Significant innovations have been introduced in Italy by Law Decree no. 83 of 27 June 2015 (entitledUrgent Measures on Insolvency, Civil and Procedural Matters and the Organization and Functioning of Judicial Commissioners (the "Decree").The Decree was converted by the Italian Parliament into statutory law no.132 enacted 6 August 2015 (the "Conversion Law").
The changes result from engagement between various institutions and organisations, including our Ernesto Apuzzo who participated in the work of the organizing committee coordinated by the Italian Ministry of Economy which devised the reform.
What is the aim of these new measures?
To stimulate and sustain supply and demand for Italian Non-Performing Loans (NPLs). The NPL market has grown significantly over the last few years in many Eurozone countries with the notable exception of Italy where operators have struggled with staggered tax deductions for debt write-offs and lengthy, inefficient debt recovery proceedings. These changes should put the Italian NPL market in a position to compete with its European counterparts.
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New form of debt restructuring agreement
Drawing on the experience of operators in other jurisdictions (including Schemes of Arrangement in the United Kingdom), the new law introduces a new form of debt restructuring agreement for creditor banks and financial intermediaries.
Previously a bank which had a relatively significant receivable but whose position was marginal when viewed in the context of the greater creditor pool participating in a particular debt restructuring, was able to block that restructuring if its terms would not pay off the debt owed to that dissenting creditor in full. This meant that banks generally focused more on the need to sign all creditors up to a particular restructuring than on ensuring that the actual terms of that restructuring were optimal.
Under the new form of debt restructuring agreement, the debtor can complete the restructuring with banks and financial intermediaries representing more than 50% of the overall indebtedness provided that all non-financial creditors will be fully satisfied under its terms. For this purpose, all financial creditors are grouped into homogeneous classes and if creditors representing more than 75% of the value of claims of that class approve the terms of the restructuring, the deal will also bind any dissenting creditors in that class (if they have been duly informed of the restructuring agreement negotiations and placed in a position to participate in good faith in such negotiations).
The new provisions also extend the so-called "cram down" mechanism available in creditor arrangements to debt restructuring agreements. Dissenting creditors (if duly informed of the relevant negotiations and placed in a position to participate in good faith in the discussions) may be included in any temporary moratorium agreed by the debtor with those of its creditor banks and financial intermediaries who are in a similar position to the dissenting creditor and whose homogeneous position is certified by an expert. Dissenting creditors cannot be forced to grant new loans or credit lines though.
Acceleration of tax deductions
The tax deductibility of bad debts has been accelerated for financial institutions from the current five year timetable, thus aligning Italian tax rules to those applicable in other EU countries and removing the competitive disadvantage from which the Italian financial operators have suffered to date.
Depreciation and losses arising from bad debts registered in banks and insurance companies' accounts will now be fully deductible for the purposes of both corporate income tax (IRES) and regional tax on productive activities (IRAP) under the accrual principle in the year in which they arise.
While the enhanced right to tax deductions takes effect immediately, the effect is staggered in the first year (fiscal year 2015) with the amount of the deduction limited to 75% of the amounts recorded in the creditor's financial statements with the remaining 25% deductible in equal instalments over the subsequent ten fiscal years, attenuating the immediate impact, for the Italian Revenue Service (IRS), of the expected significant write-offs by financial institutions this year.
Further transitional provisions, also aimed at preserving the IRS' cash flow, include (i) the rescheduling over a more extended timeframe of deductions for tax purposes in relation to bad debt write-downs or write-offs; and (ii) the determination of advance payments of IRES and IRAP for fiscal years 2015-2017 on the basis of the former (more onerous) rules, and not pursuant to the new and more favourable rules.
These measures end the misalignment under which financial institutions have been able to deduct bad debts for accounting purposes but only to a limited extent for tax purposes. As an obvious consequence no deferred tax asset may in future be recorded in relation to the relevant bad debts, given that these will enjoy full tax deductions. Nevertheless, deferred tax assets already registered in the financial statements based on the rules previously applicable should not be affected by the new regime, which merely reschedules their deductibility for tax purposes. It also appears that, if the relevant conditions are met, such deferred tax assets may still be converted into corresponding tax credits.
