2021 Italian reform On Crisis Management
In August 2021 the Italian government, led by Mario Draghi, enacted a Law Decree (no. 118) to issue “urgent measures to deal with companies’ and entrepreneurs’ crises and subsequent restructuring and other urgent measures for the justice system.” On October 23, 2021, the Law Decree no. 118 was converted into Law no. 147/2021 (Law 147). The new tools introduced by Law 147 have been put in place to deal with entrepreneurs in crises that need an urgent turnaround, including during the ongoing COVID-19 emergency. The key feature of Law 147 (and in particular composizione negoziata della crisi) aims to identify special situations and financial difficulties early and eventually to offer management a path to an out-of-court settlement, without formal insolvency proceedings or the like. This is a great achievement and in line with developments in other European jurisdictions, and it’s progress compared to other pending reforms of insolvency law. But let’s have a look at a bit of history here.
Pending 2019 Italian Reform and the entry into force in 2021 of New Law 147
In 2019, the Italian system put in place a thorough reform of Italian Insolvency Law (which dates back to 1942 and has been subject to several rehashes) with a code (the 2019 Crisis Code). Due in part to the COVID-19 pandemic, the reform has been rethought and perceived as no longer appropriate to deal with the current crisis.
The entrance into law of the 2019 Crisis Code (apart from some parts which are already in place) has been postponed to May 2022 (in line with the EU directive duty). The system of internal alert created by the 2019 Crisis Code (the early insolvency indicators based on specific covenants and tests) has been pushed back even later to December 2023.
That system of internal alert has in fact been considered too complex given the liability of internal auditors and board members involved and the organizational burden that comes with it.
Thanks to Law 147, which is now in force, the path for an enhancement of control and action duties of internal auditors and board members has been established by a step-by-step approach, which is more feasible.
The rules can lead to voluntary early disclosure of the crisis to deal with it in an effective manner, which will eventually benefit the entrepreneur and the creditors (the composizione negoziata della crisi).
The rules set by Law 247 are as follows:
- All companies are required to have an internal management and accountancy set up that is adequate for the size and nature of the business to detect signs of crisis earlier and to appropriately deal with them using the correct restructuring tool.
- Board members (or sole director as the case may be) are the only ones in charge of the business management and are liable to the company’s creditors if they have breached their duties “to preserve the assets of the company” (actions can be brought by creditors when the net assets of the company are not sufficient to satisfy their claims). The company can withdraw its claim versus the creditors, but this does not settle the third-party creditors’ action, which can go on.
- Internal auditors must report to the directors in writing if the correct conditions for the filing of the composizione negoziata are detected, with a 30-day period for the directors to report back to the auditors of the actions taken. The compliance by the internal auditors with this reporting duty (and the connected supervisory role) is taken into account in the assessment of their liability (jointly with the directors) in case of damages towards the company and its creditors (damages which would not have occurred if the auditors had performed their duties correctly).
More duties will be imposed on external “professional” creditors (such as banks and tax authorities) by the 2019 Crisis Code – an update on this will be available in the second half of 2022.
Any entrepreneur (for companies, its directors with surveillance and input duties of the internal auditors) is now allowed to open an attempt to settle with its creditors with an out-of-court restructuring plan.
Features of this attempt (composizione negoziata della crisi) are the following:
- Any entrepreneur (even if not established as a company) may ask to access the composizione negoziata della crisi (crisis management) if they detect an imbalance in their assets or debts which make the crisis or insolvency likely.
- The filing of the request to open the composizione negoziata della crisi is available online through a website.
- The entrepreneur must file documentation (the last three years’ balance sheets, a list of creditors and guarantees, etc) on the website asking for the appointment of an expert (from a published list of accountants, lawyers, advisors etc). The entrepreneur will conduct a self-test on the website to understand if “the restructuring plan can be successfully achieved.”
- The appointment of the expert (who must be independent from all parties involved) is made by a committee of the competent Chamber of Commerce (published on the website) and the fees (quite low) are set by Law 147. The expert is in essence a mediator/facilitator for the parties to reach an agreement.
