By Fabio Marelli
The new Insolvency Code ("CCII" or "Code") will come into force on 15 July 2022. Legislative Decree 17 June 2022, No. 83 (“Legislative Decree”) implements the EU Directive and introduces several significant changes in the Code. It is not so much the replacement of the entire Title II of the Code with the negotiated composition (which is already in force as per Law-Decree No. 118/2021), as this was highly anticipated. Many significant interventions concern the “concordato preventivo” and the introduction of a further preventive restructuring framework represented by the "restructuring plan subject to confirmation" pursuant to articles 64-bis and 64-ter. We report here only the most important changes.
The negotiated composition replaces the assisted composition and OCRI
The Legislative Decree transfers the scheme recently introduced by Law Decree No. 118/2021 into Title II of the Code (Articles 12 to 25-undecies), replacing the assisted composition and the warning and prevention tools that provided for reporting to the OCRI.
It should be noted that the simplified concordato is confirmed (articles 25-sexies and 25-septies CCII) and, above all, that a Chapter III is added to Title II (articles from 25-octies to 25-undecies CCII) where we find new provisions (absent in Law Decree No. 118/2021) relating to reports by qualified public creditors, who will merely invite the debtor to request the appointment of the expert (art. 25-novies), while it is moved at art. 25-decies the provision (which was art. 14, last para. CCII), relating to the notice from banks and financial intermediaries to the supervisory body of the revocation or modification of credit facilities.
Some additional changes are introduced in the version of the negotiated composition implemented in the Code:
a) together with the application for the appointment of the expert, the debtor must include, in addition to the report on his business and the financial plan for the next six months, also a "draft recovery plan";
b) the deadline before which it is not allowed to submit again the application is reduced from one year to four months if the motion for dismissal is submitted by the same debtor;
c) the expert will be asked by the Court to express his/her opinion on the protective interim measures required by the debtor, if functional to the successful outcome of the negotiations;
d) the expert may invite the parties to renegotiate in good faith the contracts when performance has become too burdensome due to any circumstances (and not limited to the effects of the pandemic), but conversely it will no longer be possible to ask the Court to issue an order to the same effect, in case there is no agreement;
e) the debtor employing more than 15 employees must inform the union representatives in advance.
The new "restructuring plan subject to approval" or PRO (Article 64-bis)
The directive No. 2019/1023 provides that the Member States introduce a preventive restructuring framework that our legal system does not yet contemplate, which therefore the Legislative Decree provides at articles 64-bis and 64-ter of the Code.
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 order of the priority rights (so-called absolute priority rule), provided that the secured claims of the workers are fully satisfied in cash within 30 days from the approval of the proposal. The plan can provide that the debtor continues to trade, the liquidation of assets or the satisfaction of the creditors "in any other way", in any case to an extent no lower than the alternative of the judicial liquidation.
With respect to concordato preventivo, there is no limitation to the ordinary course of business, but prior notice must be given to the judicial commissioner of acts of extraordinary administration and inconsistent payments, such as in the negotiated composition.
The proposal must be submitted in the form and with the documentation required for the "full" concordato preventivo (in the sense that the debtor cannot request the deadline for presentation). The Court, having verified that the classes are properly formed and that the proposal complies with law, appoints a Judge in charge of the procedure and the judicial commissioner, and then submits the proposal to the creditors to vote.
The provisions of the concordato preventivo apply to the vote, specifying that in each class the proposal is approved according to the ordinary rules, or, alternatively, if a two-thirds majority is reached, calculated only on voting creditors.
In case not all of the classes approve (but also outside of this case), the debtor can change the application by submitting a concordato preventivo proposal, and he may be granted the ordinary term as per art. 47 to do so.
Many provisions of concordato preventivo are applicable, including those relating to (a) competing offers and proposals, (b) pending contracts, (c) authorization of super-priority loans, (d) revocation for fraud, (e) effects, performance, breach and voidance of the proposal.
It is therefore a sort of "accelerated" concordato preventivo with greater flexibility in terms of company management while the procedure is pending (as well as of submission of the proposal without respecting the absolute priority rule, even beyond the conditions upon which this is allowed in concordato preventivo) and which at the same time allows the "conversion" into the concordato preventivo procedure at any time.
