Italian bankruptcy law — Royal Decree No. 267 of 16 March 1942 — (the Bankruptcy Law) underwent a substantial reform between 2005 and 20091, mainly aimed at introducing (i) a more efficient regulation of the pre-bankruptcy agreement procedure (concordato preventivo)2 and (ii) new pre-bankruptcy schemes of arrangements, in the form of the out-of-court debt restructuring plan (piano attestato di risanamento)3 and the debt restructuring agreement (accordo di ristrutturazione dei debiti)4.

The credit crunch scenario demonstrated that the legal framework applicable to the pre-bankruptcy agreement procedure and pre-bankruptcy schemes of arrangements was still in need of further improvements. The main issues limiting their use were, among others, the following: (i) uncertainty regarding the seniority of new finance made available while debt restructuring agreements and pre-bankruptcy agreement procedures were pending, if the debtor was later declared bankrupt following an unsuccessful restructuring, (ii) uncertainty as to whether payments and transactions carried out in the implementation of pre-bankruptcy agreement procedures and pre-bankruptcy schemes of arrangements were exempted from criminal sanctions5, if the debtor was subsequently declared bankrupt, and (iii) until the publication in the Companies’ Register of the executed debt restructuring agreement, creditors could initiate or continue restraining or enforcement actions on the assets of the debtor.

In order to improve the legal framework and further encourage the use of pre-bankruptcy agreements and pre-bankruptcy schemes of arrangements, Decree Law No. 78 of 31 May 2010 — as converted by Law No. 122 of 30 July 2010 — (the 2010 Amendment) recently introduced some additional changes to the Bankruptcy Law.

Seniority of New Finance

In any negotiation process aimed at restructuring indebtedness and getting over a state of crisis, the availability of new finance necessary for the debtor to continue its business and meet its daily indebtedness is of crucial importance. In particular, bridge loans can ensure the continuity of the debtor’s business during the period preceding the court’s approval of a pre-bankruptcy agreement or debt restructuring agreement, increasing the probability that the restructuring itself is successful.

The new Article 182-quater of the Bankruptcy Law, introduced by the 2010 Amendment, expressly allows the recourse to new finance not only when it is made available in the implementation of pre-bankruptcy agreements or debt restructuring agreements that have been approved by the court (omologazione), but also when the disbursement of new finance is functional for the obtaining of the court’s approval of a debt restructuring agreement or for the filing of a petition for admission to the pre-bankruptcy agreement procedure. The ratio is to facilitate (i) the court’s approval of such agreements and (ii) the procurement of new finance instrumental to and in the context of such procedures.

In particular, pursuant to such new provision of the Bankruptcy Law, if a debtor is declared bankrupt following a court approved pre-bankruptcy agreement or debt restructuring agreement, claims arising from new finance shall be treated as super-senior (prededucibile), pursuant to Article 111 of the Bankruptcy Law, under the condition that the new finance was made available by a bank and/or financial intermediary (intermediario finanziario)6:  

  1. before the debtor was declared bankrupt, to perform a pre-bankruptcy agreement or debt restructuring agreement approved by the competent court; or
  2. for the obtaining of the court’s approval of a debt restructuring agreement or for the filing of a petition for admission to the pre-bankruptcy agreement procedure, provided that (a) such new finance is contemplated in the plan for the pre-bankruptcy agreement, pursuant to Article 160 of the Bankruptcy Law, or in the debt restructuring agreement, (b) the court expressly grants such super-seniority and (c) the debt restructuring agreement is approved by the court.

Article 182-quater of the Bankruptcy Law also qualifies as super-senior the fees of the expert7 that drafts the opinion pursuant to Article 161, paragraph 3,8 and Article 182-bis, paragraph 1,9 of the Bankruptcy Law, provided that the court expressly grants such super-seniority and the debt restructuring agreement is approved by the court.

Finally, shareholder loans are also considered super-senior10, for up to 80 percent of their total amount. In order for such claims to be super-senior, the shareholder loan must be (i) contemplated in the plan for the pre-bankruptcy agreement, pursuant to Article 160 of the Bankruptcy Law, or in the debt restructuring agreement and (ii) made available only following the court’s approval of the pre-bankruptcy agreement or debt restructuring agreement. The scope of this provision is to encourage shareholders to financially support restructurings by cooperating actively in their implementation, together with the lenders who are making available new finance and those creditors that agree to waive part of their rights pursuant to the relative pre-bankruptcy agreement or debt restructuring agreement.

The new provisions on the super-seniority of certain claims represent a significant change in the legal framework. However, pursuant to Article 111-bis of the Bankruptcy Law, such claims are not super-senior to those secured by a pledge or mortgage: we are therefore still far from offering the solutions applicable under US law such as DIP (debtor-in-possession) financing, which really allow the granting of super senior-finance.  

Criminal Bankruptcy Liability

The 2010 Amendment has significantly changed the regulation of criminal bankruptcy liability in order to coordinate the criminal law provisions with the regime now provided for the pre-bankruptcy agreement, debt restructuring agreement and out-of-court debt restructuring plan.

In particular, the newly introduced Article 217-bis of the Bankruptcy Law expressly provides that payments and transactions carried out in performing a court approved pre-bankruptcy agreement or debt restructuring agreement or an out-of-court debt restructuring plan, are not subject to the aforementioned criminal law provisions.

This important amendment to the Bankruptcy Law should, therefore, eliminate the risk that creditors (or their representatives) involved in pre-bankruptcy agreements, debt restructuring agreements or out-of-court debt restructuring plans might be prosecuted for such criminal bankruptcy offenses, should the restructuring fail and the debtor be subsequently declared bankrupt.

Debt Restructuring Agreement: Stay on Restraining Actions and Enforcement Proceedings

Pursuant to Art. 182-bis, paragraph 3, of the Bankruptcy Law, during the 60 day period following the date the debt restructuring agreement is published in the competent Companies’ Register, those creditors whose claims arose prior to such date of publication cannot commence or proceed with restraining actions or enforcement proceedings on the assets of the debtor. Such stay period certainly favors the definition of the relative debt restructuring agreement, as it allows the debtor to negotiate the terms and conditions of such agreement (with creditors representing at least sixty percent of its indebtedness) without having to simultaneously face the initiatives of non-participating creditors.

Following the 2010 Amendment, which introduced paragraphs 6 to 8 to Article 182-bis of the Bankruptcy Law, the aforementioned stay can be requested by a debtor in a state of distress also during the negotiation phase of a debt restructuring agreement (with creditors representing at least 60 percent of its indebtedness), by filing, inter alia, the following documents before the competent court: (i) a request for such stay; (ii) the proposed debt restructuring agreement accompanied with an affidavit of the debtor attesting that such proposal is being negotiated with creditors representing at least sixty percent of its indebtedness; (iii) an interim opinion of an expert11 on the suitability of such proposed debt restructuring agreement to ensure the regular payment of the claims of non-participating creditors; (iv) an updated financial report and (v) an analytical report and an appraisal of the debtor’s assets together with a list of the names of its creditors, indicating their respective claims and preferential rights.

After the competent court has verified that all the required documentation has been filed and that the conditions exist to reach a debt restructuring agreement (with a number of creditors representing at least sixty percent of the debtor’s indebtedness), which ensures the regular payment of dissenting creditors’ claims, such court issues a decree that prohibits creditors from starting or proceeding with any restraining action or enforcement procedure on assets of the debtor and from acquiring any pre-emptive right that has not been agreed. The court also assigns a term, not exceeding 60 days, within which the debtor has to file the executed debt restructuring agreement and the expert’s opinion on the feasibility of the restructuring plan.