- Pending negotiations, the entrepreneur is fully in charge of the business (ordinary and extraordinary course). They must manage it to avoid acts prejudicial to the economic and financial sustainability of the business activity and in case the situation worsens, and they become insolvent but restructuring is still feasible, the business must be managed in the “prevailing interest of the creditors.”
- The entrepreneur must keep the expert informed of any extraordinary act of management or of activities not consistent with the negotiations and the turnaround target, and in case of dissent by the expert, this is subject to an alert notice (to be mentioned in the Chamber of Commerce public registry). Such extraordinary act of management or activity cannot be stopped by the dissenting expert. However, while as a general rule the acts/payments of the debtor pending the negotiations cannot be clawed back, such exemption no longer works if the expert is dissenting.
- Creditors (especially banks and financial intermediaries in respect of which the opening of the composizione negoziata della crisi does not per se constitute a termination/acceleration event of the credit lines) must actively participate in the negotiations (it goes without saying, fear of micromanagement should be “calmed down”).
- The composizione negoziata della crisi can also be carried out for a group of companies.
- Protective measure requests can be submitted to the competent Court by the debtor pending the negotiations (such as the stay from enforcement or the filing of bankruptcy). No such measures can be applied to employees’ claims.
At the end of the negotiation period (which may last for a maximum of 180 days), the expert will issue a final report on how the negotiations were carried out (the Expert Final Report) and may lead to several exits:
- Mutual agreement on restructuring and rescheduling or standstill agreement with creditors, art. 67 recovery plan.
- Majority agreement restructuring, ie art. 182bis restructuring agreement, requiring at least 60% of adhering creditors with the possibilities to cram down homogenous classes of creditors with a 75% majority per class (the 75% is lowered to 60% if this cram down agreement is reported in the Expert Final Report).
- Simplified restructuring agreement, ie art. 182bis simplified restructuring agreement with 30% of adhering creditors if all creditors are paid and there is no request for an automatic stay pending negotiations.
Any of these options can also involve the sale of the business going concern.
If no agreement is reached, among other possible solutions (including bankruptcy), within 60 days from the filing of the Expert Final Report, the debtor can file before the competent Court a request for the simplified composition with creditors with liquidation purposes (the Simplified Liquidation Composition).
This is a very new tool where, in a nutshell, the debtor can ask the Court for approval of a composition with creditors (concordato) as insolvency proceeding (with the liquidation or sale of the going concern) without the vote of the creditors (neither the majority of them) leaving the creditors with the sole possibility to raise objections before the Court hearing for the homologation or appealing the homologation decree (without suspending though its effects).
Such sacrifice of the creditors’ rights is backed by several safety nets:
- The mandatory carrying out of the composizione negoziata della crisi closed with the Expert Final Report setting out the reasons why an agreement cannot possibly be reached and confirming that the negotiations have been conducted in good faith and in the correct manner (ie keeping the creditors constantly informed).
- A new opening report of the expert describing “the expected outcome of the liquidation and the offered guarantees” when the request for concordato is filed with the competent Court.
- The liquidation plan and the concordato proposal are notified in a timely fashion by the Court to the creditors.
- The Court will approve the concordato liquidation plan if:
- the possibility for the creditors to raise objections has been granted;
- the ranking of the claims has been complied with;
- the plan is considered feasible; and
- such liquidation is not prejudicial to the creditors compared with a bankruptcy and in any event gives each creditor “something” (utilità which, apart from cash, can also be represented, in case of the sale of the going concern, by the prosecution of the commercial relationships).
In addition, other news introduced by Law 147 are:
- in an art. 182 bis restructuring the possibility with the usual majorities (set out above) to cram down commercial creditors and if 50% or more of the debt is owed to banks and financial intermediaries, the cram down of such financial creditors can also be applied in a liquidation scenario; and
- the possibility to impose a standstill also on suppliers if there is no write off.
Given that in May 2022 we will have the entry into law of the residual parts of the 2019 Crisis Code, there is more to come from Italy.