Mediation and over-indebtedness in Italy

Article by Giovanni Matteucci

Categories: Business Law
Typology: Articles

Mediation and over-indebtedness in Italy (1)

In 2005, in Italy, a reform of the insolvency procedures started out, which reached an ubi consistam in August 2010. Among the main innovations there was the introduction of spaces of negotiation between debtor and creditors, extensive in the debt restructuring agreements (Article 182-bis of the Italian Bankruptcy Law – “Legge Fallimentare”, hereinafter LF), which include also the possibility of a tax transaction (Art. 182-ter LF). These agreements, however, began to be used properly only in summer 2010 after predeductibility of debts arising from bank loans in execution of these agreements (Art. 182-quater LF) was introduced and the possibility of not incurring the crime of bankruptcy (Art. 217-bis LF) came into force.

However, at conferences and in specialized papers very little space is reserved to negotiation techniques, which are the essence of a swift and satisfactory conclusion of negotiations. For example, in the valuable Manual of Bankruptcy "Manuale di diritto fallimentare", by BERTACCHINI E., GUALANDI L., PACCHI S., PACCHI G. and SCARSELLI G, published by Giuffrè in 2011, 15 pages are devoted to debt restructuring agreement; in one of them it is specified that it "requires out-of-court negotiations between the parties involved; this thus will require that the entrepreneur, perhaps assisted by one or more professionals, involves creditors, at first individually and then all together, with some restructuring proposals, which should lead to a written and undersigned document, specifying where all modes of the agreement are identified and all claims involved are specified with the percentages of credit "(p. 536): a total of six lines. But on the techniques of negotiation, which are the indispensable basis for the success of the proposal, absolute silence.

In early 2011 an expert in bankruptcy proceedings showed an initial modest interest in mediation. In Venice, the trustee in the bankruptcy of a medium-sized company, having single even small debts and accounts out of order against creditors also without flawless papers, given the moderate cost and speed of the procedure provided by the Decree n. 28/2010, considered an attempt to mediation proceedings to be in the interest of the trusteeship and of the creditors. "Before starting the procedure it is appropriate that the trustee requires the approval from the bankruptcy judge;… in case an agreement according to the art. 11 D.Lgs. n. 28/2010 is reached, he will determine the effects on the bankruptcy of the acceptance and approval by the other bodies of the bankruptcy (judge and the creditors' committee) " (2).

A wider initiative, especially in terms of future developments, was carried out by the Ordine dei Dottori Commercialisti of Milan, who in October 2011 concluded with the Bankruptcy Section of the local court an agreement to recur to civil and commercial mediation ex D.Lgs. n. 28/2010 in bankruptcy proceedings.

The decisive step, instead, to use (at least formally) mediation in the management of insolvency, in Italy, was made ​​with the approval of Law 27.1.2012, n. 3 (OJ No. 24 of 1.30.2012), effective from 29.2.2012. It was accorded, to the small and medium-sized companies (those with parameters below the limits of fallibility Art. 1 LF) (3) over-indebted, the chance to deal with creditors to restructure their debts: new methods and timing of payment against a maximum of one year and four months of respite from enforcement proceedings and seizures. Everything managed by the bodies of resolution of the crisis (“organismi di risoluzione della crisi”) a new figure that will be located primarily in the mediation bodies of the Chambers of Commerce and the professional orders of lawyers, accountants and notaries. I mentioned above the use "at least formal" of mediation, because I believe that to get to any actual use of the techniques of negotiation / mediation in the management of the liquidity crisis in Italy will take time; at first the interpretation of the new instrument will be very formalistic.

As well-known, especially to deflate the civil litigation, with the Decree 28/2010 the Italian government introduced mediation as a mandatory condition to judicial prosecution in disputes relating to many rights disposable. They later established fiscal mediation to take effect from April 2012. Then, due to the economic crisis which exploded in the summer of 2008 and the consequent increase in the debts of families and companies, as well as the raise in the limits of fallibility in the previous years to ease the burden of the courts with bankruptcy proceedings, they were also engulfed by monitory and executive procedures and seizures. As a remedy to deflation, even in this field, the government has decided to use mediation by approving Law n. 3/2012.

