The main types of reorganisation and liquidation procedure are:
- composition with creditors;
- debt restructuring agreement;
- extraordinary administration; and
- extraordinary administration of large enterprises.
The requirements for a debtor to commence a financial reorganisation are different in relation to each of the proceedings mentioned above.
Composition with creditors
A debtor in ‘crisis’ (see below) may file a petition for a composition with its creditors with the local court. Also, creditors representing at least the 10 per cent in value of the total debt, can file a concurrent petition for a composition with creditors. As a general rule, the petition must contain a proposal for an agreement with creditors and must be accompanied by a restructuring plan, a report of an expert assessing the plan’s feasibility, and other documents illustrating the debtor’s financial situation. The expert has to be an independent professional (such as a lawyer, a business consultant or an accountant) and he or she must be appointed by the debtor and entered in the register of auditors. It is not a requirement for the debtor to be technically insolvent at the time of filing the proposal, it is sufficient that the debtor is in a state of ‘crisis’ (a situation of temporary illiquidity or financial difficulties). The debtor’s proposal may provide for a wide range of arrangements, including, for instance, the assignment of assets or the attribution of shares or financial instruments to creditors (as a means of satisfying their claims) and the division of creditors into different classes, each of which may be offered different treatment. As regards the approval thresholds, please see question 8.
The debtor’s proposal can provide that secured creditors are not fully repaid, provided that the secured creditor obtains at least the market value of the secured asset (this market value being the market value that could have been achieved in a liquidation sale) and does not receive worse treatment than unsecured creditors. The debtor’s proposal has to guarantee the payment of at least 20 per cent of the unsecured debt. Should the proposal provide for part satisfaction of the secured creditors’ claims, they will be admitted to vote for the portion of the claim that has not been satisfied. Secured creditors are also admitted to vote if they waive their security.
Pursuant to the Development Decree, the debtor may also file a ‘conditional’ petition for a composition with its creditors, (ie, a generic petition without the restructuring plan and the other documents generally required by law), reserving its right to file a definitive proposal, a plan and other documents within a certain period, which the court will set at between 60 and 120 days (with the possibility of a further extension of 60 days: see article 161 of the Insolvency Act). Within this period, the debtor may change strategy and opt to file a petition for the validation of a debt-restructuring agreement instead of filing the definitive petition for a composition with creditors.
Law Decree No. 69 of 21 June 2013, as subsequently converted into Law No. 98 of August 2013, amended certain aspects of the ‘pre-composition’ with creditors to prevent abuse, and provides for the following:
- the debtor must deposit a list of its creditors (indicating the amount of the respective credits), together with its financial statements, when requesting to open the procedure;
- the court has the power to reduce the period to between two and six months after the initial request to deposit the remaining documentation if the debtor’s activity results in it not being suitable to continue the procedure;
- the court has the power to appoint a judicial officer to monitor the debtor’s management and report any breaches to the court during the procedure (such as the concealment of losses); and
- the debtor must provide reports to the court at least once a month during the procedure (it is up to the court to decide what information must be provided). Law Decree No. 83/2015 provides that the petition for a composition with creditors may also be filed by creditors in cases where the debtor’s petition does not provide for the satisfaction of at least 25 per cent of unsecured creditors and as long as it is an approved proposal.
The petition for a composition with creditors, whether complete or ‘conditional’, is published in the Companies’ Register and once published:
- creditors may not start or continue any enforcement or interim actions on the debtor’s assets, nor may they acquire preferential rights (unless authorised by the court), on penalty of nullity;
- any mortgages registered in the 90 days prior to the publication of the petition in the Companies’ Register will have no effect on creditors;
- each creditor is obliged to set off debit and credit balances with the debtor (provided that the debts arose before the submission of the petition for the composition with creditors);
- interest ceases to accrue on creditors’ claims;
- until the order allowing the composition is issued, the debtor may carry out acts of ordinary administration and, where authorised by the court, urgent acts of extraordinary administration; and
- the debtor may ask the court to authorise the termination or the suspension of ongoing contracts (excluding employment contracts): in this case, the other party has a claim in damages equal to the damages caused by the failure to comply with the contractual provisions.
