The Court of Modena (8 February 2016) challenged precedents of the Court of Cassation ruling that delayed payment of secured creditors is allowed only if the timing would not be shorter in bankruptcy liquidation

The case

A company assisted by Nctm Studio Legale filed a request for admission to concordato preventivo providing for the company to continue to trade during the procedure, in order to avail itself of the benefits of Art. 186-­‐bis IBL.

In order to admit the company to the procedure, the Court required that some amendments be made to the concordato proposal, in particular with respect to the term for payment of secured creditors, which was set to more than one year after confirmation by the Court.

The issues

The Court was faced with two main issues:

  • whether, in a concordato preventivo providing for the company to continue to trade during the procedure – considering that Art. 186-­‐bis IBL provides only that a one-­‐year delay can be imposed to secured creditors, without them being allowed to vote on the proposal – a further delay is admissible provided that secured creditors are admitted to vote;
  • if so, what is the amount for which secured creditors vote and whether a further delay is subject to any other condition.

The decision of the Court

The Court of Modena expressly stated that it does not share the precedents of the Court of Cassation (decisions Nos. 10112 and 20388/2014 and No. 17461/2015) according to which a delay of more than one year is allowed and the secured creditors affected can vote for an amount equal to the prejudice consequent to the delay.

The Court of Modena considers that this would create great uncertainty, as

  1. on one side, the debtor could unilaterally set the timing for payment of secured creditors, and
  2. on the other side, the rule would not be consistent with that of Art. 160 second para. IBL allowing a partial payment to secured creditors only for the portion of their claims exceeding the liquidation value of the assets on which the security can be exercised.

According to the Court, a delay for more than one year can be allowed, provided that

  1. the delay does not exceed the delay which would be imposed by bankruptcy liquidation, and
  2. this is certified by the expert in his sworn report provided by Art. 160 IBL.

With respect to the amount for which affected secured creditors vote on the proposal, according to the Court, the entire amount of the claim – limited to the portion whose payment is provided more than one year after confirmation – should be considered “as it is the overall regime of the claim which is affected by the concordato proposal”.

Commentary

According to the Court of Cassation, lower Courts should assess in the specific cases the entity of the prejudice consequent to the delay of payment, in order to determine the amount for which the affected secured creditors must be allowed to vote on the proposal. In the specific case, the Court of Modena goes farther than that and – openly challenging precedents of the Supreme Court – sets a different test in order to determine the amount of the claims to be admitted to vote.

It should be noted in particular that the Court of Modena points to a “missing link” in the reasoning of the Court of Cassation, i.e. a lack of coordination with the rule set forth by Art. 160 second para. IBL.

Indeed:

  • considering that such a rule is aimed at ensuring that secured creditors are paid no less than they would receive in insolvency liquidation;
  • a delayed payment is equivalent, as a matter of fact, to less than full payment of the claim;

the consequence is that the rule should ensure that secured creditors are paid at least as much and with no further delay than they would be paid in insolvency liquidation.

The reasoning of the Court of Modena could be shared in principle, but doing so the risk is to “overweight” the vote of secured creditors in case of a delayed payment, in particular if one considers that they are paid the relevant interests and are therefore already indemnified for the prejudice they suffer: it follows that the balance between the voting creditors can be altered, with respect to the required majorities, in light of the fact that unsecured creditors do only receive a share of their claims and could risk to see a favourable proposal rejected due to the vote of secured creditors who do not suffer any real prejudice. On the contrary, the balance between the voting creditors can be preserved if secured creditors vote for a lower amount (equal to the prejudice due to the delayed payment), considering that they need to be allocated in a separate class, which is aimed precisely at granting them an increased influence with respect to the approval of the proposal.