The Italian Supreme Court (5 July 2016, No. 13719) issues a maiden decision on the conditions for the protection afforded by restructuring plan to stand if the plan fails and bankruptcy is declared
The bankruptcy receiver objects to the secured status of the claim, on the grounds that the pledge is subject to claw -‐back.
Both the Bankruptcy Judge in the first instance and the Bankruptcy Court on appeal reject the objection by the receiver and rule in favour of the bank on the grounds that acts performed according to a restructuring plan can never be challenged by the receiver.
The receiver then files a further appeal before the Supreme Court of Cassation.
The Court had to consider whether a restructuring plan provides an unfettered protection if the plan fails, or acts carried out in accordance with the plan can be challenged by the bankruptcy receiver under certain conditions. In particular, the issues are (i) if third parties, such as creditors, are required to verify if the plan is reasonable and if the expert’s statement is reliable and in case (ii) which are the criteria for such assessment.
The decision of the Court
The Supreme Court upholds the receiver’s appeal and hands down the case to the lower Court to ascertain:
- if the restructuring plan could be considered reasonably feasible when it was drawn up, failing which the protection from the receiver’s claw-‐back action cannot be awarded;
- the “economic feasibility” of the restructuring plan must be assessed according to the same criteria set by the Court of Cassation with respect to the concordato preventivo plan, i.e. “whether or not the plan prepared by the debtor is beyond doubt unfit to reach its own goals”.
First of all the Supreme Court rules that the confirmation of the plan by the expert does not provide unfettered protection from claw-‐back actions by the bankruptcy receiver. The ruling of the Court of Cassation reverses the decisions by the Court of Rome, which stated that third parties have no role in the process and are not required to assess the feasibility of the plan as confirmed by the expert.
With respect to this last point the Supreme Court doesn’t provide any specific explanation. Indeed, the need for third parties involved in the performance of the plan to assess whether it is feasible is implied in the power of the receiver to challenge an act or a guarantee, when the restructuring plan was prima facie unable to turnaround the debtor’s financial and economic situation leading to insolvency.
The Supreme Court then focuses on the criteria according to which the local Court should determine if the plan is suitable for yielding the intended protection from the receiver’s actions.
The Supreme Court refers to its own precedents regarding the scope of assessment of a concordato
preventivo plan (decision No. 11497/2014). This test does not impose indeed on third parties to make a guess at the outset in order to rely on the protection sought under the restructuring plan, as this would result in an excessive degree of uncertainty which would finally shy away third parties from being involved in the restructuring process.
As the Supreme Court ruled in other cases (see decision No. 24970/2013), it is only when the plan is beyond doubt unfit to achieve its own goals that it can be later challenged by the bankruptcy receiver; in other words, the plan can still protect from claw-‐back even if the forecasts and the milestones provided by the plan are unlikely or even very unlikely to be attained.
This assessment must be obviously conducted on an ex ante perspective (although a Court would inevitably examine a case only ex post, if the plan has actually failed and bankruptcy has been declared). It should be noted in this regard that a recent precedent by a lower Court (see Court of Verona, 22 February 2016) focused on the conditions for a claw-‐back, namely that not only (i) the restructuring plan is "clearly unreasonable and certainly impossible" to perform, but also (ii) the receiver convince the Court that the faults in the plan could be actually perceived and assessed based on elements whose knowledge was available to the third party involved.
This is certainly a correct perspective to be followed by other Courts, in order to protect third parties’ interests and to encourage restructuring plans to be resorted to in support of turnaround efforts by distressed businesses.