By Fabio Marelli
The new Italian Insolvency Code (hereinafter "CCII" or "Code") has entered into force on 15 July 2022, with the latest amendments introduced by Legislative Decree No. 83 of 17 June 2022, which has transposed EU Directive No. 2019/1023 ("Directive"). The Directive mainly concern the composition with creditors (concordato preventivo) and the new "restructuring plan subject to approval" (concordato preventivo soggetto a omologazione) or PRO.
The new Code organically regulates the insolvency proceedings of companies, minor companies, corporate groups, professionals and consumers. The extraordinary administration of large companies (regulated by Legislative Decree No. 270/99 and Law Decree No. 347/03) remains outside the scope of the Code.
Introduction
The entry into force of the CCII has been troubled: it was initially scheduled to enter into force on 14 August 2020, then postponed by the emergency provisions related to the pandemic to 1 September 2021, then to 16 May 2022 by Law Decree No. 118/2021, which introduced the procedures of negotiated composition (composizione negoziata) and simplified composition (concordato semplificato), and it was eventually postponed to 15 July 2022 by Law Decree No. 36/2022 and by Legislative Decree No. 83/2022, which transposed the Directive.
The early detection and assisted composition procedure (procedura di allerta e composizione assistita della crisi), originally provided for in Articles 12-25 of the Code, should have come into force, pursuant to Law Decree No. 118/2021, on 31 December 2023. Instead, Legislative Decree No. 83/2022 replaced the procedure with the negotiated composition procedure.
It is worth underlining the publication of Ministerial Decree No. 75 of 3 March 2022, regulating the public register of business crisis managers (gestori della crisi d’impresa) referred to in Art. 356 of the Code (concerning the receiver, the court-appointed commissioner, the liquidator and the members of the business crisis composition bodies).
Below is a brief introductory overview of the main innovations.
The main features and procedures regulated by the Code
The CCII partly preserves the characteristics and structure of the existing insolvency procedures and largely follows the provisions of the Bankruptcy Law (which the CCII replaces), which have been amended in accordance with the criteria of Law No. 155 of 19 October 2017, which had mandated the Government to issue the new Code (the “Mandate Law”). The sections of the Code which contain rules entirely new are: (i) the definitions and general principles (Articles 1-11), (ii) the negotiated composition procedure (Articles 12-25-quinquies), (iii) the common proceeding to access insolvency procedures (procedimento uniforme di accesso alle procedure di regolazione della crisi e dell’insolvenza) (Articles 40-53), (iv) the new procedure of the restructuring plan subject to approval (or “PRO”), (v) the rules for managing the insolvency procedures of group of companies (Articles 284-292) and (vi) the coordination between the judicial liquidation procedure and interim criminal measures (Articles 317-321).
The CCII sets out:
The procedures dedicated to consumers and small businesses (which are not subject to the regular insolvency procedures), currently governed by Law No. 3/2012, are now included in the Code as “restructuring of consumer debts” (Articles 67-73) and “minor composition with creditors” (Articles 74-83), as well as “controlled liquidation of the over-indebted” (liquidazione controllata del sovraindebitato) (Articles 268-277).
(a) From bankruptcy to judicial liquidation
The deletion of the terms 'bankruptcy' and 'bankrupt' in the Code implements one of the principles of the Mandate Law and it is mainly a mere re-wording, since “judicial liquidation” retains the familiar features of bankruptcy proceedings (see more in detail in section k).
(b) Protective measures (Articles 8, 18, 54 and 55)
The CCII provides new rules regarding protective measures pending a distress and insolvency regulation procedure.
The automatic stay of individual creditors’ enforcement and interim actions as a result of the filing for the concordato preventivo or to debt restructuring agreements, occurs only if the debtor requests so, but the duration must be established by the Court on a case-by-case basis (Art. 54, as amended by Legislative Decree No. 83/2022).
The total duration of the protective measures granted in the various situations, including renewals and extensions, must not in any case exceed twelve months (Art. 8).
