The New Italian Insolvency Code

By Paolo Manganelli and Tommaso Paltrinieri (Ashurst LLP)

On 15 July 2022, the new Italian code for business crisis and insolvency (the "New Code"), which was adopted by Legislative Decree No. 14/2019, entered into force. The rules set forth under Royal Decree No. 267 of 16 March 1942 (former Italian bankruptcy law) will continue to apply to proceedings commenced before that date.

Given the complexity and length of the New Code, we provide below a high-level overview of its most interesting new features.

Scope of application

The New Code applies to consumers, professionals and entrepreneurs performing a commercial, artisan or agricultural activity, even on a non-profit basis. This includes natural persons, corporations and other collective entities, group entities and publicly-listed companies, but excludes the State and public entities.

Definitions

The New Code introduces several definitions, including:

• Crisis: "a situation which will likely lead to insolvency when the forecasted cash flow is not sufficient to fulfil the company's obligations over the next twelve months". The definition of insolvency, on the other hand, refers to the inability of a company to regularly meet its obligations as they fall due, whether manifested by defaults or other external factors.
• Group of companies: "the group of companies, enterprises and entities, excluding the State and territorial entities, which, pursuant to articles 2497 and 2545-septies of the Italian Civil Code, exercise or are subject to the management and coordination activities by a company, entity or natural person".
• Center Of Main Interests ("COMI"): "the place where the debtor habitually manages its business in a way recognisable by third parties".

Early crisis intervention tools

Adequacy of measures and organisational structure

The New Code sets out a number of obligations aimed at anticipating and preventing the emergence of a crisis.

An individual entrepreneur/debtor company must take measures to enable them to: (a) detect any economic and/or financial imbalances; (b) verify whether they can satisfy their debts and the prospects of business continuity over the next twelve months; (c) practically ascertain the reasonable prospect of recovery, also through a specific practical test provided by the legislator.

Crisis disclosure notice

In order to allow for early intervention in a crisis, under the New Code, the supervisory body of the debtor company must promptly notify management of the requirements to access the recently introduced out-of-court restructuring procedure (composizione negoziata per la crisi di impresa).

The notice must contain an appropriate deadline, which must not exceed 30 days, within which the management body must report on any initiatives taken to prevent the crisis.

Qualified public creditors (Agenzia delle Entrate, INPS, INAIL and Agenzia delle Entrate - Riscossione) have a similar obligation to notify the debtor of and invite them to apply for the composizione negoziata per la crisi di impresa.

Banks and financial intermediaries must also notify the supervisory body of the debtor company of any change to, revision of or withdrawal of the credit facilities which they provide.

Composizione negoziata per la crisi di impresa

The New Code incorporates some minor changes into the new out-of-court restructuring procedure (composizione negoziata per la crisi di impresa) introduced by Law Decree no 118/2021 (see client alert https://www.ashurst.com/en/news-and-insights/legal-updates/new-changes-to-the-italian- bankruptcy-act/).

The notable changes are as follows: (i) the petition for protective measures shall be filed with the competent tribunal on the day following its publication in the Chamber of Commerce; (ii) the restructuring procedure may result in extended-effect debt restructuring agreements, where the requirement for consent of 75% (by value) of the creditors is reduced to 60% for the purposes of the extension.

The crisis recovery tools governed by the New Code

The New Code maintains the original distinction between out-of-court procedures (certified recovery plans) and judicial procedures (debt restructuring agreements, restructuring plan subject to homologation and concordato preventivo). However, it materially amends all these procedures.

The New Code provides for a unified procedure to access judicial proceedings before the competent tribunals. The main documentation which the debtor has to provide to the relevant tribunal is the same across all the restructuring tools (albeit the prescribed content is burdensome).

Protective measures

The debtor may ask the tribunal to approve tailored protective measures which are best suited to its needs. The tribunal may confirm, amend or revoke such measures at any time.

The duration of the protective measures may not exceed 12 months in aggregate.

The protective measures cannot affect employees' credits rights.

DIP Financing

Where the business is to be preserved as a going concern under the relevant procedure, the debtor may request and obtain new financing, in any form, including the issuance of guarantees which benefit from super-priority status subject to court authorisation.

Where judicial liquidation proceedings are subsequently commenced, however, such super-priority status would not apply where (a) the petition to the court was based on false information/data, material information was omitted from the petition or the debtor committed fraudulent actions which were detrimental to its creditors in obtaining the new financing; and (b) the new lenders were aware of those circumstances.

Shareholders in restructuring proceedings

One of the most striking features of the New Code is the introduction of specific rules concerning shareholders in restructuring proceedings and their relationship with the management body.

