The Court of Florence (November 2, 2016) confirmed that the debtor can retain part of his assets, with a view to support the company’s recovery and in derogation to principles of liability of the debtor.
A company applied for concordato preventivo, based on a plan providing for, on one side, the sale of those assets not functional to the business and, on the other side, the company to continue to trade retaining those other assets which were needed for the activities to be carried on.
A creditor opposed to confirmation of the concordato proposal, arguing that the creditors were not assigned all of the earnings generated from continued operations.
In the most common form of concordato preventivo, based on the «assignment of assets to creditors» scheme, the entire estate of the debtor is liquidated for the benefit of the creditors. However, the concordato preventivo scheme providing for the debtor to continue to trade (as considered by art. 186-bis IBL) does not provide for the liquidation of assets, which are retained by the debtor in order to generate the cash flows to be then paid out to the creditors according to the proposal.
The decision of the Court
First of all, the Court of Florence recalled the case law excluding that the debtor can retain part of the assets – with reference to concordato preventivo based on the «assignment of assets to creditors» scheme and in relation to the principle of liability of the debtor set forth in art. 2740 ICC – which noted that the debtor can choose the alternative scheme provided by art. 186-bis IBL, expressly allowing the debtor (who planned to continue to trade) to liquidate some of his assets which are not functional to the plan: therefore, according to this scheme, the debtor is not required to liquidate all of its assets, but it can retain those which are necessary to carry on his business activities.
As to the specific issue, whether all future earnings generated from continued operations, the Court noted that the concordato preventivo scheme providing for the debtor to continue to trade is structurally and functionally different from that based on the «assignment of assets to creditors» and it is an alternative to the liquidation of the entire estate of the debtor: the purpose of the law is to allow the turnaround and preservation of the business and this also allows the principle of financial liability provided by art. 2740 ICC to be derogated, so that the debtor can retain part of its own future earnings in order to ensure a sufficient capitalization of the company and prevent future distress.
The debtor is required to guarantee that creditors be paid under the concordato proposal an amount which is more than they would get in a liquidation of assets (pursuant to either concordato or bankruptcy), which is the alternative to the scheme proposed by the debtor who wishes to continue to trade. The benchmark in this respect should refer to what is practically feasible and not to all which may happen in theory, as this would require an effort incompatible with the close timing imposed by the state of distress of the debtor.
The Court of Florence rejected the opposition of the creditor and, having noted that the proposal satisfied the best interest of creditors’ test with respect to an alternative liquidation, confirmed the concordato preventivo proposal of the debtor.
The decision of the Court is remarkable for the emphasis placed on the principle of liability of the debtor set forth by art. 2740 ICC, without prejudice to the best interest of creditors in comparison to an alternative liquidation: concordato preventivo is a means of implementing that principle, but this must be considered with reference only to the liquidation value of the estate.
Broadening the perspective, as noted by a prominent scholar (Fabiani, “La residualità del dogma della responsabilità patrimoniale e la de-concorsualizzazione del concordato preventivo“), if one considers the insolvency principles applied to a debtor continuing to trade, the meaning of the principle of liability of the debtor must be reconsidered. According to this analysis, which is to be fully shared, the bottom line is represented by the value of the assets in the alternative liquidation, and the resources generated from continued operation of the business can be allocated among creditors according to criteria that need not to strictly abide to the absolute priority rule and the par condicio creditorum principle, and can also accrue to the benefit of the debtor, provided that this will instead abide to the best interest of creditors test: the new rules entitling creditors to put forth their own concordato proposal allows them to challenge the debtor’s proposal and this makes the surplus available to be contended for and freely allocated.
Accordingly, case law and interpretations which still abide to a strict meaning of the principle set forth by art. 2740 ICC deserve to be reconsidered. An example is a recent decision of the Court of Milan rendered on 15 December 2016, ruling that «a concordato proposal based on a plan providing for continued operation of the business may not cause the principle of liability of the debtor to faint» and it is not «allowed to cancel the absolute priority rule (art. 2741 ICC), which follows from the principle of liability of the debtor, a rule which can be departed from only as a consequence of the actual liquidation of the estate following a forced sale».