Greater transparency and efficiency in bankruptcy proceedings
To expedite bankruptcy proceedings and improve transparency, as well as enhancing the accessibility and circulation of information regarding insolvencies, the Decree:
- establishes for the first time a National Public Registry of Insolvency Practitioners, in which all persons acting as bankruptcy trustees, judicial commissioners or liquidatorsmust be registered
- imposes deadlines within which the bankruptcy trustee must complete its inventory of the insolvent company's assets and implement the asset liquidation plan, with the real threat of removal for failure to comply
- removes pending litigation as an obstacle to the payment of distributions to creditors. In addition, the Conversion Law provides that legal disputes involving bankrupt entities or under creditor arrangements shall be handled by courts with priority over other litigation.
Streamlined debt enforcement
The Decree aims to accelerate and simplify enforcement processes and encourage the circulation of goods by expediting judicial sales and facilitating access to the relevant information, while at the same time affording reasonable protections to the debtor. Taken together, these measures should render NPLs more marketable, as recovery prospects (and timelines) improve.
Most significantly, certain of the procedural deadlines applicable in enforcement proceedings have been halved, while the period of duration for attachments has been reduced, in the debtor's favour.
There will be an online registry of public auctions to be handled primarily out-of-court, and a list of entities specialized in the custody and sale of foreclosed assets. The debtor is now entitled to replace any foreclosed or seized assets with sums of money. Furthermore, garnishment of salaries and pensions will be partially limited, favouring the debtor and its workforce.
A financial lifeline for distressed businesses
Several measures have been introduced to enhance the prospects of fresh financing for distressed businesses, even in the initial phases of creditor arrangement proceedings, and to increase the likelihood of successful business restructurings.
Based on experience, in the past banks have generally proven reluctant to grant new financing (or the continued use of existing credit lines) during this initial procedural phase in the absence of a court order. At the same time, the previous requirement for expert certification that the new moneys were necessary and urgent, was onerous and unduly time-consuming in a context where business continuity was crucial.
When presenting a petition for an arrangement with its creditors or proposing a debt restructuring agreement, a distressed company will now be able to request and obtain the Court's authorisation for the assumption of new financing – enjoying super priority – provided the loan is essential, and needed urgently, for the carrying on of the company's business.
The court may give its authorisation after having made only summary inquiries, since the certification by an expert of the urgency and necessity of the loan is no longer needed provided the allocation of funds is clearly identified and failure to grant the loan would result in irreparable prejudice.
No court authorisation is required to maintain pre-petition self-liquidating credit lines. If these lines are maintained for more than 12 months after the petition (or the termination of the insolvency procedure, if earlier), the pre-petition lender's cashing-in of such credit is not considered payment of a pre-petition debt (for up to the amounts made available to the debtor after the petition).
Bridge financing claw back exemptions
New measures have been enacted to incentivise bridging loans which previously did not enjoy any priority and were at risk of claw back action if the creditor arrangement was declared inadmissible or if the debt restructuring agreement was not successfully certified.
Under the new law, exemption from claw back actions has been extended to acts, payments and guarantees entered into in connection with new financing – including shareholder loans – sought in the context of a petition for admittance to a creditor arrangement procedure or certification of a debt restructuring agreement, even if the creditor arrangement is ultimately denied or the restructuring agreement is not certified.
Introduction of competition in creditor arrangements
Drawing on the US Chapter 11 model, the Decree seeks to enhance the role of creditors by encouraging multiple solutions so as to optimise the treatment of creditors and improve the prospects for the injection of fresh funds into distressed companies (encouraging financing by lenders and the intervention of white knight investors to save viable businesses) and ensure a proper appreciation and realisation of their assets. In particular, the scope for creditors to propose alternative arrangements with creditors has been broadened, while judicial commissioners have been given greater leeway to introduce competition into the process by imposing controlled auctions.
The Conversion Law introduces a 20% minimum threshold of satisfaction for un-preferred creditors for a creditor arrangement plan to be admitted. It is worth noting that this provision does not apply to creditor arrangements aimed at ensuring business continuity.
In addition, the Conversion Law cancelled the pre-existing provision prescribing the implied consent rule for creditors failing to cast an express vote in the creditor arrangement plan voting process.