The procedure provided for by the Italian Law n. 3/2012 is divided into five phases:

1) draft agreement on debt restructuring by the debtor to the creditors;

2) filing of the proposal in court;

3) order setting the hearing to discuss the procedure and conduct of the hearing;

4) implementation of the agreement;

5) validation.

The Pivotal role in this procedure is exercised by the body of resolution of the crisis (“organismo di risoluzione della crisi”), whose tasks-and responsibility- are not insignificant:

- helping the overindebted subject to propose a debt restructuring;

- taking any relevant initiative to prepare the plan, reach an agreement and change it if necessary;

- attesting the validity of the data contained in the plan and its feasibility;

- being the link between debtor, creditors and magistrate;

- arranging the forms of communication and publicity set by the magistrate;

- ensuring the precise execution of the agreement and working together to solve the difficulties of its realization.

1) Proposal of debt restructuring agreement by the debtor to creditors

The overindebted subject, which

- is not subduable to bankruptcy proceedings

- did not use the procedure for settlement of the crisis in the last three years (Art. 7, co. 2)

may propose to creditors, with the help of a body of composition of the crisis, a debt restructuring agreement that:

- ensures the payment of the creditors who have not joined in and of the privileged (unless they have waived this prerogative);

- provides means (even through sale of assets and future income – Art. 8, co. 1) and timing in the satisfaction of the creditors (also divided into classes) who participate, possible provision of guarantees and liquidation of assets, possible contribution of the debtor's assets to a trustee for the liquidation of assets and distribution of the proceeds to creditors (Art. 7, co. 1), possible intervention of a guarantor third-party (Article 8, co. 2).

"In the proposed agreement are indicated any limitations to access the market of consumer credit (i.e., reporting in a network that a bank or finance company does not give loans - ed), to use instruments of electronic payment on credit (i.e., that credit cards were blocked or revoked for misuse - ed) and to subscribe financial credit instruments (that is, negative notifications from the Central of Risks) " (Art. 8, co. 3). I’d also add the notification to the Interbank Central of Alarms, which has become increasingly common for non-payment of checks at first submission.

If the plan is likely to ensure payments to the newly set deadlines AND its execution is entrusted to a liquidator appointed by the court upon proposal of the body AND the moratorium does not relate to the payment of unseizable debts, it can also provide an up to one year delay of not involved creditors (Art. 8, co. 4).

The preparation of the plan is made ​​by the entrepreneur, or the private, with the help of the body composition of the crisis, which "takes all the appropriate functional initiatives to prepare the restructuring plan ... ", Art.17, co. 1).

2) Deposit of the proposed restructuring agreement in Court

The proposal of agreement is registered at the Court of the place of residence (or location of the headquarters) of the debtor, with the lists of

- the creditors and the amounts due (and, I might add, of the relevant guarantees and pre-emptive titles);

- assets and any disposals made ​​in the last five years;

- if the debtor is a private person, tax returns for the last three years, and composition of the household (with a certificate of marital status) and declaration of the amounts necessary to sustainment;

- if the debtor is a company, tax returns and records of the last three tax years, with certification as a faithful copy.

All accompanied by a declaration of feasibility of the plan by the body, which is also to certify the veracity of the data (combined provisions of Art. 9, co. 2 and Art. 17, co. 2).

3) Decree of setting of the hearing to conduct of the proceedings and conduction of the hearing

The magistrate (Art. 10), after checking the existence and requirements of the above documents, with a decree fixes the hearing to conduct the proceedings and provides notice to creditors (carried out by the body – Art. 17, co. 3) of the deposit of the proposal, their call and the possible measures that he might take. In accordance with the limited formality of the procedure all the possible means of communication are stated: telegram, registered letter with advice of delivery, fax, certified email (Art. 10, co.1). The magistrate also prepares appropriate publicity of the proposal of restructuring agreement and of the decree; if the proposer is an entrepreneur, publication in a special section of the register of companies.