Finally, protective measures (Art. 18) are also available pending the negotiated composition procedure, which is not included among the “distress and insolvency regulation procedures”.
(c) Negotiated composition and simplified concordato (Articles 12-25-undecies)
The negotiated composition was introduced by Law Decree No. 118/2021 and entered into force on 15 November 2021. Legislative Decree No. 83/2022 transferred the rules regarding the negotiated composition into Title II of the Code, replacing the assisted distress composition and the OCRI (company distress composition body).
The assisted composition can be used by all entrepreneurs (commercial, farmers or minor), provided that they are duly registered in the companies’ register. The procedure starts with the request to have an independent expert appointed, through the telematic platform referred to in Art. 13, which must be filed with documentation (balance sheets and debt situation), including a 'draft recovery plan’, which, however, does not correspond to an actual plan. Art. 25-quinquies restricts access to the composition if an application to access to one of the distress and insolvency regulation procedures or to judicial liquidation is pending.
The debtor may request protective or precautionary interim measures that involve the prohibition for the creditors to refuse to perform contracts or to terminate or modify them (to the debtor’s detriment), if based exclusively on the non-payment of debts prior to the application for the appointment of the independent expert. Limited bonus measures of a mainly tax-related nature are also provided for.
Articles 25-sexies and 25-septies regulate the simplified concordato agreement, which can be accessed only upon the outcome of the negotiated composition (the application must be submitted within 60 days from the expert's final report), under the twofold condition that (i) negotiations were carried out fairly and in good faith and (ii) negotiated solutions - identified in Article 23(1) and (2)(b) - were not feasible. This is a liquidation-only arrangement, as it must follow the asset sale scheme, which, however, as is well known, is compatible with the sale of the business as a going concern. An important feature is that the proposal is not subject to the approval of creditors (who can only file objections) and is instead approved directly by the Court.
(d) Venue (Art. 27)
The Mandate Law recommended to ensure that bankruptcy procedures dealt with by more specialized judges, inter alia, by consolidating only in the major Courts the venue to deal with insolvency procedures.
The CCII has only very conservatively implemented this recommendation, namely with respect to the concentration of venue for extraordinary administration procedures and groups of companies of significant size.
(e) Single proceeding to enter judicial restructuring and liquidation procedures (Articles 40-53)
The CCII provides a single proceeding to deal with all requests to start any of the different judicial restructuring or liquidation procedures with respect to the same business entity or consumer. Art. 7 expressly states that, where in the best interest of the creditors, the restructuring proceedings must be always preferred to judicial liquidation.
The Code clarifies the meaning of 'crisis’ (distress) relevant for the access to a crisis restructuring framework (Art. 2), supplementing it with the principle of 'inadequacy of prospective cash flows to meet obligations in the next twelve months'.
It is worth noting the extension of the power to file the request for opening the judicial liquidation to the corporate supervisory bodies and the possibility for the Public Prosecutor, in addition to proposing a request for the opening of judicial liquidation, to intervene in all proceedings aimed at the initiation of a procedure for the regulation of the crisis and insolvency. On the other hand, the initiative to file for crisis and insolvency regulation tools remains reserved to the debtor.
A significant innovation concerns the immediate enforceability of the judgment revoking the judicial liquidation, which is no longer conditional to the decision being final and not subject to further appeal: Art. 53 lays down rules aiming to reconcile the inherently conflicting interests at stake.
(f) Certified restructuring plans (Art. 56)
Compared to former rules, it is provided that (i) the content of the plan underlying the agreements is broader and (ii) milestones to check the actual implementation of the plan and the actions to be taken, in case these are not implemented, have to be indicated.
(g) Debt restructuring agreements (Articles 57-64)
Pursuant to Article 61, the possibility of extending the effects of the agreement to creditors who did not accept it is no longer limited to financial creditors, but only if the continuity of business is guaranteed (extended effectiveness agreements or accordi ad efficacia estesa).
Express rules are introduced on the renewal of the expert’s report, in the event of substantial changes to the plan or agreements, even after the Court’s approval, with the option for creditors to oppose the new report (Article 58).
