Important changes to Italian bankruptcy law with particular respect to the composition with creditors (concordato preventivo) and restructuring agreements (accordi di ristrutturazione) have entered into force on 27 June 2015.
The aim of decree No 83/2015 (the Decree) is stated to be to “enhance the credit access for companies in financial difficulties, boost companies’ position in case of asset disposal in the context of composition with creditors (hence improving the efficacy of the restructuring) and to broaden the scope/characteristics of debt restructuring agreements”. The Decree also brings an important change in tax, aligning Italy to other EU member states, with respect to deducibility of losses by a lender/financial entity. The Decree has to be converted into law within 60 days from the date of its publication (i.e. by 26 August 2015). If this conversion does not occur by that date, all provisions cease to be effective with retrospective effect.
Below is a short summary of the main changes introduced by the Decree:
Composition with creditors (concordato preventivo)
- Third parties may make alternative offers to purchase assets: if the composition plan presented by the company provides for an asset disposal (to an identified investor), the court officer (the court officer is court appointed and acts on behalf of the court) can ask the Court to open a competitive auction process if the offer, on which the debtor’s plan is based, is not deemed to be in the “best interest of creditors”. The court officer’s decision will most likely be exercised if other expressions of interest are submitted. Third parties will therefore be allowed to submit new offers. The same possibility also applies to leases of a going concern and other transactions outside the ordinary course of business.
- Creditors may put forward a composition plan: creditors of a company, which proposed a composition plan, representing at least 10% of the company’s debts, will be allowed to submit an alternative composition plan concurrently with the debtor’s plan if the debtor’s plan submitted does not ensure the repayment of at least 40% of the unsecured claims. Arguably, such creditors need not have been creditors of the debtor prior to the composition but can include third parties who have acquired debt after the filing of the composition plan. This additional leverage given to the creditors will reduce situations where the company used the composition with creditors tool tactically simply to delay difficult decisions which were necessary for an efficient restructuring. However, given the 40% threshold, these provisions may also discourage the debtor in presenting proposals which may be open to competition.
- Access to information: both for competitive purchase offers and concurrent creditor proposed composition plans, creditors are allowed to have access to such of the company’s information which is available to the court officer (the court officer has access to information filed bythe debtor with its composition plan such as for example debt/economic/assets situation of the company). Access to such information is crucial to allow concurrent creditors to make alternative proposals.
- Sanctions if the debtor does not proper implement the approved composition with creditors: once approved, the debtor must implement the plan. If the debtor fails to do so the Court may take action and allow the court officer to take control of the company to implement the plan.
- New cram down provisions in connection with restructuring agreements with financial creditors (new article 182 septies of Bankruptcy Law): The decree introduces a new type of restructuring agreement, as a sub category of the existing restructuring agreement provisions already provided for by Italian bankruptcy law (i.e. agreement to be reached with at least 60% of the debtor’s creditors to (for example) amend, reschedule or write off some of their debts and subject to Court approval). These new restructuring agreement provisions apply if a debtor’s indebtedness to banks and financial intermediaries exceeds 50% of the company’s overall indebtedness. The debtor may then enter into a restructuring agreement with its financial creditors which are split into classes. Classes of financial creditors are determined in the restructuring agreement according to the ranking and the terms of the debt. If 75% (by value of debt) of the financial creditors, in each class of financial creditors, agree with the debtor’s proposal for the restructuring agreement the remaining dissenting financial creditors can be crammed down, provided that (i) the restructuring agreement is approved by the court (approval will be granted if certain criteria specified below are met) and (ii) dissenting creditors are informed and have had the option to take part in any negotiations. Crammed down creditors will be considered as “consenting creditors” for the purposes of reaching the 60% threshold required for the entry into the restructuring agreement pursuant to article 182 bis of Bankruptcy Law (as mentioned above). All non-financial creditors (e.g. suppliers of goods or services) are still required to be repaid in full (unless specific agreements are reached with such non-financial creditors). The Court, in approving such restructuring agreement which will bind even dissenting creditors (providing that the 75% and 60% majorities of creditors above are met), will need to exercise a certain level of scrutiny to assess the transparency of the process, the criteria and basis on which the classes of financial creditors were formed and the Court will need to be satisfied that the proposal will provide recoveries to the dissenting creditors in an amount which is not less than that which would be achievable under any “feasible alternative solutions”. The dissenting creditors will have 30 days to challenge the decision of the Court.
This cram down mechanism is aimed at avoiding restructuring agreements failing or being delayed due to the interests of financial creditors with a minor exposure. Such smaller creditors are usually informed about the restructuring agreement but do not tend to take an active – or at least cooperative - part in the negotiation given their limited exposure. The assessment of the “feasible alternative solutions” mentioned above can be a challenging task for the Court and this has not yet been tested by the Courts.
Concordato preventivo and restructuring agreements
- Easier access to financing for companies in financial distress: the Court may authorize senior ranking priority interim financing in the preliminary phase of a composition with creditors (i.e. in a blank filing, concordato in bianco) or pending the approval of restructuring agreements, without the need for an approval by the independent expert (i.e. the independent expert appointed by the company subject to certain statutory liabilities) which was previously required. Before approving the financing, the Court will need to consider the debtor’s needs for liquidity, gather information on the proposed plan, consult with the court officer and the main creditors. The same will apply to the confirmation of receivable discounts credit (linee di credito autoliquidanti). It is difficult to predict whether this measure will effectively enhance quicker interim financing since Court approval is still required.
Out of court standstill agreements
- Standstill with financial creditors: the cram down procedure set out above will apply in order to agree out of court standstill agreements between the debtor and banks/financial intermediaries. In this case the standstill would need to be blessed by an external expert. Financial creditors with an exposure exceeding 75% of the financial indebtedness can agree on a standstill, binding any dissenting creditors, if an expert confirms that the dissenting creditors have the same economic interest/similar debt exposure characteristics. Again, dissenting creditors have 30 days in which to challenge the agreement before the court.
- Tax deductibility of loan write-downs and write-offs: specific provisions have been introduced to make loan write-downs and write-offs more tax efficient for banks and financial institutions . Until the end of 2012, banks were allowed to deduct loan write-downs from taxable income up to 0.3 percent of outstanding loans; the balance was deductible in equal instalments over a period of 18 years, generating the recognition of deferred tax assets (DTA) on balance sheets. From 2013, banks were allowed to deduct loan write-downs and write-offs over a period of 5 years. Under the new tax provisions, as of 2015, loan write-downs and write-offs are entirely deductible in the year in which they are recognized in the financial statements, subject to certain transitory provisions. Specific tax rules deal with the “stock” of DTA generated in previous tax years. These are long-awaited tax measures designed to help banks move the nearly €300 billion in bad loans off their balance sheets more quickly, and free-up capital to lend and stimulate economic recovery.
Other measures introduced by the Decree
- Liens (vincoli di indisponibilità) and gratuitous disposals: if a debtor takes actions aimed at preventing the creditor from enforcing over real estate assets or registered movables, the creditor may seek to enforce its claim even before the Court declaring the disposal invalid.
- Realisations of secured/seized assets: amendments have been made to the procedural rules for enforcement of security interests/liens over assets and with respect to the relevant information and publicity system (with the creation, to be implemented, of a new website of court sales/auctions and assets to make information more readily available). The principal aim is to improve the efficiency of auctions and forced sales (e.g. reducing their length or modifying/meliorating the criteria for the sale/auction price) and the realization of assets.