The Court of Milan with a decision on 28 May 2014 addressed some heavily debated legal issues: the Bankruptcy Court may authorize the debtor to terminate credit facility agreements when the debtor submitted a pre-filing for concordato preventivo (known as “concordato con riserva”)?

The Case

A  company  submitted  a  “concordato con riserva” application,  under article  161, sixth  paragraph  of  the  Italian Bankruptcy Law (IBL) which allows the debtor to enjoy immediate protection from creditors’ actions and certain relief while it is preparing a debt restructuring proposal. Together with this application, the company also applied for specific relief – according to Article 169-bis IBL – consisting of the suspension or termination of several bank loan agreements and credit facilities, with an aim at disregarding the relevant guarantees granted in favor of the banks.

The Issues

The introduction of Article 169-bis IBL in late 2012 was favorably received by many. Indeed, the IBL did not expressly address the fate of pending agreements in the case of concordato preventivo (unlike Articles 72-82 IBL, setting forth a full set of rules applicable in the bankruptcy liquidation procedure). Consequently, many uncertainties arose in respect of performing or terminating pending agreements in concordato preventivo. Article 169-bis IBL was an attempt to offer a special termination remedy, when the debtor seeking to reorganize its own indebtedness would find certain agreements as being detrimental to this aim.

Some issues arose then, inter alia (i) whether this remedy is available not only to debtors filing a final concordato proposal to their creditors based on a specific reorganization plan, but also to debtors seeking relief under a “concordato con riserva” application, and in this latter case (ii) what is the remedy which can be granted (termination or only suspension). In general, there is also a debate regarding the definition of “pending agreements” for the purposes of Article 169-bis IBL, and in particular whether credit facility agreements can be considered as such.

The Court Ruling

The Milan Court ruled that relief can be granted also in the context of a pre-filing or “concordato con riserva” under article 161, sixth paragraph, IBL. In this case, however, the Court maintained that termination of a contract pursuant to Article 169-bis IBL is not admissible because it is “not compatible with the flowing situation following a concordato preventivo pre-filing [] with the establishment of irreversible effects of termination vis-à-vis the contractual counterparties”. On the other side, the Court ruled that a request to simply suspend pending agreements, being more limited in scope, is admissible under a “concordato con riserva” application.

The Court then elaborated on the meaning of “pending agreement” according to Article 169-bis IBL in concordato preventivo (which is not clearly defined by IBL) and, in particular, whether this is consistent with the meaning of “pending agreement” which is known in the context of the bankruptcy liquidation procedure (Art. 72 IBL). The Court noted that the provisions relating to “pending agreements” operate differently in the two procedures, given that in concordato preventivo agreements are performed unless the debtor requests their termination/suspension, while in bankruptcy the general rule is that performance of agreements is suspended until the receiver decides whether they should be performed or terminated.

The Court held that in concordato preventivo the definition of “pending agreements” is the same as in bankruptcy and, therefore, relate only to agreements for consideration in which both parties still have to perform at least in part their reciprocal obligations at the time of commencement of insolvency proceedings: indeed, the Court noted, if one of the parties has fully performed its own obligations, then only a debt would be left, to be discharged according to the concordato proposal if it lies on the side of the party resorting to the insolvency procedure, or to be paid in full by the other party which is not insolvent.

As a result, in the specific case the Court granted the suspension relief with respect to credit facility agreements, considered as “pending agreements”.

Commentary

The decision touches on heavily debated legal issues which do not allow at present for the identification of a uniform rule of application. Indeed, many local Courts have taken different stands and no precedents of the Supreme Court of Cassation are known as yet.

While the view that relief is admissible in the context of a “concordato con riserva” application is widely shared, opinions differ sharply when it comes to the issues of termination of agreements and particularly of credit facility agreements, which according to many cannot be considered as “pending agreements”.

The Courts have addressed also other issues, maintaining e.g. that a request for relief under Article 169-bis IBL must be accompanied by a disclosure of the features of the plan and proposal which the debtor intends to submit, so as to enable the Court to assess the conditions for the requested termination or suspension. Some rulings were issued that considered it necessary to provide advance concrete information regarding the contents of the restructuring plan and the proposal and as well as a  “preliminary expert report attesting to the accuracy of the company information and the feasibility of the proposal”. Instead, with respect to the simple suspension of the agreement, the provision of even generic advance information regarding the contents of the restructuring plan to be submitted, were held to be sufficient.

In other cases the relief under Article 169-bis IBL was conditioned on the demonstration that the termination of the agreement would provide the best outcome for the concordato preventivo restructuring, in the best interest of the creditors.