The Supreme Court (decision No. 20559 of 13 October 2015), decided that a single application for admission to the procedure is not admissible if it involves a group, with a single proposal for all the creditors of the different companies, although the relevant assets and liabilities are kept formally separated.

The case

A corporate group – made up of a general partnership incorporated for the specific purpose (“Newco”) and four companies as partners with unlimited liability, which had contributed to Newco their own assets and liabilties – filed a single petition for admission to concordato preventivo before the Tribunal of La Spezia.

Against the decree of the Tribunal confirming the concordato some creditors appealed, objecting, inter alia, the breach of Art 2740 ICC requiring substantial separation of the assets and liabilities of each company, resulting in a damage to the creditors of the companies having a higher asset value.

The appeals were rejected by the Court of Appeals of Genoa, which recognized that a concordato preventivo  based on a single plan for the group, within a single procedure, is legally admissible.

Against this decision, creditors further appealed with the Supreme Court of Cassation.

The issues

The decision deals with a single concordato preventivo petition, proposal and procedure for a group of companies, lacking specific rules such as those provided for the amministrazione straordinaria procedure governed by Legislative Decree No. 270/1999 or Law-Decree No. 347/2003 to which only large companies exceeding certain thresholds are eligible.

The need for coordination of the restructuring efforts through the concordato preventivo relating to companies of a group is often unavoidable, due to the intense interweaving of economic and financial relations within the group. Precedents have mainly allowed a single group concordato preventivo procedure, differing then in details relating to the various features of the specific cases.

The decision

The Court of Cassation reversed and cancelled the lower courts’ decisions, on the assumption that the concordato procedure should have never been allowed to start, since the IBL does not provide for a group concordato preventivo. According to the Supreme Court, the application for concordato preventivo should have been made by each company individually, with separate proposals, separate meetings of creditors and separate conformation proceedings, and not by the Newco and the four companies with unlimited liability as such.

The Court confirmed that assets and liabilities of each company of a group need to be kept separated. According to the Court, a formal distinction of estates is not sufficient, because a Newco to which assets and liabilities of the individual companies were contributed, caused a “commingling” so that all the creditors were merged into the same classes and creditors of the companies with lower and higher asset value were set to compete with each other, in breach of the principle set forth by Art. 2470 ICC according to which creditors have a right to satisfy themselves on the assets of their debtor company.

According to the Supreme Court, absent a legislative framework for group concordato preventivo, this cannot be attained either through a broad interpretation of rules on groups of companies in other areas of law, or through mergers between companies, seeking to implement “coordination” schemes more or less intense between companies belonging to the same group, because this is unlawful and cannot be allowed.

Commentary

The decision of the Supreme Court can be shared with respect to the need to protect creditors of the companies of the group with a higher asset value, but it is certainly a “step back” with respect to case law allowing single group concordato preventivo procedures, on a single plan and proposal.

In this respect, among others, the decision of the Tribunal of Palermo of 4 June 2014 should be recalled. In that case, the company was a limited partnership incorporated for the specific purpose, having as general partners with unlimited liability some companies and as a limited partner an individual. The Tribunal of Palermo allowed the proposal on the assumption that the close relationship with respect to the economic and financial situation of the companies made it preferable, for the benefit of creditors, a single group concordato preventivo arrangement, on the basis of a single plan and proposal, and consequently a single vote and confirmation.

The different approach by the Court of Cassation stems from affirmed principles of law, not allowing creditors to vote and thereby assess whether a single plan and the proposal (which by the way creditors actually approved in the specific case) could be more convenient for themselves. One can guess that in the specific case at hand the Supreme Court had no other way to prevent the implementation of a plan which was based on a merger which had already occurred (and was not subject to reversal) involving assets and liabilities transferred to Newco. However, the decision of the Court is not based on this specific aspect, but instead on matters of principle and concludes that any single group proposal and procedure is not admissible at law. From this point of view, the decision appears to be too inflexible and formalistic: a more permissive approach is arguably not barred in cases where assets and liabilities of each company are kept separated and the proposal allows each creditor to assess whether it is treated more or less favourably in comparison to a possible return in the alternative of a bankruptcy liquidation.