Traditionally in Italy the financial distress of a corporation was treated in a very strict way through proceedings aimed at the dissolution of the company, the sale of its assets and the replace of the directors with commissioners appointed by Public Bodies.

Indeed, should the enterprise become insolvent (i.e. not able to regularly pay its debts), it was unavoidably destined to be declared under bankruptcy or be put into extraordinary administration, a special form of insolvency procedure dedicated to the largest companies and aimed at preserving the workforce.

Under the bankruptcy, a lot of negative effects occur:

  • The company’s business gradually ceases;
  • The assets are no longer part of a sole on-going concern and often separately sold at a low price;
  • The employees are fired;
  • The creditors have the right to be paid only in part and not in whole. In addition, very often the liquidity of the company is so lacking that the creditors are not paid at all.

Evidently all the above mentioned consequences arising out of the bankruptcy have a shocking impact both to the company and, more generally, to the domestic economics and the social welfare.

In light of above, the legislator decided to bring into question its punitive view of the financial distress opting for solutions aimed at the corporate restructuring and relegating the bankruptcy for the most serious cases only.

THE RESTRUCTURING AGREEMENTS: HOW THEY WORK

Few years ago the Italian Parliament introduced a measure alternative to the bankruptcy and named “Restructuring Agreement”, deputy, in the same breath, to save the company, to positively solve its distress and to preserve the rights of the creditors. Furthermore, on last May the Government approved the Law Decree 78/2010 (became definitively effective on last July) by which introduced some corrective measures aimed at encouraging the creditors to enter into the Restructuring Agreements.

The regulation of the captioned measure in short provides that:

  • The company under financial distress is entitled to enter into an agreement with creditors representing at least the percentage of 60% of the overall amount of the debts. Through this agreement, generally the main creditors either waive part of their rights or accept to postpone the payments of their credits or deicide to convert part of their receivables into equity thus becoming stake-holders of the company. The latter item is especially appreciated by the financial creditors (such as banks) which participate to the re-launch of the corporation and aim at obtaining the payment of their receivables through the dividends of the enterprise once the distress is over. Pursuant to the above Law Decree no. 78/2010, the financial institutions (such as banks and financial brokers) and the stake-holders are currently encouraged to finance the distressed company. Indeed, should the financed company be later declared bankrupt, the receivables of the banks and the stake-holders arising out of their loans - carried out performing a Restructuring Agreement – are preferred to those of the other creditors. In fact, while the receivables of the other creditors are paid proportionally (and not for the overall amount) and only after the sale of the assets of the bankrupt company, the receivables deriving for the captioned loans are paid immediately by the receiver for the overall amount (those of the banks) or at the 80% (those of the stake-holders);
  • Once executed and notarized, the Restructuring Agreement must be filed with the Company’s Register and the competent Court along with (i) a business plan (ii) an updated financial statements and (iii) a report carried out by an expert attesting that the agreement can be properly performed by the company and is able to guarantee the punctual payment of all the receivables hold by the creditors not being part of the Restructuring Agreement;
  • From the date of the filing with the Company’s Register: 
    • The Restructuring Agreement becomes (even temporarily) effective and binding for all its parties (i.e. the company and the creditors who signed this); 
    • The creditors cannot sue the corporation before a Court for the enforcement of their receivables for sixty days. This provision has been introduced 2 years later as corrective measure. Indeed, originally the restructuring proceeding did not work properly because all the creditors not being part of the agreement, immediately after the filing with the Company’s Register, began all the allowed enforcement proceedings. Evidently, these immediate judicial initiatives jeopardized the restructuring since the corporation did not have time enough to face its crisis adopting the instruments able to re-launch its business. Furthermore, the recent Law Decree no. 78/2010 even improved the captioned corrective measure providing that the prohibition to sue the corporation before the Court may become effective also before the signing and the filing of the Restructuring Agreement with the Company’s Register (i.e. during the negotiation stage should the company fulfil some requirements provided by the captioned law decree). Thanks to this additional improvement, it is currently possible to avoid that the creditors may prejudice the execution of the Restructuring Agreement during a crucial phase as the negotiation is;
  • The creditors disagreeing with the terms and conditions of the Restructuring Agreement are entitled to oppose such agreement before the competent Court within 30 days from the date of its filing with the Company’s Register. Should the creditor not propose oppositions or these being rejected by the Court, the Restructuring Agreement becomes definitively effective and binding.

THE RESTRUCTURING REGULATION: PROS AND CONS

After five years from the introduction of the restructuring regulation it is time to take a first stock of the application and the effectiveness of the captioned proceeding.

Concerning the pros, we can state that thanks to the Restructuring Agreements it is currently possible to safeguard all the interests involved in a financial distress context.

Indeed:

  • The creditors have the concrete possibility to be satisfied for the overall amount of their receivables;
  • Banks and stake-holders are pushed to finance the distressed company since in case the latter becomes bankrupt they will immediately receive the payment back of their receivables arising out of the loans carried out in execution of the Restructuring Agreement;
  • The company continues its business preserving, in whole or in part, its workforce;
  • The domestic economics does not get down as well as it happens when several big companies fall into bankruptcy (maybe at the same time). In this regards, few months ago two of the biggest players – respectively in real estate and food business – entered into a Restructuring Agreement through which they planned to re-launch their respective business. Only few years ago, such giants would be destined to collapse.

On the other hand, the regulation is not clear and exhaustive on some points (e.g. the consequences in case of breach of the Restructuring Agreement): probably a more detailed and complete discipline would have encouraged the execution of a larger number of agreements and avoided the bankruptcy or the extraordinary administration of lots of big corporations. However, the recent corrective measures of the original legislation highlighted herein are on the direction to increase the restructuring deals in Italy and it is predictable that the Restructuring Agreements are going to be executed will jack up in the next months.