Introduction
Eligibility
Scope of proposed agreement
Filing a proposal
Judge's acceptance of application and order against individual enforcement
Approval by creditors and settlement panel
Formal approval
Panel's role in implementation phase
Cessation or termination of plan
Comment
Rising levels of debt among private individuals, as a result of increasing reliance on consumer credit, have led to a need to develop a legal tool allowing for some form of debt discharge in the event of over-indebtedness (ie, where a debtor can no longer meet his or her credit commitments). The legislature recognised this need and issued Legislative Decree 212/2011, which was subsequently enacted as Law 3/2012; the new provisions came into effect on February 29 2012. The law provides for a new approach to civil insolvency whereby a debtor who is ineligible for standard insolvency procedures may negotiate his or her critical debt position through a procedure similar to the debt restructuring arrangements in Article 182(2) of the Bankruptcy Act.
A debtor who wishes to use the procedure must meet two requirements: one subjective and one objective.
Article 7(2)(a) of Law 3/2012 requires that the debtor be ineligible for any insolvency procedures in force at the time. This is patently a negative definition. It covers a number of different classes of debtor, including natural persons, individuals engaged in the professions and commercial entities that do not exceed the size limits set forth in Article 1 of the Bankruptcy Act at the time of filing their proposals. Article 7(2)(b) of the new law discourages the exploitative use of the procedure by excluding debtors who have used it at any time in the preceding three years.
The objective requirement is that the debtor must be over-indebted. The concept of 'over-indebtedness' is similar to insolvency. Article 2 of the law describes:
"[a] persistent imbalance between [the debtor's] credit commitments and his or her assets that can be readily liquidated to meet [such commitments], and the debtor's definitive inability to fulfil his or her debt obligations when they fall due."
The debtor initiates the procedure by filing a proposal for a debt restructuring agreement that is intended to be accepted by some of the creditors only, at a later date. Pursuant to Article 7, the proposal must be based on a feasible plan that would allow the debtor to fulfil both the obligations arising from the debt restructuring agreement and those undertaken to any creditors that are unwilling to enter into the agreement.
As in the case of insolvency proceedings governed by the Bankruptcy Act, the plan may provide for any available forms of satisfaction of creditors and debt restructuring, including assignments of future income and the division of creditors into classes; however, any dissenting or outside creditors must be paid to the full extent of their claims.
In respect of this class of dissenting and outside creditors, it should be noted that Article 8(4) entitles the debtor to propose a payment moratorium for up to one year, provided that:
- the plan appears to be adequate to ensure payment when the moratorium expires;
- the plan is placed under the responsibility of a judicially appointed liquidator, to be nominated by the crisis settlement panel; and
- the moratorium does not apply to payments due to holders of claims that cannot be pledged.
Where the debtor has insufficient assets and income to make such a plan feasible, the proposal instrument must be executed by one or more third parties which agree to contribute sufficient revenues or assets, whether as collateral or otherwise, to secure proper performance of the agreement.
On the question of initiating an over-indebtedness settlement procedure, Article 9 gives a general indication on the filing of the proposal. However, it is reasonable to assume that the procedure should be initiated by filing a formal application with the district court of the debtor's place of residence or business. The debtor must supplement the proposal with a document identifying:
- all creditors and the amounts due to each of them;
- the debtor's own assets;
- relevant disposals in the past five years, complete with the debtor's tax returns for the past three years;
- a plan feasibility certificate; and
- a list of necessary living expenses for the debtor and his or her dependents, based on the current composition of his or her household as formally certified by the family register.
If the debtor is engaged in business activities, he or she must file his or her accounting records for the past three years, together with a declaration that the records thus filed are consistent with the originals.
The debtor must file an appropriate certificate issued by the crisis settlement panel. The task of the panel - a body of professionals who meet the appropriate requirements - is to supervise the performance of the procedure and to act as intermediaries between debtor, judge and creditors.
