A ruling of the Court of Padua of 31 December 2016 is compared with few other known Court decisions regarding the extension of the effects of a debt restructuring agreement to dissenting financial creditors

The case

Two companies having an indebtedness mainly towards banks and leasing companies, jointly submitted to the Court a request for confirmation of a debt restructuring agreement providing for a two-year moratorium of payment of principal and a restructuring of interests.

The debtors also requested the Court to cram down a dissenting bank, while certain ad hoc agreements were concluded with other dissenting banks, rescheduling the relevant debt.

The issues

Article 182-septies IBL provides that the effects of a debt restructuring agreement, concluded with other creditors belonging to the same class and representing the 75% of the value of the class, can be extended to dissenting financial creditors if, inter alia, under the terms of the agreement they are paid no less than they would receive according to «feasible alternatives» and the debtor’s indebtedness is mainly towards banks and other financial creditors.

A few issues remain unsettled, including (i) whether there is a need to include all creditors in classes, (ii) what is the test to cram down dissenting creditors, (iii) whether separate agreements can be concluded with some of the dissenting creditors, not being considered as part of the agreement which is subject to Court confirmation and cram down.

The decision of the Court

The Court of Padua confirmed the agreement and crammed down the dissenting bank, considering that it would be paid under the agreement no less than following insolvency liquidation of the real estate assets of the debtors, and that the latter was the alternative to be considered.

In the specific case there was not an issue regarding how the class was formed, given that the creditors concerned were all unsecured and the treatment was the same, although the Court elsewhere in its reasoning mentions that separate agreements were concluded with other dissenting banks.

Commentary

After almost two years from the introduction of Article 182-septies IBL , in June 2015, case law so far highlighted just a few decisions by the Courts:

  1. a decision by the Court of Milan on 16 February 2016; in this case, financial creditors were divided in three classes, but apparently only two of those were relevant for cram down purposes;
  2. a decision by the Court of Forlì on 5 May 2016, ruling that the class including secured creditors was not correctly formed by reason of the fact that only collateral on debtor’s assets was considered, but not personal guarantees by third parties. The Court, nevertheless, confirmed the agreement and crammed down the dissenting bank, reshaping the classes by creating a third one (which was not formed by the debtor), thus being able to conclude that the legal requirements for confirmation were met.

With respect to assessing whether the agreement is convenient for dissenting creditors, both these decisions are in line with that of the Court of Padua, as they deem that the «alternative» to be considered is the bankruptcy liquidation scenario.

As to the need to form classes including all creditors, both decisions show that this was indeed what the debtors had done, although the dissenting banks to be crammed down were included only in some of the classes. In this respect, it should be pointed out there is actually no need to classify all creditors – as it is instead the case in concordato preventivo – pointing out that (i) the law considers a class exclusively in relation to the 75% majority of the creditors belonging to the same class as the bank to be crammed down, and (ii) it is undisputed that the debt restructuring agreement can provide a different treatment for each creditor who has agreed to that. In a case in which our firm was involved, indeed, the Court of Vicenza confirmed an agreement in which classes were limited to banks having the same position and interests as the banks to be crammed down (another feature of the agreement was also the express provision that further banks could enter into the agreement later, before it was confirmed).

The case decided by the Court of Padua highlights that the debtor can conclude ad hoc agreements with some dissenting creditors, but he may choose not to consider these as part of the debt restructuring agreement for the purposes of confirmation. It is uncertain whether these creditors can be deemed as dissenting or parties to the agreement, if one considers that the debtor can certainly conclude a series of separate agreements with creditors and then put them together as a debt restructuring agreement for the purposes of confirmation. There seems to be a limitation to this, only in the event that such a selective approach can alter the conditions required by law for confirmation or cram down purposes.