Law Decree No. 83/2012, providing “Urgent Measures for the Country's Development”
Law Decree No. 83 of 22 June 2012 (the “Decree”), effective as from 26 June 2012 and converted into law with amendments1, has introduced important measures aimed at stimulating the Italian economy (also referred to as “Decreto Sviluppo”).
The Decree, consisting of seventy articles, sets forth a heterogeneous set of rules, including, among other provisions, significant amendments to the Italian Bankruptcy Law.2
The Purpose of Article 33 of the Decree
Article 33 of the Decree plays a central role in supporting the revitalization of a failing business by significantly changing the structure of the ‘Composition with Creditors’ or ‘Business Reorganizations’ (i.e. the concordato preventivo).3
New provisions, clearly inspired by Chapter 11 of the US Bankruptcy Code, have been added with the aim of solving certain issues that in the past were an obstacle for a successful reorganization of the debtor’s business. Specifically, the new rules seek to address the following concerns:
- The insufficient protection offered to the debtor during the preparation of the filing and the Plan;
- The debtor’s difficulties in obtaining new financing during the phase of its request for the Composition with Creditors (i.e. “interim financing”); and
- The absence of provisions supporting the conduct of the business during the phase of the filing before the Plan's approval.
The main purpose of the new provisions is to resolve these concerns in order to facilitate a quick filing with the understanding that the sooner a Petition is filed, the easier it is to find solutions allowing for a fresh start for the debtor’s business.
Quicker Access to the Composition with Creditors
One of the most innovative items introduced by Article 33 of the Decree relates to the commencement of the case. The debtor is now entitled to simply file a straightforward Petition with the Court, while in the past it was required to file, together with the Petition, the Plan and a support opinion from an independent expert confirming the feasibility of the Plan. As a consequence, the filing diverted significant time and resources away from the conduct of the business and exposed the debtor to the risk of harassment by creditors. Under the new rules, the Court sets the period for filing the Plan, as well as the supporting documents and opinions,4 which may be 60 to 120 days from the filing of the Petition. This filing period can be extended by the Court by up to 60 days. This new set of rules allows the debtor to immediately benefit from the protections granted upon the commencement of the case, the so called “Automatic Stay,” with effects substantially similar to those provided by §362 of the US Bankruptcy Code,5 while allowing it to postpone its focus on the Plan to the period when its business is being conducted under the supervision of the Court.
Thus, the Italian Legislator has attempted to solve the timing problems frequently encountered by debtors, who often faced an irreversible worsening of their crisis while they were drafting the Plan and collecting supporting materials, while often simultaneously attempting to manage informal negotiations with their main creditors.
Duties of Publicity
Pursuant to new Article 161, paragraph 5, of the Italian Bankruptcy Law, within one day after the filing of the Petition, the application must be published on the companies’ register.
This provision has been coordinated with Article 168, paragraph 1, of the Italian Bankruptcy Law, which provides that the date of the publication of the Petition on the companies’ register is the trigger date for identifying the debtor’s creditors (as opposed to the date of the filing of the Petition with the Court, as it was in the past).
This form of publicity provides notice to third parties negotiating with the debtor of the filing of the Petition and the consequences thereof.
Composition with Creditors Aimed at Ensuring Business Continuity
The Decree6 has introduced a new category of Composition with Creditors for debtors seeking to continue their business as a going concern, either on a stand-alone basis or through the sale or contribution of assets to a new entity.
If a debtor seeks approval to continue its business, then the Plan must contain (i) details of the profits and losses expected from the continued conduct of the business, together with information on required financing and proposed methods of repayment; (ii) an expert opinion supporting the proposition that the continued conduct of the business will function to enhance the creditors’ recovery; and (iii) a request, at the election of the debtor, to freeze any secured creditors for up to one year.
Furthermore, in the context of this special form of Composition with Creditors, there are relevant provisions relating to Executory Contracts and participation in public tenders.
Executory Contracts may not be terminated as a result of the Composition with Creditors proceedings, despite any contractual provision to the contrary7. In addition, the Decree provides an exception to one of the principles set forth in the Code for Governmental Agreements,8 and allows a debtor admitted to Composition with Creditors proceedings to continue to perform contracts with governmental authorities9 and participate in public tenders in accordance with the conditions set forth in the Decree. The debtor, however, must comply with the following requirements:
- The debtor must provide the Court with an opinion of an independent expert certifying that the agreement complies with the Plan and that the debtor can reasonably fulfill the terms of the Plan itself in the context of the tender;
- The debtor must comply with the “availment” rules (i.e. avvalimento10) under Article 49 of the Code of Governmental Agreements;11 and
- The debtor may not elect an “agent” company qualification in the event it participates in A.T.I. (i.e. Temporary Association of Companies).
From the commencement of the case until the Plan is either approved or rejected by creditors,12 in order to ensure the continuity of the debtor's business, the debtor benefits from the following special protections:
- actions taken in the ordinary course of business can be implemented autonomously, while activities falling outside the ordinary course (i.e. extraordinary transactions) require notice, a hearing and Court authorization;
- financing of the debtor’s operations during the Case is ranked with a “super-priority”13 claim status in the event of bankruptcy,14 and payments on such financing are not subject to claw-back actions.
The purpose of these amendments, particularly the “super-priority” ranking, is to allow a debtor in crisis to continue its business, overcoming obstacles that previously prevented third parties, particularly suppliers, from contracting with a debtor during the pre-filing stage.
Inspired by the First Day Orders of the U.S. Bankruptcy Code,15 the Italian Legislator has intervened to solve one of the main problems with the previous system, which was the absence of bridge-financing allowing quick access to the financial resources needed to continue the debtor's business activity and execute the Plan.16
New Article 182-quinquies of the Italian Bankruptcy Law overcomes some of the limits of past regulations,17 granting the debtor the opportunity to seek from the Court, simultaneously with the filing of the Petition, authorization to receive loans,18 provided that an independent expert certifies that such loans will function to enhance the creditors’ recovery.
The Court may authorize the granting of loans identified only by kind and/or amount, which have not been negotiated yet, on the basis of the report of the independent expert, after obtaining further information, if needed.
A further novelty introduced by Article 182-quinquies of the Italian Bankruptcy Law concerns the debtor’s ability to seek Court authorization, simultaneously with the filing of the Petition, to pay selected suppliers of goods or services, provided that an independent expert certifies that the such supplies are essential for the continuation of the business and will function to enhance the creditors’ recovery.
It is now clear that the Italian Legislator’s perspective is directed towards business continuity, which is not protected as a value in itself, but only to the extent that it functions to enhance the creditors' recovery as a whole. Particularly, the Italian Legislator has sought to help the debtor in crisis, allowing the continuity of supply of strategic goods and services (such as raw materials and transport) essential to the debtor's business, which otherwise would be jeopardized irreparably if suppliers’ claims were not prioritized.
Since allowing priority claims reduces the amounts available to pre-petition creditors (and conflicts with the general principle of par condicio creditorum (i.e. equal treatment of all the creditors), Courts will be very careful in issuing authorizations and will authorize administrative claims only for those suppliers of goods and services that are essential for the continuity of the business, as supported by expert opinion.
The Role of the Expert
Finally, the new provisions have strengthened the role of independent experts, by broadening the number of cases in which an expert opinion is required to confirm the debtor’s compliance with relevant matters, such as compliance with the par condicio creditorum, as a basis for the Court's decision.19
Under the new rules,20 in the event of material misstatements or omissions of facts, experts will be personally liable and may be punished under criminal law with jail and other sanctions.21