Judge's acceptance of application and order against individual enforcement
Article 10 states that once the debtor's application has been filed, the judge must:
- ensure that the requisite formalities have been performed;
- issue a decree for the holding of a hearing; and
- order that both the debtor's proposal and the decree be notified to the crisis settlement panel.
Unless fraudulent projects or actions are contrived to the creditors' detriment, the judge will order that for a period of no more than 120 days, no individual enforcement actions may be initiated or pursued, no writs of attachment may be issued and no preferential rights may be acquired in or against the debtor's assets. It is reasonable to assume that at this stage in the proceedings, the judge is not required to assess the feasibility of the plan and has no discretion in granting or denying such a term of asset protection.
Approval by creditors and settlement panel
Article 11 provides that each creditor which is willing to accept the debtor's proposal must deliver a duly executed written notice of acceptance to the crisis settlement panel. In order for the proposal to be formally authorised, it must be accepted by at least 70% of all creditors. Although the law is silent on the issue, the proposal presumably may (or should) be formulated in a manner that divides the creditors into classes with a view to encouraging acceptance.
If an agreement is reached between the debtor and his or her creditors within the time provided, the settlement panel has a duty under Article 11 to report to each creditor on the acceptance notices received and the attainment of a statutory quorum, along with the text of the final agreement. After receiving such report, the dissenting creditors - if any - have 10 days to raise additional objections. Once this term has elapsed, the settlement panel submits the report to the judge, specifying any objections received and providing its final certification that the proposed plan is feasible.
At this stage the judge is responsible for establishing that the quorum for consent has been achieved. Moreover, it must ascertain the grounds for objection and the ability of the plan to ensure full satisfaction of the claims of creditors that it does not cover. On the basis of this assessment, the judge will decide whether to grant or deny formal approval. Either decision may be appealed to the competent district court. The judge assigned to the procedure may not be a member of the panel hearing the case.
Panel's role in implementation phase
Article 13 provides that in the implementation phase following formal approval of the plan, the settlement panel must:
- decide any issues that may arise in the performance of the agreement;
- supervise compliance with the contractual provisions; and
- notify the creditors of any breaches that it detects.
In order to ensure proper performance of the agreement, the legislation provides for the voidance of payments or disposals of assets made in breach of the plan or agreement. This provision will also discourage the debtor and any other party to the agreement from perpetrating, or assisting in the perpetration of, a breach of the plan or agreement.
Cessation or termination of plan
The agreement ceases to be effective mainly in the event of the voidance or termination of the contract under Article 14. The agreement may be declared null and void by the competent district court at the request of a creditor where:
- the debtor's liabilities have fraudulently been inflated or reduced;
- a significant proportion of his or her assets have been removed or concealed; or
- non-existent assets have been fraudulently invented.
Termination can be allowed where:
- obligations arising from the agreement are not performed;
- promised security interests are not provided; or
- the agreement cannot be performed for reasons outside the debtor's control.
Moreover, Article 14 states that the agreement is automatically terminated where the debtor fails to make a payment due to the public administration or to any providers of mandatory pension or welfare benefits within 90 days of the relevant due date.
Comment
In providing for the statutory settlement of over-indebtedness, the new law is to be commended. It establishes a procedure that allows a person who is ineligible for bankruptcy proceedings to discharge its indebtedness through a procedure that involves all of that person's creditors, even if only some of them participate in the agreement.
However, it remains to be seen whether the procedure will be widely adopted, especially as there appears to be no strong incentive for creditors to enter into such an agreement. The benefits accruing to creditors that accept such a proposal may prove insufficient to dissuade them from seeking individual enforcement actions against the debtor's present and future assets.
For further information on this topic please contact PierDanilo Beltrami or Giacomo Bertone at Lombardi Molinari e Associati by telephone (+39 02 896 221), fax (+39 02 8962 2333) or email ([email protected] or [email protected]).