Insolvency in Italy has been regulated for more than 60 years by the Royal Decree of March 16, 1942 no. 267 (the "Italian Bankruptcy Law"). Although integrated and amended over time, such law is still permeated with the general outlook of the era in which it was conceived, namely when insolvency was considered as an offense to the economy, bankruptcy proceedings as a punishment for the entrepreneur, and liquidation of the assets as the only remedy available for creditors.
A change was then necessary when the Italian Government issued last March Law Decree no. 35/2005, subsequently converted into law no. 80/2005 ("Law 80/2005"), introducing certain significant amendments to Italian Bankruptcy Law. A further, deeper reform of the Italian Bankruptcy Law, to be shaped on some of the principles set out by Law 80/2005, is expected by November 2005.
The modifications entered into force with Law 80/2005 concern mostly the simplification of the procedure for the composition with creditors ( concordato preventivo ) and the shortening of the "look back period" (or the so called "suspected period") within which transactions involving the debtor may be clawed back by the bankruptcy trustee.
This article will offer a brief overview of such amendments.
Composition With Creditors
One of the objectives of Law 80/2005 is to help companies in financial difficulties to recover through more flexible arrangements with its creditors. To a certain extent, one can say that Law 80/2005 reflects features of the U.S. Chapter 11 regime on this subject.
Before the entry into force of Law 80/2005, composition with creditors was only available to "insolvent" companies (i.e., in the permanent impossibility to regularly perform their obligations); now, a company may be entitled to apply for composition with creditors when it is in a state of crisis, thus allowing, in principle, a broader resort to this tool and an earlier prevention of insolvency situations.
Law 80/2005 has also lowered the mandatory requirement previously provided in order to be admitted to such procedure. Under the previous regime, the debtor was requested to prove its insolvency status and guarantee the payment of (i) at least 40% of the unsecured claims and (ii) 100% of the secured claims, within a six months period starting from the approval of the composition by the relevant bankruptcy court.1 While payment of all secured claims is still required,2 no threshold now applies to the payment of unsecured claims.
Under the new provisions, composition plans can now offer a broader range of means to restructure the existing debt, both financial and legal: from assumption of debt by a third party to mergers or other corporate transactions (such as, for instance, the allocation to creditors or classes of creditors of stocks, quotas or bonds, including convertible bonds, or other financial instruments). Creditors may be divided into classes, according to their legal position and uniform economic interests and different repayment schemes may apply to creditors belonging to different classes.
From a procedural standpoint, a company intending to be admitted to the composition with creditors has to file a motion with the competent court (i.e., the court where the company has its registered office). Once the documentation filed (which also includes a complete list of the company's creditors) has been verified, the court calls a meeting of creditors which has to be held within the following 30 days to vote on the restructuring proposal.
Upon filing of the motion, enforcement proceedings against the company in financial difficulties are "frozen" (so called "stay of the enforcement proceedings") and interest ceases to accrue on the company's debt. Throughout the procedure, all pending agreements entered into by the company continue to be effective and enforceable; the company is still under the management of its directors, although under the control of the court and a special commissioner, appointed by the same court.
The creditors will vote upon the composition proposal within the term established by the court.3 Under the new provisions of Law 80/2005, the composition is approved if voted favourably by creditors representing the majority, in value, of claims admitted to vote (it was two/thirds in value of the total unsecured claims under the old regime). If there is more than one class of creditors, the composition passes when it is approved by a majority of creditors in each class. If approved by the creditors, the court will ratify the proposal. In case of more than one class of creditors, the court may approve the composition proposal even if this has not been approved by the majority of creditors in one or more classes, provided that: (i) the majority of classes have approved the proposal; and (ii) the court believes that the creditors in the dissenting classes will be in a not worse position under the composition than they would be in case of any other viable alternative (similar to the 'cram-down' provisions in Chapter 11 of the U.S. Bankruptcy Code). If approved, the composition becomes binding on all creditors.
Notwithstanding the new law provisions are not entirely clear on this point, in the event that the composition with creditors is not approved, it seems that the company, if found insolvent, is declared bankrupt by the court and undergoes ordinary bankruptcy dissolution proceedings.
An alternative to the composition with creditors is represented by a new procedure under Law 80/2005 which allows the company in financial difficulties to file a petition with the competent court for the ratification and enforcement of a debt restructuring agreement, previously agreed to by the creditors and the same company. Two requirements exist for the court's ratification: the plan has to be agreed to by creditors representing at least 60% of all the debtor's claims and a report of an independent expert (such as an accountant) has to confirm the feasibility of the payments provided under the plan.
Unlike the composition with creditors, such debt restructuring plan is not binding on creditors which have not agreed to the plan; however, transactions and payments made pursuant to same are not subject to claw-back actions should the company eventually be declared bankrupt.