Amendments to the concordato preventivo procedure
Of great importance are the changes regarding concordato preventivo (mentioning just the main ones):
a) requirements for jobs retention are completely cancelled (so-called "employment condition" and "employment clause") from the concordato with business continuity, while it is now just stated that this "preserves, to the extent possible, workplaces" (art. 84);
b) the plan is no longer limited to liquidation or business continuity, thus confirming that satisfaction of creditors can be proposed "in any other way" (art. 84);
c) 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; a mostly liquidation plan may then still be considered as concordato with business continuity, provided that even a small portion of the revenues come from the going concern of the company (art. 84);
d) 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 (it is therefore implemented a relative priority rule) (art. 84); 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 art. 120-quater in the next paragraph);
e) in the concordato with business continuity, creditors must always be divided into classes, including that of smaller companies for the supply of goods and services (art. 85);
f) in the liquidation concordato it is clarified that 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); as noted above, this provision will have a very limited scope of application, i.e. when the concordato plan provides for a full piecemeal liquidation; it is also specified that the additional resources can be distributed without respecting the absolute priority rule (art. 84);
g) whatever the kind of concordato, it must satisfy the creditors "to an extent no lower than that achievable in the event of judicial liquidation"; thus, the requirement of the "convenience" of the composition is introduced, which however would seem to be subject to review by the Court only in the event of an opposition to confirmation (art. 84);
h) at the time of opening of the procedure, the Court's review on the feasibility of the plan is differentiated, namely it is limited to the following being "clearly unfit": in the liquidation concordato, the Court would review the "objectives set", while in the concordato with business continuity the Court would consider " the satisfaction of creditors and the preservation the of corporate value" (art. 47);
i) in the concordato with business continuity, a provision similar to that in force in the negotiated composition is introduced with regard to pending contracts in the event of interim protective measures, i.e. creditors cannot refuse performance, terminate or modify "essential" contracts, being those necessary for business continuity (art. 94-bis);
j) in the voting phase, only for the concordato with business continuity, it is provided that (a) all classes must approve the proposal, but at the same time an alternative majority is introduced for approval within each class (as already seen in the PRO) equal to two thirds of the voting creditors; (b) secured creditors do not vote if fully satisfied in cash within 180 days (30 days for workers) from approval (art. 109);
k) in the confirmation phase, only for the concordato with business continuity, the Court must verify that the plan "is not without reasonable prospects of preventing or overcoming the insolvency" (which provides sort of a presumption of feasibility) and also that any necessary new loans "do not unjustly prejudice the interests of creditors";
l) in the confirmation phase, only for the concordato with business continuity, the Court can confirm the proposal even if not approved by all the classes if (a) the distribution rules for the liquidation value and the value in excess are complied with, and (b) what are defined as "transversal restructuring conditions" are met, including the correct distribution of the liquidation value and the excess value, as well as the approval by the majority of the classes, provided that at least one consisting of secured creditors or creditors who - if the absolute priority rule would have been applied - would have received at least part of the value exceeding the liquidation value (art. 112);
m) in the confirmation phase, the Court's review of the convenience of the proposal, in the event of opposition, (a) in the concordato with business continuity may be solicited by each dissenting creditor who has already raised this issue when making his remarks to the commissioner's report according to art. 107, while (b) in the liquidation concordato only by dissenting creditors belonging to a dissenting class or representing at least 20% of the credits admitted to vote (which is in line with pre-Insolvency Code provisions); in the event of opposition in the concordato with business continuity, the Court is then expected to order an appraisal of the business only if the convenience of the proposal is challenged or failure to comply with the "transversal restructuring conditions" is alleged (art. 112).
The preventive restructuring frameworks of companies (art.120 bis-120 quinquies)
Also of great importance are the changes on preventive restructuring frameworks of companies:
a) 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 (if they do not vote, they are considered as approving the proposal); the confirmation order determines the amendments to the articles of association provided for in the plan;
b) the decision to access a preventive restructuring framework remains "on an exclusive basis" with the directors, who cannot be revoked from the day the resolution is entered in the companies’ register;
c) competing proposals may also be submitted by minority shareholders, holding at least 10% of the share capital;
d) the shareholders can oppose to confirmation if they claim a prejudice "with respect to the liquidation alternative";
e) 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, i.e. that the dissenting class receives at least as much as the classes of the same grade and more than the classes of a lower grade (if the dissenting class is placed immediately before the members, it must receive a higher value than that reserved for the members) is complied with;
f) changes in the shareholding structure cannot lead to the termination or modification of contracts stipulated by the company.
The content of this article is for information purposes only and is not, and cannot be intended as, professional advice on the matters dealt with. For further information please contact fabio.marelli@advant-nctm.com
