The Court of Milan (10 November 2016) issued a confirmation order of a debt restructuring agreement pursuant to Art. 182-bis of the Italian Bankruptcy Law on a petition by an investment fund, which was deemed as a legal entity on its own right and not only a separate estate within the SGR which is the legal representative of the fund

The case

An SGR pleaded for confirmation of a debt restructuring agreement on behalf of a closed real estate investment fund, on the basis the fund’s assets were insufficient to meet the fund’s liabilities.

The Court set the confirmation hearing and, in the meantime, granted a stay of enforcement actions on the fund’s assets pursuant to Art. 182-bis sixth para. IBL.

Art. 57, para. 6-bis TUF regulates a special judicial liquidation procedure of investment funds in a state of insolvency, but does not clarify whether – as an alternative to liquidation – an investment fund could also be eligible for debt restructuring agreements or concordato preventivo.

According to Italian insolvency laws, only entities or persons are eligible to insolvency procedures and not the estate or the business unit as such which is owned or run by the enterpreneur: the estate of the debtor is managed within the procedure with an aim at discharging the debtor’s indebtedness as the owner of the assets pertaining to the estate. As a consequence, the main obstacle for an investment fund to be eligible to insolvency procedures alternative to judicial liquidation is that the fund is a separate estate, but is not considered as an entity or person.

The decision of the Court

The Court of Milan granted confirmation of the debt restructuring agreement pursuant to Art. 182-bis IBL, recalling its own recent decision (Trib. Milan, 10 June 2016, No. 7232) whereby the Court had already deemed as a legal entity on its own right, on the basis of various arguments including that based on the same Art. 57, para. 6-bis TUF which, by providing the judicial liquidation procedure of a fund, treats the same as a legal entity.

The decision of the Court is based also on the grounds that a fund (“irrespective of it being deemed as an entity”) must be eligible also to remedies to insolvency alternative to the judicial liquidation procedure.

In the rationale of its ruling, the Court also states that the confirmation proceeding of debt restructuring agreements pursuant to Art. 182-bis IBL does not fall within the definition of an insolvency procedure and, therefore, an SGR could also resort to it, considering that SGRs are not eligible for insolvency procedure different from liquidazione coatta amministrativa.

The Court of Milan is well aware that its own ruling deeming investment funds as legal entities on their own right is a ground-breaking one, in a much wider perspective going far beyond the issue at hand.

The Court, indeed, provides alternative grounds for its decision as to confirmation of the debt restructuring agreement: (i) the judicial liquidation procedure of investment funds is a sort of liquidazione coatta amministrativa, which is certainly an insolvency procedure (ii) investment funds “as such” are eligible for the judicial liquidation procedure and (iii) remedies alternative to liquidation must also be available to funds. The decision of the Court is to be fully shared, as it is in line with arguments set forth by us in a previous newsletter.

The rationale for the decision clearly sets the ground for making investment funds eligible also for concordato preventivo, on the basis that the general provision of Art. 3 IBL, which states that “entities subject to liquidazione coatta amministrativa are eligible to concordato preventivo”. The Court indeed in its reasoning recalls that SGRs are not eligible for insolvency procedures (such as concordato preventivo) different from liquidazione coatta amministrativa, but the Court itself clarifies that SGRs act only as legal representatives of investment funds: there would be therefore no obstacle for a SGR to make a concordato filing on behalf of a fund, given that the SGR would in any case not be subject to the procedure in his own capacity, but only in its capacity as the SGR in charge of the single insolvent investment fund, which the SGR could continue managing in the ordinary course of business according to the general rules of concordato preventivo, and the SGR would not be involved as far as its own activity and other funds managed by the SGR are concerned.