By Fabio Marelli
In the new Code introduced by Legislative Decree 12 January 2019, No. 14 the provisions related to concordato preventivo can be found in various different Sections, regarding a) the single model proceeding for the opening of an insolvency procedure, b) protective measures, c) the specific concordato preventivo procedure, and d) group procedures.
a) Proceeding for the opening of an insolvency procedure (Articles 40-53)
(i) A single procedural model
The CCI provides a single model of proceedings suitable for dealing with any request to open the various insolvency procedures or to cure a state of distress of the same debtor.
In one of the preliminary versions of the CCI it was expressly provided that, if a demand to open the judicial liquidation was filed, the demand for the composition with creditors had to be proposed as a counterclaim in the same proceeding. In the final version, this provision has been cancelled, raising the question whether this is admissible. It should be so: indeed, in case the application for concordato preventivo is filed separately, it shall in any case be joined to the proceeding to open the judicial liquidation, as expressly provided for by Art. 7.1, while Art. 7.2 states that applications different from judicial liquidation must be dealt with as a priority (provided, however, that it can be shown that they are more convenient for the creditors).
(ii) Pre-filing
A pre-filing (i.e. to request admission to concordato while reserving to file the relevant proposal and plan later) is still possible, but with greater limitations: the term for the full filing (which must be expressly requested by the debtor) is halved (from 30 to 60 days instead of 60-120), with a possible extension up to 60 days, but only if no requests for judicial liquidation are pending (Art. 44.1.a). However, if the debtor promptly resorted voluntarily to the new «assisted distress management» tool provided for by Title II of the CCI (a board of experts appointed to assist the debtor to address its own distress at an early stage), the maximum extension is doubled (up to 120 days): only in this case, therefore, the maximum aggregate term may still be 180 days as the IBL currently provides.
The judicial commissioner is always appointed in the concordato preventivo (Art. 44.1.b) and a contribution for the costs of the procedure until its opening must be paid within 10 days (Art. 44.1.d).
(iii) Opening of the procedure
At the outset, the Court shall assess whether the plan and the proposal filed by the debtor are economically (and not only legally) feasible (Art. 47.1): this is a clear departure from currently undisputed case law under the IBL (absent a specific rule on the issue). Another change from the current provisions (Art. 162 IBL) regards the order of the Court refusing to open the procedure, which will be subject to appeal.
With the order opening the procedure, the Court sets the initial and final terms for the casting of votes by the creditors (Art. 47.1.c).
(iv) Confirmation
The most important change under the Code concerns challenges by creditors allowed under corporate law (Art. 116), if any transactions contemplated by the plan are subject to those, on which see point c) below at (viii).
Other changes are of minor relevance: (i) the term for challenges to confirmation is expressly qualified as a deadline (Art. 48.2), contrary to current case law under the IBL; (ii) the Court confirms the proposal in the form of a judgment and no longer of a decree, once again (and finally) assessing the economic feasibility of the underlying plan (Art. 48.3).
b) Protective measures (Articles 8, 54-55)
The CCI provides new rules on protective measures pending an insolvency procedure.
The automatic stay of creditors' enforcement actions and interim remedies (as a result of the publication of the filing for concordato or confirmation of debt restructuring agreements) applies only if the debtor has expressly applied for it (Art.54): in such case, the effect is automatic, but the duration must be fixed by the Court on a case-by-case basis, after a specific hearing is held within 30 to 45 days (as a matter of fact, the debtor will always benefit from an automatic stay until the hearing is held).
The overall duration of the protective measures which may be granted (including in the «assisted distress management» tool, if the debtor resorted to it before filing for concordato and including any renewals and extensions), may never exceed twelve months (Art. 8). This means that the debtor must carefully evaluate the actual need to apply for an automatic stay, considering the risk that he may run out of protection, before he has achieved the final confirmation of the concordato proposal.
The protective measures can be modified or revoked in the event of fraud, or if the debtor is not working towards the preparation of the plan and the proposal (Art. 55).
c) Concordato preventivo (Articles 84-120)
(i) Types of plan
Art. 84 contemplates as the only types for the concordato plan a liquidation plan or a going concern plan.
