The Court of Bolzano (5 April 2016) confirms that revolving credit facility agreements providing for ancillary set-off and collection terms in favour of the bank can be suspended, but the bank is protected because the amounts collected are controlled by the Judicial Commissioner

The case

A company, further to a concordato pre-filing, asked the Court to authorize a stay of various revolving credit facilities, some of which providing, in addition to collection mandates in favour of the bank with respect to debtor’s receivables, provisions allowing the bank to set-off amounts collected with its own claims for repayment of amounts advanced on the same receivables.

The issues

The Court of Bolzano was confronted (among others) with the following issues:

  • whether a stay of agreements can be requested after a concordato pre-filing;
  • whether revolving credit facilities can be considered as “pending contracts” pursuant to Art. 169-bis IBL and, therefore, can  be  subject  to  stay  or  termination,  in  particular  when  debtor’s receivables were assigned to the bank as a security.

The decision of the Court

According to the Court, the concordato procedure starts with the filing (or pre-filing) of the petition for admission to concordato, and the Court must decide on requests to stay or terminate pending contracts, assessing on a case-by-case basis whether based on the disclosure by the debtor, the stay or termination of pending contracts is more favourable  with  a  view  to  performing  the  concordato  plan, and, in such a case, to grant the required authorization.

The Court considered that:

  • revolving credit facilities including ancillary collection and set-­off terms must be considered as “pending contracts” pursuant to Art. 169-bis IBL as they are made up by a series or linked arrangements whereby the bank has not fulfilled all of its obligations by making advances on debtor’s  receivables;
  • Art. 169-bis IBL is not applicable where debtor’s receivables have been assigned as a security to the bank, as the bank can proceed to collect such receivables irrespective of the termination of the revolving facility.

The Court authorized in the specific case the stay of the credit facilities and ancillary arrangements, as the business had been leased to a third party and there was no need therefore to keep the revolving credit lines in force. In such a context, the Court ordered that the debtor’s receivables collected be credited on a specific bank account under the control of the Judicial Commissioner.

Commentary

The ruling of the Court follows on the footsteps of mainstream case law (see recently Court of Bergamo, 28 January 2016) considering as “pending contracts” within the meaning of Art. 169-bis IBL facility agreements providing for ancillary collection and set-off rights in favour of the bank as a security for repayment of amounts advanced on receivables due to the debtor by its own customers, so that the bank can recover such amounts. This is a widespread credit arrangement and it is precisely to avoid that the bank can collect receivables belonging to the debtor and exercise set-off rights after a concordato pre-filing that the Courts are inclined to grant the stay or termination of these arrangements according to Art. 169-bis IBL (some Courts go so far as ruling that the bank can never exercise set-off rights by operation of law and stay orders are not even required: see Court of Verona, 31 August 2015).

As to the criteria which should be followed in order to decide whether or not to grant the authorization, the Court correctly points out that an assessment must be made (i) to see if the required stay or termination is functional to the proposed concordato plan and, therefore, to the interests of the creditors generally, rather than (ii) to balance the interests of the bank and those of the debtor (in this sense see also Court of Appeals of Milan, 29 January 2015). The Court has however considered the interests of the bank, by ordering that – pending the term for filing the concordato plan by the debtor and in light of a possible termination of the concordato procedure – amounts of receivables cashed should be deposited on a special account under the control of the Judicial Commissioner.