At the hearing, if acts in fraud of creditors are not detected, the judge provides that up to a maximum of 120 days continued individual enforcement actions cannot - on pain of nullity - be started or ordered attachments or acquired rights of first refusal on assets of the debtor by creditors entitled of previous cause (however, initiatives by the holders of not seizable claims may be pursued) (Art. 10, co. 3). In this period the prescriptions are suspended and there are no forfeitures (Art. 10, co. 4).

WITHIN THESE 120 DAYS, then, THE AGREEMENT SHOULD BE REACHED AND ALSO THE VALIDATION , or its refusal.

4) Implementation of the Agreement

The creditors (Art. 11) express their views, even with changes to the debtor’s proposal, and notify it to the body with any of the four means above listed. If the positive opinions represent at least 70% of the credit an agreement is reached. "If the agreement is reached, the body of composition of the crisis sends to all creditors a report on the consent expressed and the achievement of the percentage-above indicated - attaching the text of the agreement" (Art. 12, co. 1 ).

Within 10 days of receiving the report (but, depending on the chosen medium, one can not always be sure of the date on which the individual recipient received the message) the creditors may raise objections.

"After that ... period, the body of settlement of the crisis sends the report to the judge, attaching the objections received, as well as an ultimate declaration about the feasibility of the plan " (Art. 12, co. 1) .

5) Validation

"After checking the agreement with the percentages as in Article 11 c.2, verified the suitability to ensure the payment of not involved creditors and resolved any other objection" the judge approves the agreement and arranges its publication (Art. 12, co. 2). This does not affect the rights of the creditors (or rather, banks) against the jointly liable guarantors of the debtor and forced by regression; does not determine novation of the obligation, unless otherwise agreed upon; must be lifted ipso jure if ​​within 90 days of the deadline provided for the payments to tax agencies and social security and compulsory assistance institutions have not been made (Art. 11, cc. 3, 4 and 5).

From the date of validation and for not more than one year continued individual enforcement actions or ordered attachments or acquired pre-emptive rights on the assets of the debtor can not be started (combined provisions of Art. 10, co. 3 and Art.12, co. 3), unless in case of:

- termination of the Agreement;

- failure to pay not involved creditors (ascertained through appeal to the judge).

If to come to the agreement goods under seizure have been used, or if provided for in the agreement, the judge, upon proposal by the body of settlement of the crisis, appoints a liquidator who solely decides about the same and the sums collected (Art. 13, co. 1); the release of the latter is established by the magistrate (Art. 13, co. 3).

The invalidity affects payments and disposals of the assets made in violation of the Agreement (Art. 13, co.4).

According to Art. 13, co. 2, "The body of composition of the crisis resolves any difficulties arising in the execution of the Agreement and shall supervise the exact fulfilment of the same, reporting to creditors about any irregularities. ... ".

Under Art. 18, the bodies, for the performance of their duties and with the leave of the judge, may have access to public databases relating to taxes, credits, social security.

Civil and criminal penalties are imposed by Art. 19, not only to the debtor as a result of fraudulent behaviour and to have intentionally failed to comply with the agreement, but also to the member of the body of composition of the crisis "who gives false declarations as for the outcome of the voting by the creditors on the proposal of agreement ... or the veracity of the data contained in this proposal or in the documents accompanying it or as to the feasibility of the plan of debt restructuring " or " if he causes damage to the creditors by failing or refusing without just motive, an act of his office ". So, someone appointed of public service, with all the relevant consequences for errors and omissions in his duty.

To fulfil their functions the bodies must be listed in a special register at the Ministry of Justice (that will have to issue regulations implementing the Act within 90 days of its entry into force - Art. 15, co. 3). Also, the Ministry will establish, by court district, the date and starting of the tasks and functions of each body.

