By Fabio Marelli
On September 27, 2024, Legislative Decree No. 136 (the "Amendment") to the Corporate Crisis and Insolvency Code was published in the Official Gazette.
Beyond several stylistic and minor adjustments, the Amendment on the one hand incorporates certain practices and guidelines or resolves related doubts of interpretation and, on the other, introduces tools (above all the tax settlement in negotiated crisis resolution) widely expected by practitioners. One significant update includes minimum satisfaction thresholds for taxes and contributions claims during cram downs in restructuring agreements.
Below is a summary of the main changes.
1. Negotiated Crisis Resolution ("CNC")
- Requirements (Section 12): It is now expressly confirmed that even an insolvent entrepreneur can access the CNC.
- Appointment of the expert (Section 13): The track record of prior CNC cases will now serve as an element of evaluation in expert appointments.
- Credit facilities (Section 16): Any suspension or withdrawal of credit lines must clearly state its underlying reasons. Its prosecution will not automatically imply liability, and accessing the CNC won’t automatically lead to a worse credit ranking. Additionally, there is now an obligation to reactivate suspended credit lines after the request for protective measures, provided they are upheld against the banks concerned. However, banks can maintain the suspension under prudential supervision regulations.
- Duration (Section 17): It is now easier to extend the expert's assignment beyond the initial 180 days, up to an additional 180 days. This requires only a request from the entrepreneur or negotiating parties (not necessarily all creditors), with the expert's consent.
- Protective and precautionary measures (Section 19): The decree setting the hearing must be published in the companies registrar. The court may order specific ways for serving notice, addressing practical challenges when there are hundreds of creditors.
- Court Authorizations (Section 22): To facilitate restructuring operations, authorized financing or business transfers may be finalized even after the closing of the CNC (where provided for in the order or in the expert's final report). Super-priority ranking of receivables applies regardless of the CNC’s outcome also in subsequent enforcement and insolvency proceedings.
- Tax Settlement (Section 23): A new provision allows for the settlement of tax debt, excluding EU-own resource taxes, in CNC proposals. However, cram down is not allowed here.
2. Simplified judicial composition
- Classes of creditors (Section 25-sexies): Secured claims that have been downgraded to unsecured status will also have to be classified.
3. Certified Restructuring Plans
- Minimum Content (Section 56): Particular attention is given to compliance with health and safety regulations, with the associated costs to be covered by the plan alongside the position of workers.
4. Applications for Crisis Regulation Tools and protective measures
- Effects of preliminary applications (Section 44): The Amendment allows effects of preliminary applications to be tailored to the chosen instrument, upon submitting a draft plan for crisis regulation. This helps in managing the delicate initial phase of recovery, aligning the impact with restructuring agreements or PRO processes.
- Protective Measures (Section 54): It is clarified (resolving a judicial disagreement on this point) that "atypical" protective measures may also have the same content as "typical" ones (and therefore may be granted even after the latter have been exhausted, beyond the maximum period of one year provided by Section 8). However, the filing of the proposal and plan is required: it is not possible to obtain "atypical" measures in the so-called pre-filing phase, where only precautionary measures are available, as the Amendment explicitly confirms.
5. Debt Restructuring Agreements
- Transformation, Merger, and Demerger (Section 57): Extraordinary transactions under the plan must comply with provisions in Section 116.
- Tax Settlement (Section 63): tax authorities have 90 days to accept the agreement, with possible extensions for amendments (60 days) or new proposals (90 days). Court’s filing is allowed only after the agreements have been executed or expiration of these deadlines.
- Cram Down for Taxes (Section 63): If tax authorities do not accept, approval may still be granted if their approval is critical and the following conditions are met:
1. the agreement does not provide for the business’ winding up.
2. Claims from other creditors account for at least 25% of the total.
3. Public creditor satisfaction is at least 50%, excluding charges and default interests. If the non-public adhering creditors are fewer than 25%, the threshold rises to 60%.
- Cram down is not available if:
- The debtor was part of a terminated tax settlement within the past five years (except in renegotiation cases).
The following conditions are jointly met: (i) the debt owed to public creditors is 80% or more of the total debt, and (ii) the debt owed to public creditors derives (a) predominantly from failure to make payments during 5 even non-consecutive tax periods or (b) at least one-third from the assessment of violations carried out by fraudulent acts of various kinds.
6. Restructuring Plan Subject to Approval (PRO)
- Tax Settlement (Section 64-bis): Introduced in the PRO as well, but without cram down.
- Business Transfer (Section 64-bis): The court may authorize the transfer of businesses or branches (free from prior liabilities) before approval, provided it benefits creditor satisfaction and business continuity.
7. Judicial Composition with creditors
- Liquidation Value (Section 87): According to dominant case law, the Amendment confirms liquidation value as the net result after deducting liquidation expenses, with adjustments if a going concern sale is possible. This is a crucial issue in determining how to allocate the restructuring surplus.
- Mandatory Classes (Section 85): The maximum threshold for small companies to be included in relevant ad hoc class has been raised, based on assets, turnover, and employee count.
- Public Guarantees (Section 87): Risk provisions for public guarantees must be specifically addressed in the plan.