Italian claw-back rules have traditionally been considered to be more favorable to bankruptcy trustees than those of certain other jurisdictions, such as the United States. In particular, under former Italian Bankruptcy Law payments and transactions could be voided by the bankruptcy trustee, upon the occurrence of certain conditions, if these were made within one or two years - depending on the type of transaction - prior to the starting of the bankruptcy proceedings.
Law 80/2005 has significantly amended the rules of the claw-back actions with respect to insolvency proceedings started after March 17, 2005. In particular, the look back period has been significantly reduced ( i.e., from two years to one year and from one year to six months, respectively). In addition, Law 80/2005 has introduced additional criteria to establish when transactions may be voided as transactions outside the ordinary course of business and has introduced certain exemptions from claw-back rules.
More in detail, the bankruptcy trustee is entitled to start so called "extraordinary" claw-back actions with respect to certain transactions that took place during the suspected period, unless the other party gives proof that it was not aware of the debtor's insolvency. Typical transactions subject to such extraordinary claw-back actions are transactions in which the consideration for services to the debtor is significantly higher than the current market price, or those where the debtor performs its payment obligation through some unusual means (for instance, by sale of receivables). Also suspicious are situations in which normal commercial transactions are secured by guarantees on the debtor's assets. Generally, in these cases, the look-back period is one year, with some exceptions.
In addition to the extraordinary claw-back actions, the bankruptcy trustee is also entitled to start a so-called "ordinary" claw-back action with respect to transactions carried out in the six-month period prior to bankruptcy. Such transactions include the payment of debts which are due, transactions at arm's length and the execution of guarantees on the debtor's assets granted simultaneously with the relevant debt. Requisite for the action is the proof by the trustee that the third party was aware of the debtor's insolvency.
However, probably the most significant change introduced by Law 80/2005 is the provision of a detailed list of transactions which - if performed after March 17, 2005 - cannot be subject to claw-back actions. Those are: (i) payment of goods or services in the company's ordinary course of business and in accordance with customary terms and conditions; (ii) banking remittances, except those that significantly increased the company's indebtedness toward the bank; (iii) sales at market value of real estate which is used by the purchaser as his/her residence; (iv) transactions, payments and guarantees over the debtor's assets provided that these have been entered into pursuant to a plan aimed at reducing the company's liabilities and rebalancing its financial position, when supported by a favorable opinion of an independent expert; (v) acts, payments and guarantees which have been made pursuant to a composition with creditors procedure or a debt restructuring plan, or pursuant to the so called Amministrazione Controllata (another pre-insolvency procedure); (vi) payments of salaries and consulting fees; and (vii) payments of receivables due to obtain services necessary to be admitted to the composition with creditors or the Amministrazione Controllata.
By reading the categories exempted from claw-back actions, one can see the intent of the legislator to encourage the rescue of companies in financial difficulties, by exempting transactions related to debt restructuring procedures. In fact, while under the previous regime rescues could only take place by means of equity transactions (which were not subject to claw-back actions), it now appears possible to achieve such result also by means of a debt transaction (equally not subject to claw-back actions).
Future Reform Of Italian Bankruptcy Law
Law 80/2005 has also vested the Government with the power to implement a further, more comprehensive reform of Italian Bankruptcy Law by November 2005. The reform should simplify and shorten the bankruptcy proceedings with respect, in particular, to the approval of the list of creditors, distribution of the company's assets to creditors and composition with creditors during bankruptcy proceedings (the so-called concordato fallimentare).
In response to the creditors' requests for a U.S.-style creditors' committee to be included in the bankruptcy proceedings, the reform should also introduce the provision for such creditors' committees and provide for their participation in the management of all aspects of the bankruptcy proceedings. Furthermore, creditors' information rights should be increased in case the insolvent company is permitted to temporarily continue its activity.
1 The debtor was also entitled to perform the composition through the transfer of all of its assets to the creditors if the relevant percentages of (secured and unsecured) claims were expected to be paid through the sale of the assets and within the same period of time.
2 Indeed, even if not expressly stated by the new provisions of Law 80/2005, it seems that the debtor is still requested to pay in full its secured creditors, because the latter do not vote upon the composition proposal (the irrebuttable presumption of law is that the secured creditors are not interested to the composition proposal, since they are in any case paid in full).
3 Secured creditors do not participate in the voting procedure since they are expected to be paid in full, unless they waived their priority rights.
4 Claw-back actions are mainly aimed at preventing the creditors' claims from being jeopardized by certain transactions performed by the debtor: the bankruptcy trustee can request the Court to declare null and void, with respect to the bankruptcy estate, certain transactions performed before the bankruptcy proceedings started.
Stefano Crosio is the Partner in charge of the New York office of Gianni Origoni Grippo & Partners. Gherardo Cadore is an Associate in the New York office. They can be reached at (212) 957-9600.