The Tribunal of Milan with a decision of 12 June 2014 took a stand which is in sharp contrast with mainstream case-law, with respect to clauses – widely used as common practice in distressed assets deals as part of “concordato preventivo” restructurings based on an interim lease of business period while the insolvency proceeding is pending – allowing the lessee to apply rental fee payments to the final purchase price of the business, once the “concordato” is confirmed and the sale can take place

The Case

A company filed a request for admission to the “concordato preventivo” procedure, proposing to its creditors to receive the proceeds of the entire liquidation of the estate, based on a restructuring plan providing for the interim lease of the business and the subsequent sale to the lessee.

According to the Tribunal of Milan, the proposal and the plan, as they were devised by the company, were not admissible.

One of the major elements of the proposal and of the restructuring plan, which the Tribunal considered contrary to principles of Italian insolvency laws, was the provision of the lease of business agreement allowing the lessee to apply rental fee payments to the final purchase price of the business, in case the lessee would actually be selected as the purchaser.

The Issues

Within a “concordato preventivo” restructuring under Italian insolvency laws, the business as a going concern can be preserved for the benefit of creditors “indirectly” through a transfer of the business to a third party new investor who – according to the provisions of the restructuring plan and of the proposal made by the debtor to its creditors – initially runs the business as a lessor and then can purchase the business, only after the “concordato” has been approved by the creditors and confirmed by the Tribunal and the liquidation phase of the procedure is started.

The Tribunal of Milan, as many others, ruled that a sale of business within the specific “concordato” scheme providing for the entire liquidation of the debtor’s estate (so-called “concordato con cessione dei beni”) according to Art. 182 IBL must necessarily entail a competitive bid process for the sale of the assets and of the business according to Art. 107 IBL.

The Court Ruling

The Tribunal of Milan deemed the above-mentioned clause of the lease of business agreement contrary to the mandatory rule of competitive bid sales according to Articles 107 and 182 IBL. Indeed, such a clause, according to the Tribunal, “causes the possible bidders in the competitive process on a different footing […] and in such a perspective also the timing of the lease of business, instead of being a safeguard to the creditors, seems to represent a further element hindering a sale at the best possible market price”.

Commentary

The decision of the Tribunal of Milan took a stand which is in sharp contrast with mainstream case-law, generally not objecting to clauses included in interim lease of business agreements and allowing the lessee to apply rental fee payments to the final purchase price of the business, in case the lessee is selected as the purchaser of the business in the liquidation phase following confirmation of the “concordato preventivo”.

Such a clause, widely used in interim lease of business agreements in the framework of “concordato preventivo” workouts, represents a further incentive for the lessee to purchase the business. Indeed, this contractual scheme is a key factor for a successful completion of the “concordato preventivo” restructuring – at least in some cases – considering that the purchase of the business by the same new investor which is already running it as an interim lessee, offers a feasible solution and a sound one from an economic point of view, so that the proposal to the creditors and the restructuring plan can be attained.

The decision of the Tribunal, which held such a clause invalid due to a contrast with principles of equality of potential bidders in a competitive sale process according to Art. 182 IBL, may be questionable if one considers that there are not so many chances of securing a serious purchase offer being also in line with market values, in a situation where timing is a critical factor for the survival of an ailing business in a complex context such as that of a forthcoming insolvency procedure.

It is certainly true that the clause in question may determine a competitive advantage in favour of the lessee in the bid process for the sale of the business, but it is also true – and practice has confirmed this – that the clause is a key factor in order to secure a binding commitment by the lessee to purchase the business, which has the advantage for the creditors that the going concern value is preserved for their benefit.

Some commentators had commented that applying rental payments to the final purchase price would determine that the lease may be free of charge for the new investor. However, in this perspective, it is emphasized indeed that this clause does not really impact on the final purchase price, but rather on the rental fees which would tend to zero with a view to a final, secure purchase of the business. This seems reasonable indeed, considering not only the risks assumed by the lessee of an insolvent business, but also the investments that the lessee is called on to make to run the business in the interim period – before the actual bid process for the sale can take place – and to which he would not be available, absent a contractual arrangement as that being considered here, thereby putting at risk the survival of the business.