The Court of Siracusa (5 June 2017) ruled that a pending lease of business contract continues on a regular basis, according to the restructuring plan, in case no bids are made according to Art. 163-bis of the Italian Bankruptcy Law

The case The debtor entered into a business lease contract with a third party before he filed for concordato preventivo.

The Court, considered that the restructuring plan was based on the prosecution of the lease of business contract, admitted the debtor to the concordato preventivo procedure and ordered a public auction, as provided by Art. 163-bis IBL, aimed to find bidders offering better conditions.

The lessee did not pay the deposit and did not upgrade his offer to make it binding and final, pursuant to the terms of the auction set by the Court.

The debtor then filed a petition to the Bankruptcy Judge asking to be authorized to continue the lease of business contract. The Judge rejected the petition and ruled that it was inconsistent with the outcome of the auction and with the conduct of the lessee, who did not abide to the auction’s terms.

The lessee and the debtor thus appealed the decision to the Bankruptcy Court.

The issue There is not a specific provision as to the consequences when no bids are submitted according to Art. 163-bis IBL and, in particular, whether or not the lease of business contract (or in general the offer which triggered the auction) remain valid when the third party to the contract (or initial offeror) doesn’t comply with the terms set by the Court in order to take part to the auction.

The decision of the Court The Bankruptcy Court upheld the appeal based on the following grounds:

  • the current law does not provide for any obligation by the tenant (or the initial bidder) to take part to the public auction, set by the Court seeking competitive bids;
  • the current law does not provide that the initial bid is void if it is not made compliant with the terms set by the Court for the competitive auction, but only that it has no effect in the framework of the competitive auction (to which the initial bidder does not take part);
  • the current law provides that the original bidder is relieved of its obligations for the case that another bidder is successful in the public auction, but there is no such provision for the case that the original bidder did not take part to the auction;
  • the public auction set by the Court is sufficient per se to fulfil the aim, provided by the law, to maximize the recovery for creditors, by avoiding that pre-packaged restructuring schemes set up by the debtor be the only existing option for the creditors; the fact that there are no other bidders confirms indeed that market conditions do not allow for a better offer than that arranged by the debtor;
  • otherwise, there would be an unreasonable and unlawful limitation of the will of the parties by the Court: on the one hand, there would be a contract made by the parties and changed by a Court (if the pending lease of business contract could not continue); on the other hand, the concordato proposal arranged by the debtor and admitted by the Court would also be changed, from a proposal providing for an “indirect” prosecution of the business (through a lease of business) to another providing for the prosecution of the business by the debtor himself;
  • the original proposal thus retains its full validity and the contract continues in the ordinary course of business, without a need for any authorization.

Commentary The decision appears to be correct and can be endorsed, since it takes in due account both the general interests of creditors, pursued by the concordato preventivo procedure (the search for potential bids, in order to avoid “pre-packaged” schemes which may affect creditors, who should not have bankruptcy liquidation as the only alternative if they reject the proposal of the debtor), as well as individual interests (avoiding that the Court can replace the restructuring plan prepared by the debtor as a suitable remedy to insolvency and to which, following a market test, there is not a better alternative).

The decision is in line with other known rulings of the Courts and confirms that the original bidder or lessee is free to comply or not with the conditions set by the Court, thereby (i) running the risk of being set aside by a single alternative bidder who filed an offer compliant with the conditions of the public auction, but on the other side (ii) being able to maintain the original conditions of his proposal, if there is no other bid.