In particular:

• the management body is solely responsible for filing an application for restructuring proceedings;
• the restructuring plan may entail any amendment of the by-laws of the company, including (a) share capital increases with the exclusion of option rights; (b) changes in shareholders' rights; (c) mergers and de-mergers;
• from the filing date and until homologation, directors may not be dismissed except for just cause; any resolution for the dismissal of a director must be approved by the commercial court (Tribunale delle Imprese);
• the plan may provide for the division of shareholders into classes. Division into a separate class is mandatory if the plan provides for amendments to shareholders' rights and shareholders vote based on their participation in the share capital of the debtor company;
• in concordato proceedings where the business is to be preserved as a going concern, if the restructuring is also intended to benefit pre-filing shareholders (determined by calculating the effective value of their participation in the company resulting from the homologation of the concordato, less potential capital contributions made to the concordato), where there are dissenting class(es), the concordato can be homologated if the treatment proposed to that dissenting class is at least equal to any class of equal rank and not worse than any class of lower rank, even if the value intended for the shareholders is attributable to a dissenting class;
• changes to the corporate structure as a result of the implementation of a restructuring tool do not constitute grounds for the termination or amendment of contracts entered into by the company. Accordingly, change of control clauses are deemed ineffective.

Certified Reorganisation Plan (Article 56)

The certified reorganisation plan is a restructuring tool similar to the former reorganisation plan under Article 67, paragraph 3, letter d): it consists of a plan prepared by the debtor and addressed to its creditors that allows for the reorganisation of the company's debt and rebalances the debtor's economic and financial circumstances. An independent professional must attest to the accuracy of the business data and the feasibility of the plan. 

Unilateral documents and contracts adopted in order to enforce the plan must have certain date (data certa) and must be in written form.

Debt Restructuring Agreements

Debt Restructuring Agreements (Articles 57 - 60)

Debt restructuring agreements may be entered into between the debtor and creditors representing at least 60 per cent in value of the total indebtedness. The minimum threshold is reduced by half (30 per cent) where (i) there is no moratorium in respect of debts owed to non-consenting creditors, and (ii) the debtor has not requested for and has waived the application for any protective measures. Debt restructuring agreements are subject to court homologation.

The agreement must be based on an economic and financial plan to be redacted according to Article 56 of the New Code. An independent professional must certify the accuracy of the company's data, the feasibility of the plan and its suitability to guarantee the payment of non-consenting creditors (a) within 120 days of approval in the case of claims which are outstanding as of the date of homologation; (b) within 120 days of maturity in the case of claims which have not yet matured as of the date of homologation.

Extended-Effect Debt Restructuring Agreements (Article 61) and moratorium agreements (convenzioni di moratoria) (Article 62)

The effects of a debt restructuring agreement may be extended by the court to non- consenting creditors belonging to the same class (where such creditors have homogenous economic interests and legal positions), provided that:

• all the creditors belonging to the class have been informed of the negotiations;
• the agreement is for the purpose of preserving the business as a going concern;
• the consent of creditors representing at least 75 per cent (by value) of each class is obtained (60 per cent where the debt restructuring agreement is reached in the context of a composizione negoziata);
• non-consenting creditors are 'no worse off' than in the scenario where the debtor entered judicial liquidation instead; and
• creditors affected by the extended-effect debt restructuring agreement are notified of the agreement and the petition for homologation.

The same rules apply to moratorium agreements (convenzioni di moratoria) but, in addition, the accuracy of the company's data, the feasibility of the agreement to provisionally manage the crisis, as well as its suitability to guarantee the payment of non- consenting creditors per paragraph 5.5.2, have to be verified by an independent professional.

The effects of the debt restructuring agreement providing the liquidation of the debtor's assets may be extended to non-consenting banks and financial creditors only, to the extent such creditors represent at least half of the total indebtedness of the company.

Settlement (transazione) of tax and social security debts (Article 63)

The restructuring agreement may provide for the partial payment of tax and social security debts, on condition that the debtor submit a settlement proposal to the competent entities (transazione su crediti tributary e contributivi).

The tribunal may approve an agreement without the consent of the tax authorities or pension entities, whether: (a) their consent is required to reach the requisite majorities; and (b) they are 'no worse off' than in the scenario where the debtor entered judicial liquidation instead.

The same rules apply to concordato preventivo.

Restructuring Plan subject to Homologation (Article 64bis - 64quater)

Creditors benefit from the restructuring plan by way of exception to the order of priority prescribed by insolvency law (i.e. there is no absolute priority rule).

The consent of each class of creditors has to be obtained. However, the New Code provides for special "simplified" majority thresholds. A proposal is deemed to receive the approval of a class of creditors where it has gained the consent of (a) more than 50% (by value) of the creditors entitled in vote; or (b) more than 2/3 (by value) of the creditors who voted, provided that at least 50% (by value) of the creditors entitled to vote actually voted.

Secured creditors and employees are not entitled to vote if the plan provides for full satisfaction of their debt within 180 days and 30 days (respectively) of homologation.

If the restructuring plan is not approved by all classes, the debtor may amend its petition by submitting a proposal for concordato preventivo.

Concordato preventivo (Articles 84 – 120quinquies)

Liquidation vs going concern

The concordato preventivo regime has been materially amended by the New Code. Different provisions apply to (a) a concordato for liquidation purposes and (b) a concordato where the business is to be preserved as a going concern.

