In a recent decision, the Tribunal of Monza (23 October 2014) ruled that super-priority status can be denied if it is established that (i) professional duties were not properly performed or (ii) the concordato proved to be useless or detrimental for the creditors.

The Case

An attorney filed a proof of debt in a bankruptcy proceeding for services rendered to the insolvent company, asking for its claim to be admitted with a super-priority with respect to all secured and unsecured claims. The attorney prepared a pre-filing for concordato preventivo according to Art. 161, sixth para., IBL. Subsequently, it was concluded that not all the conditions for admission to the concordato preventivo procedure could be met and, therefore, the attorney prepared the petition by the company itself to be declared bankrupt.

The Bankruptcy Judge rejected the claim of the attorney, and then the latter appealed to the panel of the Tribunal.

The Issues

Receivables of an advisor are included in those for “services functional to access to the concordato preventivo procedure” which are exempted by Art. 67, third para., lett. g), IBL from avoiding powers of the bankruptcy receiver, while on the other hand Art. 161, seventh para., IBL states that after the filing of a petition for admission to the concordato preventivo procedure “claims arisen from lawful acts performed by the debtor enjoy super-priority pursuant to Art. 111 IBL”, which in turn relates to “claims arisen on the occasion or functional” to concordato preventivo.

Should the concordato procedure fail, the issue is then whether such a super-prioprity could be conditional upon certain circumstances, thus limiting the rights of professionals in the ensuing bankruptcy proceeding.

The Decision

The Tribunal ruled that a first test must be met, relating to the professional having performed his services diligently: this indeed impacts not only on the super-prioprity status of the claim, but also on the grounds themselves of the claim. The claim cannot be admitted altogether, then, should the filing be rejected due to a professional negligence, the proceeding termineated or conformation of the concordato proposal denied. According to the Tribunal of Monza, a correct performance of professional services can be inferred when the Tribunal admitted the debtor to the procedure or otherwise recognized that it was lawfully prepared and submitted during the procedure or in the confirmation phase. Provided, however, that no detrimental facts are later discovered (as in the case of termination of the procedure for fraud provided by Art. 173 IBL or denial of confiormation in similar circumstances).

The Tribunal pointed out then a second test to be met, relating to the concordato later proving to be useless or damaging for the interests of the creditors.

In such a case, super-priority can be denied if the receiver shows that the concordato procedure, although in theory it was functional to the interest of creditors, proved indeed to have been detrimental to them because it caused a loss of the total value of assets (e.g., due to losses accrued as a consequence of trading during the procedure, without an upside consisting in the going concern value of the business being preserved).

Therefore, evidence of an actual damage breaks the causal connection between professional services and the concordato procedure, unless of course the professional can prove that this was due to external factors which could not be foreseen, or occurred after the termination of the concordato procedure.

Commentary

The ruling of the Tribunal of Monza requires to focus on the role of professionals and of their advice to the debtor in the difficult task of finding a possible remedy to financial and economic distress of the business through a concordato preventivo.

The reasoning of the Tribunal is certainly correct, where it does point out that the claim for professional fees can be admitted if services were duly rendered. This may look as common sense, but it is not as far as superpriority status is recognized, considering that this issue was recently debated due to certain changes back and forth in the law.

The ruling states another important principle in this respect, i.e. that a sort of presumption can be reached as to the actual due diligence on the part of the advisor in rendering his advice, when the Tribunal admits the debtor to the procedure, and in other similar circumstances.

On the ther side, the decision can leave one doubtful, with respect to limiting super-priority status in cases where the concordato preventivo proved to be useless or detrimental to the creditors. This may be correct in cases where the advisor was negligent in the specific case, not adequately assessing the risk of possible negative outcomes of the procedure, but in general terms this seems to encumber advisors with consequences which may be outside of their control and may create for them an obligation to provide a certain result, which is normally considered as not being the case for professional services.

It must also be pointed out, as a general remark, that advisors have different roles in providing their services needed to the distressed company in order to pursue a restructuring plan through a concordato, such as legal services, accounting review of the indebtedness, preparation of the restructuring plan in a sound financial and commercial perspective. These are areas of expertise which are different from one another and in particular, as to attorneys, a possible negligence cannot be charged for errors which are of no legal nature.