(A) the liquidation plan
- a concordato for a pure liquidation of assets is admissible only if the debtor offers external contributions capable of increasing the satisfaction of unsecured creditors by at least 10%, which shall meet a minimum threshold of 20% (as already provided under the IBL at Art.84.4);
- the 10% increase should be measured towards a hypotetical satisfaction of the creditors in a judicial liquidation (which is bankruptcy liquidation, as now defined by the Code), but it is not clear whether it should be a fixed increase (e.g. 25% estimate in the judicial liquidation, offer of 35% in the concordato) or a percentage (e.g. estimate of 25% in the judicial liquidation, offer of 27.5% in the concordato);
- there is no issue as long as the alternative is lower than or equal to 10%, because in any case the debtor will have to make up for at least an additional 10% to reach the minimum threshold of 20%;
- the main difference will be linked to claw-back actions and those for abusive direction and coordination (which cannot be brought within the concordato), while there should be no difference with regard to actions for damages against directors and statutory auditors, which are always mandatory in concordato under the Code (Art. 115, see below at ix).
(B) the going concern plan
- the Code provides for two ways of preserving the business as a going concern, «direct» (by the same company) and «indirect» (by a sale of the business to a new investor) (Art. 84.2), thus codifying the wording that has become market standard;
- the definition of going concern plan is specifically focused (Art. 84.3) on the satisfaction of creditors with the proceeds generated by the going concern under the plan («directly» or «indirectly») and on the continuation of the business activity (Art. 87.3);
- the Code expands the scope of an «indirect» going concern plan, not only including transfer to third parties «by any means», but also allowing the activity to be «resumed» by another party (thus, it is no longer necessary that the business unit be «in operation» when transferred);
- moreover, the scope of an «indirect» going concern plan expressly includes the lease of the business before the filing of the concordato, but only if «functional» to the same;
- the Code, on the other side, introduces some conditions to an «indirect» going concern plan, which is allowed only if the transferee commits to keep at least half of the workforce for one year after confirmation (so-called «employment clause»);
- in the case of a «direct» going concern plan, there are no conditions related to job retention;
- both «direct» and «indirect» going concern plans shall meet a «best satisfaction of creditors» test (Art. 87.3), while there is no minimum threshold for payments to the creditors (as in the liquidation plan).
(C) the «mixed» plan
- when the plan provides both for the preservation of going concern and at the same time liquidation of certain assets, it is considered as a going concern plan if creditors are satisfied mainly by the proceeds deriving («directly» or «indirectly») from the going concern under the plan (the latter including the proceeds of the sale of the stock);
- the condition is always deemed to be met (i.e. even when proceeds from the going concern are less than those from sales of assets) if at least half of the jobs are kept for two years (so-called «employment condition»).
Although the provision of Art. 84.1 provides for a liquidation plan as an alternative to a going concern plan, the contents of these two plans are in part overlapping, not only in the «mixed» plan, but also in the «indirect» going concern plan which, normally, provides for the sale of business units as part of a plan for the sale of all assets and, therefore, within a liquidation structure. Indeed - both in the new Code and in the IBL - the rules related to the going concern proposal (minimum thresholds of dividends to creditors, additional 10% contributions, delayed repayment of secured creditors), to the plan and its implementation (special expert report, appointment of the judicial liquidator, liquidation, mandatory actions for damages) do not contradict one another and can be selectively applicable, under their respective terms. However, since the Code considers the two plans as alternative (which the IBL did not), each of them should be subject to its own rules, without overlapping and without limitations. If this is so, however, one must accept all the relevant consequences, including that the «indirect» going concern plan would not require the liquidation of all the assets of the debtor (of course, insofar as the «best satisfaction of creditors» test is met pursuant to Art. 87.3).
