New tools in Italy for the composition with creditors

Typology: Articles

 

As it was before, the “composition with creditors” (art. 160, Italian Bankruptcy Act) helped too little the insolvent entrpreneurs. Not to mention the “restructuring agreements” (art. 182bis, I.B.A.). The tools provided by the legislator between 2005 and 2006, were amended several times but threatened to become old before their time: anyway, no more fit to cope with the rapid decay of Italian companies, affected by the economic and financial crisis.

Was it worth to manage with? Probably yes, and of course we can not know if the legislative intervention on this summer (effective by next September, 10) will reach the goal, considering the high risk of irreversible insolvency of a large part of italian firms (according to a recent report from the ECB).      
 

So, an aid to the management of corporate in crisis. But what the change from the past? Let's see in brief.

The new rules are contained in Article 33 of Decree-Law no.83, converted into Law no.174, published on 11 August.

They mainly concern the composition with creditors and restructuring agreements, as well as the set aside action, and move from the criticisms pointed out in the first five years of application in the courts.      

What had happened in practice? It had happened that the instrument of composition with creditors had been used most to liquidate non-operating companies rather that to give a chance of continuity to those still in business.

Law makers sought to improve the efficiency of the courts for the benefit of the still-operating companies: these were penalized for filing a complaint, not quickly followed by the decree of admission to procedure. Pending the procedure, many business had to be interrupted, not to mention a brutal and final credit crunch.   
 

The new provisions now facilitate the firm, in a twofold way: first, the entrepreneur is no longer expected to file the application with the proposal and with a complete recovery plan. It is enough a simple application (accompanied by the balance sheets), which declares that the firm wants to prospect an arrangement of debts to creditors: the publication of the application in the Business Register allows to reach the aim of stopping the enforceable actions and the precautionary measures (“automatic stay”), as well as the court mortgages up to three months before.

By this time, the entrepreneur will have sixty days (may be extended by sixty) to formalize the proposal, complete with all the data and the period within which it will be fulfilled the promise of payment. By this time, the entrepreneur could continue the business (if not already stopped) and can refer to the appointed judge to obtain various permissions and to forcibly obtain the termination of contracts which are no longer useful to the company, as well to impose third parties to continue execution contracts and relationships which, in many cases, they would have broken off because of the crisis.

In order to help the company in the difficult way towards the reorganization, some mechanisms of reward and security to creditors, shareholders or funders (who decide to 'believe' in the rescue project) will play a decisive role. They who help the company to survive, will be provided with prededuction (preference over creditors) in the event of failure of the operation (e.g., bankruptcy). The obligations of the corporate governance for restoring the capital stock are now disengaged.

Furthermore, the formation of the majority in the expression of consent to the restructuring plan is now easier. In fact, it was observed that the lack of interest in voting by some creditors had often caused the rejection of the bailouts, and that is why it seemed more appropriate to introduce a second round of voting for the recovery of votes in favor with the formula of acquiescence.

By this way, big opportunities lie now ahead to entrepreneurs and professionals: these are called to lead the first to rescue companies by means of solutions compatible with generally accepted economic principles.

From the point of view of equity, we can not fail to see that the benefits to entrepreneurs in crisis are as many penalties for creditors.

From a more general point of view, what is considered most important is not the exact payment of debts but the firm's survival.

The firm is nowadays seen as the place where the accrued experience and skills should not be carried away by the fury of the financial storms. Moreover, a firm in business is also a spending center, so essential to the maintenance of the macroeconomic chain.

Anybody can see that the economic logic is completely opposed to that which animated the legislator in 1942. Once "the sick company" could have compromised the others, and it had to be pushed off the market. Today, by contrast, a company has yet its own value, even if it is badly injured, so it hasn’t to be removed from the system, not to create more disasters (domino effect).

 

Paolo Porcari

-lawyer – naming Partner PORCARI LAW FIRM

Milan - Rome

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