Once the petition has been declared admissible, the court appoints an officer who monitors the directors of the company.
A composition that has been approved by a court is binding on all creditors existing before the publication of the relevant petition in the Companies’ Register. However, creditors keep their rights as regards any joint obligors, and the debtor’s guarantors. During the sale of assets, offers for the purchase of goods can be made not only by the debtor, but also by third parties, provided that their proposals are approved and comparable. Any payments and securities entered into or given pursuant to a composition with creditors (provided that the composition with creditors obtains the final approval by the court) are not subject to clawback actions.
Alternatively, the debtor may ask the court to validate a debt restructuring agreement executed with creditors that represent at least 60 per cent of the debtor’s outstanding debts or with 75 per cent of the financial creditors representing at least 50 per cent of the debtor’s outstanding debts and without prejudice to the full payment of non-financial creditors. To do so, it must file the same documentation required for the composition petition (see above), together with an expert’s report attesting: the accuracy of the company’s data, the feasibility of the agreement and whether the creditors not party to the agreement will be paid in full. According to the Development Decree, such suitability will have to be verified by an expert based on specific indications established by law.
The agreement is published in the Companies’ Register and for 60 days from the date of the publication creditors may not start or continue any enforcement or interim actions on the debtor’s assets, nor may they acquire preferential rights, unless other creditors agree.
The debtor may also request a prohibition on interim or enforcement actions during the negotiations on the agreement.
Extraordinary administration is available to companies that: employed at least 200 employees during the previous year (including those admitted to the redundancy fund), have debts equalling at least two-thirds of their assets and are insolvent but able to show serious restructuring prospects within strict time limits (to be achieved through the sale of business assets, financial restructuring or assignment of contracts).
The court is tasked with assessing the chances of achieving such restructuring. After hearing the advice of the judicial commissioner and the Ministry of Economic Development concerning the opening of the extraordinary administration procedure, the court issues a decree that places the company under the administration procedure or, if the restructuring is judged as not achievable, the court will make a bankruptcy order. The Ministry of Economic Development appoints one or three extraordinary commissioners, who are primarily responsible for drafting a ‘plan of reorganisation’, specifying the assets to be kept as well as those to be transferred, and any possible trade structures. The execution of the plan must be authorised by the Ministry of Economic Development after hearing from a supervisory committee (which is a consultative body) appointed by the Ministry.
The main effect of the procedure is that the extraordinary commissioners are only responsible for the liquidation of the company or the transfer of the company as a going concern to a purchaser, as the case may be.
Extraordinary administration of large enterprises
In response to the Parmalat collapse, the Italian government amended the procedure of extraordinary administration. The amendments were intended to facilitate and expedite the restructuring and reorganisation of large insolvent companies. In the past, the economic and financial restructuring provisions set out by the extraordinary administration procedure have been rarely used - the preferred route being a break-up and disposal of the company’s assets.
The extraordinary administration of large enterprises is available to insolvent companies with least 500 employees and an overall debt of €300 million.
This is a procedure whereby a company is admitted to extraordinary administration and an extraordinary commissioner is appointed. The Ministry of Economic Development can admit large enterprises to extraordinary administration and appoint an extraordinary commissioner immediately upon application by the insolvent company. The court is informed of the company’s application and the Ministry’s decision. For companies providing public services, the Prime Minister or the Ministry of Economic Development shall appoint the extraordinary commissioner and may fix the conditions of the appointment, even in derogation of the applicable provisions.
The role of special extraordinary commissioner can be performed by a single individual who shall:
- within 60 days of appointment (which can be extended by an additional 60 days), file with the competent court a report on the state of insolvency and the viability of the restructuring and extraordinary administration (on the basis of which the court shall declare the insolvency and adopt the ensuing measures);
- within 180 days of appointment (which can be extended by an additional 90 days), file with the Ministry of Economic Development (which has the power to approve) the following:
- a plan for the economic and financial restructuring and reorganisation of the company or disposal of business assets for a period not exceeding two years (restructuring plan); and
- a detailed report of the reasons underlying the insolvency of the company or the group;
- until the plan is authorised, the extraordinary commissioner may request authorisation to implement those transactions (or categories of transactions) that are necessary to ensure the continuation of the business and protect the economic and commercial value of the group. Such authorisation is not required for any transaction implemented in the ordinary course of business or having a value (when considered individually) lower than €250,000; and
- if the Ministry of Economic Development does not approve the restructuring plan within 60 days from the rejection of the plan, the company must evaluate whether it could be suitable to file an alternative plan relating to the disposal of business assets.