An issue arises from the limitation to a liquidation or a going concern plan, i.e. whether other plans –someone called them «atypical» – are still admissible. This is not the case of the plan providing for a third party («assuntore») assuming the obligation to satisfy the creditors, as a consideration for being assigned the entire estate of the debtor, which is still expressly provided for by Art. 85.3.b) of the Code and which can be regarded as a liquidation scheme; nor is the case where semi-equity notes (or SFPs) are assigned to creditors, which can vice versa be regarded as a going concern plan (considering that the remuneration of such notes should in any case come from continued operation of the business). The issue rather concerns a plan providing that the resources for the satisfaction of creditors come from a capital increase or from a merger, without, therefore, either liquidation of assets or continued business activity. This kind of «atypical» plan should in any case be considered admissible, while the issue should be only that of qualifying it under one of the «typical» liquidation or going concern plans, if the relevant conditions are met: alternatively, the «atypical» plan could be considered as a third category of plans, to which none of the rules set for the liquidation and going concern plans would be applicable.
(ii) Concordato plan
Art. 87 provides specifically that the plan must indicate:
(A) the reasons which determined a state of distress;
(B) the restructuring strategy;
(C) possible claw-back actions and action for damages against directors and statutory auditors (even if they could be brought only in case of judicial liquidation) and the relevant possible recoveries;
(D) steps to be taken in the event of non-performance of the plan.
A going concern plan should also include:
(E) the expected timing of a financial rebalancing;
(F) the reasons why it is functional to the best satisfaction of creditors;
(G) expected costs, revenues and relevant funding, only for a «direct» going concern plan;
(H) the economic advantage for creditors, which can be represented just by keeping the contractual relations with the debtor or the assignee of the business under the plan (Art. 84.3).
(iii) Concordato proposal
The proposal may still provide for any way of satisfying creditors, including assumption of debts, extraordinary transactions, assignment of securities or shares, different treatments among classes of creditors (Art. 85.3).
The Code provides that in some cases classes of creditors are mandatory (Art. 85.5): (i) creditors holding third-party guarantees, (ii) creditors having filed themselves a concordato proposal, or parties related to them, (iii) creditors not fully satisfied (in this last case, only the social security and tax creditors are mentioned, but it is uncertain whether this limitation can be deemed reasonable).
In the case of a going concern plan:
• the moratorium which the debtor can provide for payments to secured creditors is increased to two years (Art. 86); the Code establishes that such creditors always vote and how the amount for which they vote is calculated (i.e. the differential between the amount of the receivable plus interest and the value of the proposed payment determined as of the confirmation date);
• suppliers may receive no payment or value, other than the chance to keep the contractual relationship with the debtor or his successor in title (Art. 84.3);
• it must still be certified that «the continuation of the business activity is functional to the best satisfaction of creditors» (Art. 87.3, as in the IBL; therefore, it was not specified which the term of comparison exactly is).
As regards the partial repayment of secured creditors (Art. 85.7), it is specified that the portion left unpaid must be satisfied as an unsecured claim.
Finally, the threshold above which competing proposals by creditors are not allowed (Art. 90) is lowered to 30%, and to 20% if the debtor has resorted to the new «assisted distress management» tool (a lower threshold is therefore no longer linked to a going concern plan, as in the IBL).
(iv) Mandatory auctions
The new provisions regarding auctions are not particularly relevant. Art. 91.1 provides that the offer triggering the competitive bid process must be irrevocable, and an initial solicitation of interest phase is contemplated before binding offers are submitted (Art. 91.3): on the one hand, this can simplify the procedure – avoiding setting up a complete data room in cases where there is no market interest for the assets – but it makes it more complex otherwise.
It is confirmed (as in current case law) that the original offer remains binding and can lead to the sale if no other offers are tendered (Art. 91.10) and that auctions can be carried on also in the pre-filing phase (Art. 91.11).
The most relevant new provision is that according to which, in case of urgency, if the best satisfaction of creditors is at stake, the competitive bid process can be set aside altogether (Art. 94.6).
(v) Pending contracts
New provisions set out the test for the review by the Court: the authorization to terminate or suspend performance of a contract can be granted if the contract is not consistent with the plan or functional to its implementation (Art. 97.1). A further clarification concerns the pre-filing phase, pending which only the suspension of the contract can be authorized (Art. 97.2).
