The Court Monza decided upon a petition filed by the managing director of a company, after confirmation of a “concordato preventivo con continuità  aziendale”  proposal, seeking an authorization to perform certain acts not in the ordinary course of business.

The case

The legal representative of a company admitted to concordato preventivo according to a plan providing that creditors would be paid out of future earnings (so-called “concordato con continuità aziendale”) requested the Court to be authorized, pursuant to Article 167 IBL, to perform acts of extraordinary administration in the interest of the company.

In particular, the company had to issue a first demand bank guarantee as a performance bond and the banks required that the Court have its say in advance on that.

The issues

The confirmation order of the Court terminates the concordato preventivo procedure, and then the execution phase follows, which is governed – for the concordato con continuità aziendale  solely by the general rules of Articles 185 and 186 IBL: (i) the Judicial Commissioner must supervise the fulfilment of the concordato proposal, according to conditions set forth in the confirmation order of the Court, and (ii) the concordato can be resolved for breach of the terms of the proposal.

The Court of Monza was requested to clarify if and how the duties of the Judge and of the Judicial Commissioner would remain in force after the confirmation order of the Court and, in particular:

  1. whether the Judge shall authorize acts of extraordinary management pursuant to Article 167 IBL;
  2. upon which terms the Judicial Commissioner shall supervise the fulfilment of the proposal.

The decision

  1. With reference to the first issue, it must be preliminary noted as a general remark that, after the confirmation order of the Court, the debtor is no longer insolvent and, therefore, is fully reinstated in its management  powers.

This effect – as underlined by the Court of Monza – can be fully  appreciated  in  the  concordato  con continuità aziendale, whereby the business continues to be carried out under the control of the same debtor, who can perform any kind of acts without the need of any authorization, but with the only limit of directing the activity to the implementation of the plan.

The Court of Monza thus considered that it should not rule on the request filed by the company.

  1. With reference to the second issue, the Court notes that the concordato con continuità aziendale, by providing for an obligation of the debtor to pay to the creditors a certain percentage of their claims, requires that the Judicial Commissioned monitors the fulfilment of the proposal.

Since  creditors are  paid  out of  cash  flows  originated  by  the  continuing  operation  of  the  business  by  the debtor, the supervision by the Commissioner cannot be limited to the point  in  time  when  payments  to creditors are scheduled, but it shall also be exercised before such time and in particular monitor that the terms of the plan are complied with, because a management and financial trend not meeting the forecasts of the plan has direct and immediate consequences on the fulfilment of the proposal.

The Court, therefore, ruled that the Judicial Commissioner shall monitor the trend of  operations  of  the company and see that management decisions do not depart from the terms of the plan, so to jeopardize the fulfilment of the proposal.

The comment

It can be argued from the decision of the Court that, should the terms of the plan not be complied with by the debtor, with an ensuing risk of breach of the proposal, may trigger resolution of the concordato preventivo – when the Judicial Commissioner reports to the Court according to Article  185  IBL  any  “facts causing damage to the creditors” – through a notice thereof to be given to the creditors, who are solely empowered to file the relevant request to the Court.

A further issue, which was not addressed by the Court, is that of the consequences of acts departing from the plan and the purpose of performing the proposal. Considering that no sanction of invalidity is provided for by the law, the following can be said:

  • such acts, as they could not be considered in execution of the concordato preventivo, cannot benefit of the exemption from the claw back action and of other protection provided by law;
  • directors of the company can be held liable of possible adverse consequences for the  creditors, according to the ordinary rules of law applicable in an insolvency situation.

As we address, further, in general terms, the issue of limitations which the debtor may suffer in his management powers, until the proposal is fully performed, we should consider differently (α) the payment or assignment to creditors of assets according to the concordato proposal, which represent the real obligation undertaken by the debtor, and (β) the completion of the transactions provided for in the plan, which only represent the means to fulfil the proposal.

(α) As far as payment or assignment to creditors of assets according to the concordato proposal is concerned, the obligation is strict but disposable, in the sense that, in case of a material breach of such obligation (Article 186 IBL), any of the creditors (but not the Court sua sponte or the Public Prosecutor) can request the resolution of the concordato: therefore, if no creditor so acts, the concordato remains in force.

(β) As far as the completion of the transactions provided for in the plan is concerned, the obligation is flexible, in the sense that:

  • the debtor must comply with the plan in its key terms and, therefore, he could not perform acts which are inconsistent and contradictory with the implementation of the concordato plan and such as to jeopardize the fulfilment of the proposal;
  • in particular, in the case of a concordato plan providing for a full liquidation of the debtor’s assets (which is the most common scheme), this cannot be avoided: indeed,  Article  182  IBL  contains  a specific provision entrusting this task to the judicial liquidator appointed by the Court;
  • in the case of concordato con continuità aziendale, on the contrary, no liquidation activity is provided for or needed, since the debtor keeps his assets in order to continue running the business and generate the cash flows for the fulfilment of the proposal;
  • moreover, in the concordato con continuità aziendale, it is clear that the future business activities of the debtor cannot be in any way be pre-determined and limited, except in case the concordato proposal specifically provides that certain transactions be performed, thus committing the debtor to do so (it can be argued that this is also the case, when liquidation of specific assets is provided in a concordato con continuità aziendale plan).

As a consequence, the issue of non fulfilment of the concordato plan may be differently addressed with respect to (i) the omission of acts provided for by the plan, or vice versa (ii) the performance of acts which are not contemplated therein. In any event, the issue must be evaluated in light of the consequences which may arise for the debtor with respect to the fulfilment of the concordato proposal: indeed, this is the aim of the provisions of the plan and of the activities contemplated therein, once the confirmation order is issued by the Court and the execution phase of the concordato starts.

The foregoing must be also considered against this background: any restriction or limitation relating to the

plan ceases once and to the extent that the proposal is fully performed (or the concordato creditors have been otherwise fully satisfied).