Should the Ministry reject the plan, the competent court shall, upon hearing the extraordinary commissioner, make a bankruptcy order and open judicial liquidation proceedings.
As an alternative to the procedure above, the extraordinary commissioner may carry out a private negotiation for the disposal of the business concerns and assets if the purchaser guarantees to provide such public services for a certain time and complies with the relevant legal provisions. The extraordinary commissioner’s decision shall comply with the principles of transparency and non-discrimination governing any insolvency and restructuring procedure and the price for the dismissal shall not fall below the market value (as estimated by the Ministry of Economic Development).
Any merger transaction carried out according to the restructuring plan approved by the Ministry of Economic Development is deemed to reflect the general public interests and does not require further governmental approvals provided that it is not an abuse of a dominant position and does not have the effect of restricting competition. For six months from its admission to the restructuring procedure, the company must still comply with any legal requirements for the possession of a licence or concession necessary for the exercise of its corporate activity. If parts of the business that require a licence or concession are sold, such licences and concessions are transferred to the purchaser.
If the extraordinary commissioner is willing to dispose of certain business assets to protect the economic and commercial value of the group, the extraordinary commissioner and the purchaser shall enter into a consultation procedure with the unions to agree on the transfer of the employees; in particular, the extraordinary commissioner and the purchaser may agree to transfer only some of the employment contracts granting the possibility for employees to benefit from the redundancy fund. Any decision relating to the employee redundancy or unemployment will be agreed among the parties in a very short time frame, enabled by the extraordinary administration procedure of large enterprises, which halves the time periods under the applicable employment laws.
In summary, the extraordinary administration of large enterprises is different to the extraordinary administration procedure in three key respects:
- it provides that the two stages are merged into one with a sole extraordinary commissioner having all powers, so that the reorganisation may be pursued in a shorter time frame;
- it enhances the powers of the ministry as regards those of the court, with the former having most approval powers; and
- the extraordinary commissioner may at any time apply for the avoidance of earlier detrimental corporate transactions.
The extraordinary commissioner may (within 60 days of appointment) ask the Ministry of Economic Development to extend the extraordinary administration of large enterprises to any other group company.
Finally, according to Law Decree No. 1/2015, converted into Law No. 20/2015, companies that manage at least one industrial site of strategic national interest, such as the steel-making plants of Ilva, will benefit from the extraordinary administration procedure for companies operating in essential public service sectors. In such cases, certain exceptions to the extraordinary administration procedure for companies operating in essential public service sectors apply. These include, in particular:
- if the company is already under extraordinary receivership, the application to be admitted to the procedure can be submitted by the extraordinary commissioner, who can be appointed as special commissioner in the new procedure by the Ministry of Economic Development;
- for companies providing public services and companies managing at least one industrial site of strategic national interest, the extraordinary commissioner may carry out a private negotiation not only to sell, but also to rent business concerns and assets. In such cases, and with exclusive regard to business concerns and assets included in the negotiation, the extraordinary commissioner is not required to file any of the following:
- the aforementioned restructuring plan with the Ministry of Economic Development;
- the detailed report of the reasons underlying the insolvency of the company or the group with the Ministry of Economic Development; and
- a report on the state of insolvency and the viability of the restructuring and extraordinary administration with the competent court; and
- for 18 months (and not six, as is provided for other companies) from its admission to the restructuring procedure, any company providing public services or managing at least one industrial site of strategic national interest must still comply with any legal requirements for the possession of a licence or concession necessary for the exercise of its corporate activity. If parts of the business that require a licence or concession are sold, such licences and concessions are transferred to the purchaser.
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