(h) Restructuring plan subject to approval ("PRO") (Articles 64-bis - 64-quater)
The Directive mandates the Member States to introduce a preventive restructuring framework that our legal system did not contemplate, which therefore has been introduced in the Code under articles 64-bis and 64-quater by Legislative Decree No. 83/2022. The debtor will be able to make a proposal to the creditors (necessarily divided into classes) which must be approved unanimously by the classes, but which will allow to distribute the proceeds disregarding the par condicio creditorum and the absolute priority rule. The plan can provide (i) that the debtor continues to trade, (ii) the liquidation of assets or (iii) the satisfaction of the creditors “by any other means”, in any case to an extent not lower than the alternative of the judicial liquidation.
With respect to the concordato preventivo, there is no limitation to the ordinary course of business, but there is a mechanism for prior notice to the court-appointed commissioner, similar to the negotiated composition.
The provisions of PRO replicate those of the concordato preventivo regarding (i) the submission of the application and related documentation, (ii) the voting of classes of creditors, and refers back to concordato preventivo with regard to (iii) competing bids and proposals, (iv) pending contracts, (v) authorization of super-senior loans, (vi) revocation for fraud, and (vii) effects, performance, breach and voidance of the proposal.
In the event that unanimity is not reached (and even outside of this scenario, at any time), the debtor may amend the application by submitting a proposal for a concordato preventivo, subject to granting of terms pursuant to Art. 47 for filing of the proposal and plan.
It is therefore a sort of “accelerated” concordato preventivo with greater flexibility in terms of company management while the procedure is pending.
(i) Concordato preventivo procedure (Articles 84-120)
The Code, as amended by Legislative Decree No. 83/2022, contains the following innovations:
In the concordato with business continuity, the amounts exceeding the liquidation value (except for workers' claims) can be distributed disregarding the absolute priority rule, provided that each class of creditors receives at least as much as the classes of the same grade and more than the classes of lower grade (a “relative priority” rule is therefore provided) (Art. 84[1]).
Moreover, in the concordato with business continuity (direct or indirect) it is sufficient that the creditors are satisfied "also to a lesser extent" by the proceeds of the going concern and even a concordato which is mainly characterized as a liquidation plan may still be considered as concordato with business continuity, provided that at least a small portion of the revenues comes from the going concern of the company (Art. 84).
In the liquidation concordato (concordato liquidatorio) it is clarified that (i) the additional external resources must increase the available assets by 10% (previously the increase was referred to the percentage of creditors' satisfaction, which generated various uncertainties) and (ii) it is also specified that the additional resources can be distributed without respecting the absolute priority rule (Art. 84).
Finally, the Code (Art. 115) provides that, in the concordato providing for a full liquidation of assets, the judicial liquidator can always bring actions against directors and statutory auditors to recover damages arising from breach of their duties.
(j) The preventive restructuring frameworks of companies (Articles 120-bis-120-quinquies)
Pursuant to recent updates introduced by Legislative Decree No. 83/2022, the plan may provide for amendments of the articles of association, including capital increases and reductions with the exclusion of option rights, mergers, demergers and change of corporate form, even without the consent of the shareholders; in this case, the shareholders must be included in a specific class for the purposes of the proposal and they vote in an amount equal to the share of capital held (with abstention counting as approval the proposal); the confirmation order determines the amendments to the articles of association provided for in the plan.
Competing proposals may also be submitted by minority shareholders, holding at least 10% of the share capital. Shareholders can oppose the approval of such a proposal if they claim that it causes a prejudice compared "to the alternative of liquidation”.
When previous shareholders retain part of the "value resulting from the restructuring" and there is disagreement by one or more classes of creditors, the proposal can only be confirmed if it is found that, even if the entire value reserved for shareholders would be distributed to creditors, the relative priority rule is complied with.
The decision to access a preventive restructuring framework remains "on an exclusive basis" with the directors, who cannot be revoked starting from the day the resolution is entered in the companies’ register.