- Cram Down in plans providing for business prosecution (Section 88): the Amendment confirms that a judicial composition can be approved even if tax authorities vote against it. Additionally, the relevant classes are considered for the purpose of forming a majority in cross-class cram down provisions, but will not account for reaching the approval of the so-called "disadvantaged" or “mistreated” class.
- Competing Proposals (Section 90): The threshold for submitting a competing proposal has been reduced from 10% to 5% of the credits, with the clear intention of encouraging the use of this tool.
- Pending Contracts (Section 94-bis): The Amendment clarifies that the protections under the composition providing for business continuity apply from the moment the request is submitted (rather than when protective and precautionary measures are granted).
- Cross class cram down in compositions providing for business continuity (Sections 111-112): A deadline of seven days from the end of voting is set for requesting or granting approval in the absence of class unanimity. It is confirmed that an arrangement can be approved even if only a single class (the "disadvantaged" or "mistreated" class) agrees, provided that it is partially satisfied and would have received a better outcome if restructuring surplus value had been distributed according to the absolute priority of claims.
- Asset liquidation in composition providing for business continuity (Section 114-bis): The Amendment provides for explicit rules for asset liquidation within a continuity plan. Upon final sanction, the court may appoint one or more liquidators and a creditors' committee specifically for liquidation. The sales process must follow principles of efficiency, speed, transparency, and public disclosure. The effects will be those of forced sales, and the court will order the cancellation of encumbrances once the sale proceeds are collected.
- Extraordinary transactions (Section 116): The composition plan, including any extraordinary transactions, must be published in the companies registrar along with related drafts. Challenges must be raised during the final sanction process.
- Substantial changes to the plan or proposal (Section 118-bis): The debtor can request the renewal of the expert’s report and inform the judicial commissioner, who reports to the Court. This is followed by publication in the companies registrar and communication to creditors, who have 30 days to file any challenge. This is similar to what provided for debt restructuring agreements.
- Approval of composition involving shareholders (Section 120-quater): The Amendment outlines criteria for determining the actual value reserved for shareholders, using accounting standards applicable to figures provided within the plan. However, uncertainties remain regarding the conditions to be met (such as shareholder contributions and criteria for distributing restructuring value) in case of class dissent.
8. Bankruptcy Liquidation
- Exemption from claw back action (Section 166): The exemption from claw back for acts, payments, and guarantees as part of the plan is extended to simplified compositions for asset liquidation. The lookback period in cases involving consecutive procedures now begins from the publication of the application for access to a crisis regulation tool, including pre-filings.
- Preliminary Contracts (Section 173): The Amendment includes:
- The right of a mortgage secured creditor to challenge the verdict declaring the passive estate enforceability if believing the sale price in the preliminary agreement is at least 25% disproportionate. If upheld, the contract is dissolved, and the property is liquidated by the receiver unless the buyer offers to pay the difference.
- The enforceability against creditors of all payments made by traceable means to the debtor before the proceedings began (no longer just half of the amount), if the receiver takes over the preliminary contract.
- Empowerment of the delegated judge, once the sale is complete and the price is collected, to cancel mortgages and other liens.
- Employees (Section 189): The rules governing termination and takeover by the receiver are simplified. In cases of termination, no repayment of welfare or social security benefits received during the suspension period is required from the worker. The deadline for filing an application for welfare provisions for termination starts from the worker's resignation or receipt of termination by the receiver.
- Challenge to verdict declaring passive estate enforceability (Section 207): The Amendment provides for:
- deadlines to file additional defensive briefs could be granted.
- in case a settlement agreement is reached during the litigation, the court orders to amend the passive estate accordingly.
- Asset liquidation (Section 213): Asset liquidation must be completed within five years from its start, unless an extension is granted due to complexity or difficulty in asset sales.
- Actions for liabilities (Section 215): The power to assign claims to third parties is explicitly provided, along with claw back actions.
- Real estate sales (Section 216): At least one sales attempt must be conducted in the first year and two in subsequent years.
- End of proceedings (Section 234): The option to close proceedings, already available in pending judgments and enforcement cases, is now extended to include distributions expected from other procedures.
- Composition in Bankruptcy Liquidation: The Amendment introduces several important updates:
- Group composition (Section 240): This can be proposed in cases of unified bankruptcy liquidation, with a single application permitted, subject to the autonomy of the assets involved.
- Multiple proposals (Section 241): In case of multiple proposals, all must be submitted to the creditors for approval, unless more favorable proposals are identified through a joint evaluation by the receiver and creditors' committee.
- Approval (Section 244): In cases of multiple proposals, the one approved by the majority of claims is considered approved, with the chronological order serving as the tie-breaker if necessary.
- Sanction (Section 245): When assessing the convenience of the arrangement, the court’s cram down decision must ensure the claim is treated no worse than in a judicial liquidation scenario, even if tax or contribution authorities vote against it.
- Provisional enforceability of the sanction verdict (Section 246): Enforceability begins upon the publication of the verdict, no longer dependent on final judgment. Pending challenges to the passive estate are stayed and may be resumed later. The Court of Appeals may suspend enforceability if serious grounds are found.
- Reform or cassation of the sanction order (Section 249): In the event of reform or cassation of the sanction order, all acts lawfully performed in execution and related orders are unaffected.
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The contents of this article are for informational purposes only and do not constitute professional advice.
For more information contact Fabio Marelli
