The Court of Pavia (14 October 2016) denies confirmation of a concordato preventivo plan and proposal approved by the creditors, based on the opinion of the Judicial Commissioner that the plan is clearly unsuitable to cure the debtor’s state of financial and economic distress

The case

A real estate company files a petition to the Court of Pavia for the confirmation of the concordato preventivo plan, providing for the company to continue to trade in order to generate the resources to pay the creditors under the proposal (so-called “concordato con continuità aziendale”).

The Judicial Commissioner indeed explained in his reports to the creditors before and after the vote that, based also on the outcome of the carrying on of business during the procedure, the forecasts contained in the plan appeared clearly unsuitable to support the performance of the proposal after confirmation.

The issues

The issue concerns the scope of the evaluation of the plan by the Court in the context of the confirmation of the proposal.

According to the Court of Cassation, only the creditors are entitled to evaluate the “economic feasibility” of the concordato, provided that they have been properly informed as to the grounds for evaluation, while the Court can assess the “legal feasibility” of the concordato.

In particular the issue is whether the Court can deny confirmation if the plan and proposal are clearly not feasible from an economical and financial point of view, though considering this as a “legal feasibility” issue, lacking one of the underlying conditions of the concordato.

The decision of the Court

The Court denied confirmation by ruling that the plan was clearly not feasible and this indeed frustrated the very purpose of the “concordato con continuità aziendale”.

In short, these is the reasoning of the Court:

  • the “concordato con continuità aziendale” is based on a plan providing for cash flows to be generated by future operations of the business and financial distress to be so cured;
  • the company’s restructuring is then the purpose of this kind of concordato;
  • the “economic feasibility” assessment is up to the Judicial Commissioner who should also make reference to the outcome of the business activity performed during the procedure;
  • in the specific case, the debtor incurred material losses jeopardizing the chances of success of the plan, which was also based on assumptions out of the debtor’s direct control;
  • the clear lack of feasibility of the concordato plan to attain the main goal of the procedure can be evaluated by the Court at the confirmation stage, as it pertains to the “legal feasibility”.

Commentary

The well-known decision No. 1521 of 23 January 2013 of the Court of Cassation is the leading case on the issues at hand: it is up to the Bankruptcy Court to assess the “legal feasibility” at the initial opening, revocation and confirmation phases of the procedure, while it is up to the creditors to assess the chances of success of the plan from a factual point of view, since the creditors are those taking the risks arising therefrom (“economic feasibility”).

The review of the Court as a matter of law consists in the assessment of the “real possibility to attain the purpose of the concordato proposal”, which varies in each case depending on the type of proposal, but in general means that the debtor will be able - by implementing the plan - to repay at least in part the unsecured creditors.

The Court of Cassation ruled in subsequent decisions that the Bankruptcy Court can be satisfied that the concordato cannot attain its own purpose when “the proposal is beyond doubt unable to repay at least in part all creditors” (Cass. 4 May 2016, No. 8799) and when “the plan is clearly unsuitable at all for reaching the concordato preventivo plan and proposal’s goals” (Cass. 9 August 2016, No. 16830).

The issue is therefore to define the real scope of assessment by the Court in the specific circumstances of the given case: the principle is that the Court should not do any evaluation of facts in the merits, because “if beyond doubt the plan cannot be performed, no evaluation is involved” (Cass. 6 November 2013, No. 24970). The Court can then simply take note of what certainly will not happen, while it should refrain from making a factual assessment when there is even a slight chance that something could happen (Court of Appeals of Turin, 17 April 2014).

In the case at hand, the impression is that it could not be ruled out that the plan and proposal – although with very little chances – could possibly be implemented. Indeed, the circumstances seem to be not too different from those considered in the decision of Cass. No. 24970/2013 (namely: relevant losses, lack of a binding commitment by the banks to grant new loans, lack of guarantees to back the sale of property, lack of sufficient resources to fund the plan throughout its duration), which were all considered by the Court of Cassation as factual assessments barred to the Bankruptcy Court.

In the end, a factual assessment is in any case necessary in order to conclude that something is “clearly unfeasible”, which is not inherently a legal evaluation and is then subject to unavoidable margins of appreciation in the given case.