By the Law 155/2017, that became effective on November 14, 2017, the Italian Parliament required the Government to adopt, within the next 12 months, a comprehensive and organic reform of insolvency proceedings and rules governing a business crisis. The rules governing liens and security interests will also be reformed.
Although the reform will not be converted into binding law before the end of 2018, foreign lawyers and investors may be interested in knowing the guidelines in advance.
Law 155/2017 provides that the Italian Government shall consider EU legislation and, in particular, EU Regulation 2015/848, the Commission Recommendation 2014/135, and the principles of the United Nations Commission on International Trade Law model law on insolvency.
Law 155/2017 states that in reforming insolvency proceedings:
- the term “bankruptcy” (“fallimento”) shall no longer be used and shall be replaced by the term “judicial liquidation” (“liquidazione giudiziale”);
- priority shall be given to proceedings aimed at overcoming the crisis by keeping the business as a going concern (even if through a new entrepreneur), provided that they are in the best interests and to the satisfaction of creditors. Therefore, the reform:
- shall provide that judicial liquidation will be commenced only when no other suitable solution has been proposed by the debtor;
- shall facilitate debt restructuring agreements (“Accordi di ristrutturazione dei debiti”: under the current law, a debt restructuring agreement is entered into between the debtor and creditors representing at least 60% of all claims; such agreement is subject to approval by the bankruptcy court and is only binding upon the participating parties. Law 155/2017 provides that debt restructuring agreements shall be facilitated, inter alia, by reducing the minimum percentage of claims involved in the agreement);
- shall encourage out-of-court debt restructuring plans (“Piani attestati di risanamento”: under the current law, such plans are to be reviewed by an independent accounting expert; agreements between a debtor and any of its creditors that are based on the reviewed plan and provide for new financing are granted with some protection against claw-back actions);
- shall provide that the traditional pre-bankruptcy arrangement with creditors (“concordato preventivo”: a procedure enabling the debtor to agree to a restructuring plan with the majority of its creditors, that, if approved by the creditors and confirmed by the court, is also binding upon the dissenting creditors) has to be focused on business continuity. The liquidation of the debtor’s assets under a pre-bankruptcy arrangement with creditors shall be allowed provided that (i) new external financing is provided to increase creditors’ satisfaction, and (ii) it ensures the payment of at least 20% of all unsecured claims;
- a definition of “state of crisis” (i.e., the likelihood of future insolvency) shall be provided with explicit consideration given to business economics;
- one singular procedure shall be introduced for the acknowledgment of the existence of the state of crisis or insolvency, and this model shall be applied to all debtors (except public entities). The appropriate court shall be determined by the “center of the debtor’s main interests” as defined in EU legislation; and
- “early warning procedures” and “out-of-court procedures for the settlement of the crisis” shall be introduced to facilitate the early disclosure of the crisis and the negotiations between the debtor and the creditors.
Early warning procedures and out-of-court procedures for the settlement of the crisis will be a novelty in Italian regulations.
Out-of-court procedures for the settlement of the crisis—which shall not apply to either listed or large companies—will be commenced by the debtor’s demand and carried out by a new special body set up at every office of the Chamber of Commerce.
These procedures will be confidential although the Chamber body shall immediately inform the qualified public creditors (inter alia, the Tax Revenue Agency and social security entities) of the filing of the debtor’s demand.
The procedure shall be completed within a reasonably short term. If no appropriate measures to ensure the settlement of the crisis are identified and there is evidence of the debtor’s insolvency, the Chamber body shall immediately inform the court prosecutor to allow prompt detection of the insolvency.
With reference to the early warning procedures, the reform will provide that:
- company internal and external auditors of the company shall have the duty to immediately inform the directors of the likelihood of insolvency and, where no suitable reply is provided by the directors, to promptly inform the competent Chamber body;
- qualified public creditors shall be under the duty to immediately report to the company auditors and to the competent Chamber body the persistence of unpaid taxes or social security contributions;
- with regard to auditors’ and/or qualified public creditors’ queries, the Chamber body shall convene the debtor and its auditors without delay, to verify its economic and financial situation and identify, in the shortest possible time, the appropriate measures to solve the crisis;
- with regard to out-of-court procedures, while the negotiations with creditors are pending, the debtor shall be entitled to ask the court to grant certain protective measures; and
- certain incentives (both financial and with regard to personal and even criminal liability) shall be granted to the debtor that has promptly applied for an out-of-court procedure for settling the crisis or commencing insolvency proceedings.
Lastly, the reform shall contain a specific regulation for the crisis and the insolvency of company groups. In this aspect, the reform shall set forth, inter alia:
- a subordinate status to the receivables of companies belonging to the same group, with some exemption to facilitate funding for the execution of a pre-bankruptcy arrangement with creditors or a debt restructuring agreement;
- the possibility to file a singular application for (1) judicial liquidation, (2) the confirmation of a pre-bankruptcy arrangement with creditors, or (3) a debt restructuring agreement, which involves all the insolvent or in crisis companies of the group, without prejudice to the autonomy of their assets and liabilities;
- in the single management of a pre-bankruptcy arrangement with creditors procedure, companies in the group that have claims against the companies involved in the insolvency procedure are excluded from the vote; and
- in the single management of a judicial liquidation procedure, a court-appointed receiver is granted the power to (1) challenge transactions made before the commencement of the procedure that are aimed at shifting resources from a company of the group to another one; (2) bring liability actions, (3) to report any irregularities in the management, and (4) to file for insolvency for companies in the group that are not involved in the procedure.