It is provided that the request by the debtor shall indicate the amount of the indemnity to the other party (Art. 97.3) and that, if an agreement is not reached on this by the parties, the Judge sets an amount only for the purposes of the vote on the concordato proposal, while the dispute is left to be resolved by ordinary means outside of the insolvency procedure (Art. 97.10).
With specific regard to public contracts, Art. 95.1 states that termination is prevented by the filing or pre-filing and no longer by the opening of the procedure. Art. 95.2 also allows public contracts to be performed in case of a liquidation plan, but an expert shall certify that this is functional to the sale of the business as a going concern.
Finally, as regards leasing contracts, Art. 97.12 clarifies certain aspects regarding the calculation of overdue instalments, buy-back and residual claim for principal.
(vi) Transactions exceeding extraordinary administration, new loans and payments
The rules regarding transactions exceeding ordinary administration is set forth in Articles 46 and 97. Some additional requirements are provided for the relevant authorization to be granted: urgency (Art. 46.1) and functionality to the best satisfaction of creditors (Art. 94.3) need to be established. The request for authorization shall set forth the envisaged terms of the plan, if not yet filed (Art. 46.3).
A limitation is introduced for new loans. Art. 99.1 provides that these are required to continue the business as a going concern until final confirmation of the concordato, while on the other side allows new loans also under a liquidation plan, if the continuation of the activity is functional to the liquidation.
Art. 99.6 furthermore provides that new loans can be stripped of their super-priority status, in case the required expert report is found to be false or incomplete and the lender was aware of that.
Some changes concern the payments of pre-petition creditors, admitted under the IBL only in case of a going concern plan: they can also be authorized in case of a liquidation plan, as far as continuation of the activity is envisaged (Art. 100.1). The payment of pre-petition wages is also allowed, but only for the month prior to the filing and only for workers employed in the activity which is expected to continue.
(vii) Voting and majorities
Some new provisions concern majorities and admission to vote.
When a single creditor holds a majority of the votes (thus being able to impose alone its own choice to all the other creditors) a double majority is introduced also by number of creditors (Art. 109.1).
The Code widens the cases where creditors are excluded from the vote. On the one hand, the traditional case of relatives and in-laws is extended to companies of the group (Art. 109.6) and, on the other hand, with a striking new rule, creditors in conflict of interest are also excluded (Art. 109.5). This is a provision raising several uncertainties: first of all, as a general rule, it seems to refer to situations of conflict both with respect to the debtor and to other creditors. Creditors, however, are not bound to pursue a common goal (differently from shareholders of a company) and are, instead, usually, in a mutual contrast, so much that a duty to abstain for a conflict of interest is currently provided in the IBL only for creditors (i) voting in the creditors' committee, or (ii) having filed a concordato proposal, in which case they are not excluded from the vote, but rather are included in a separate class. In practice, a quite common case concerns creditors potentially subject to claw-back actions in case of a declaration of insolvency, which is one risking to make the vote difficult to manage. Considering on the other hand a conflict with respect to the debtor, this was already provided for creditors who are relatives or companies belonging to the same group, with an aim to sterilize votes likely biased in favor of the debtor: this is, clearly, a situation which cannot be generalized, if we consider cases where, to the contrary, a creditor may be in contrast with the debtor.
Other changes concern the modalities for voting.
The CCI no longer provides for a hearing in this respect and, consequently, the vote will be expressed only by certified email to be sent to the judicial commissioner (Art. 107.8) within the term (initial and final) fixed by the Court in the decree opening the procedure. The report of the judicial commissioner must be sent to creditors 15 days before the initial date of the vote, attaching the list of voting creditors (Art. 107.3); comments and challenges by the debtor and creditors (today made during the hearing) are sent by certified email up to 10 days before the initial date of the vote (Art. 107.4) to the commissioner, who notifies them to all creditors and files his final report within 5 days from the initial date of the vote (Art.107.6). The decisions of the judge on any dispute are communicated directly to the creditors and the debtor (Art. 107.7). Finally, it is expressly specified that the voting deadlines are not subject to suspension from 1 to 31 August (Article 107.9).