(k) From bankruptcy to judicial liquidation (Articles 121-267)
As already mentioned, the bankruptcy procedure changes its name to ‘judicial liquidation’, but the rules are mainly unchanged. The impact of the innovations is rather limited, indeed. To point out some among the most relevant: (i) the rule prohibiting set-off of debts and receivables with a debtor subject to judicial liquidation, in case receivables towards the latter were purchased in the year preceding or after the opening of the liquidation, has been widened to exclude any possible exemption (Art. 155); (ii) the look-back period for claw-back actions has been anticipated to the submission of the application to open the judicial liquidation (Articles 163-166); (iii) a specific regulation has been provided for pending employment contracts, which remain on hold until the receiver chooses to withdraw or take over the contracts, within four months from the start of the liquidation, unless the business can be sold as a going concern (Art. 189) with the provision of special social security safeguards for employees (Art. 190); (iv) holders of security interests on assets, which the debtor subject to judicial liquidation had given as security for a third-party debt, are now required to file a proof of debt to enforce their security (Art. 201); (v) the final deadline to file a proof of debt has been shortened to six months after the decision on the first lot of proofs of debt (Art. 208); (vi) look-back periods for the avoiding powers of the receiver set forth by Articles 163, 164, 166(1) and 169 start from the date of publication of the original application for access to an insolvency proceeding, (vii) the previous authorization to continue the business after the opening of judicial liquidation has been deleted (being the business continuity, in fact, is no longer the exception but the rule).
(l) Insolvency and groups of companies (Articles 284-292)
The Code introduces a set of rules (so far missing in our system) for the management of the insolvency of groups of companies.
This will allow to establish a single procedure for different companies of the group, on the basis of a single restructuring plan, while maintaining the principle of separation of assets and liabilities.
The definition of a group of companies is found under Art. 2(h), and it does not include the state and local governments.
(m) Over-indebtedness procedures (Articles 65-83, 268-277)
The rules governing the insolvency procedures of smaller businesses, farmers and consumers (so-called over-indebtedness procedures), introduced by Law No. 3/2012, are now part of the Code.
Also in this case, as for bankruptcy, changes in the name of the procedures (mentioned above under a) leave the substance mostly unchanged. The main innovations concern (i) an easing of certain requirements for admission to the procedures, (ii) the streamlining of some procedural steps, (iii) specific rules for the joint treatment of the insolvency of over-indebted families, (iv) the possibility for the debtor entitled to the benefit to obtain a discharge, following the controlled liquidation procedure, even in case creditors did not receive any payment (Art. 278); and (v) the possibility, for the consumer, to opt for a differentiated satisfaction of the creditors.
(n) Compulsory administrative liquidation (Articles 293-316)
Compulsory administrative liquidation (liquidazione coatta amministrativa) remains the exclusive insolvency procedure for banking, financial intermediation, fiduciary and insurance companies. With respect to other companies subject to supervision by regulatory bodies, it will only be applicable if the liquidation is driven by situations of irregularity and not by insolvency. Co-operatives (except those carrying out banking activities, etc.) and mutual assistance bodies are therefore exclusively subject to judicial liquidation (and are no longer subject to compulsory administrative liquidation).
(o) Insolvency procedures and criminal interim measures (Articles 317-321)
The CCII provides a new set of rules dealing with the relationship between insolvency procedures and criminal interim measures, such as seizures. In a nutshell, the Code provides that criminal seizures aimed at confiscation prevail over judicial liquidation, while judicial liquidation prevails over the so-called “safeguard seizures” (sequestri impeditivi) which have a precautionary function aimed at preventing further consequences of crimes.
This article is for informational purposes only and does not constitute professional advice. For more information please contact Fabio Marelli, at fabio.marelli@advant-nctm.com
News([1]) This is a very significant innovation, which stands in clear contrast to the Supreme Court case law (which is firmly against the free use of cash flows stemming from the business continuing to trade), but which finds a balance in the new rules on the approval of concordato preventivo in which the shareholders preserve a portion of the "value resulting from the restructuring" (see Article 120-quater).
