The institution of composition with creditors enabling business continuity (Article 186-bis of the Bankruptcy Law) and its impact on the legislative framework of public contracts (on the matter see “Composition with creditors enabling business continuity in public contracts”, June 2013, in www.nctm.it/wp-content/uploads/2013/11/CPCP) have given rise to contrasting applications of case-law, and as matters stand, the institution is often applied in different ways. The Council of State, which was required to decide on two antithetical decisions of the Regional Administrative Courts concerning the same law, recently issued two judgments which provide diametrically opposing interpretations of Article 186-bis.

The controversial issue concerns the possibility of admitting to public procurement procedures an undertaking which has submitted a request for admission to composition with creditors enabling business continuity, but which has not yet been admitted.

The interpretative aspect which has given rise to the two differing schools of thought in case-law is linked to identification of the phase of the composition procedure which must be reached in order for the undertaking to be entitled to participate in the tender, given that the wording of Article 38(1)(a) of Italian Legislative Decree 163 of 2006 (Public Contracts Code) appears to limit participation in the tender to undertakings that have already been formally admitted to the procedure for composition with creditors enabling business continuity.

With judgment no. 6272 of 27 December 2013 (which confirmed judgment no. 146 issued on 7 March 2013 by the Friuli Venezia Giulia Regional Administrative Court, Section I) the Council of State, Section V stated that the focus should be placed on the spirit and purpose of the bankruptcy law reform, and that is, on giving the business or business branch the possibility of operating, and therefore of surviving, also by being able to participate in tenders for award of public contracts and concessions. In that light, the judgment states that in view of the interest of the market and the creditors the law cannot be interpreted in a literal-formal way, as this would exclude from tenders undertakings that have submitted a request for admission to composition with creditors enabling business continuity. The law must instead be interpreted in a wider sense, so as to bring forward the benefit of admission to composition with creditors enabling business continuity to the time the petition for admission is submitted. This interpretation also appears consistent with the one established by Article 186-bis concerning the case of request for composition with creditors enabling business continuity submitted by an undertaking during execution of a contract (in this case the fact that the undertaking is in critical difficulties does not lead to termination, unless the request is dismissed).

According to the judgment under review, preventing an undertaking from participating in tenders for award of public contracts in the period of time between filing of the request and admission to composition enabling business continuity is in conflict with the purpose of the law, which is designed to preserve the undertaking’s capacity to best satisfy its creditors by acquiring new public contracts.

In any case the undertaking is obliged to comply with the conditions and obligations established by Article 186- bis(4) of the Bankruptcy Law. Therefore, for award of the contract, it must produce certain documents before the final award and namely, a report of a qualified professional certifying conformity of the plan and reasonable capability to fulfil the contract; a declaration from another operator meeting the general requirements and those concerning financial, technical and economic standing, and a certificate, necessary for award of the contract, in which it undertakes in respect of the competitor and the contracting body to provide (pursuant to Article 49 of the Public Contracts Code) the resources required for execution of the contract for the full duration of the contract and to succeed the lead undertaking if it should go bankrupt during the tender or after conclusion of the contract or if for any reason it should no longer be able to regularly execute the contract.

Accordingly, the impossibility of fulfilling these obligations, after the provisional award and before the final award, must lead to the exclusion of the undertaking from the tender procedure due to the absence of a subjective conditional requirement requested by Article 38 of the Public Contracts Code.

A decision to the contrary was issued by the Council of State, Section III, with judgment no. 101 of 14 January 2014 (which confirmed judgment no. 23 issued on 18 April 2013 by the Valle d’Aosta Regional Administrative Court) which ruled that participation in tenders is only permitted if the decree of admission to the composition procedure has already been issued.

This judgment is based on an exclusively literal interpretation of the aforesaid Article 38(1)(a) of the Public Contracts Code. It affirms that, if the aforementioned law only “saves” the case governed by Article 186-bis of the Bankruptcy Law, by basing reinstatement of the subjective requirement needed for participation in public tenders on admission to composition enabling continuity (with fulfilment of the prescribed obligations), it cannot be held that this regime can apply when no express provision has been made, and therefore in cases in which the motion-petition for admission to composition with creditors has only been filed (Article 162 or 163 of the Bankruptcy Law).

In this regard it is also necessary to mention the need for certainty and rapidity in the tender procedure, which could be compromised by admitting a competitor whose requirements for participation have not yet been met, but are instead dependant on a possible future order of the bankruptcy court. Both the theories asserted by the judgments raise issues worthy of attention. However it does not appear possible tofind a compromise solution, as the two positions are based on incompatible assumptions.

We must therefore expect a period of uncertainty in application of the law in question due to the absence of standard guidelines, and this will continue at least until a ruling is issued on the matter by the Plenary Assembly of the Council of State (but for this purpose we must wait until new proceedings are brought before the Council of State), or until the introduction of a law (or legislative amendment) that brings in the much-needed clarity and guarantees standard treatment.