The Court of Cassation with a decision of 25 September 2017, No. 22274 confirms that Art. 74 of the Italian Bankruptcy Law provides a special rule, which does not apply to cases to which it is not explicitly extended
A creditor challenged an order by the Bankruptcy Judge in the proof of debt phase in bankruptcy denying super-priority status to a claim arising from an electricity supply contract which was entered into with the company and was continued – after the declaration of bankruptcy – while the receiver was authorized to temporarily carry on of the business.
The Bankruptcy Judge recognized super-priority status only to supplies made after the declaration of bankruptcy, considering that – after the receiver ceased to carry on the business ceased – he did not continue further the contract, but rather transferred it to another company together with the business as a going concern.
The Court noted that, while the receiver was temporarily carrying on the business, it was not Art. 74 IBL to apply, but rather Art. 104 IBL.
The creditor filed an appeal before the Supreme Court.
Art. 74 IBL states that, if the receiver takes over a contract providing for continuous supplies, he must fully satisfy also the claims for supplies made prior to bankruptcy. The issue is then whether this rule applies also in the temporary carrying on the business by the receiver, because in this case a different general rule is set by Art. 104 IBL, seventh paragraph, according to which (i) contracts in force continue, unless the receiver chooses to suspend or terminate them and (ii) the rules set forth in Articles 72 and following IBL apply at the time when the temporary carrying on of the business ceases.
The decision of the Court
The Court of Cassation rejected the appeal.
The decision is based on the assumption that Art. 74 IBL does not constitute a general principle relating to the nature of the contract, but sets a special rule, which cannot be applied in case a contract is continued, if this is not expressly provided.
In contracts providing for continuous supplies, each set of supplies and relevant consideration in each time unit provided by the contract, does not constitute partial performance of the contract, but full performance of the obligations arising in such a time unit: the performance by the receiver of the contract does not therefore prevent – unless Art. 74 IBL applies – to differentiate the status of pre-bankruptcy claims (to be satisfied pari passu as unsecured claims in bankruptcy) and subsequent claims (to be considered as super-priority claims).
The Court therefore clarifies the relationships between Art. 104 and Art. 74 IBL. The special rule of Art. 74 does not apply in case the receiver continues to carry on the business under Art. 104 IBL, which states that the rules regarding the effects of bankruptcy on pending contracts “apply at the time when the temporary carrying on of the business ceases“.
The Court of Cassation follows on its own ruling of 19 March 2012, No. 4303 whereby it considered separately three different moments in the performance of a contract: (i) the receivables arising pending the temporary carrying on of the business enjoy super-priority status; (ii) the receivables arising after the temporary carrying on of the business are also super-priority claims, but only in case the receiver takes over the contract; (iii) the receivables which arose before bankruptcy shall be considered either as super-priority or unsecured claims, depending on the receiver, at the end of the temporary carrying on of the business, choosing to take over the contract or not. In this sense there is also case law by lower Courts (Tribunal of Busto Arsizio of 18 January 2012).
The Supreme Court also states that this is an appropriate rule to be followed, otherwise the Bankruptcy Court would be at odds authorising receivers to temporarily carry on of the business, forcing receivers to terminate pending contracts and to enter into new ones, in order not to create undue burdens to the estate.
It has been objected that, in both cases, one can see that the contract continues with the receiver, who has the choice to continue or to terminate the contract, while the other party to the contract has the right to be paid in full as a super-priority creditor only in one case and not in the other.
The rule of Art. 74 IBL might be liked or not in that it grants a special right to the supplier for prior claims, but it must be applied fairly: the Supreme Court’s opinion allows instead the receiver to apply the rule at will, forcing the other party to make further supplies, then dissolving the contract before the end of the temporary carrying on of the business (or alienating the business as a going concern).