Composition with creditors is one of the tools that Italian law makes available to a commercial party in financial difficulties in order to allow it to reach an agreement with its creditors in the event that bankruptcy is declared. The applicable procedure is governed by Article 160 of the Bankruptcy Act (Decree 267/1942). It has recently been amended by, among other things, Legislative Decree 5/2006 and Legislative Decree 169/2007.
The recent modifications have been modelled on experiences with various forms of corporate reorganisation in the United States. Their purpose is to give debtors greater latitude in structuring the content and terms of the proposal for composition that will be filed with the court, with a view to encouraging the continuation of the business or otherwise providing the best possible solution to satisfy creditors' claims on winding-up. The procedure has been given greater flexibility by the removal of the worthiness requirements that a debtor business had to meet before being admitted to the composition procedure - such requirements made composition with creditors an uninviting option, and it was seldom used in practice. Furthermore, Legislative Decree 5/2006 considerably reduced the court's role in the composition procedure, restricting it to reviewing points of law.
However, an insolvent company must first file a petition with the clerk of the court in the place where the company has its principal place of business. The petition must contain a plan that is designed to satisfy the creditors' claims under a debt restructuring proposal, which the company can draw up at will. In return for the greater freedom afforded to the debtor, and in order to ensure greater protection of creditors' rights, the Bankruptcy Act requires the debtor to submit a report prepared by an expert professional (eg, a business consultant) to certify the veracity of the information provided by the debtor and the feasibility of its plan. The expert report is the key instrument for creditors and the court, since it allows them to assess in detail the reliability of the proposal in light of a third-party opinion about the debtor's income prospects and financial position, as well as the available assets on which the plan is based.
Following the filing of the petition, the court must assess the completeness and legal compliance of the documents filed by the debtor. The judiciary's powers at this stage are not as far-reaching as before, since it is now the reporting expert's duty to determine the accuracy of the accounts and the reliability of the debtor's plan. At the end of this stage, the court issues an order to open the composition procedure (if it is satisfied). It appoints an official receiver and sets the date on which the creditors must meet to vote on the plan. This initiates the preliminary phase, during which the court-appointed receiver must prepare a report for the creditors. The receiver's report must be filed with the court before the ballot; it plays a crucial role in allowing the creditors to form a well-founded opinion before voting.
The preliminary phase ends with the creditors voting on the composition proposal. If the proposal is accepted, a new phase begins, in the course of which the proposal must receive the court's formal approval, which must be issued no later than six months after the debtor's petition was filed with the clerk of the court.
After acknowledging the creditors' vote in favour and establishing that the procedure was legally valid, the court formally approves the composition proposal. This concludes the composition procedure. The enforcement phase then begins - its objective is to satisfy the creditors' claims based on the debt restructuring plan. In most cases, this is done by liquidating the debtor's assets.
Once the debtor has filed its petition and while the proceedings are underway, unpredictable events may make it necessary or advisable to amend the terms of the proposal for composition. Restricting the right to amend the debtor's original proposal during the composition procedure would harm the interests of all parties. Furthermore, binding the success of the proposed composition to the proposal as initially submitted would unfairly limit the parties' statutory freedom of choice, especially if potential changes would be for the better (eg, in the event that the debtor obtains additional guarantees from third parties).
However, the need to amend a debtor's initial proposal is normally prompted by adverse events (eg, when the pro rata amount offered to creditors without statutory preferential rights must be reduced, or where a restructuring plan to pay a guaranteed percentage of claims is replaced with a plan for the assignment of assets to the creditors). Before Legislative Decree 169/2007, the consensus was that a proposal for composition could be amended - for better or worse - until the debt restructuring plan was filed with the clerk of the court. In the preliminary phase, minor additions or changes (ie, changes that would not affect the timing or manner of payment to creditors or the overall scheme of the proposal) were undoubtedly admissible, especially if they were intended as improvements on the original plan. However, this was not true of major changes that were liable to overturn the structure of the plan (eg, by changing an agreement for payment extensions into an agreement for the assignment of assets).
The issue of whether a proposal for composition could be amended - and, if so, to what extent - was also debated in relation to the stage after the creditors' meeting (ie, the court approval stage). The prevailing view was that changes to the composition agreement were admissible, provided that they were intended as improvements and did not alter the timing and manner of implementation. However, if the proposal was not approved, no further proposals could be put forward, even if they were intended as improvements - the rationale being that the creditors' rejection of the composition agreement automatically resulted in an ex officio declaration of bankruptcy.
The greater contractual nature of composition with creditors, following the amendments in Legislative Decree 169/2007, has removed some of the uncertainty surrounding the ability to amend a proposal once the procedure has begun. There is now an express prohibition against changes to the composition proposal once vote-taking operations have started at the creditors' meeting.
Based on the new statutory rules, academic experts increasingly agree that a proposed plan can be amended - for better or worse - at any time before the start of the voting process. The predominant view appears not to distinguish between major and minor alterations, and to suggest that even a substantial amendment to the terms of a proposal for composition is admissible, provided that it is made before a vote is taken at the creditors' meeting.
However, it remains unclear whether the composition proposal may be amended at the final stage (ie, once the court approval process is underway). It would arguably be preferable to consider the matter to be frozen at the time of the creditors' vote - any changes that may have been made following the execution of the composition agreement are immaterial to the question of its validity. However, an alternative view is that amendments may be made after the vote, provided that they represent an unequivocal improvement for all creditors; conversely, where an amendment is proposed that is essentially less advantageous, a second vote must be taken at the creditors' meeting.
If an amendment (with either effect) is expected, it is advisable for the judge who is supervising the insolvency proceedings to order the postponement of the creditors' meeting so that the official receiver can supplement his or her report accordingly and the creditors have enough time to examine and assess the newly submitted composition proposal.
The question remains as to whether a proposed amendment to the composition plan, as initially submitted, requires the debtor to ask the expert to prepare a new report on the feasibility of the amended plan. Some commentators have suggested that no new report is required, since this would cause unreasonable delay to the procedure. Moreover, the official receiver is in a position to express a considered opinion on the feasibility of a revised plan, taking into account changes that the debtor may have made to the original proposal. However, the prevailing view is that an additional report is necessary; it certainly provides greater protection for the creditors' interests. It would also be consistent with the newly regulated composition procedure, which reduces the courts' investigative powers in order to give the debtor greater freedom, for the debtor to be required to ask a third-party expert to reassess the feasibility of the amended plan.
For further information on this topic please contact Andrea Spadacini 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]).