What are the most critical stages of this procedure?

Between the beginning of preparing the plan and filing it in Court, creditors may take action to protect their interests. In addition, after presenting the plan to the Court, the judge checks the existence of legal requirements, and issues the first bill, which inhibits seizures and sequestrations for 120 days; after receiving notice of all

- creditors cast their votes, but also any possible modifying proposals;

- the body collects the answers and, in case of disagreements, has text of the agreement reviewed, sends it back to the creditors with details of the majorities reached and the latter, if necessary, raise objections; after 120 days, if the different needs have not been reconciled, each creditor may take action as he sees fit;

- if the votes in favour are over 70% of the value of credits, the final report is submitted to the magistrate, who issues the decree of validation, " any dispute resolved", and if these are consistent everything can be called into question again.

Therefore, from phase four (implementation of the agreement ) onwards, that is after more than half of the procedure has been carried out, there are THREE more steps during which such complaints may come up as to nullify what has been done up to that moment. It is therefore appropriate to have, even before bringing the project before the magistrate, reached the agreement, and on a firm foundation.

How to make it ? TIMELINESS and TECHNIQUES OF NEGOTIATION.

From a theoretical point of view there are no doubts about the timing: the sooner the intervention, the better the chance of solution. We must also consider that the major creditors (with the employees, tax authorities and social security institute) are the banks, which must comply with the provisions of Basel 2 on the control of problematic risks and the methods of "alert". Management, property and finance irregularities of the companies customers within a few months result in a deterioration of the rating given by the bank to the company, and this deterioration limits the possible decisions. Also, once the relationship has been reclassified as suffering, even by a single bank, "the gate falls down": the whole credit class tightens, the case is run by law firms, which typically consider only two possibilities: a returning plan of the credits before granted without operativeness (and thus less financial oxygen available for the company) or a coercive recovery of the credit.

Who should move quickly? In theory the debtor, but he generally tends to consider the crisis as temporary and almost always thinks of being able to overcome it, as well as in any contingencies in the past. Among its professional consultants, the lawyer is the one where the private/enterprise turns to when the situation is no longer manageable by ordinary means. The accountant is the professional who has contacts with the company at least every three months, but his performance is too often limited to accounting and taxes. The bank is the one left, which inter alia has a series of alarm signals, which can be promptly exploited. However, the person in charge of the report, at the first signs of financial stress, thinks he can manage it with the ordinary means; though if the criticality persists, he has a psychological hesitation to admit his previous evaluation mistake; afterwards, that credit relationship comes almost in a gray area, because it is no more useful to reach the production budgets. The bank itself, moreover, tends to postpone for as long as possible the reclassification of relationships involving capital reserves. Finally it would be advisable the coordination between the banks, whose debtor is a customer; in recent decades, unfortunately, banks hardly exchange information with each other and eventually come together to examine, at best, a proposal for a restructuring of debts under Article 182-bis of the Bankruptcy Law. As for the timeliness of interventions, therefore, there is still much to do (4).

If the situation of economic difficulty is not overt (that is, if there are no injunctions, protests, etc.), proper negotiation techniques are very useful. A single written communication addressed to all should be avoided: most likely it would be considered the prelude to a bankruptcy petition. More appropriate is a phone call to the individual creditor (at least the most important or critical ones) to schedule an appointment, in order to personalize the communication and take advantage of the residual margins for negotiation with the individual. It can also happen that while talking with a bank one remembers that in the face of a loan securities had been underwritten, whose sale would decrease the debt and reduce the debt interests; or that another bank did not renew a line of credit (with consequent report of irregularities to the Central of Risks) because they had not received the final approved balance sheet; that another bank is still willing to restructure its credit, by lengthening the depreciation. That is, the debtor makes his financial position clear and the banks will assess this in a positive way (5).