In the case of liquidation, the proposal must provide for external funding which increases the value of assets available at the petition date by at least 10 per cent and ensures that no less than 20 per cent (by value) of the unsecured creditors' claims are satisfied.

In the case of a concordato preventivo with the aim of preserving the business as a going concern:

• the division of creditors into classes is mandatory;
• the plan may provide for a moratorium for secured creditors, who consequently have the right to vote on the concordato proposal. For employees' claims, the moratorium cannot be longer than six months, starting from the homologation date;
• the consent of each class of creditors has to be obtained. However, the New Code provides for special "simplified" majority thresholds. A proposal is deemed to receive the approval of a class of creditors where it has gained the consent of (a) more than 50% (by value) of the creditors entitled to vote; or (b) more than 2/3 (by value) of the creditors who voted, provided that at least 50% (by value) of the creditors entitled to vote have cast their votes.

Notwithstanding the above, the concordato preventivo can be approved even if there are dissenting classes such that they can be crammed-down. See paragraph 5.7.4 below.

Competitive procedures and competing proposals

In the case of a concordato preventivo plan based on an irrevocable offer by an identified party whose goal is to purchase the company, one or more of its branches or certain assets belonging to the company, competitive procedures must be carried out to ensure the plan is in the best interests of the creditors.

The debtor is under an obligation to amend the concordato plan and proposal in accordance with the outcome of the competitive procedure.

Creditors representing at least 10 per cent of the claims (including creditors whose claims result from claim purchasing after the commencement of the concordato) may submit competing proposals. Competing proposals would not be admitted if the concordato plan provides for the payment of unsecured creditors for: (a) 30% or less of their claims; or (b) 20% or less of their claims where the concordato commenced after the composizione negoziata per la crisi di impresa.

Voting procedures

The New Code introduces two new voting rules: (a) creditors with a conflict of interest are excluded from the voting procedures and their claims are not accounted for when calculating the requisite majorities (however, the New Code does not define 'conflict of interest'), and (b) where a creditor holds more than 50 per cent (by value) of the claims entitled to vote, the consent of a majority in number of creditors entitled to vote is required, in addition to the support of more than 50% (by value) of the creditors entitled to vote, in order to approve the concordato.

The concordato preventivo must be approved by creditors representing the majority (by value) of the creditors entitled to vote and by the majority of the classes (where applicable). Different rules apply to concordato preventivo which have the aim of preserving the business as a going concern (see paragraph 5.7.1 above).

Homologation

Where there are one or more dissenting classes, the concordato preventivo which has the aim of preserving the business as a going concern may be approved by the tribunal at the request of the debtor - or with the debtor's consent in the case of competing proposals whether (a) the value of the liquidation is distributed to creditors in accordance with the absolute priority rule; (b) the excess value is distributed to creditors in such a way that the creditors belonging to a dissenting class receive no less than a class of equal rank and more than a class of a lower rank; (c) no creditor receives more than the amount of his/her claim; and (d) the proposal is approved by the majority of classes (including one/more classes of secured creditors).

Group of companies

The New Code introduces specific provisions concerning the insolvency of a group of companies.

Companies belonging to the same group and having their COMI in Italy may file a single petition for a concordato or for the homologation of a group debt restructuring agreement, where doing so is more convenient than filing multiple separate petitions.

In order to protect the equal treatment of creditors (par condicio creditorum), each company's assets and liabilities must be segregated and no commingling is allowed.

In concordato proceedings, the tribunal appoints one delegated judge and one judicial commissioner; the costs of the proceedings are shared amongst the group companies in proportion to their respective assets and liabilities. Pre-petition intra-group loans are subordinated to other debts and excluded from voting procedures.

Conclusions

The New Code provides for a brand new set of rules concerning crisis and insolvency management and will require a period of time before it is fully understood and efficiently applied by all insolvency practitioners and other participants in the market.

Whilst it is not the simplest set of rules (and the interaction among its various provisions can prove quite complex), the New Code brings some interesting novelties. For example, new restructuring dynamics are introduced as the requirements to notify supervisory bodies and qualified public creditors will prevent debtors from continuously delaying the commencement of restructuring procedures. Also, given that a stay is no longer "automatic" and can be revoked at any time by the courts, debtors are prevented from seeking protections without having a credible proposed restructuring plan. Furthermore, the protections cannot last for more than 12 months.

In addition, the New Code seems to enhance the divergence of interests between shareholders and directors in the event of an insolvency (or crisis) as directors can put forward concordato proposals which cram-down shareholders.

Finally, for the first time under the Italian insolvency framework, it is possible to derogate from the absolute priority rule where there is a concordato preventivo with the aim of preserving a business as a going concern. This will certainly facilitate restructurings, alongside the debtor-friendly provisions concerning simplified majorities, where the goal is to rescue to the business.

It is hoped that the features of the New Code and a more modern legal framework will ultimately facilitate increased restructurings in Italy.

(*) The original article was published as a Client Alert by Ashurst