dividend to be paid to unsecured creditors – the exemption from possible competing concordato proposals by creditors if the debtor proposes a minimum 30% dividend to unsecured creditors, instead of 40%) do grant a certain “benefit” to the debtor, but this can be justifiable also in light of an “indirect” preservation of business, keeping in mind that the special rules for concordato “preserving the business” include also certain additional limits and conditions, such as the need for an independent expert to certify that the proposed plan is more favourable to the creditors.

The “value” of preserving the business as a going concern – irrespective of the entity (debtor or a third party) running it – seems indeed to be the key factor justifying a rule excluding a minimum guaranteed level of satisfaction of their claims.