(viii) Challenges provided by corporate law in the confirmation process
An important new rule introduced by the Code concerns challenges provided by corporate law: when mergers, spin-offs or changes of the corporate structure are envisaged by the concordato plan, the relative challenges by creditors can be filed only with an opposition to confirmation of the concordato (Art. 116.1); the transaction is irreversible and cannot be wound up even in the event of termination or invalidation of the concordato (Art. 116.3).
(ix) The implementation of a liquidation plan - Liability and recovery actions
When a liquidation plan is provided by the concordato, the judicial liquidator is always appointed by the Court: therefore, the appointment by the debtor is no longer possible (Art. 114.1). Art. 115.1 provides that actions «aimed at achieving availability of assets» and «aimed at the recovery of receivables» can be brought only by to the judicial liquidator, thus clarifying an issue under the IBL.
A relevant new express rule (Art. 115.2) provides that actions for damages towards directors and statutory auditors must be exercised by the judicial liquidator and any contrary agreement or provision of the concordato proposal has no effect. It should be noted that this applies only to liquidation plans: debtors, therefore, will certainly have an incentive – from this point of view – to rather go for a going concern plan.
Nothing changes with respect to actions that the judicial liquidator is not entitled to bring, as they remain available to individual creditors: this is the action for damages directly and specifically caused to individual creditors, pursuant to Art. 2394 of the Italian Civil Code (as expressly established by Art. 115.3 CCI), as well as the action for abusive direction and coordination (Art. 2497.4 of the Italian Civil Code).
d) Concordato in groups (Articles 284-286)
The CCI introduces specific rules (so far missing in our system, considered admissible by the case law before the landmark ruling to the opposite by Cass. No. 20559/2015) for the management of insolvency of groups of companies. The definition of a group of companies is shaped on the notion of direction and coordination (Art. 2.1.h).
(i) Single concordato procedure
The Code allows the introduction of a single concordato procedure for the various companies of the group (Art. 284.1), with a single judge and judicial commissioner (Art. 286.2). The competent Court is that where the company exercising direction and coordination on the group has its COMI (Art. 286.1). As to both assets and liabilities, the estates of the companies of the group remain separated (Art. 284.3).
The petition must set forth the reasons why a single procedure is functional to the best satisfaction of creditors of the individual companies (Art. 284.4).
Special rules are set regarding the approval of the proposal: a) companies of the group are excluded from the vote (Art. 286.6); b) the group proposal is approved if the proposals of all companies are approved by their respective creditors (Art. 286.5).
(ii) Single group plan
The group proposal can be based on a single plan or «connected and interfering» plans (Art. 284.1). A single plan providing the liquidation of some companies and the continuation of the activity of others (Art. 285.1) is considered as a going concern plan if the overall cash-flows generated by the going concern (directly or indirectly) are higher than those coming from any liquidation activities.
The following should be noted in this respect: a) the «employment clause» and condition (provided by Art. 84 for the concordato of single companies) does not seem to apply to groups; b) the minimum 20% dividend to creditors and the 10% external contribution equally would not apply to individual companies having a predominantly liquidating role in the overall group going concern plan.
(iii) Intragroup transfers of assets according to the plan
The most important new rule is that allowing to allocate resources of all companies in order to foster the implementation of the group plan: the Code allows reorganization transactions and transfers of resources among companies of the group, if an in dependent expert certifies that these are functional to preserving the business as a going concern and consistent with the best satisfaction of creditors of all companies of the group (Art. 285.2).
Objections to any detrimental effects of the plan can be raised with a challenge to confirmation of the group concordato proposal: a) by dissenting creditors belonging to a dissenting class, or representing 20% of the indebtedness of a single company (Art. 285.3), and b) by shareholders (Art. 285.5). The Court can in any case confirm the concordato proposal if it is more favorable to creditors than liquidation of the single company (Art. 285.4), or if the advantages deriving from the group plan compensate for any prejudice to the shareholders (Art. 285.5).
The contents of this article is only for the purpose of information and does not constitute legal professional advice.
For further information, please contact Fabio Marelli
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