In this personalized communication activity, however, certain points should be fixed, to be communicated to all creditors (that is the banks), such to constitute a shared basis for future contacts and, especially, for finding a common solution:

- to acquire at the local branch of the Bank of Italy the report on your company by the Central of Risks (too often, when one has relationships with more than 5 to 6 banks, he forgets the leasing and factoring operations, or a modest relationship with a bank, which, precisely because they have little to lose, might take sudden action in court): this paper reports in detail for every credit agency exposures and guarantees;

- prepare the balance sheets of the last three financial reclassified evenly, so that one can get a better picture of the exact causes of the current crisis, with all necessary attachments, and a provisional budget to a maximum of two years; too many times, even in insolvency procedures, provisional budgets are deposited up to 5/6 years, which, due to the high volatility of the economy, are a mere exercise of computerized spreadsheets;

- submit copies of the tax returns for which the outcome of automatic controls has not arrived, with details of any pending litigations;

- draw up an analytical and likely report of the difficulties of the company and of a reasonable restructuring plan to be carried out, with the timetable for its implementation, as well as a plan "B" in case the main one, in time, appears impossible;

- deliver everything to each creditor in individual meetings.

Using the terms of the mediation, there is a multiparty and multilevel dispute to manage, starting by drawing the "map of the conflict", in order to induce the parties to overcome the positions, objectify the issues, focus on the interests and start to formulate options. All this in individual meetings, even before the initial joint session. This resembles the pre-mediation statements of the U.S. mediation in bankruptcy (6), though in a manner appropriate to the Italian reality, not yet accustomed to such methods of dispute prevention / resolution.

And the role of the mediator, in this all, may well be performed by the body of resolution of the crisis, which to the L.3/2012 explicitly attributes the task of " taking any appropriate steps functional to prepare the restructuring plan," then to "reach the agreement". Though superfluous, the more the body will be able to bring together the parties' positions in the initial negotiation phase, the less the subsequent proposed amendments or impugnations of the decision of validation. The shorter also the timing of the conclusion of the procedure.

Therefore, TIMELINESS and NEGOTIATION.

Disposizioni in materia di usura e di estorsione, nonché di composizione delle crisi da sovraindebitamento.

(12G0011) (GU n. 24 del 30-1-2012 )

(1) Report by Giovanni Matteucci giovannimatteucci@alice.it at the seminar on "Over-indebtedness, the new discipline of resolution of the crisis of non-fallible subjects, Law January 27, 2012, No. 3," Matera (Italy), 2.24.2012. A first version of this article appeared on the website www.mondoadr.it on 18.1.2012, under the title " Mediazione e insolvenza: il ruolo degli organismi di composizione della crisi ", referring to Decree n. 212/2011, subsequently converted into L. n. 10/2012, but without the articles on insolvency.

(3) The L. n. 3/2012, Art. 6, speaks of "situations of over-indebtedness not subject nor subduable to the  bankruptcy procedures in force" which suggests that it refers to entrepreneurs (as individuals and associates) with the parameters of fallibility below those specified in Art. 1 of the Bankruptcy Law (gross revenues EUR 200,000, assets EUR 300,000, liabilities EUR 500,000), as well as to private persons. Probably the government will enact specific legislation for the "consumer". To date L.3/2012 is in force, whose  content may well be used even by citizens who are not indebted entrepreneurs.

(4) In theory, the bank that should take the initiative of the contacts is the one with the highest exposure, or  which has the largest unsecured credit;  nothing prevents , however, another credit institute from taking action.

