Nearly a year ago, the Italian Parliament passed Law 155/2017 giving the Government twelve months to adopt a root and branch reform of the rules governing business distress and insolvency procedures, taking into account European legislation (EU Regulation 2015/848, Commission Recommendation 2014/135) and the principles of the United Nations Commission on International Trade Law. On 11 October 2018 the Italian Government issued the long-awaited draft of the legislative decree establishing the new Code for Distress and Insolvency (Codice della crisi d’impresa e dell’insovenza, the “New Code“).
The demise of insolvency?
At the heart of the New Code is the concept that the notion of “bankruptcy” (fallimento) is a thing of the past, to be replaced by “judicial liquidation” (liquidazione giudiziale), which becomes the last resort, available only when the debtor has failed to propose any other suitable solution. Seeking to ensure the best interest and satisfaction of creditors, the New Code prioritises procedures aimed at overcoming the crisis by keeping the business as a going concern (even if under new ownership).
The new measures include:
- An alert system (procedura di allerta) based on an early warning procedure to be exercised on a confidential basis and completed within reasonably short timeframes, to improve efficiency and speed of reaction to a financial crisis.
- Out-of-court crisis settlement procedures to ensure early disclosure of economic distress and facilitate negotiations with the distressed company’s creditors. These procedures, which will not be available to listed companies or large corporations, may be activated by the distressed company and will be undertaken by a special new body to be established by the local Chamber of Commerce. Promptly applying for an out-of-court settlement procedure will be incentivized under the New Code.
- Business continuity is encouraged wherever possible, through (i) debt restructuring agreements (accordi di ristrutturazione dei debiti), where the level of approval required from creditors will be reduced, (ii) composition with creditors (concordato preventivo) and (iii) out-of-court turnaround plans (piani attestati di risanamento).
- A state of crisis or insolvency acknowledgment process before the Court of the distressed business’ centre of main interests (COMI, as defined under EU law), available to all businesses other than public entities, to avoid the length, cost and negative consequences currently associated with insolvency.
- Provisions aimed at coordinating management of a crisis affecting a group of companies in a bid to achieve restructuring harmonisation, such as the introduction of a definition of group of companies based on the notion of “direction and coordination” (direzione e coordinamento) established under Article 2497 of the Italian Civil Code, and the ability to file a single application for the group’s distressed companies seeking either judicial liquidation, composition with creditors or debt restructuring agreement and rules for subordinating receivables of companies belonging to the same group, with exemptions to facilitate funding for creditor arrangements or debt restructuring agreements.
- Reforming several critical provisions in the Italian Civil Code, introducing specific rules to facilitate early disclosure of distress and encourage management to seek the assistance of external bodies. Notably, corporate directors will be under a duty to disclose facts or events that are reasonable indicia of distress or insolvency, and internal and external auditors will be obliged to immediately warn the directors of the likelihood of insolvency. If there is no satisfactory response to such a warning, the auditors must promptly inform the newly established bodies, referred to above, to perform the early warning and out-of-court procedures.
The New Code must be converted into law before 14 November 2018, when the authority granted by Law 155/2017 expires. We will be monitoring the process of review, and final approval, of the New Code.