The Court of Milan (29 September 2016) confirmed that the concordato preventivo can be terminated as a consequence of the mere fact that a “material” breach occurred, as provided by Art. 186 of the Italian Bankruptcy Law.

The case

Two creditors filed different motions with the Court, arguing that the debtor breached the obligations assumed with the concordato preventivo proposal, as the creditors were not paid within the timeframe provided by the liquidation plan and the Court’s confirmation order. The creditors argued that the same Judicial Liquidators acknowledged that there were no expectations that secured creditors could be paid in full and, therefore, no payments were expected for the unsecured creditors.

The creditors thus asked the Court to terminate the concordato pursuant to Art. 186 IBL and consequently to declare bankruptcy of the debtor.

The debtor – in turn – asked for the creditors’ demands to be rejected and replied that it had done what was within its own control (delivering all assets to the Judicial Liquidators) and that the breach resulted exclusively from the breach by third parties to their own obligations to purchase some of the assets.

The issue

According to civil law principles on debtor’s liability and termination of contracts (Articles 1218, 1453 and 1455 ICC) the breach must be a fault of the debtor, material and causally linked to the debtor’s conduct.

Instead, the insolvency regime of termination of concordato preventivo provided by Art. 186 IBL only refers to the circumstance that the breach must be material.

The Court’s decision

The Court of Milan terminated the concordato, arguing that the breach is relevant ex se, regardless that the debtor could be responsible for that and despite any causal link between the conduct of the debtor and the non-performance of the obligations assumed with the concordato.

Otherwise – the Court reasoned – it could never be possible to resolve a concordato based on a liquidation plan, as in this kind of procedure the debtor is never involved in the performance phase of the proposal, which instead is entrusted to a Judicial Liquidator who act as the creditors’ agent.

Commentary

The decision of the Court of Milan follows in the footsteps of a traditional interpretation, which recently has been (re)affirmed also by the Supreme Court (see Judgement of 4 March 2015, No. 4398) and other lower Courts (see, inter alia, Court of Modena, 11 June 2014 and Court of Florence, 25 September 2013).

Also in the current legal framework of the concordato preventivo (after the reforms which, since 2005, focused on the contractual features of the procedure), what matters is therefore the expectation of the creditor to receive the payment and not the debtor’s control over the performance of the concordato obligations.

What instead should be noted is that the Court issued its ruling in a situation where the performance of the plan was not concluded as yet (although the two-year term provided by the proposal had already expired). Therefore, the decision of the Court could be considered as a provisional assessment of the final outcome of the liquidation, which led the judges to conclude that the concordatofailed to its goal, as [...] the amounts which can be recovered from the liquidation are insufficient [...] to meet, even minimally, the unsecured creditors and, in full, the secured creditors”.

In this latter respect, it should be underlined that the rules of concordato preventivo based on a liquidation plan – prior to the 2015 recent reform – did not provide for a minimum share to be paid to unsecured creditors, who therefore had to bear the risk of the final outcome of the liquidation, with the sole exception stated by case-law that the distribution to unsecured creditors – as it is in this case – did not yield any return to them.