(5) In an article "Mediation in bankruptcy: how to mediate with banks in crisis situation"  I specified: "In situations of a company's financial deterioration, to prevent the precipitation of the crisis, one of the first things to do is run a successful communication. Keep in mind the protocol of the commercial mediation ... might be useful:

- Activating communication: usually just a phone call and to ask for an appointment;

- Managing the communication, knowing that this is not only verbal, but mainly para-verbal and nonverbal

- Overcoming the positions and evaluating the interests ("We are interested in recovering the money that we lent you. And you?" - "Continuing to have the availability of such credits to meet ongoing payments" - "Shall we agree on a return?" - " Let's try, but let’s avoid a rigid plan and analyze the situation every three or four weeks ".....);

- Creating negotiation options ("The bank receipts you bring us to  advance subject to collection are too often  unpaid . Why don’t we advance the credit that you claim  against the City of ......., asking the latter to accept the assignment? ");

- Subjecting the options to  objective filters ("The acceptance by the municipality requires the intervention of the notary public and too long a practice, within two weeks I have tax deadlines ");

- Evaluating the best and worst alternatives to an agreement;

- Reaching, if possible, a shared solution. "

However this article dates from late 2010; I do not know how this protocol could be used in a situation of  "credit crunch" of late 2011-early 2012.

I reported two further examples of "lack of communication" bank- customer.

"A company, subject to bankruptcy, with debt equal to the amount of sales,  records bad debts amounting to 25% of sales. It is exposed with over ten banks and is in a crisis situation. The professional person contacts the single institutions to obtain, with each one separately, debt consolidation. A bank agrees to postpone the repayments in time, but feels more appropriate to apply the restructuring agreement pursuant to Art. 182-bis LF, to avoid that any creditor, initiating an execution action, causes the worsening of the situation with a possible risk of bankruptcy. The professional shows astonishment: 'It has to be assessed if the company is beyond the parameters of fallibility'. Before contacting the banks he had not assessed the possible alternatives (in this case, probable) to what he was about to propose!

"A company has a shortage of liquidity. It maintains relationships with three banks, two are willing to wait, one wants a return from its exposure, but with it ​​the risk position of the company is regular: the amount used is within the limits of the allowance, current accounts are handled properly, the invoices advanced are generally reimbursed  within the agreed term. Despite this, the bank demands a strict repayment plan to the customer, excluding the operativity of the credits, on pain of revocation of the latter and the request of an immediate reset of the exposure. It does not consider (or underestimate) the worst possible alternative to an agreement: the conviction for failing to comply with the principle of good faith in fulfilling the contract (see Supreme Court n. 4538/1997 and n. 9321/2000), with the additional risk of claim for damages. "

(6) The mediator contacts the parties (entrepreneur in crisis and creditor) and their advisors, usually asking for a pre-mediation statement, that is a document where everyone presents his vision of the dispute. The outline of this document is:

- the presentation of the party and the people who will participate in the negotiations, with the indication of the powers of attorney;

- the vaunted claims, the most significant points of contrast and the related legislation;

- a statement of the  reconciliation efforts already practiced;

- an estimate of the timing and costs (in the USA very high) of the court procedures practicable;

- the document that  is considered useful to enclose;

- information on how to proceed in the mediation, especially the formulation of potential alternative solutions to the dispute based not on legal aspects but on the interest.

The pre-mediation statements are not binding on the final outcome of the procedure, because they serve only to provide initial information to the mediator. They are exchanged in the pre-mediation conference, which is usually attended by the consultants of the parties.

The mediation starts. First session where all parties are present with their advisors. The mediator presents the fundamental principles he will follow during the procedure: mutual respect, alternative interventions, exposition of  one’s positions based on the facts and attitude oriented to understand the positions of others ("explanation" and "understanding"), common sessions, private sessions with individuals and preparation of an agenda of work. In mediation typically documents are not exhibited; in the competition one, however, as the subject is particularly technical the parties’ advisors since the first session  produce documentation, usually in such a number of copies as  to be distributed to everyone present. The procedure will develop following the general practice.

In the final joint session  the final  settlement agreement is written, which should include clauses provided for by the Country of the Union where the  mediation  takes place, to give it the enforcement prescribed by law. To a post-mediation settlement agreement are deferred the specification of technical details, the production of the documentation to be attached,  the indication of the out-of-court resolution procedures of  any possible disputes relating to the execution of the agreement, an indication of who will deposit all this to the court.

Giovanni Matteucci

 

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