The Court of Cassation (19 February 2016, No. 3324) ruled that unauthorized payment of pre-­‐petition claims mandate a stop of the concordato procedure according to Art. 173 of the Italian Bankruptcy Law only if a prejudice follows for the creditors

The case

During the procedure a company admitted to concordato preventivo made certain payments of claims already existing at the date of the concordato filing. The Court of Messina, with a decision confirmed by the Court of Appeals, revoked the admission to the concordato procedure and declared the company bankrupt. The ruling of the Court of Appeals of Messina was challenged before the Court of Cassation.

The issues

The Court of Cassation had to determine whether payments made by the debtor lacking the required authorization of the Court pursuant to Art. 182-­‐quinquies IBL determine an automatic termination of the procedure.

There is no express provision mandating this consequence (such as, instead, Art. 161 eight para. IBL in case of breach of the information duties set by the Court, or Art. 163 third para. IBL in case the required deposit for procedural costs is not made by the debtor) and, therefore, the issue is whether Art. 173 third para. IBL can apply, which so provides in case the debtor performs acts exceeding the ordinary management without the required authorization of the Judge according to Art. 167 IBL.

The decision of the Court

The Court of Cassation did consider that payment of pre-­‐petition claims are acts exceeding the ordinary management, but ruled that this may cause the termination of the procedure only where, in the specific case, such payments can be also qualified as acts of fraud to the creditors. This rule, according to the Supreme Court, is preferable in light of the current concordato preventivo regime, which favours solutions of the companies’ distress which are based on agreements with the creditors.

The ruling of the Court is based on three separate arguments:

  1. since the Judge cannot scrutinize in the merits whether the concordato plan and proposal are feasible or convenient to the creditors, there is no reason why unauthorized payment of pre-­‐petition claims should cause the termination of the procedure, irrespective of an actual fraud or detriment to the creditors;
  2. debtor-­‐in-­‐possession business activity is no longer subject to the directives of the Judge and this leads to conclude that an authorization is required for acts which, for their relevance, could negatively affect the debtor’s estate or be inconsistent with the performance of the plan;
  3. the “best outcome for the creditors” test provided by Articles 182-­‐quinquies and 186-­‐bis IBL must be considered as a general principle of law in order to assess whether or not acts performed by the debtor can be considered legitimate, with the consequence that the par condicio creditorum rule does not imply automatically that a damage to the creditors ensues from payment of pre-­‐petition claims: according to the Court, indeed, a payment can also determine an increase, rather than a decrease, of the overall value of the estate (such as in the case of payment of employees’ claims, saving the accrual of interest).

Commentary

The interpretation offered by the Court of Cassation considers payments of pre-­‐petition claims as “acts not authorized pursuant to Art. 167 IBL”, but only as far as they are aimed at “defrauding the creditors” as it is provided by Art. 173 IBL: this, by the way, is not meant to be necessarily a wilful aim by the debtor, because the test set by the Court does indeed concentrate on the increase or decrease in the value of the debtor’s estate as a result of such an act.

The Court stated a principle which should be approved, trying to mitigate the consequences of the automatic termination of the procedure, which has been considered as mandatory by the majority of local Courts (see Court of Modena 13 July 2015; Court of Venezia 18 September 2014; Court of Lecco 3 January 2014; Court of Ancona 4 December 2013; Court of Firenze 14 November 2013; Court of Pesaro 26 July 2013; for the opposite solution see Court of Rovigo 26 May 2015, based on the negligible amounts of the payments, and App. Venezia 30 January 2014, in line with the decision of the Court of Cassation here at hand). The Court offers a rationale for its ruling, focused on the “best outcome for the creditors” principle, which is indeed directing lower Courts and interpreters towards a more flexible approach, also in a broader perspective.